Health Net to be a Part of Centene; Continues to Face Risk

We issued an updated research report on Health Net, Inc. HNT on Jul 8, 2015.

Last week Health Net announced that it has entered into an agreement with Centene Corp. CNC, according to which it will be acquired by Centene by early 2016. Health Net which is otherwise suffering from customer attrition, stiff competition and numerous restriction imposed by the Health care Reform will get a strong partner in Centene.

With Centene, Health Net will be able to expand in two businesses– Medicaid and Medicare Advantage. These businesses offer huge growth potential. The deal is a net positive for Health Net which will clearly gain from bigger scale and greater diversification.

The company is facing issues in margins from its Medicare business, though this business witnessed an increase in enrollment in 2014, margins did not meet expectations. Moreover, the company's dual demonstration programs launched in San Diego and Los Angeles enrollment failed to live up to the company's expectations because of higher-than-expected opt-out rates among potential enrollees.
 
The company also witnesses a surge in general and administrative expenses which increased in 2014 compared to 2013 levels, primarily because of premium taxes, the health insurer fee and other ACA-related fees.

The company is also expected to pay health insurer fee of about $230 million in 2015. It paid $141.4 million of health insurer fee in 2014. These charges have an adverse impact on the company's cost of operations.

Health Net's agreement to be a part of Centene, thus proves to be the best strategy for growth of the company in order to survive in the fast changing health insurance industry.

Health Net is scheduled to release second-quarter 2015 earnings results next month. The Zacks Consensus Estimate for the same is pegged at 88 cents per share. This translates into a year-over-year improvement of 41.76%.

Health Net currently holds a Zacks Rank #4 (Sell). Investors interested in the HMO space may consider stocks like Aetna Inc. AET and Anthem, Inc. ANTM. Both stocks sport a Zacks Rank #1 (Strong Buy).

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