Health Net Reports Third Quarter 2009 Adjusted1 Net Income of $69.6 Million, or $0.67 per Diluted Share
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The Company Recorded $189.5 Million in Pretax Charges, Including $170.6 Million in Asset Impairments Related to the Pending Sale of Its Northeast Division
Charges Cause GAAP Net Loss of $66.0 Million, or $0.64 Per Share
LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYSE: HNT) today announced a third quarter 2009 GAAP net loss of $66.0 million, or $0.64 per share. GAAP net income in the third quarter of 2008 was $18.5 million, or $0.17 per diluted share.
The third quarter 2009 GAAP results include the effect of two pretax charges:
1. $170.6 million in noncash charges for the impairment of goodwill and other assets related to the pending sale of the company's Northeast division; and
2. $19.5 million related to the company's operations strategy that is designed to reduce general and administrative (G&A) expenses.
Both of these charges were offset by a favorable $0.6 million litigation reserve true-up. A reconciliation of non-GAAP financial measures on the income statement is included with this press release.
Excluding the impact of the charges, net income in the third quarter of 2009 was $69.6 million, or $0.67 per diluted share. Net income in the third quarter of 2008 was $37.8 million, or $0.35 per diluted share, excluding the impact of a $17.1 million pretax charge related to the company's operations strategy and a $14.6 million pretax charge for impairment of the company's investments.
"We are pleased with our third quarter results. Cash flow was strong, and the balance sheet is solid," said Jay Gellert, president and chief executive officer of Health Net, Inc. "In addition, while we continue to produce strong new commercial sales in targeted segments and products in our Western health plans, overall commercial enrollment decreased due to in-group losses driven by the economy. Also, our Medicare plans continue to meet expectations, and we are reducing our administrative costs."
On July 20, 2009, Health Net announced that it had entered into a definitive agreement with UnitedHealthcare for the sale of Health Net's Northeast health plan subsidiaries and membership renewal rights. The regulatory approval process for the Northeast transaction is proceeding as expected. The transaction is currently expected to close by year-end 2009 or early 2010.
Membership
Total health plan enrollment as of September 30, 2009 was approximately 3.6 million members, a decrease of 144,000 members, or 3.8 percent, compared with September 30, 2008. Sequentially, total health plan enrollment decreased by 21,000 members, or 0.6 percent, from June 30, 2009.
Total commercial risk enrollment decreased by 166,000 members, or 8.0 percent, to approximately 1.9 million members as of September 30, 2009 compared with September 30, 2008. Sequentially, commercial risk enrollment decreased by 49,000 members, or 2.5 percent, from June 30, 2009.
"Our Western health plans produced new commercial sales of 35,000 members in the third quarter, with more than 24,000 of these new members in California's narrow-network, lower-cost products," said Jim Woys, Health Net's chief operating officer. "Overall commercial enrollment declined due to persistent pressures from the economic downturn."
Enrollment in the company's Medicare Advantage plans decreased by 7,000 members, or 2.4 percent, to 286,000 members at the end of the third quarter of 2009 compared with the end of the third quarter of 2008. Sequentially, Medicare Advantage membership increased by 2,000 members, or nearly 1.0 percent, from June 30, 2009.
Membership in the company's Medicare PDP plans was 466,000 at the end of the third quarter of 2009, a decrease of 72,000 members, or 13.4 percent, compared with the end of the third quarter of 2008. Sequentially, PDP membership increased by 8,000 members, or 1.7 percent, from June 30, 2009.
Medicaid enrollment at September 30, 2009 was 894,000 members, an increase of 106,000 members, or 13.5 percent, from September 30, 2008. Sequentially, Medicaid membership increased by 16,000 members, or 1.8 percent, from June 30, 2009. Both the quarter-over-quarter and sequential increases in Medicaid enrollment were the result of the economic downturn that causes the Medicaid-eligible population to increase.
Revenues, Health Care Costs and G&A Expenses
Health Net's total revenues increased 3.9 percent in the third quarter of 2009 to approximately $4.0 billion from $3.8 billion in the third quarter of 2008. Health plan services premium revenues increased approximately 3.1 percent to nearly $3.2 billion in the third quarter of 2009 compared with approximately $3.1 billion in the third quarter of 2008.
The company's Government contracts revenues increased 4.7 percent in the third quarter of 2009 to $758.5 million from $724.3 million in the third quarter of 2008. The increase was the result of Option Period 6 pricing for the company's TRICARE contract and continued growth in the Military and Family Life Consultant (MFLC) contract that is administered by the company's behavioral health subsidiary, Managed Health Network. Sequentially, revenue decreased 8.8 percent from the second quarter of 2009 primarily as a result of lower estimates of health care costs related to Option Periods 5 and 6 and a change to TRICARE payment policies that align with Medicare payment practices.
The health plan services medical care ratio (MCR) was 86.4 percent in the third quarter of 2009 and 87.5 percent in the third quarter of 2008.
The commercial MCR was 87.0 percent in the third quarter of 2009 compared with 86.7 percent in the third quarter of 2008. Excluding the litigation reserve true-up benefit in the third quarter of 2009, the commercial MCR would have been 40 basis points higher than the commercial MCR in the third quarter of 2008, or 87.1 percent.
Commercial premium yields per member per month (PMPM) increased by 7.6 percent in the third quarter of 2009 compared with the third quarter of 2008. Total commercial health care costs PMPM increased 8.0 percent in the third quarter of 2009 compared with the third quarter of 2008.
"Commercial health care costs in the quarter were adversely affected by higher utilization related to the H1N1 flu virus, COBRA-related utilization and higher-than-expected trends in our Northeast plans," said Woys. "We are encouraged that the commercial MCR in our Western states improved substantially in the third quarter of 2009 compared to the third quarter of 2008."
Health Net's Medicare plans continued to perform consistent with expectations in the third quarter of 2009. The Medicare Advantage and Part D MCRs improved in the third quarter of 2009 compared with the third quarter of 2008.
The Government contracts cost ratio was 94.4 percent in the third quarter of 2009 compared with 95.0 percent in the third quarter of 2008 and 95.1 percent in the second quarter of 2009. "The improvement in the Government contracts cost ratio was due to an increase in MFLC volume and lower health care cost trends in the third quarter," said Woys. "For 2009, we expect this ratio to be at the low end of our previous guidance of 95.0 percent to 95.5 percent."
On a GAAP basis, G&A expense was $319.5 million in the third quarter of 2009 compared with $294.2 million in the third quarter of 2008. On an adjusted basis1, G&A expense was approximately $300.0 million in the third quarter of 2009 compared with $277.0 million in the third quarter of 2008. This increase was primarily due to premium taxes and regulatory fees.
On an adjusted1 basis, Health Net's G&A expense ratio in the third quarter of 2009 increased 40 basis points compared with the third quarter of 2008.
Health Net's selling expenses of $83.3 million in the third quarter of 2009 decreased by approximately $10.0 million compared with the third quarter of 2008, primarily a result of a decrease in commercial membership during the past 12 months.
Balance Sheet
As a result of the pending sale of the company's Northeast health plans, assets and liabilities relating to the Northeast business have been reclassified to either "assets held for sale" or "liabilities held for sale" on the company's consolidated balance sheet. A supplemental balance sheet showing the impact of these reclassifications is included with this press release.
Cash and investments as of September 30, 2009 were approximately $1.8 billion compared with approximately $2.2 billion as of September 30, 2008, and $2.1 billion as of June 30, 2009. Reserves for claims and other settlements as of September 30, 2009 were $951.8 million compared with $1.3 billion as of September 30, 2008. All of these amounts reflect the reclassifications noted above.
Days claims payable (DCP), including provider and other claims settlements and charges, capitation payments and Medicare Part D expenses, for the third quarter of 2009 decreased by 5.3 days to 41.0 days compared with 46.3 days in the third quarter of 2008, and decreased sequentially by 2.1 days compared with the second quarter of 2009.
On an adjusted2 basis, DCP in the third quarter of 2009 decreased by 2.2 days to 50.5 days compared with the third quarter of 2008, and decreased by 3.7 days sequentially. The sequential decline is primarily due to the timing of the company's check-runs. At September 30, 2009, the amount of claims processed but waiting for the weekly check-run decreased by $48.0 million from June 30, 2009. Reserves for incurred but not reported (IBNR) health care costs were stable in the third quarter of 2009 compared to the second quarter of 2009.
The company's debt-to-total capital ratio was 25.8 percent as of September 30, 2009 compared with 27.6 percent as of September 30, 2008 and 25.2 percent as of June 30, 2009.
Cash Flow
Operating cash flow was $154.4 million in the third quarter of 2009 and was affected by the company's receipt of only two of three monthly Medi-Cal payments. The company received the third payment of $64.8 million in early October 2009.
"We received $165.0 million in Medicare risk adjuster payments in the third quarter of 2009 as expected," said Joseph Capezza, Health Net's chief financial officer. "Therefore, we continue to believe that operating cash flow for the full year of 2009 will be approximately $325 million to $350 million if we receive all 12 monthly Medi-Cal payments in calendar year 2009."
2009 Guidance
Including the impact of $100 million to $110 million in expected operations strategy-related pretax charges and additional charges related to the pending sale of the Northeast business the company expects to take in 2009, Health Net expects 2009 full-year GAAP earnings per diluted share of $0.51 to $0.56 based on expected diluted weighted average shares of 104 to 105 million shares. The company lowered the top end of its earnings guidance range by $0.05 per diluted share due to anticipated health care cost pressures in the fourth quarter of 2009 from higher utilization due to the H1N1 flu virus and continued expansion of its COBRA membership. Therefore, the company expects full-year 2009 earnings per diluted share of $2.25 to $2.30, excluding the impact of charges.
The company recorded $170.6 million in goodwill and other impairments in the third quarter of 2009 and expects to record additional impairments in the fourth quarter of 2009. The company continues to evaluate the impact of the potential sale of the Northeast business on its 2009 financial results, including potential loss on sale of the Northeast business, tax benefits, severance costs, other transaction-related costs and operating costs that will be incurred during the transition period following the close of the transaction.
The table on the following page updates previously issued full-year 2009 guidance.
Metric 2009 Guidance
Commercial Risk: -6% to -7% (previously -3% to -5%)
Medicaid: +10% to +12% (previously +6% to +8%)
Year-end Membership
Medicare Advantage: -1% to -2%
PDP: -13% to -15% (previously -15% to -20%)
Consolidated Revenues $15.5 billion to $16.0 billion
Commercial Yields ~ 8.0% (previously ~ 7.5% - 8.0%)
Commercial
~ 8.0% (previously ~ 7.0 - 7.5%)
Health Care Cost Trends
Selling Cost Ratio ~ 2.9%
Government Contracts Ratio ~ 95.0% to 95.5%
G&A Expense Ratio(a) ~ 9.6% to 9.8%
Tax Rate(a) 38.3% to 38.5% (previously 38.5% to 38.7%)
Weighted-average Fully
104 million to 105 million
Diluted Shares Outstanding
GAAP EPS(b) $0.51 to $0.56 (previously $1.85 to $2.10)
Non-GAAP EPS(a) $2.25 to $2.30 (previously $2.25 to $2.35)
(a) Excludes the impact of expected operations strategy-related charges of $100
million to $110 million in 2009.
(b)The company is currently evaluating the impact of the potential sale of the
Northeast business on its 2009 financial results, including potential loss on
sale of the Northeast business, tax benefits, severance costs, other
transaction-related costs and operating costs that will be incurred during the
transition period following the close of the transaction.
Conference Call
As previously announced, Health Net will discuss the company's third quarter 2009 results during a conference call on Tuesday, November 3, 2009, beginning at approximately 11:00 a.m. Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:
866.393.1637 (Domestic) 800.642.1687 (Replay - Domestic)
706.643.5711 (International) 706.645.9291 (Replay - International)
An access code is required for both the live conference call and the replay. The access code is 31753874. A replay of the conference call will be available through 12.00 a.m. Eastern time on November 8, 2009. A live webcast and replay of the conference call also will be available at www.healthnet.com under "Investor Relations." The conference call webcast is open to all interested parties. Anyone listening to the company's conference call will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2008, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009, and June 30, 2009, and other reports filed by the company from time to time with the Securities and Exchange Commission.
About Health Net
Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company's health plans and government contracts subsidiaries provide health benefits to approximately 6.6 million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net's behavioral health subsidiary, MHN, provides mental health benefits to approximately 6.5 million individuals in all 50 states. The company's subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.
For more information on Health Net, Inc., please visit the company's Web site at www.healthnet.com.
Cautionary Statements
All statements in this press release, other than statements of historical information provided herein, may be deemed to be forward-looking statements and as such are subject to a number of risks and uncertainties. These statements are based on management's analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, statements including the words "believes," "anticipates," "plans," "expects," "may," "should," "could," "estimate," "intend" and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, any failure to close the pending sale of our Northeast business; costs, fees and expenses related to the pending sale and proposed post-closing administrative services; potential termination of our TRICARE North operations; rising health care costs; a continued decline in the economy; negative prior period claims reserve developments; investment portfolio impairment charges; volatility in the financial markets; trends in medical care ratios; unexpected utilization patterns or unexpectedly severe or widespread illnesses; membership declines; rate cuts affecting our Medicare or Medicaid businesses; litigation costs; regulatory issues; operational issues; health care reform; and general business and market conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors" section included within the company's most recent Annual Report on Form 10-K, subsequent quarterly reports on Form 10-Q, and the risks discussed in the company's other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise any of its forward-looking statements to reflect events or circumstances that arise after the date of this release.
The financial information presented in this press release is unaudited and is subject to change as a result of subsequent events or adjustments, if any, arising prior to the filing of the company's Form 10-Q for the period ended September 30, 2009.
Footnotes
1Detailed explanations of the non-GAAP financial measures referred to in this press release and reconciliations to the comparable GAAP measures are included in the attached financial tables.
2See footnote (a) in the Notes to Consolidated Financial Statements in the financial schedules attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.
Health Net, Inc.
Enrollment Data - By State
(In thousands)
Change from
June 30, 2009 September 30, 2008
Sept June Sept Increase/ % Increase/ %
30, 30, 30,
2009 2009 2008 (Decrease) Change (Decrease) Change
California
Large Group 888 908 954 (20 ) (2.2 )% (66 ) (6.9 )%
Small Group and 365 380 431 (15 ) (3.9 )% (66 ) (15.3 )%
Individual
Commercial Risk 1,253 1,288 1,385 (35 ) (2.7 )% (132 ) (9.5 )%
ASO 5 3 5 2 66.7 % 0 0.0 %
Total Commercial 1,258 1,291 1,390 (33 ) (2.6 )% (132 ) (9.5 )%
Medicare 136 134 131 2 1.5 % 5 3.8 %
Advantage
Medi-Cal 841 827 742 14 1.7 % 99 13.3 %
Total California 2,235 2,252 2,263 (17 ) (0.8 )% (28 ) (1.2 )%
Connecticut
Large Group 92 92 117 0 0.0 % (25 ) (21.4 )%
Small Group and 23 23 26 0 0.0 % (3 ) (11.5 )%
Individual
Commercial Risk 115 115 143 0 0.0 % (28 ) (19.6 )%
ASO 25 26 25 (1 ) (3.8 )% 0 0.0 %
Total Commercial 140 141 168 (1 ) (0.7 )% (28 ) (16.7 )%
Medicare 53 52 57 1 1.9 % (4 ) (7.0 )%
Advantage
Total 193 193 225 0 0.0 % (32 ) (14.2 )%
Connecticut
New York
Large Group 97 97 101 0 0.0 % (4 ) (4.0 )%
Small Group and 146 145 107 1 0.7 % 39 36.4 %
Individual
Commercial Risk 243 242 208 1 0.4 % 35 16.8 %
ASO 7 7 11 0 0.0 % (4 ) (36.4 )%
Total Commercial 250 249 219 1 0.4 % 31 14.2 %
Medicare 2 2 6 0 0.0 % (4 ) (66.7 )%
Advantage
Total New York 252 251 225 1 0.4 % 27 12.0 %
New Jersey
Large Group 17 19 20 (2 ) (10.5 )% (3 ) (15.0 )%
Small Group and 62 61 55 1 1.6 % 7 12.7 %
Individual
Commercial Risk 79 80 75 (1 ) (1.3 )% 4 5.3 %
ASO 3 2 4 1 50.0 % (1 ) (25.0 )%
Total Commercial 82 82 79 0 0.0 % 3 3.8 %
Medicaid 53 51 46 2 3.9 % 7 15.2 %
Total New Jersey 135 133 125 2 1.5 % 10 8.0 %
Arizona
Large Group 59 64 80 (5 ) (7.8 )% (21 ) (26.3 )%
Small Group and 38 39 50 (1 ) (2.6 )% (12 ) (24.0 )%
Individual
Commercial Risk 97 103 130 (6 ) (5.8 )% (33 ) (25.4 )%
Medicare 65 65 67 0 0.0 % (2 ) (3.0 )%
Advantage
Total Arizona 162 168 197 (6 ) (3.6 )% (35 ) (17.8 )%
Oregon
Large Group 78 86 99 (8 ) (9.3 )% (21 ) (21.2 )%
Small Group and 47 47 38 0 0.0 % 9 23.7 %
Individual
Commercial Risk 125 133 137 (8 ) (6.0 )% (12 ) (8.8 )%
Medicare 24 24 22 0 0.0 % 2 9.1 %
Advantage
Total Oregon 149 157 159 (8 ) (5.1 )% (10 ) (6.3 )%
Other States
Medicare 6 7 10 (1 ) (14.3 )% (4 ) (40.0 )%
Advantage
Medicare PDP 466 458 538 8 1.7 % (72 ) (13.4 )%
(stand-alone)
Total Health Plan
Enrollment
Large Group 1,231 1,266 1,371 (35 ) (2.8 )% (140 ) (10.2 )%
Small Group and 681 695 707 (14 ) (2.0 )% (26 ) (3.7 )%
Individual
Commercial Risk 1,912 1,961 2,078 (49 ) (2.5 )% (166 ) (8.0 )%
ASO 40 38 45 2 5.3 % (5 ) (11.1 )%
Total Commercial 1,952 1,999 2,123 (47 ) (2.4 )% (171 ) (8.1 )%
Medicare 286 284 293 2 0.7 % (7 ) (2.4 )%
Advantage
Medicare PDP 466 458 538 8 1.7 % (72 ) (13.4 )%
(stand-alone)
Medi-Cal/Medicaid 894 878 788 16 1.8 % 106 13.5 %
Total Health 3,598 3,619 3,742 (21 ) (0.6 )% (144 ) (3.8 )%
Plans
TRICARE - North 3,040 3,040 2,951 0 0.0 % 89 3.0 %
Contract Eligibles
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
Change from
June 30, 2009 September 30, 2008
Sept June Sept Increase/ % Increase/ %
30, 30, 30,
2009 2009 2008 (Decrease) Change (Decrease) Change
Large Group
California 888 908 954 (20 ) (2.2 )% (66 ) (6.9 )%
Connecticut 92 92 117 0 0.0 % (25 ) (21.4 )%
New York 97 97 101 0 0.0 % (4 ) (4.0 )%
New Jersey 17 19 20 (2 ) (10.5 )% (3 ) (15.0 )%
Arizona 59 64 80 (5 ) (7.8 )% (21 ) (26.3 )%
Oregon 78 86 99 (8 ) (9.3 )% (21 ) (21.2 )%
1,231 1,266 1,371 (35 ) (2.8 )% (140 ) (10.2 )%
Small Group and
Individual
California 365 380 431 (15 ) (3.9 )% (66 ) (15.3 )%
Connecticut 23 23 26 0 0.0 % (3 ) (11.5 )%
New York 146 145 107 1 0.7 % 39 36.4 %
New Jersey 62 61 55 1 1.6 % 7 12.7 %
Arizona 38 39 50 (1 ) (2.6 )% (12 ) (24.0 )%
Oregon 47 47 38 0 0.0 % 9 23.7 %
681 695 707 (14 ) (2.0 )% (26 ) (3.7 )%
Commercial Risk
California 1,253 1,288 1,385 (35 ) (2.7 )% (132 ) (9.5 )%
Connecticut 115 115 143 0 0.0 % (28 ) (19.6 )%
New York 243 242 208 1 0.4 % 35 16.8 %
New Jersey 79 80 75 (1 ) (1.3 )% 4 5.3 %
Arizona 97 103 130 (6 ) (5.8 )% (33 ) (25.4 )%
Oregon 125 133 137 (8 ) (6.0 )% (12 ) (8.8 )%
1,912 1,961 2,078 (49 ) (2.5 )% (166 ) (8.0 )%
ASO
California 5 3 5 2 66.7 % 0 0.0 %
Connecticut 25 26 25 (1 ) (3.8 )% 0 0.0 %
New York 7 7 11 0 0.0 % (4 ) (36.4 )%
New Jersey 3 2 4 1 50.0 % (1 ) (25.0 )%
40 38 45 2 5.3 % (5 ) (11.1 )%
Total Commercial
California 1,258 1,291 1,390 (33 ) (2.6 )% (132 ) (9.5 )%
Connecticut 140 141 168 (1 ) (0.7 )% (28 ) (16.7 )%
New York 250 249 219 1 0.4 % 31 14.2 %
New Jersey 82 82 79 0 0.0 % 3 3.8 %
Arizona 97 103 130 (6 ) (5.8 )% (33 ) (25.4 )%
Oregon 125 133 137 (8 ) (6.0 )% (12 ) (8.8 )%
1,952 1,999 2,123 (47 ) (2.4 )% (171 ) (8.1 )%
Medicare Advantage
California 136 134 131 2 1.5 % 5 3.8 %
Connecticut 53 52 57 1 1.9 % (4 ) (7.0 )%
New York 2 2 6 0 0.0 % (4 ) (66.7 )%
Arizona 65 65 67 0 0.0 % (2 ) (3.0 )%
Oregon 24 24 22 0 0.0 % 2 9.1 %
Other States 6 7 10 (1 ) (14.3 )% (4 ) (40.0 )%
286 284 293 2 0.7 % (7 ) (2.4 )%
Medi-Cal/Medicaid
California 841 827 742 14 1.7 % 99 13.3 %
New Jersey 53 51 46 2 3.9 % 7 15.2 %
894 878 788 16 1.8 % 106 13.5 %
Medicare PDP 466 458 538 8 1.7 % (72 ) (13.4 )%
(stand-alone)
Total Health Plan
Enrollment
Large Group 1,231 1,266 1,371 (35 ) (2.8 )% (140 ) (10.2 )%
Small Group and 681 695 707 (14 ) (2.0 )% (26 ) (3.7 )%
Individual
Commercial Risk 1,912 1,961 2,078 (49 ) (2.5 )% (166 ) (8.0 )%
ASO 40 38 45 2 5.3 % (5 ) (11.1 )%
Total Commercial 1,952 1,999 2,123 (47 ) (2.4 )% (171 ) (8.1 )%
Medicare 286 284 293 2 0.7 % (7 ) (2.4 )%
Advantage
Medicare PDP 466 458 538 8 1.7 % (72 ) (13.4 )%
(stand-alone)
Medi-Cal/Medicaid 894 878 788 16 1.8 % 106 13.5 %
Total Health 3,598 3,619 3,742 (21 ) (0.6 )% (144 ) (3.8 )%
Plans
TRICARE - North 3,040 3,040 2,951 0 0.0 % 89 3.0 %
Contract Eligibles
Health Net, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share, PMPM and ratio data)
Quarter Ended Quarter Ended Quarter Ended
September 30, June 30, September 30,
REVENUES: 2008 2009 2009
Health plan services premiums $ 3,072,717 $ 3,152,783 $ 3,166,877
Government contracts 724,323 832,088 758,507
Net investment income 10,204 20,432 27,691
Administrative services fees and 11,607 8,387 15,578
other income
3,818,851 4,013,690 3,968,653
EXPENSES:
Health plan services 2,689,790 2,718,039 2,734,984
Government contracts 687,848 791,044 716,323
General and administrative 294,178 332,188 319,451
Selling 93,232 81,359 83,275
Depreciation and amortization 17,255 15,708 12,689
Interest 10,413 11,518 10,264
Impairments on assets held for - - 170,570
sale
3,792,716 3,949,856 4,047,556
Income from operations before 26,135 63,834 (78,903 )
income taxes
Income tax provision 7,665 23,694 (12,881 )
Net income $ 18,470 $ 40,140 $ (66,022 )
Basic earnings per share $ 0.17 $ 0.39 $ (0.64 )
Diluted earnings per share $ 0.17 $ 0.38 $ (0.64 )
Weighted average shares
outstanding:
Basic 105,915 103,854 103,873
Diluted 106,869 104,323 103,873
Pretax margin 0.7 % 1.6 % -2.0 %
Health plan services MCR 87.5 % 86.2 % 86.4 %
Government contracts cost ratio 95.0 % 95.1 % 94.4 %
G&A expense ratio 9.5 % 10.5 % 10.0 %
Selling costs ratio 3.0 % 2.6 % 2.6 %
Days claims payable (a) 46.3 43.1 41.0
Days claims payable - adjusted (a) 52.7 54.2 50.5
Effective tax rate 29.3 % 37.1 % 16.3 %
Health plan services premiums PMPM $ 276.29 $ 295.11 $ 296.16
Health plan services costs PMPM $ 241.86 $ 254.41 $ 255.77
Health Net, Inc.
Reconciliation of Non-GAAP Financial Measures
Operating Results Excluding Charges
(Amounts in thousands, except per share, PMPM and ratio data)
Note: This table presents the company's consolidated operations for the periods presented below and the charges recorded in the consolidated
statement of operations. Management believes that the presentation of certain financial information in the attached press release (such as Net
investment income, Health plan services expense, General and administrative expense, Income before income taxes, Income tax provision, Net income,
Basic and diluted earnings per share, Pretax margin, MCR, G&A expense ratio, and effective tax rate), excluding the charges that were recorded, all
of which are non-GAAP financial information, are important to investors as they exclude special items that are not indicative of our core operating
results. Non-GAAP financial information presented below should be considered in addition to, not as a substitute for, financial information
prepared in accordance with GAAP.
Quarter Ended September 30, 2008 Quarter Ended June 30, 2009 Quarter Ended September 30, 2009
Excluding Excluding Excluding
Impact of Impact of Impact of Impact of Impact of Impact of
As Reported Charge1 Charge1 As Reported Charge2 Charge2 As Reported Charge3 Charge3
(Non-GAAP) (Non-GAAP) (Non-GAAP)
REVENUES:
Health plan
services $ 3,072,717 $ 3,072,717 $ 3,152,783 $ 3,152,783 $ 3,166,877 $ 3,166,877
premiums
Government 724,323 724,323 832,088 832,088 758,507 758,507
contracts
Net investment 10,204 (14,642 ) 24,846 20,432 20,432 27,691 27,691
income
Administrative
services fees 11,607 11,607 8,387 8,387 15,578 15,578
and other
income
3,818,851 (14,642 ) 3,833,493 4,013,690 - 4,013,690 3,968,653 - 3,968,653
EXPENSES:
Health plan 2,689,790 2,689,790 2,718,039 (2,056 ) 2,720,095 2,734,984 (571 ) 2,735,555
services
Government 687,848 687,848 791,044 791,044 716,323 716,323
contracts
General and 294,178 17,145 277,033 332,188 19,646 312,542 319,451 19,495 299,956
administrative
Selling 93,232 93,232 81,359 81,359 83,275 83,275
Depreciation
and 17,255 17,255 15,708 15,708 12,689 12,689
amortization
Interest 10,413 10,413 11,518 11,518 10,264 10,264
Impairments on
assets held - - - - 170,570 170,570 -
for sale
3,792,716 17,145 3,775,571 3,949,856 17,590 3,932,266 4,047,556 189,494 3,858,062
Income (loss)
from operations 26,135 (31,787 ) 57,922 63,834 (17,590 ) 81,424 (78,903 ) (189,494 ) 110,591
before income
taxes
Income tax
provision 7,665 (12,498 ) 20,163 23,694 (6,977 ) 30,671 (12,881 ) (53,890 ) 41,009
(benefit)
Net income $ 18,470 $ (19,289 ) $ 37,759 $ 40,140 $ (10,613 ) $ 50,753 $ (66,022 ) $ (135,604 ) $ 69,582
(loss)
Basic earnings
(loss) per $ 0.17 $ (0.19 ) $ 0.36 $ 0.39 $ (0.10 ) $ 0.49 $ (0.64 ) $ (1.31 ) $ 0.67
share
Diluted
earnings (loss) $ 0.17 $ (0.18 ) $ 0.35 $ 0.38 $ (0.11 ) $ 0.49 $ (0.64 ) $ (1.31 ) $ 0.67
per share
Weighted
average shares
outstanding:
Basic 105,915 105,915 103,854 103,854 103,873 103,873
Diluted 106,869 106,869 104,323 104,323 103,873 104,432
Pretax margin 0.7 % -0.8 % 1.5 % 1.6 % -0.4 % 2.0 % -2.0 % -4.8 % 2.8 %
Health plan 87.5 % 0.0 % 87.5 % 86.2 % -0.1 % 86.3 % 86.4 % 0.0 % 86.4 %
services MCR
Government
contracts cost 95.0 % - 95.0 % 95.1 % - 95.1 % 94.4 % - 94.4 %
ratio
G&A expense 9.5 % 0.5 % 9.0 % 10.5 % 0.6 % 9.9 % 10.0 % 0.6 % 9.4 %
ratio
Selling costs 3.0 % - 3.0 % 2.6 % - 2.6 % 2.6 % - 2.6 %
ratio
Effective tax 29.3 % -5.5 % 34.8 % 37.1 % -0.6 % 37.7 % 16.3 % -20.8 % 37.1 %
rate
1 Includes a $14.6 million pretax realized losses from other-than-temporary impairments of investment securities included in net investment income
and a $17.1 million pretax charge primarily for severance and other expenses related to the company's operations strategy and included in G&A
expenses.
2 Includes a $2.1 million pretax benefit for a litigation reserve true-up included in health plan services expenses and a $19.7 million pretax
charge primarily for severance and other expenses related to the company's operations strategy and included in G&A expenses.
3 Includes $0.6 million litigation reserve true-up included in health care costs, a $19.5 million pretax charge primarily for IT systems and other
expenses related to the company's operations strategy and included in G&A expenses and a $170.6 million pretax asset impairments for goodwill,
intangible and IT-related assets related to the pending sale of our Northeast health plans.
Health Net, Inc.
Consolidated Balance Sheet
(Amounts in thousands, except ratio data)
September 30, June 30, Sept 30,
2008 2009 2009
ASSETS
Current Assets
Cash and cash equivalents $ 340,121 $ 565,856 $ 463,311
Investments - available for 1,838,951 1,477,651 1,309,864
sale
Premiums receivable, net 295,854 414,199 307,488
Amounts receivable under 235,064 279,290 224,495
government contracts
Incurred but not reported
(IBNR) health care costs 307,970 334,104 323,207
receivable under TRICARE North
contract
Other receivables 107,032 181,563 183,258
Deferred taxes 111,266 77,600 101,043
Assets held for sale - - 848,601
Other assets 238,615 207,383 195,799
Total current assets 3,474,873 3,537,646 3,957,066
Property and equipment, net 228,256 169,925 136,819
Goodwill, net 751,949 751,949 611,886
Other intangible assets, net 96,122 82,698 29,478
Deferred taxes 58,555 67,247 44,119
Investments - available for - 60,047 11,435
sale-noncurrent
Other noncurrent assets 132,427 133,501 103,093
Total Assets $ 4,742,182 $ 4,803,013 $ 4,893,896
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Reserves for claims and other $ 1,348,681 $ 1,243,517 $ 951,778
settlements
Health care and other costs
payable under government 56,505 76,709 61,037
contracts
IBNR health care costs payable 307,970 334,104 323,207
under TRICARE North contract
Unearned premiums 197,881 184,881 124,828
Borrowings under amortizing 26,693 117,999 119,915
financing facility
Liabilities held for sale - - 355,530
Accounts payable and other 285,016 352,890 529,740
liabilities
Total current liabilities 2,222,746 2,310,100 2,466,035
Senior notes payable 398,224 398,378 398,429
Borrowings under amortizing 119,900 - -
financing facility
Borrowings under revolving 100,000 100,000 100,000
credit facility
Other noncurrent liabilities 206,187 167,993 154,087
Total Liabilities 3,047,057 2,976,471 3,118,551
Stockholders' Equity
Common stock and additional 1,181,481 1,191,021 1,184,905
paid-in capital
Treasury common stock, at cost (1,367,302 ) (1,368,825 ) (1,368,854 )
Retained earnings 1,908,565 2,006,275 1,940,253
Accumulated other comprehensive (27,619 ) (1,929 ) 19,041
loss
Total Stockholders' Equity 1,695,125 1,826,542 1,775,345
Total Liabilities and $ 4,742,182 $ 4,803,013 $ 4,893,896
Stockholders' Equity
Debt-to-Total Capital Ratio 27.6 % 25.2 % 25.8 %
Health Net, Inc.
Supplemental Consolidated Balance Sheet
As of September 30, 2009
(Amounts in thousands, except ratio data)
Note:
Set forth below is a supplemental consolidated balance sheet as of September 30,
2009, which breaks out certain assets and liabilities being held for sale, a
portion of which is non-GAAP financial information. Management believes that the
presentation of this non-GAAP financial information presented below is important
to investors as it shows the assets and liabilities and the related amounts that
will no longer be included in our consolidated balance sheet following closing
of the pending sale of our Northeast health plans to UnitedHealth Group.
Non-GAAP financial information presented below should be considered in addition
to, not as a substitute for, financial information prepared in accordance with
GAAP.
Including
Assets/Liabilities
Held for Sale Assets/Liabilities
(Non-GAAP) Held for Sale As Reported
ASSETS
Current Assets
Cash and cash $ 701,571 $ 238,260 $ 463,311
equivalents
Investments - available 1,663,264 353,400 1,309,864
for sale
Premiums receivable, 350,390 42,902 307,488
net
Amounts receivable
under government 224,495 224,495
contracts
Incurred but not
reported (IBNR) health
care costs receivable 323,207 323,207
under TRICARE North
contract
Other receivables 211,840 28,582 183,258
Deferred taxes 114,897 13,854 101,043
Assets held for sale - (848,601 ) 848,601
Other assets 222,496 26,697 195,799
Total current assets 3,812,160 (144,906 ) 3,957,066
Property and equipment, 136,819 136,819
net
Goodwill, net 611,886 611,886
Other intangible assets, 75,630 46,152 29,478
net
Deferred taxes 62,927 18,808 44,119
Investments - available 17,145 5,710 11,435
for sale-noncurrent
Other noncurrent assets 177,329 74,236 103,093
Total Assets $ 4,893,896 $ - $ 4,893,896
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and $ 1,194,947 $ 243,169 $ 951,778
other settlements
Health care and other
costs payable under 61,037 61,037
government contracts
IBNR health care costs
payable under TRICARE 323,207 323,207
North contract
Unearned premiums 169,413 44,585 124,828
Borrowings under
amortizing financing 119,915 119,915
facility
Liabilities held for - (355,530 ) 355,530
sale
Accounts payable and 591,056 61,316 529,740
other liabilities
Total current 2,459,575 (6,460 ) 2,466,035
liabilities
Senior notes payable 398,429 398,429
Borrowings under
amortizing financing - -
facility
Borrowings under
revolving credit 100,000 100,000
facility
Other noncurrent 160,547 6,460 154,087
liabilities
Total Liabilities 3,118,551 - 3,118,551
Stockholders' Equity
Common stock and
additional paid-in 1,184,905 1,184,905
capital
Treasury common stock, (1,368,854 ) (1,368,854 )
at cost
Retained earnings 1,940,253 1,940,253
Accumulated other 19,041 19,041
comprehensive loss
Total Stockholders' 1,775,345 - 1,775,345
Equity
Total Liabilities and $ 4,893,896 $ - $ 4,893,896
Stockholders' Equity
Debt-to-Total Capital 25.8 % 25.8 %
Ratio
Health Net, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Quarter Ended Quarter Ended Quarter Ended
September 30, June 30, September 30,
2008 2009 2009
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 18,470 $ 40,140 $ (66,022 )
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities:
Amortization and depreciation 17,255 15,708 12,689
Share-based compensation expense 8,216 5,987 (5,025 )
Deferred income taxes 52,249 11,579 (45,976 )
Excess tax benefits from (35 ) - -
share-based compensation
Asset and investment impairment 15,733 491 170,570
charges
Other changes (4,985 ) 1,140 (5,362 )
Changes in assets and liabilities:
Premiums receivable and unearned 112,741 (20,673 ) 48,341
premiums
Other receivables, deferred taxes (61,547 ) 29,290 (30,470 )
and other assets
Amounts receivable/payable under 5,977 (9,039 ) 39,123
government contracts
Reserves for claims and other (9,075 ) (85,192 ) (48,570 )
settlements
Accounts payable and other (62,558 ) (43,598 ) 85,055
liabilities
Net cash provided by (used in) 92,441 (54,167 ) 154,353
operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES:
Sales of investments 154,478 307,407 465,732
Maturities of investments 58,400 51,010 37,355
Purchases of investments (580,780 ) (455,652 ) (520,733 )
Proceeds from sale of property and - - 12
equipment
Purchases of property and equipment (7,887 ) (5,081 ) (8,018 )
Net sales and purchases of 7,661 (41 ) 6,558
restricted investments and other
Net cash used in investing (368,128 ) (102,357 ) (19,094 )
activities
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise of stock
options and employee stock 235 - 485
purchases
Repurchases of common stock (100,110 ) - (29 )
Excess tax benefits from 35 - -
share-based compensation
Borrowings under financing 200,000 25,000 -
arrangements
Repayment of borrowings under (245,000 ) (42,444 ) -
financing arrangements
Net cash (used in) provided by (144,840 ) (17,444 ) 456
financing activities
Net decrease in cash and cash (420,527 ) (173,968 ) 135,715
equivalents
Cash and cash equivalents - - (238,260 )
classified as assets held for sale
Cash and cash equivalents, 760,648 739,824 565,856
beginning of period
Cash and cash equivalents, end of $ 340,121 $ 565,856 $ 463,311
period
Health Net, Inc.
Notes to Consolidated Financial Statements
Note:
(a) Management believes that days claims payable (excluding capitation, provider
and other claim settlements and Medicare Part D), a non-GAAP financial measure,
provides useful information to investors because, in excluding those health care
costs for which no or minimal reserves are maintained, it is a more accurate
reflection of days claims payable calculated from claims-based reserves than is
days claims payable, which does not exclude such costs. This non-GAAP financial
information should be considered in addition to, not as a substitute for,
financial information prepared in accordance with GAAP. The following table
provides a reconciliation of the differences between days claims payable
(excluding capitation, provider and other claim settlements and Medicare Part D)
and days claims payable, the most directly comparable financial measure
calculated and presented in accordance with GAAP:
Q3 2008 Q2 2009 Q3 2009
(Dollars in millions)
Reserve for Claims and Other Settlements $ 1,348.7 $ 1,243.5 $ 951.8
Add: Reserve for Claims and Other $ 243.2
Settlements Held for Sale
Less: Capitation Payable, Provider and
Other Claim Settlements and Medicare Part (245.3 ) (196.9 ) (159.2 )
D
Adjusted Reserve for Claims and Other 1,103.4 1,046.6 1,035.8
Settlements
(1) Average Reserve for Claims and Other 1,353.2 1,286.1 1,219.3
Settlements
(2) Average Adjusted Reserve for Claims 1,084.0 1,089.4 1,041.2
and Other Settlements
(3) Health Plan Services Cost 2,689.8 2,718.0 2,735.0
Less: Capitation Payable, Provider and
Other Claim Settlements and Medicare Part (796.5 ) (887.4 ) (837.3 )
D
(4) Adjusted Health Plan Services Cost 1,893.3 1,830.6 1,897.7
(5) Number of Days in Period 92 91 92
= (1) / (3) * (5) Days Claims Payable 46.3 43.1 41.0
= (2) / (4) * (5) Days Claims Payable - 52.7 54.2 50.5
Adjusted
Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
(In millions)
Health Plan Services
YTD 9/2009 Year 2008 Year 2007
Reserve for claims (a), beginning of period $ 957.1 $ 838.7 $ 754.2
Incurred claims related to:
Current Year 4,899.5 6,372.2 5,790.7
Prior Years (c) (72.1 ) (8.3 ) 0.6
Total Incurred (b) 4,827.4 6,363.9 5,791.3
Paid claims related to:
Current Year 4,018.2 5,443.2 4,972.3
Prior Years 843.4 802.3 734.5
Total Paid (b) 4,861.6 6,245.5 5,706.8
Reserve for claims (a), end of period 922.9 957.1 838.7
Add:
Claims Payable (d) 183.8 284.8 365.6
Other (e) 88.2 96.2 96.1
Held for Sale Reserve for Claims and other (243.2 )
Settlements (f)
Reserves for claims and other settlements, $ 951.7 $ 1,338.1 $ 1,300.4
end of period
(a) Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses. (b) Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included. (c) This line represents the change in reserves attributable to the difference between the original estimate of incurred claims for prior years and the revised estimate. In developing the revised estimate, there have been no changes in the approach used to determine the key actuarial assumptions, which are the completion factor and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally accepted accounting principles. The majority of the reserve balance held at each quarter-end is associated with the most recent months' incurred services because these are the services for which the fewest claims have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months' incurred services. Revised estimates for prior years are determined in each quarter based on the most recent updates of paid claims for prior years. (d) Includes amount accrued for litigation and regulatory-related expenses. (e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items. (f) Reserves for claims and other settlements related to Northeast business reclassified to liabilities held for sale due to pending sale.
Source: Health Net, Inc.
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