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Form 8-K HEALTH NET INC For: Nov 02

November 2, 2015 9:11 AM EST

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): November 2, 2015

 

 

Health Net, Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Delaware   1-12718   95-4288333

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

21650 Oxnard Street, Woodland

Hills, California

  91367
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (818) 676-6000

Not Applicable

Former Name or Former Address, if Changed Since Last Report

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 2.02 Results of Operations and Financial Condition.

On November 2, 2015, Health Net, Inc. (“we”, “us”, “Health Net” or “our”) issued a press release announcing our financial results for the quarter ended September 30, 2015. The press release contains the non-GAAP financial measure “adjusted days claims payable (DCP).” Adjusted DCP for the third quarter of 2015 was 63.4 days, adjusted DCP for the second quarter of 2015 was 59.1 days and adjusted DCP for the third quarter of 2014 was 65.3 days. Adjusted DCP excludes claims reserve and health plan costs related to our capitation and Medicare Advantage-Prescription Drug payables and costs. The most directly comparable GAAP financial measure to this non-GAAP financial measure is third quarter of 2015 DCP of 46.7 days, second quarter of 2015 DCP of 47.6 days and third quarter of 2014 DCP of 51.4 days.

Management believes that adjusted DCP provides useful information to investors because the adjusted DCP calculation excludes from both claims reserve and health plan costs amounts related to health care costs for which no or minimal reserves are maintained. Therefore, management believes that adjusted DCP may present a more accurate reflection of DCP than does GAAP DCP, which includes such amounts. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the attached press release. As used herein, “GAAP” refers to accounting principles generally accepted in the United States.

The press release is attached hereto as Exhibit 99.1 and hereby incorporated in this Item 2.02 by reference. The information in this Item 2.02 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing by Health Net, Inc. under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

Item 9.01 Financial Statements and Exhibits.

 

(d) Exhibits

 

99.1    Press Release dated November 2, 2015


Exhibit Index

 

Exhibit No.

  

Document Description

99.1    Press Release dated November 2, 2015


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    Health Net, Inc.
November 2, 2015     By:  

/s/ James E. Woys

    Name:   James E. Woys
    Title:   Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer

Exhibit 99.1

 

LOGO

 

Investor Contact:    Media Contact:
Peter O’Neill    Brad Kieffer
(818) 676-8692    (818) 676-6833
[email protected]    [email protected]

HEALTH NET REPORTS THIRD QUARTER 2015 RESULTS

Company Reports GAAP Net Income of $60.3 Million, or $0.77 per Diluted Share

Western Region Operations and Government Contracts Segments Produce

Combined Net Income of $0.96 per Diluted Share in Third Quarter of 2015

Consolidated MCR Improves to 83.4 Percent in Third Quarter of 2015

LOS ANGELES, November 2, 2015 - Health Net, Inc. (NYSE: HNT) today announced 2015 third quarter GAAP net income of $60.3 million, or $0.77 per diluted share, compared with a GAAP net loss of $8.9 million, or a loss of $0.11 per share, for the third quarter of 2014 and GAAP net income of $58.4 million, or $0.75 per diluted share, for the second quarter of 2015.

In the third quarter of 2015, Health Net incurred $21.7 million of pretax expenses primarily as a result of information technology costs associated with the suspension of the previously announced transaction with a wholly owned subsidiary of Cognizant Technology Solutions Corporation (Cognizant). In addition, this amount includes $5.2 million of pretax expenses related to the company’s previously announced definitive merger agreement with Centene Corporation (Centene). Efforts toward the commencement of services pursuant to the Cognizant transaction were suspended in connection with Health Net’s July 2, 2015 announcement that it had entered into a definitive merger agreement with Centene (see Recent Events).

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $75.1 million, or $0.96 per diluted share, in the third quarter of 2015 compared with $58.5 million, or $0.72 per diluted share, in the third quarter of 2014 and $74.6 million, or $0.95 per diluted share, in the second quarter of 2015.


RECENT EVENTS

On July 2, 2015, Health Net announced that it had entered into a definitive merger agreement with Centene under which Centene will acquire all of the issued and outstanding shares of Health Net, subject to the terms and conditions of the merger agreement.

Centene and Health Net received early termination of the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 on August 11, 2015.

On October 23, 2015, Health Net’s stockholders voted to approve the adoption of the merger agreement with Centene. On the same date, Centene’s stockholders voted to approve the issuance of Centene common stock to stockholders of Health Net in connection with Centene’s pending merger with Health Net.

Health Net continues to expect that the transaction will close in early 2016, subject to receipt of required regulatory approvals and satisfaction of other customary closing conditions.

2015 GUIDANCE

Health Net is lowering GAAP earnings per diluted share guidance from $2.70 to $2.50 for the full year 2015. This adjustment primarily reflects third quarter expenses that were incurred as a result of information technology costs in connection with the suspension of the Cognizant transaction as well as costs related to the pending merger transaction with Centene. Health Net is maintaining diluted EPS guidance for the combined Western Region and Government Contracts segments at a range of $3.25 to $3.35 for the full year 2015.

GAAP diluted EPS guidance and diluted EPS guidance for the combined Western Region and Government Contracts segments for the full year 2015 do not include expected fourth quarter 2015 costs associated with the pending merger transaction with Centene or expected fourth quarter 2015 expenses due to the suspension of the Cognizant transaction.

THIRD QUARTER 2015 HIGHLIGHTS

Highlights from the third quarter of 2015 include:

 

  1. Health Net’s total revenues grew 9.6 percent in the third quarter of 2015 compared with the third quarter of 2014, and health plan services premiums revenues rose 9.5 percent over the same period;

 

  2. Combined net income for Health Net’s Western Region and Government Contracts segments rose 28.3 percent in the third quarter of 2015 compared with the third quarter of 2014;

 

  3. The company’s Western Region pretax margin increased 140 basis points to 4.3 percent in the third quarter of 2015 compared with the third quarter of 2014 and increased 50 basis points compared with the second quarter of 2015;

 

  4. Enrollment in the company’s Western Region health plans grew by 6.4 percent to 3.3 million members as of September 30, 2015 compared with 3.1 million members as of September 30, 2014, and increased by 1.0 percent compared with 3.2 million members as of June 30, 2015;

 

  5. Total Medicaid enrollment increased by 17.8 percent, or 279,000 members, to 1.8 million members as of September 30, 2015 compared with September 30, 2014, and rose by 3.1 percent, or 56,000 members, compared with June 30, 2015; and

 

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  6. Health Net’s Western Region health plan services Medical Care Ratio (MCR) improved by 210 basis points year-over-year to 83.4 percent in the third quarter of 2015 and improved by 60 basis points sequentially compared with the second quarter of 2015.

“The third quarter of 2015 continued our positive momentum that we expected for this year,” said Jay Gellert, Health Net’s president and chief executive officer. “We will remain focused on a disciplined execution of our strategy while we work to complete the Centene merger transaction.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 9.6 percent in the third quarter of 2015 to $4.2 billion from $3.8 billion in the third quarter of 2014 and were essentially flat compared with the second quarter of 2015. The year-over-year increase in total revenues was primarily due to an increase in enrollment in the company’s Western Region health plans. Health plan services premiums revenues were approximately $4.0 billion in the third quarter of 2015, an increase of 9.5 percent compared with the third quarter of 2014.

Total expenses increased 6.2 percent in the third quarter of 2015 to $4.0 billion from $3.8 billion in the third quarter of 2014 and were essentially flat compared with the second quarter of 2015. Health plan services expenses increased by 6.9 percent to approximately $3.3 billion in the third quarter of 2015 compared with the third quarter of 2014.

Included in total expenses are $21.7 million, $26.4 million and $47.3 million of expenses primarily related to the transaction with Cognizant for the three months ended September 30, 2015, June 30, 2015 and March 31, 2015, respectively. With respect to the third quarter of 2015, these expenses were primarily information technology expenses associated with the suspension of the Cognizant transaction. In addition, these expenses in the third quarter of 2015 include $5.2 million of pretax expenses related to Health Net’s definitive merger agreement with Centene.

Western Region Health Plan Services

Health plan services premiums revenues in the Western Region of $4.0 billion in the third quarter of 2015 increased by 9.5 percent compared with $3.6 billion in the third quarter of 2014, primarily due to enrollment growth from Medicaid expansion.

Health plan services expenses in the company’s Western Region of $3.3 billion in the third quarter of 2015 increased by 6.9 percent compared with $3.1 billion in the third quarter of 2014, primarily as a result of enrollment growth from Medicaid expansion.

Government Contracts Segment

Government Contracts revenues in the third quarter of 2015 were $160.7 million compared with $146.2 million in the third quarter of 2014 and $141.1 million in the second quarter of 2015. The increase in Government Contracts revenues in the third quarter of 2015 was primarily due to increased revenues from the Department of Veterans Affairs (VA) Patient-Centered Community Care (PC3) program.

Government Contracts expenses in the third quarter of 2015 were $158.2 million compared with $123.6 million in the third quarter of 2014 and $137.2 million in the second quarter of 2015.

 

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As a result of the expedited implementation of the PC3 program, the company experienced higher-than-expected costs in the third quarter of 2015. In total, the company expects to spend approximately $40 million in ramp-up costs in 2015 which are not expected to recur in 2016.

As previously reported, the VA notified Health Net on July 27, 2015 of its intent to exercise option period two for the PC3 program. This one-year option period commenced on October 1, 2015, and continues the health care services provided to veterans in all or portions of 37 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.

On July 23, 2015, Health Net responded to the U.S. Department of Defense’s (DoD) request for proposal for the next generation TRICARE contract which will reduce the three existing TRICARE regions to two regions. In March 2015, the DoD modified the company’s T-3 contract for the TRICARE North Region to add three additional one-year option periods and awarded Health Net the first of the three option periods, which allows the company to continue providing access to health care services to TRICARE beneficiaries through March 31, 2016.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at September 30, 2015 was approximately 3.3 million members, an increase of 6.4 percent from enrollment at September 30, 2014, and an increase of 1.0 percent from June 30, 2015.

Total enrollment in the company’s California health plans at September 30, 2015 was approximately 2.9 million members, an increase of 10.2 percent from enrollment at September 30, 2014, and an increase of 1.8 percent from enrollment at June 30, 2015.

Western Region commercial enrollment at September 30, 2015 was approximately 1.1 million, a decrease of 7.7 percent compared with enrollment at September 30, 2014, and a decrease of 1.9 percent compared with June 30, 2015. The year-over-year decrease was primarily due to membership decreases in the company’s large group business in California and individual business in Arizona.

Membership in tailored network products represented 54.9 percent of the company’s Western Region commercial membership at September 30, 2015, a 320 basis point increase compared with 51.7 percent at September 30, 2014, and up 20 basis points compared with 54.7 percent at June 30, 2015.

Enrollment in the company’s Medicare Advantage (MA) plans at September 30, 2015 was 270,000 members, essentially flat when compared with enrollment of 271,000 members at September 30, 2014 and 269,000 members at June 30, 2015.

Medicaid enrollment increased 17.8 percent to approximately 1.8 million members at September 30, 2015 compared with approximately 1.6 million members at September 30, 2014, and increased 3.1 percent compared with June 30, 2015. These increases are primarily due to Medicaid expansion under the Affordable Care Act (ACA).

In the third quarter of 2015, enrollment increased year-over-year in each of the three health plan categories for members who are dually eligible for both Medicare and Medicaid.

 

    In MA plans for dually-eligible members, enrollment was approximately 28,000 members in Los Angeles and San Diego counties at September 30, 2015 compared with approximately 27,000 at September 30, 2014 and June 30, 2015.

 

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    Membership in the company’s managed long-term services and supports (LTSS) program in these demonstration counties was approximately 120,000 at September 30, 2015 compared with approximately 37,000 at September 30, 2014 and compared with approximately 112,000 at June 30, 2015.

 

    Enrollment in Health Net’s dual eligible demonstration project (Cal MediConnect) was 24,000 at September 30, 2015, an increase of 15,000 members compared with enrollment of 9,000 at September 30, 2014, and a decrease of 11.1 percent, or 3,000 members, compared with dual eligible enrollment at June 30, 2015.

As of October 1, 2015, Health Net administered benefits to 42 percent of the Cal MediConnect enrollment in Los Angeles County and 20 percent of the enrollment in San Diego County. Enrollment in this line of business continued to be challenged by higher-than-expected opt-out rates during the third quarter of 2015.

Investment Income

Net investment income for the Western Region was $13.9 million in the third quarter of 2015 compared with $11.0 million in the third quarter of 2014 and $16.4 million in the second quarter of 2015.

Western Region Operations Premiums

Western Region premiums per member per month (PMPM) increased by 1.2 percent to approximately $406 in the third quarter of 2015 compared with approximately $401 in the third quarter of 2014.

Western Region Health Care Cost Trends and Medical Care Ratio (MCR)

Health care costs PMPM for the Western Region decreased by 1.2 percent to approximately $338 in the third quarter of 2015 compared with approximately $343 in the third quarter of 2014.

“Consistent with the first half of 2015, health care cost trends remained moderate and within expectations in the third quarter,” said James Woys, Health Net’s chief financial and operating officer. “This has helped lead to a continued improvement in the company’s consolidated medical care ratio.”

The Western Region health plan services consolidated MCR was 83.4 percent in the third quarter of 2015 compared with 85.5 percent in the third quarter of 2014 and 84.0 percent in the second quarter of 2015, representing an improvement of 210 basis points year-over-year and 60 basis points sequentially. The improvement is primarily due to better performance in the company’s Medicaid business.

General and Administrative (G&A) Expenses

G&A expenses in the Western Region were $420.6 million in the third quarter of 2015 compared with $353.4 million in the third quarter of 2014 and $422.6 million in the second quarter of 2015. The G&A expense ratio was 10.6 percent in the third quarter of 2015 compared with 9.7 percent in the third quarter of 2014 and 10.5 percent in the second quarter of 2015.

Health Net’s administrative expense ratio was 6.8 percent in the third quarter of 2015, a 20 basis point increase compared with the third quarter of 2014 and a 10 basis point decrease compared with the second quarter of 2015. The administrative expense ratio does not include premium taxes and ACA-related fees.

 

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BALANCE SHEET

Cash and investments as of September 30, 2015 were approximately $3.2 billion compared with approximately $2.8 billion as of September 30, 2014.

Reserves for claims and other settlements were $1.7 billion as of September 30, 2015 compared with $1.7 billion as of September 30, 2014 and $1.8 billion as of June 30, 2015.

Days claims payable (DCP) for the third quarter of 2015 was 46.7 days compared with 51.4 days in the third quarter of 2014 and 47.6 days in the second quarter of 2015.

On an adjusted1 basis, DCP for the third quarter of 2015 was 63.4 days compared with 65.3 days in the third quarter of 2014 and 59.1 days in the second quarter of 2015. Adjusted DCP met expectations for the third quarter of 2015. Adjusted DCP for the second quarter of 2015 was lower, primarily due to the payment of provider risk sharing and incentive programs.

The company’s debt-to-total capital ratio was 25.4 percent as of September 30, 2015 compared with 22.1 percent as of September 30, 2014 and 26.3 percent as of June 30, 2015.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $30.7 million in the third quarter of 2015.

“Operating cash flow in the third quarter of 2015 was negatively impacted by a $123 million net disbursement for ACA-related programs, including payment of the health insurer fee and net settlements for the ACA’s risk adjustment and reinsurance programs for the year 2014,” noted Woys.

The company noted that cash at the parent was $100.9 million at September 30, 2015.

STOCK REPURCHASE UPDATE

Health Net did not repurchase any shares of its common stock in the third quarter of 2015. At September 30, 2015, approximately $306 million of authorization under the company’s existing $400 million stock repurchase program remained.

The company’s stock repurchase program is suspended for the balance of 2015 as a result of Health Net’s pending merger agreement with Centene.

 

1  See “Disclosures Regarding Non-GAAP Financial Information” attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.

 

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ABOUT HEALTH NET

Health Net, Inc. is a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Its mission is to help people be healthy, secure and comfortable. Health Net provides and administers health benefits to approximately 6.1 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid and dual eligible programs, as well as programs with the U.S. Department of Defense and U.S. Department of Veterans Affairs. Health Net also offers behavioral health, substance abuse and employee assistance programs, and managed health care products related to prescription drugs.

For more information on Health Net, Inc., please visit the company’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

The company and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act (“PSLRA”) of 1995, including statements in this and other press releases, in presentations, filings with the Securities and Exchange Commission (“SEC”), reports to stockholders and in meetings with investors and analysts. All statements in this press release, other than statements of historical information provided herein, including the guidance for future periods and the assumptions underlying such projections, may be deemed to be forward-looking statements and as such are intended to be covered by the safe harbor for “forward-looking statements” provided by PSLRA. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to changes in circumstances and a number of risks and uncertainties. Without limiting the foregoing, the guidance as to expected future period results and statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend,” “feels,” “will,” “projects” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied or projected by the forward-looking information and statements due to a number of factors, variables or events. Certain of these factors relate to the company’s proposed business combination with Centene Corporation (“Centene”), including, among other things, the expected closing date of the transaction; the possibility that the expected synergies and value creation from the proposed merger will not be realized, or will not be realized within the expected time period, including as a result of conditions, terms, obligations or restrictions imposed by regulators in connection with their approval of or consent to the merger; the risk that the businesses will not be integrated successfully; disruption from the merger making it more difficult to maintain business and operational relationships; the risk that unexpected costs will be incurred; the possibility that the merger does not close, including, but not limited to, due to the failure to satisfy the closing conditions; the risk that financing for the transaction may not be available on favorable terms; and certain other risks associated with the merger, as more fully discussed in the definitive joint proxy statement/prospectus that was filed with the SEC on September 21, 2015, in connection with the merger. Other factors include, among others, health care reform and other increased government participation in and taxation or regulation of health benefits and managed care operations, including but not limited to the implementation of, and subsequent modifications to, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 and the regulations promulgated thereunder (collectively, the “ACA”) as well as any related fees, assessments and taxes; the company’s ability to successfully participate in California’s Coordinated Care Initiative, which is subject to a number of risks inherent in untested health care initiatives and requires the company to adequately predict the costs of providing benefits to individuals that are generally among the most chronically ill within each of Medicare and Medi-Cal and implement delivery systems for benefits with which the company has limited operating experience; the company’s ability to successfully participate in

 

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the federal and state health insurance exchanges under the ACA, which involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of the company’s premium rates and may not be sufficiently offset by the risk apportionment provisions of the ACA; increasing health care costs, including but not limited to costs associated with the introduction of new treatments or therapies; the company’s ability to reduce administrative expenses while maintaining targeted levels of service and operating performance; the recompetition of the company’s T-3 contract for the TRICARE North region; negative prior period claims reserve developments; rate cuts and other risks and uncertainties affecting the company’s Medicare or Medicaid businesses; trends in medical care ratios; membership declines or negative changes in the company’s health care product mix; unexpected utilization patterns or unexpectedly severe or widespread illnesses; failure to effectively oversee the company’s third-party vendors; noncompliance by the company or the company’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; the timing of collections on amounts receivable from state and federal governments and agencies; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care and Department of Health Care Services, the Arizona Health Care Cost Containment System, the Centers for Medicare & Medicaid Services, the Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance; operational issues; changes in political, economic or market conditions; investment portfolio impairment charges; volatility in the financial markets; and general business and market conditions. The factors described in the context of such forward-looking statements in this press release could cause the company or Centene’s plans with respect to the proposed merger, actual results, performance or achievements, industry results and developments to differ materially from those expressed in or implied by such forward-looking statements. 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 and subsequent Quarterly Reports on Form 10-Q filed with the SEC and the other risks discussed in the company’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, the company undertakes no obligation to address or publicly update any of its guidance, the assessment of the underlying assumptions or 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 Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015.

Eight pages of tables follow.

# # #

 

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Health Net, Inc.

Enrollment Data - By State

(In thousands)

 

                          Change from  
                          June 30, 2015     September 30, 2014  
     September 30,
2015
     June 30,
2015
     September 30,
2014
     Increase/
(Decrease)
    %
Change
    Increase/
(Decrease)
    %
Change
 

California

                 

Large Group

     450         444         477         6        1.4     (27     (5.7 )% 

Small Group

     236         241         243         (5     (2.1 )%      (7     (2.9 )% 

Individual

     267         279         269         (12     (4.3 )%      (2     (0.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

     953         964         989         (11     (1.1 )%      (36     (3.6 )% 

Medicare Advantage

     168         168         169         0        0.0     (1     (0.6 )% 

Medi-Cal

     1,777         1,712         1,485         65        3.8     292        19.7

Dual Eligibles

     24         27         9         (3     (11.1 )%      15        166.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total California

     2,922         2,871         2,652         51        1.8     270        10.2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Arizona

                 

Large Group

     32         36         45         (4     (11.1 )%      (13     (28.9 )% 

Small Group

     36         37         44         (1     (2.7 )%      (8     (18.2 )% 

Individual

     65         69         97         (4     (5.8 )%      (32     (33.0 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

     133         142         186         (9     (6.3 )%      (53     (28.5 )% 

Medicare Advantage

     38         38         46         0        0.0     (8     (17.4 )% 

Medicaid

     67         76         80         (9     (11.8 )%      (13     (16.3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Arizona

     238         256         312         (18     (7.0 )%      (74     (23.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Northwest

                 

Large Group

     25         27         28         (2     (7.4 )%      (3     (10.7 )% 

Small Group

     22         22         23         0        0.0     (1     (4.3 )% 

Individual

     2         2         4         0        0.0     (2     (50.0 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

     49         51         55         (2     (3.9 )%      (6     (10.9 )% 

Medicare Advantage

     64         63         56         1        1.6     8        14.3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Northwest

     113         114         111         (1     (0.9 )%      2        1.8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Health Plan Enrollment

                 

Large Group

     507         507         550         0        0.0     (43     (7.8 )% 

Small Group

     294         300         310         (6     (2.0 )%      (16     (5.2 )% 

Individual

     334         350         370         (16     (4.6 )%      (36     (9.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

     1,135         1,157         1,230         (22     (1.9 )%      (95     (7.7 )% 

Medicare Advantage

     270         269         271         1        0.4     (1     (0.4 )% 

Medi-Cal/Medicaid

     1,844         1,788         1,565         56        3.1     279        17.8

Dual Eligibles

     24         27         9         (3     (11.1 )%      15        166.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Western Region Operations

     3,273         3,241         3,075         32        1.0     198        6.4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

TRICARE - North Contract Eligibles

     2,829         2,829         2,849         0        0.0     (20     (0.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Health Net, Inc.

Enrollment Data - Line of Business

(In thousands)

 

                          Change from  
                          June 30, 2015     September 30, 2014  
     September 30,
2015
     June 30,
2015
     September 30,
2014
     Increase/
(Decrease)
    %
Change
    Increase/
(Decrease)
    %
Change
 

Large Group

                 

California

     450         444         477         6        1.4     (27     (5.7 )% 

Arizona

     32         36         45         (4     (11.1 )%      (13     (28.9 )% 

Northwest

     25         27         28         (2     (7.4 )%      (3     (10.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     507         507         550         0        0.0     (43     (7.8 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Small Group

                 

California

     236         241         243         (5     (2.1 )%      (7     (2.9 )% 

Arizona

     36         37         44         (1     (2.7 )%      (8     (18.2 )% 

Northwest

     22         22         23         0        0.0     (1     (4.3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     294         300         310         (6     (2.0 )%      (16     (5.2 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Individual

                 

California

     267         279         269         (12     (4.3 )%      (2     (0.7 )% 

Arizona

     65         69         97         (4     (5.8 )%      (32     (33.0 )% 

Northwest

     2         2         4         0        0.0     (2     (50.0 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     334         350         370         (16     (4.6 )%      (36     (9.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

                 

California

     953         964         989         (11     (1.1 )%      (36     (3.6 )% 

Arizona

     133         142         186         (9     (6.3 )%      (53     (28.5 )% 

Northwest

     49         51         55         (2     (3.9 )%      (6     (10.9 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     1,135         1,157         1,230         (22     (1.9 )%      (95     (7.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Medicare Advantage

                 

California

     168         168         169         0        0.0     (1     (0.6 )% 

Arizona

     38         38         46         0        0.0     (8     (17.4 )% 

Northwest

     64         63         56         1        1.6     8        14.3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     270         269         271         1        0.4     (1     (0.4 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Medi-Cal/Medicaid

                 

California

     1,777         1,712         1,485         65        3.8     292        19.7

Arizona

     67         76         80         (9     (11.8 )%      (13     (16.3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     1,844         1,788         1,565         56        3.1     279        17.8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Dual Eligibles

                 

California

     24         27         9         (3     (11.1 )%      15        166.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Health Plan Enrollment

                 

Large Group

     507         507         550         0        0.0     (43     (7.8 )% 

Small Group

     294         300         310         (6     (2.0 )%      (16     (5.2 )% 

Individual

     334         350         370         (16     (4.6 )%      (36     (9.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

     1,135         1,157         1,230         (22     (1.9 )%      (95     (7.7 )% 

Medicare Advantage

     270         269         271         1        0.4     (1     (0.4 )% 

Medi-Cal/Medicaid

     1,844         1,788         1,565         56        3.1     279        17.8

Dual Eligibles

     24         27         9         (3     (11.1 )%      15        166.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Western Region Operations

     3,273         3,241         3,075         32        1.0     198        6.4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

TRICARE - North Contract Eligibles

     2,829         2,829         2,849         0        0.0     (20     (0.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

     Quarter Ended
September 30,
2015
     Quarter Ended
June 30,
2015
     Quarter Ended
September 30,
2014
 

REVENUES:

        

Health plan services premiums

   $ 3,977,891       $ 4,003,432       $ 3,631,617   

Government contracts

     160,661         141,055         146,183   

Net investment income

     13,915         16,424         10,964   

Administrative services fees and other income

     1,200         2,712         1,106   
  

 

 

    

 

 

    

 

 

 

Total revenues

     4,153,667         4,163,623         3,789,870   
  

 

 

    

 

 

    

 

 

 

EXPENSES:

        

Health plan services

     3,318,415         3,363,742         3,104,010   

Government contracts

     158,124         137,262         124,403   

General and administrative

     442,326         448,713         373,623   

Selling

     66,155         69,190         66,111   

Depreciation and amortization

     6,882         4,202         6,500   

Interest

     8,417         8,412         7,810   

Asset impairment

     —           —           84,690   
  

 

 

    

 

 

    

 

 

 

Total expenses

     4,000,319         4,031,521         3,767,147   
  

 

 

    

 

 

    

 

 

 

Income from operations before income taxes

     153,348         132,102         22,723   

Income tax provision

     93,095         73,734         31,662   
  

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 60,253       $ 58,368       $ (8,939
  

 

 

    

 

 

    

 

 

 

Net income (loss) per share:

        

Basic

   $ 0.78       $ 0.76       $ (0.11

Diluted

   $ 0.77       $ 0.75       $ (0.11

Weighted average shares outstanding:

        

Basic

     77,288         77,172         80,235   

Diluted

     78,405         78,157         80,235   

 

11


Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 

     September 30,
2015
    June 30,
2015
    September 30,
2014
 

ASSETS

      

Current Assets

      

Cash and cash equivalents

   $ 972,908      $ 756,797      $ 1,114,558   

Investments - available for sale

     2,221,278        2,371,540        1,664,830   

Premiums receivable, net

     832,785        434,067        579,515   

Amounts receivable under government contracts

     165,073        223,160        143,662   

Other receivables

     430,987        459,090        307,369   

Deferred taxes

     76,495        62,983        71,434   

Assets held for sale

     —          50,000        50,000   

Other assets

     309,543        501,200        157,066   
  

 

 

   

 

 

   

 

 

 

Total current assets

     5,009,069        4,858,837        4,088,434   

Property and equipment, net

     139,083        80,816        92,193   

Goodwill

     558,886        558,886        558,886   

Other intangible assets, net

     9,712        10,415        12,526   

Deferred taxes

     16,520        43,588        34,580   

Investments - available for sale - noncurrent

     20,064        6,544        3,055   

Other noncurrent assets

     270,097        300,572        173,230   
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 6,023,431      $ 5,859,658      $ 4,962,904   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current Liabilities

      

Reserves for claims and other settlements

   $ 1,684,423      $ 1,757,939      $ 1,733,307   

Health care and other costs payable under government contracts

     56,417        75,092        62,796   

Unearned premiums

     121,061        190,021        125,363   

Accounts payable and other liabilities

     1,486,133        1,168,014        540,968   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     3,348,034        3,191,066        2,462,434   

Senior notes payable

     399,658        399,607        399,453   

Deferred taxes

     —          —          —     

Borrowings under revolving credit facility

     210,000        210,000        100,000   

Other noncurrent liabilities

     277,922        346,915        235,393   
  

 

 

   

 

 

   

 

 

 

Total Liabilities

     4,235,614        4,147,588        3,197,280   
  

 

 

   

 

 

   

 

 

 

Stockholders’ Equity

      

Common stock

     154        154        152   

Additional paid-in capital

     1,489,532        1,481,691        1,432,513   

Treasury common stock, at cost

     (2,454,067     (2,453,869     (2,272,180

Retained earnings

     2,757,886        2,697,633        2,604,363   

Accumulated other comprehensive (loss) income

     (5,688     (13,539     776   
  

 

 

   

 

 

   

 

 

 

Total Stockholders’ Equity

     1,787,817        1,712,070        1,765,624   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 6,023,431      $ 5,859,658      $ 4,962,904   
  

 

 

   

 

 

   

 

 

 

Debt-to-Total Capital Ratio

     25.4     26.3     22.1

 

12


Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

     Quarter Ended
September 30,
2015
    Quarter Ended
June 30,
2015
    Quarter Ended
September 30,
2014
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income (loss)

   $ 60,253      $ 58,368      $ (8,939

Adjustments to reconcile net income (loss) to net cash

      

(used in) provided by operating activities:

      

Amortization and depreciation

     6,882        4,202        6,500   

Share-based compensation expense

     7,724        7,067        6,109   

Deferred income taxes

     9,289        2,691        (38,231

Excess tax benefits from share-based compensation

     (74     (1,653     (241

Asset impairment

     —          —          84,690   

Net realized gain on sale on investments

     82        (1,564     (346

Other changes

     9,210        12,296        7,264   

Changes in assets and liabilities:

      

Premiums receivable and unearned premiums

     (467,678     (105,357     264,032   

Other current assets, receivables and noncurrent assets

     136,889        (128,040     (34,671

Amounts receivable/payable under government contracts

     30,893        2,439        12,369   

Reserves for claims and other settlements

     (73,516     (155,839     244,985   

Accounts payable and other liabilities

     249,365        45,115        44,434   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (30,681     (260,275     587,955   
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Sales of investments

     342,013        447,939        104,628   

Maturities of investments

     23,911        24,393        21,064   

Purchases of investments

     (110,065     (517,529     (133,014

Purchases of property and equipment

     (17,731     (19,108     (18,439

Sales and purchases of restricted investments and other

     2,176        1,258        2,002   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     240,304        (63,047     (23,759
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from exercise of stock options and employee stock purchases

     2,008        6,860        14,945   

Repurchases of common stock

     (161     (298     (57,168

Excess tax benefits from share-based compensation

     74        1,653        241   

Borrowings under financing arrangements

     15,000        95,000        —     

Repayment of borrowings under financing arrangements

     (15,000     (80,000     —     

Net (decrease) increase in checks outstanding, net of deposits

     (8,230     8,230        —     

Customer funds administered

     12,797        30,321        (10,753
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     6,488        61,766        (52,735
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     216,111        (261,556     511,461   

Cash and cash equivalents, beginning of period

     756,797        1,018,353        603,097   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 972,908      $ 756,797      $ 1,114,558   
  

 

 

   

 

 

   

 

 

 

 

13


Health Net, Inc.

SEGMENT INFORMATION

($ in thousands, except per share and PMPM data)

The following table presents Health Net’s operating segment information.

 

    Quarter Ended September 30, 2015     Quarter Ended June 30, 2015     Quarter Ended September 30, 2014  
    Western Region     Government     Corporate/           Western Region     Government     Corporate/           Western Region     Government     Corporate/        
    Operations1     Contracts2     Other3     Consolidated     Operations1     Contracts2     Other4     Consolidated     Operations1     Contracts2     Other5     Consolidated  

Commercial premiums

  $ 1,412,264          $ 1,412,264      $ 1,412,920          $ 1,412,920      $ 1,430,769          $ 1,430,769   

Medicare premiums

    778,237            778,237        782,412            782,412        763,327            763,327   

Medicaid premiums

    1,668,091            1,668,091        1,673,083            1,673,083        1,397,732            1,397,732   

Dual Eligibles premiums

    119,299            119,299        135,017            135,017        39,789            39,789   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Health plan services premiums

    3,977,891            3,977,891        4,003,432            4,003,432        3,631,617            3,631,617   

Government contracts

      160,661          160,661          141,055          141,055          146,183          146,183   

Net investment income

    13,915            13,915        16,424            16,424        10,964            10,964   

Administrative services fees and other income

    1,200            1,200        2,712            2,712        1,106            1,106   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    3,993,006        160,661          4,153,667        4,022,568        141,055          4,163,623        3,643,687        146,183          3,789,870   

Health plan services

    3,318,415            3,318,415        3,363,742            3,363,742        3,104,010            3,104,010   

Government contracts

      158,158        (34     158,124          137,248        14        137,262          123,571        832        124,403   

Premium tax

    71,374            71,374        67,954            67,954        53,417            53,417   

Health insurer fee

    58,408            58,408        58,500            58,500        31,947            31,947   

Other ACA fees

    22,163            22,163        21,495            21,495        26,643            26,643   

Administrative expenses

    268,628          21,753        290,381        274,610          26,154        300,764        241,352          20,264        261,616   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative

    420,573          21,753        442,326        422,559          26,154        448,713        353,359          20,264        373,623   

Selling

    66,155            66,155        69,190            69,190        66,111            66,111   

Depreciation and amortization

    6,882          —          6,882        3,958          244        4,202        6,500            6,500   

Interest

    8,417            8,417        8,412            8,412        7,810            7,810   

Asset impairment

        —          —              —          —              84,690        84,690   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    3,820,442        158,158        21,719        4,000,319        3,867,861        137,248        26,412        4,031,521        3,537,790        123,571        105,786        3,767,147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

    172,564        2,503        (21,719     153,348        154,707        3,807        (26,412     132,102        105,897        22,612        (105,786     22,723   

Income tax provision (benefit)

    98,812        1,182        (6,899     93,095        82,300        1,587        (10,153     73,734        61,085        8,918        (38,341     31,662   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  $ 73,752      $ 1,321      $ (14,820   $ 60,253      $ 72,407      $ 2,220      $ (16,259   $ 58,368      $ 44,812      $ 13,694      $ (67,445   $ (8,939
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share

  $ 0.95      $ 0.02      $ (0.19   $ 0.78      $ 0.94      $ 0.03      $ (0.21   $ 0.76      $ 0.56      $ 0.17      $ (0.84   $ (0.11

Diluted earnings (loss) per share

  $ 0.94      $ 0.02      $ (0.19   $ 0.77      $ 0.92      $ 0.03      $ (0.21   $ 0.75      $ 0.55      $ 0.17      $ (0.84   $ (0.11

Basic weighted average shares outstanding

    77,288        77,288        77,288        77,288        77,172        77,172        77,172        77,172        80,235        80,235        80,235        80,235   

Diluted weighted average shares outstanding

    78,405        78,405        77,288        78,405        78,157        78,157        77,172        78,157        81,513        81,513        80,235        80,235   

Pretax margin

    4.3           3.8           2.9      

Western Region Operations premium yield

    1.2           8.0           13.7      

Western Region Operations premium PMPM

  $ 405.73            $ 414.68            $ 400.91         

Western Region Operations health care cost trend

    (1.2 )%            7.1           15.3      

Western Region Operations health care cost PMPM

  $ 338.46            $ 348.42            $ 342.66         

Western region operations health plan services MCR

    83.4           84.0           85.5      

Administrative expense ratio

    6.8           6.9           6.6      

Total G&A expense ratio

    10.6           10.5           9.7      

Selling costs ratio

    1.7           1.7           1.8      

 

1  Includes the operations of the company’s commercial, Medicare, Medicaid and Dual Eligibles health plans in California, Arizona, Oregon and Washington, as well as the operations of the company’s health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the company’s behavioral health and pharmaceutical services subsidiaries in several states including California, Arizona and Oregon.
2  Includes administrative services provided under the T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts.
3  Primarily includes costs related to the company’s transaction with Cognizant. Also includes costs related to the company’s pending merger with Centene.
4  Primarily includes costs related to the company’s transaction with Cognizant. Also includes severance expenses.
5  Primarily includes costs related to the company’s transaction with Cognizant and related asset impairment.

 

14


Health Net, Inc.

Disclosures Regarding Non-GAAP Financial Information

($ in millions)

Set forth below is a reconciliation of adjusted days claims payable (DCP), a non-GAAP financial measure, to the comparable GAAP financial measure, DCP. DCP is calculated by dividing the amount of reserve for claims and other settlements (claims reserve) by health plan services cost (health plan costs) during the quarter and multiplying that amount by the number of days in the quarter. In this press release, management presents an adjusted DCP metric which subtracts capitation and Medicare Advantage-Prescription Drug (MAPD) payables/costs from the claims reserve and health plan costs.

Management believes that adjusted DCP provides useful information to investors because the adjusted DCP calculation excludes from both claims reserve and health plan costs amounts related to health care costs for which no or minimal reserves are maintained. Therefore, management believes that adjusted DCP may present a more accurate reflection of DCP than does GAAP DCP, which includes such amounts. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP.

You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future.

Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

 

     Q3 2015     Q2 2015     Q3 2014  

Reconciliation of Days Claims Payable:

      

(1)    Reserve for Claims and Other Settlements - GAAP

   $ 1,684.4        1,757.9        1,733.3   

Less: Capitation and MAPD Payables

     (251.2     (374.4     (407.1
  

 

 

   

 

 

   

 

 

 

(2)    Reserve for Claims and Other Settlements - Adjusted

   $ 1,433.2        1,383.5        1,326.2   

(3)    Health Plan Services Cost - GAAP

   $ 3,318.4      $ 3,363.7      $ 3,104.0   

Less: Capitation and MAPD Costs

     (1,237.6     (1,233.0     (1,236.0
  

 

 

   

 

 

   

 

 

 

(4)    Health Plan Services Cost - Adjusted

   $ 2,080.8      $ 2,130.7      $ 1,868.0   

(5)    Number of Days in Period

     92        91        92   

= (1) / (3) * (5) Days Claims Payable - GAAP Basis (using end of period reserve amount)

     46.7        47.6        51.4   

= (2) / (4) * (5) Days Claims Payable - Adjusted Basis (using end of period reserve amount)

     63.4        59.1        65.3   

 

15


Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

($ in millions)

 

     Health Plan Services  
     YTD 9/2015     FY 2014     FY 2013  

Reserve for claims (a), beginning of period

   $ 1,186.3      $ 807.4      $ 808.7   

Incurred claims related to:

      

Current Year (f)

     4,777.0        5,613.0        4,666.0   

Prior Years (c)

     (109.4     (14.6     (56.2
  

 

 

   

 

 

   

 

 

 

Total Incurred (b)

     4,667.6        5,598.4        4,609.8   

Paid claims related to:

      

Current Year

     3,540.8        4,443.2        3,872.5   

Prior Years

     1,035.3        776.3        738.6   
  

 

 

   

 

 

   

 

 

 

Total Paid (b)

     4,576.1        5,219.5        4,611.1   
  

 

 

   

 

 

   

 

 

 

Reserve for claims (a), end of period

     1,277.8        1,186.3        807.4   

Add:

      

Claims Payable (d)

     104.5        175.4        67.0   

Other (e)

     302.1        534.3        109.7   
  

 

 

   

 

 

   

 

 

 

Reserves for claims and other settlements, end of period

   $ 1,684.4      $ 1,896.0      $ 984.1   
  

 

 

   

 

 

   

 

 

 

 

(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. Negative amounts in this line represent favorable development in estimated prior years’ health care costs. Positive amounts in this line represent unfavorable development in estimated prior years’ health care costs. The favorable developments related to prior years do not directly correspond to an increase in our operating results because any favorable prior period reserve development increases current period net income only to the extent that the current period provision for adverse deviation (see footnote (f)) is less than the benefit recognized from the prior period favorable development. The favorable development related to prior years that was recorded in the nine months ended September 30, 2015 consisted of $31.7 million in favorable prior year development primarily due to the growth of the new Medicaid expansion population in 2014 and a release of $77.7 million of the provision for adverse deviation held at December 31, 2014. For a detailed description of reserve development for fiscal years 2014 and 2013, see Note 2 to the Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the year ended December 31, 2014.
(d) Includes amount accrued for litigation and regulatory-related expenses.
(e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.
(f) Our IBNR estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. Such amounts were $84.3 million, $77.7 million and $53.4 million as of September 30, 2015, December 31, 2014, and December 31, 2013, respectively.

 

16



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