Health Net Inc. (HNT) reported first-quarter loss of $108.2 million or a loss per share of $1.16 compared to a net income of $16.1 million or 16 cents in the prior-year quarter.
The reported quarter included a $177.2 million pretax or $157.9 million after tax, charge related to the AmCareco litigation and $11.0 million in pretax expenses related to the company’s administrative cost reduction efforts.
Health Net's Western Region Operations and Government Contracts segments produced combined net earnings of $57.4 million or 61 cents in the reported quarter as opposed to $47.9 million or 47 cents in the prior-year quarter.
The improved results were supported by strong commercial and Government Contracts performance, which led to a strong buyback of shares from January 1 through April 29.
Health Net reported a 3.2% year-over-year hike in total revenues to $3.53 billion in the first quarter, exceeding the Zacks Consensus Estimate of $3.36 billion.
Health Net’s health plan services premium revenues also increased by 3.4% in the reported quarter to $2.6 billion.
Total expenses surged to $3.62 billion as against $3.25 billion in the prior-year quarter, while investment income increased to $23.8 million from $15.2 million in the prior-year quarter.
Segment Performance
Western Region: The segment posted revenues of $2.6 billion, compared with $2.5 billion in the year-ago quarter. Investment income for the segment increased 21.4% year over year to $23.8 million, while health plan services expenses increased 4.2% to $2.3 billion.
Total enrollment in the segment declined approximately 0.9% to approximately 2.9 million members. Total commercial enrollment declined 0.7% to approximately 1.4 million members. While enrollment in the Medicaid business (941,000 members) recorded a year-over-year increase of 7.8%, enrolment in Medicare PDP plans (401,000 members) and Medicare Advantage plans (209,000 members) declined 12.3% and 4.1%, respectively.
Medical care ratio (MCR) for Health Net’s health plan services in the segment declined 10 basis points (bps) to 87.4% during the first quarter 2011 compared to 87.5% in the year-ago period. Commercial MCR declined 60 bps to 85.7%.
The 60 bps improvement in the commercial MCR is the result of continued pricing and underwriting discipline combined with moderate utilization and unit cost trends and slower growth in pharmacy costs.
While Medicare Advantage MCR in the segment climbed to 89.0% compared with 88.2% in the year-ago quarter, Medicare Part D MCR increased to 101.1% in the quarter compared with 96.9% in the prior-year quarter.
Government Contracts: Revenues in the segment increased 8.1% in the quarter to $875.1 million from $809.5 million in the previous-year quarter. Year over year, cost ratio plummeted from 95.3% to 93.4%.
Northeast Operations: Health Net continues to serve the members of the sold Northeast business to UnitedHealth Group Inc. (UNH) as per the agreement. The income is shown separately. The revenues and expenses associated with the company's Northeast Operations in the quarter were $14.5 million and $19.4 million, respectively.
Financial Update
As of March 31, 2011, Health Net recorded cash and investments of approximately $1.8 billion, compared with approximately $2.0 billion as of March 31, 2010. In addition, the company’s debt-to-total capital ratio declined to 21.1% at the end of the reported quarter as compared with 23.5% at the end of the prior-year quarter.
Further, Health Net’s operating cash flow was negative approximately $150.0 million, primarily due to a sequential increase in premiums receivable and unearned premiums of approximately $106 million primarily related to Medicaid, Medicare Advantage and PDP; a $35 million increase in the net receivable related to the company’s TRICARE North Region contract; an approximate $52 million sequential decrease in reserves for claims and other settlements and a quarterly payment related to the sale of the company’s Northeast operations of approximately $35 million, partially offset by approximately $41 million in membership-related payments.
Share Repurchase Update
During the reported quarter, Health Net repurchased 4.9 million shares, at an average price of $30.49, for approximately $149.8 million under the current $300 million share repurchase program.
Health Net also approved a new share repurchase program with $300 million in aggregate authority. The company completed its previous share repurchase program in April 2011.
Outlook
Health Net expects its GAAP EPS guidance for 2011 in the range of 58 cents to 63 cents, as compared to the previous expectation of at least $2.05. The company's guidance includes the expected impact of the Centers for Medicare & Medicaid Services (CMS) sanctions previously announced on November 19, 2010 and the impact of the AmCareco litigation judgment.
The company also expects its 2011 EPS for the combined Western Region Operations and Government Contracts segments to fall in the range of $2.90-$3.00, as compared to the previous expectation of at least $2.75.
The company has also raised the guidance for year-end membership in the Western Region, with enrollment in medical membership to be up 3%−4% for 2011 and PDP to be down 11%−13%. Enrollment in the commercial business is expected to reiterate at up 1%−2%, Medicare Advantage to change to be down 8%−10%, while enrollment in Medicaid is change to be up 9%−11%.
Health Net also expects revenues for the combined Western Region and Government Contracts segments to be in the range of $12.0−$12.5 billion, including the expected impact of the CMS sanctions. Tax rate for Health Net is expected to decline to 39.0% for 2011.
The company also expects selling cost ratio to be approximately in the range of 2.3%-2.4% in 2011, and general and administrative expense ratio to be approximately in the range of 8.7%−8.9% for 2011.
For fiscal 2011, Health Net also expects the Medicaid receivable to decline by approximately $80 million and the TRICARE receivable to decline by approximately $150 million.
In addition, the company also expects operating cash flow to exceed net income plus depreciation and amortization. It is expected that any payments related to the judgment in the AmCareco litigation will be funded through the revolving credit agreement. Therefore, excluding any further share repurchases in 2011, the company expects cash at the parent company at December 31, 2011 to be approximately $300 million.
HEALTH NET INC (HNT): Free Stock Analysis Report
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