Health Net Inc.’s (HNT) third-quarter 2014 operating income, which comprised combined net earnings from the Western Region Operations and Government Contracts segments, came in at 72 cents per share. The figure missed the Zacks Consensus Estimate by a penny and decreased 13% year over year due to higher expenses.
Including expenses related to the new master services agreement with Cognizant Technology Solutions (CTSH), Health Net recorded net loss of 11 cents per share, comparing unfavorably with 83 cents earned in the prior-year quarter.
The company’s total revenue increased 36.6% year over year to approximately $3.8 billion, surpassing with the Zacks Consensus Estimate.
Health plan services premium revenues of Health Net were $3.6 billion, up 39.3% from the third quarter of 2013. Meanwhile, total health plan service expenses increased 41.3% to $3.1 billion. The company’s total expenses increased 13.6% year over year to $3.7 billion.
Segment Performance
Western Region Operations: This segment of Health Net posted revenues of $3.6 billion in the quarter, up almost 38% year over year. Net investment income declined about 8% year over year to $11 million. Health plan services expenses increased 10.7% year over year to $3.1 billion.
Total enrollment in the segment rose 24.7% year over year to 3.1 million members as of Sep 30, 2014 on sustained commercial growth from exchanges and Medicaid growth. Western Region commercial enrollment increased 11.7% to 1.2 million members as of Sep 30, 2014, while enrollment under the company’s California health plans increased 20.7% year over year to 2.7 million members. Enrollment increased 13.4% to 0.27 million in Medicare Advantage plans. Medicaid enrollment also increased 31.9% to 1.5 million as of Sep 30, 2014.
Medical care ratio (MCR) for Health Net’s health plan services in the segment deteriorated to 85.5% from 84.3% in the year-ago quarter. Commercial MCR improved 30 basis points to 83.9% from 84.2% in the prior-year quarter. This was driven by an improvement in cost trends and better business mix. Medicare Advantage MCR deteriorated to 90.9% from 89.9% a year ago. Medicaid MCR amounted to 84.2% compared with 79.5% in the year-ago quarter.
Government Contracts: Revenues from this segment decreased to $146.2 million from $149.3 million in the third quarter of 2013. The segment’s expenses decreased to $123.6 million from $125.8 million in the prior-year quarter.
Financial Update
As Sep 30, 2014, Health Net had cash and investments of approximately $2.8 billion, up from $2.3 billion as of Sep 30, 2013. The company’s debt-to-total capital ratio improved to 22.1% as of Sep 30, 2014 from 23.8% as of Sep 30, 2013.
Health Net’s operating cash flow totaled $588 million in the third quarter of 2014, comparing favorably with $302 million in the year-ago quarter.
Total assets of Health Net were worth $4.96 billion as of Sep 30, 2014, higher than $4.01 billion as of Sep 30, 2013. Stockholder equity was $1.76 billion as of Sep 30, 2014 compared with $1.6 billion as of Sep 30, 2013.
Share Repurchase Update
Health Net resumed share repurchase during the reported quarter. It spent $69 million to buy back 1.5 million shares in the reported quarter. As of Sep 30, $211 million was remaining under its $400 million authorization. Subsequent to the quarter through Oct 20, it bought back another 1.5 million shares for $69 million.
Business Update
Health Net inked a seven-year master services agreement with a wholly owned subsidiary of Cognizant. It will likely generate $150 million to $200 million in general and administrative and depreciation expense savings annually by 2017.
Outlook for 2014 Revised
Health Net lowered its net income per share guidance to a minimum of $1.5 from a minimum of $3 guided earlier.
However, operating income is expected to be a minimum of $2.25 per share from a minimum of $2.22 per share.
Total health plan membership is now expected at 3.2 million, higher than the previous guidance of 3.1 million. This is because total Medicaid membership is anticipated at 1.73 billion, (up from the previous guidance of 1.59 billion), Medicare Advantage membership expected at 0.278 million from 0.226 million guided earlier.
Health Net expects to generate revenues of $14.2 billion, up from $14 billion.
Health Net reiterated its 2014 G&A expense ratio guidance at 10.8%.
Other Healthcare Services Companies
WellPoint Inc. (WLP) reported third-quarter 2014 adjusted income of $2.36 per share, beating the Zacks Consensus Estimate of $2.28.
Molina Healthcare Inc. (MOH) reported third-quarter 2014 operating earnings of 79 cents per share, handily beating the Zacks Consensus Estimate of 41 cents.
Zacks Rank
Health Net presently carries a Zacks Rank #2 (Buy).
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