Health Net Lags Estimates - Analyst Blog

Health Net Inc. (HNT) reported fourth-quarter EPS of 83 cents compared to a loss of 43 cents in the prior-year quarter. The reported quarter included $24.9 million, a non-cash benefit related to a litigation reserve true-up; and $13.0 million of expenses primarily related to litigation and the company's overhead cost reduction efforts.

Health Net reported full year 2010 EPS of $2.06 per share compared to a loss of 47 cents in the full year 2009.

Excluding these items, Health Net's operating EPS for the fourth quarter came in at 71 cents, lagging the Zacks Consensus Estimate of 77 cents.

Health Net's Western Region Operations and Government Contracts segments produced combined net earnings of 80 cents in the reported quarter as opposed to 79 cents in the prior-year quarter. In fiscal 2010, the combined net earnings were $2.60 per share as against to $2.58 per share in fiscal 2009.

Health Net reported an 11.2% year-over-year decline in total revenues to $3.37 billion in the fourth quarter, exceeding the Zacks Consensus Estimate of $3.36 billion. Total revenues in fiscal 2010 were $13.6 billion, surpassing the Zacks Consensus Estimate of $13.4 billion.

The primary reason for the decline was the sale of its Northeast businesses in December 2009 and a reduction in membership. Health Net's health plan services premium revenues also decreased by 16.5% in the reported quarter to $2.5 billion.

Health plan services expenses plunged to $2.1 billion as against $2.6 billion in the prior-year quarter, while investment income plummeted to $15.2 million from $33.5 million in the prior-year quarter.

Segment Performance

Western Region: The segment posted flat revenues of $2.5 billion, compared with the year-ago quarter. Investment income for the segment declined 37.6% year over year to $15.1 million, while health plan services expenses were flat with the prior-year quarter at $2.1 billion.

Total enrollment in the segment declined approximately 2.6% to approximately 2.9 million members. Total commercial enrolment declined 4.4% to approximately 1.4 million members. While enrolment in the Medicaid business (901,000 members) recorded a year-over-year increase of 5.1%, enrolment in Medicare PDP plans (427,000 members) and Medicare Advantage plans (222,000 members) declined 7.2% and 2.2%, respectively.

Medical care ratio (MCR) for Health Net's health plan services in the segment declined 6 basis points (bps) to 85.2% during the fourth quarter 2010 compared to 85.8% in the year-ago period. Commercial MCR declined 9 bps to 85.5%.

While Medicare Advantage MCR in the segment climbed to 89.4% compared with 88.6% in the year-ago quarter, Medicare Part D MCR plummeted to 53.1% in the quarter compared with 59.7% in the prior-year quarter.

In fiscal 2010, Health Net's health plan services MCR was 86.6% as against 86.7% in the prior-year period. Commercial MCR also declined to 86.1% from 86.8% in fiscal 2009. While Medicare Advantage MCR in the segment increased to 88.8% compared with 88.1% in the prior-year period, Medicare Part D MCR plummeted to 77.2% in the fiscal 2010 compared with 78.4% in the fiscal 2009.

Government Contracts: Revenues in the segment increased 9.0% in the quarter to $822.4 million from $754.8 million in the previous-year quarter. Year over year, cost ratio climbed from 93.2% to 93.7%.

Northeast Operations: Health Net continues to serve the members of the sold Northeast business to UnitedHealth Group Inc. (UNH) as per the agreement. The income is shown separately. The revenues and expenses associated with the company's Northeast Operations in the quarter were $49.7 million and $63.6 million, respectively.

Financial Update

As of December 31, 2010, Health Net recorded cash and investments of approximately $2.0 billion, compared with approximately $2.1 billion as of December 31, 2009. However, the company's debt-to-total capital ratio declined to 19.0% at the end of the reported quarter as compared with 26.2% at the end of the prior-year quarter and 22.7% at the end of the previous quarter.

Further, Health Net's operating cash flow was recorded at $214.6 million, as the company received approximately $64.3 million in Medicaid payments in January 2011, which was expected to receive in the fourth quarter 2010.

Share Repurchase Update

During the reported quarter, Health Net repurchased 2.2 million shares, at an average price of $26.76, for approximately $54.5 million. At the end of the quarter, the company had a balance of approximately $149.8 million remaining under the current $300 million share repurchase program.

Outlook

Health Net has provided its GAAP EPS guidance for 2011 to be at least $2.05. The company's guidance does not include the impact of share repurchases other than to counter dilution. However, it includes the expected impact of the Centers for Medicare & Medicaid Services (CMS) sanctions previously announced on November 19, 2010.

Health Net announced that the CMS notified the company of its intent to impose intermediate sanctions suspending the marketing and enrollment of new members of all Health Net Medicare Advantage Prescription Drug (MAPD) and stand-alone Prescription Drug Plan (Part D) contracts, effective November 20, 2010.

The company also expects its 2011 EPS for the combined Western Region Operations and Government Contracts segments to be at least $2.75, based on an increase in commercial membership growth and cost containment measures.

The company has also provided guidance for year-end membership in the Western Region, with enrollment in medical membership to be up 2%−3% for 2011 and PDP to be down 14%−16%. Enrollment in the commercial business is expected to be up 1%−2%, Medicare Advantage to be down 15%−17%, while enrollment in Medicaid is to be up 6%−7%.

Health Net projects its government contracts revenue to decline in the range of $1.4-$1.5 billion and expects pretax earnings to fall by $10-$15 million in 2011, primarily as a result of the new TRICARE contract that begins on April 1, 2011.

Health Net also expects revenues for the combined Western Region and Government Contracts segments to be in the range of $12.0−$12.5 billion, including the expected impact of the CMS sanctions. Tax rate for Health Net is expected at 39.2% for 2011.

The company also expects selling cost ratio to be approximately in the range of 2.3%-2.4% in 2011, and general and administrative expense ratio to be approximately in the range of 8.7%−8.9% for 2011.