Health Net, Inc. (NYSE: HNT) today announced 2011 second quarter GAAP net income of $58.3 million, or $0.63 per diluted share, compared with $45.1 million, or $0.45 per diluted share, for the second quarter of 2010.
The GAAP results include $21.0 million in a pretax loss related to the run-out of the company's remaining Northeast operations and $3.3 million in pretax expenses primarily related to the company's administrative cost reduction efforts.
The company's Western Region Operations (Western Region) and Government Contracts segments produced combined net earnings of $0.76 per diluted share in the second quarter of 2011, an increase of approximately 25.0 percent compared with the second quarter of 2010.
"Our performance in the second quarter of 2011 again affirms our operating and financial progress on a number of fronts," said Jay Gellert, Health Net's chief executive officer. "Membership in our tailored network products grew, commercial margins expanded and the transition to the new TRICARE contract went smoothly. We continued to buy back stock, repurchasing 2.3 million shares in the second quarter for approximately $72.3 million.
"Given our strong performance to date, we are raising our 2011 earnings per diluted share guidance for the combined Western Region and Government Contracts segments to a range of $3.00 to $3.05," Gellert added.
CONSOLIDATED RESULTS
Health Net's total revenues decreased 19.2 percent in the second quarter of 2011 to $2.8 billion from $3.4 billion in the second quarter of 2010 as a result of a decline in Government Contracts revenues to $171.0 million in the second quarter of 2011 compared with $851.9 million in the second quarter of 2010.
The revenue decline in Government Contracts is due to the new T-3 TRICARE North contract that commenced on April 1, 2011. Unlike the prior TRICARE contract, the T-3 contract is an administrative services only (ASO) contract. Health Net now only records revenues and expenses associated with administrative services and related performance incentives and guarantees. These lower revenue and cost levels will continue over the term of the T-3 contract.
Health plan services premium revenues increased by approximately 2.4 percent to $2.6 billion in the second quarter of 2011 compared with $2.5 billion in the second quarter of 2010.
Health plan services expenses increased 3.1 percent to $2.2 billion in the second quarter of 2011 compared with the second quarter of 2010.
WESTERN REGION OPERATIONS SEGMENT
Health Plan Membership
Total enrollment in the Western Region Operations segment at June 30, 2011 was approximately 2.9 million members, an increase of 0.8 percent compared with enrollment at June 30, 2010. Total enrollment in the company's California health plans increased 2.0 percent from June 30, 2010 to June 30, 2011.
Medicaid enrollment in California at June 30, 2011 was 963,000 members, an increase of 86,000 members, or 9.8 percent, from June 30, 2010.
Western Region commercial enrollment on June 30, 2011 was essentially flat at approximately 1.4 million members compared with enrollment on June 30, 2010.
"The increase in Medicaid membership and stable commercial enrollment were expected given current economic conditions," said Jim Woys, Health Net's chief operating officer. "In this economic environment, we are very pleased that our tailored network products grew by 48.2 percent, or approximately 137,000 new members, since June 30, 2010. We believe these tailored network products are responsive to customers' needs for comprehensive benefits at affordable prices."
As of June 30, 2011, tailored network products accounted for 31.0 percent of the company's Western Region commercial enrollment compared with 21.0 percent at June 30, 2010.
Enrollment in the company's Medicare Advantage (MA) plans in the Western Region at June 30, 2011 was 205,000 members, a decrease of approximately 6.4 percent compared with June 30, 2010, primarily as a result of the previously announced sanctions imposed on the company's MA and Medicare stand-alone Prescription Drug Plan (PDP) businesses by the Center for Medicare & Medicaid Services (CMS).
As of August 1, 2011, CMS lifted these sanctions on Health Net's ability to market to and enroll new MA and PDP members.
Membership in the company's PDP products was 389,000 at the end of the second quarter of 2011, a 10.4 percent decrease compared with the end of the second quarter of 2010.
"We are pleased that CMS lifted these sanctions. We have resumed marketing and will be actively marketing MA and PDP products now and during the open enrollment period this fall," said Gellert.
Revenues
Total revenues in the Western Region in the second quarter of 2011 were approximately $2.6 billion compared with $2.5 billion in the second quarter of 2010.
Net investment income in the Western Region was $25.1 million in the second quarter of 2011 compared with $16.3 million in the second quarter of 2010 and $23.8 million in the first quarter of 2011. The year-over-year increase was due to a higher gain on sale of investment in the second quarter of 2011 compared with the second quarter of 2010.
Health Plan Services Expenses
Health plan services expenses in the Western Region were $2.2 billion in the second quarter of 2011 compared with approximately $2.2 billion in the second quarter of 2010.
Commercial Premium Yield and Health Care Cost Trends
In the Western Region, commercial premiums per member per month (PMPM) increased by 4.7 percent to $357 in the second quarter of 2011 compared with $340 in the second quarter of 2010.
Commercial health care costs PMPM in the Western Region increased by 4.0 percent to approximately $306 in the second quarter of 2011 compared with $294 in the second quarter of 2010.
"We continued to produce a positive spread between premium yields PMPM and health care costs PMPM during the second quarter of 2011," said Woys. "The gross margin PMPM increased by more than 9.0 percent in the second quarter of 2011 compared with the second quarter of 2010."
"Given this performance, we are increasing our 2011 annual guidance for the spread between premium yield and health care costs PMPM to approximately 140 to 150 basis points for the full year 2011 compared with previous guidance of approximately 100 to 120 basis points," said Woys.
Medical Care Ratios (MCR)
The health plan services MCR in the Western Region was 87.0 percent in the second quarter of 2011 compared with 87.1 percent in the second quarter of 2010.
The Western Region commercial MCR was 85.7 percent in the second quarter of 2011 compared with 86.3 percent in the second quarter of 2010.
The MA MCR in the Western Region was 90.9 percent in the second quarter of 2011 compared with 88.5 percent in the second quarter of 2010. The PDP MCR was 87.4 percent in the second quarter of 2011 compared with 85.9 percent in the second quarter of 2010. The increases in both the MA and PDP MCRs were due to the adverse effect of limited new member growth.
General & Administrative (G&A) and Selling Expenses
G&A expense in the Western Region was $214.8 million in the second quarter of 2011 compared with $212.7 million in the second quarter of 2010. The G&A expense ratio was 8.4 percent in the second quarter of 2011, a 10 basis point decrease compared with the second quarter of 2010 and a 90 basis point sequential decrease from the first quarter of 2011.
Selling expense in the Western Region was $57.5 million in the second quarter of 2011 compared with $55.8 million in the second quarter of 2010.
GOVERNMENT CONTRACTS SEGMENT
As previously described, health care delivery under the company's new T-3 TRICARE North Region contract began April 1, 2011.
The company's Government Contracts revenues in the second quarter of 2011 were $171.0 million. The Government Contracts revenues in the second quarter of 2010 were $851.9 million.
BALANCE SHEET
Cash and investments as of June 30, 2011 were $1.7 billion compared with $1.9 billion as of June 30, 2010.
Reserves for claims and other settlements as of June 30, 2011 were $900.7 million compared with $934.9 million as of June 30, 2010 and $889.9 million as of March 31, 2011.
Days claims payable (DCP) for the second quarter of 2011 was 36.7 days compared with 39.3 days in the second quarter of 2010 and 35.1 days in the first quarter of 2011.
On an adjusted1 basis, DCP in the second quarter of 2011 was 52.0 days compared with 53.6 days in the second quarter of 2010 and 51.8 days in the first quarter of 2011.
The company's debt-to-total capital ratio was 28.2 percent as of June 30, 2011 compared with 19.0 percent as of December 31, 2010. The increase in the debt-to-total capital ratio in the second quarter of 2011 was the result of $185.0 million in borrowings under the company's revolving credit facility. The borrowings were used primarily to pay the $181.3 million AmCareco litigation judgment and related expenses.
Interest expense was approximately $8.2 million in the second quarter of 2011 compared with $8.8 million in the second quarter of 2010.
CASH FLOW
Operating cash flow was negative $145.8 million in the second quarter of 2011. The primary factors that negatively impacted second quarter operating cash flow were the $181.3 million AmCareco payment; an approximately $102.0 million increase in TRICARE and Medicare receivables; and approximately $25.0 million in Northeast-related payments.
"We received approximately $102 million in Medicare risk adjuster payments to date in the third quarter of 2011. We expect to receive approximately $150 million in TRICARE receivables in the second half of 2011," said Joseph Capezza, Health Net's chief financial officer.
NORTHEAST OPERATIONS SEGMENT
During the second quarter of 2011, Health Net served the members of the sold Northeast companies under administrative services agreements (ASAs) that the company entered into with UnitedHealthcare (United) and its affiliates on the closing date of the transaction. The ASAs terminated on July 1, 2011, and the company entered into claims servicing agreements with United and its affiliates pursuant to which Health Net will continue to administer run-out claims.
The revenues and expenses associated with the company's Northeast Operations in the second quarter of 2011 were $11.4 million and $32.3 million, respectively, and they are shown separately in the accompanying segment information table.
As previously noted, the company expects to receive payments of approximately $121.0 million for membership transition and tangible net equity in the second half of 2011. These payments will be recorded in "Cash Flows from Investing Activities" in the company's financial statements.
SHARE REPURCHASE UPDATE
From January 1, 2011 through July 29, 2011, Health Net repurchased approximately 6.4 million shares of its common stock for approximately $195.3 million at an average price of $30.59 per share. As of July 29, 2011, approximately $254.5 million of authorization remained under the company's $300 million share repurchase program.
2011 GUIDANCE
Health Net is increasing its 2011 annual guidance for GAAP earnings per diluted share to a range of $0.63 to $0.68, or $3.00 to $3.05 per diluted share for the combined Western Region Operations and Government Contracts segments.
Following is a table with specific 2011 guidance metrics.
(a) For the company's Western Region Operations
(b) For the combined Western Region Operations and Government Contracts segments
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