Exhibit 99.1

 

		Health Net, Inc. 21650 Oxnard Street Woodland Hills, CA 91367 818.676.6000 800.291.6911 www.healthnet.com

 

Investor Contact		Media Contact
Angie McCabe		Margita Thompson
818.676.8692		818.676.7912
angie.mccabe@healthnet.com		margita.thompson@healthnet.com

HEALTH NET REPORTS FOURTH QUARTER 2011

GAAP NET INCOME OF $60.2 MILLION, OR $0.71 PER DILUTED SHARE

WESTERN REGION OPERATIONS AND GOVERNMENT CONTRACTS SEGMENTS

PRODUCE COMBINED NET EARNINGS OF $0.90 PER DILUTED SHARE IN FOURTH QUARTER 2011

WESTERN REGION OPERATIONS AND GOVERNMENT CONTRACTS SEGMENTS

COMBINED 2011 PRETAX MARGIN EXPANDS 60 BASIS POINTS TO 3.8 PERCENT

COMPANY REPURCHASED 13.6 MILLION SHARES IN 2011

LOS ANGELES, February 3, 2012 – Health Net, Inc. (NYSE: HNT) today announced 2011 fourth quarter GAAP net income of $60.2 million, or $0.71 per diluted share, compared with GAAP net income of $80.4 million, or $0.83 per diluted share, for the fourth quarter of 2010.

The fourth quarter 2011 GAAP results include a $26.8 million pretax loss related to the run-out of the company’s remaining Northeast operations and $3.3 million in pretax expenses related to the company’s general and administrative (G&A) cost reduction efforts.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net earnings of $75.6 million, or $0.90 per diluted share, in the fourth quarter of 2011 compared with $77.6 million, or $0.80 per diluted share, in the fourth quarter of 2010.

For the full year 2011, Health Net reported GAAP net income of $72.1 million, or $0.80 per diluted share, compared with $204.2 million, or $2.06 per diluted share, for the full year 2010.

The company’s Western Region and Government Contracts segments produced combined net income of $278.4 million, or $3.09 per diluted share for the full year 2011, and net income of $258.4 million, or $2.60 per diluted share for the full year 2010.

“We are pleased with all we accomplished in 2011. The pretax margin in 2011 for the combined Western Region and Government Contracts segments increased to 3.8 percent, a 60 basis point

---

improvement year-over-year. Our commercial strategy resulted in continued enrollment growth in tailored network products. In 2011, we also successfully transitioned to the new TRICARE contract and Medicaid membership rose,” said Jay Gellert, Health Net’s president and chief executive officer. “Our fourth quarter performance concluded a successful year for the company and positions us well going into 2012.

“We exceeded our annual goal for share repurchases in 2011. We repurchased 13.6 million shares of common stock for approximately $373.5 million. The 13.6 million shares represented more than 14 percent of the shares of common stock outstanding at the end of 2010. We believe that share repurchases currently represent the best use of our free cash flow,” Gellert added.

In the fourth quarter of 2011, Health Net repurchased approximately 2.7 million shares for approximately $70.7 million.

“With the momentum from our strong 2011 and our outlook for 2012, we are reiterating our 2012 guidance for GAAP earnings per diluted share of between $2.80 and $2.90 and, for our combined Western Region and Government Contracts segments of between $3.30 to $3.40,” Gellert noted.

CONSOLIDATED RESULTS

Health Net’s total revenues decreased 16.6 percent in the fourth quarter of 2011 to $2.8 billion from $3.4 billion in the fourth quarter of 2010, primarily as a result of a decline in the Government Contracts revenues to $194.6 million in the fourth quarter of 2011 compared with $822.4 million in the fourth quarter of 2010.

The revenue decline in Government Contracts is due to the T-3 TRICARE North contract that began on April 1, 2011. Unlike the prior TRICARE contract, the T-3 contract is a cost reimbursement plus fixed fee contract. Health Net now only records revenues and expenses associated with administrative services and related performance incentives and guarantees. These lower revenue and cost levels will continue over the term of the T-3 contract.

Health plan services premium revenues increased by 4.5 percent in the fourth quarter of 2011 to $2.6 billion compared with $2.5 billion in the fourth quarter of 2010. Health plan services expenses increased by 5.3 percent in the fourth quarter of 2011 to $2.2 billion compared with approximately $2.1 billion in the fourth quarter of 2010.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total health plan enrollment at December 31, 2011 was approximately 3.0 million members, or essentially flat, compared with 2.9 million members at December 31, 2010. Total enrollment in the company’s California health plan was approximately 2.3 million members at December 31, 2011 compared with 2.2 million members at December 31, 2010.

Western Region commercial enrollment at December 31, 2011 was 1.4 million members, a 1.2 percent decrease compared with enrollment at December 31, 2010.

“Membership in the company’s commercial tailored network products was approximately 428,000 at December 31, 2011, an increase of 35.1 percent from December 31, 2010. These popular products are designed to be cost-effective and meet customer needs for both affordability and robust benefits,” said Jim Woys, chief operating officer of Health Net.

 

2

---

Enrollment in the company’s Medicare Advantage plans in the Western Region at December 31, 2011 was 205,000 members, a decrease of 7.7 percent compared with December 31, 2010.

Membership in the company’s stand-alone Medicare Prescription Drug Plan (Medicare PDP) business was 382,000 at the end of the fourth quarter of 2011, a 10.5 percent decrease compared with the end of the fourth quarter of 2010.

On January 9, 2012, Health Net announced that it had entered into a definitive agreement to sell the Medicare PDP business to an affiliate of CVS Caremark Corporation. The transaction is expected to close in the second quarter of 2012, subject to the satisfaction or waiver of customary closing conditions, including regulatory approval.

Medicaid enrollment in California at December 31, 2011 was 1.0 million members, an increase of 108,000 members, or 12.0 percent, from December 31, 2010. The increase in the Medicaid membership was due to the company’s participation in California’s Seniors and Persons with Disabilities (SPD) program that began on June 1, 2011 and expansion into additional counties.

Revenues

Total revenues for the Western Region in the fourth quarter of 2011 were $2.6 billion compared with $2.5 billion in the fourth quarter of 2010.

Net investment income for the Western Region was $10.0 million in the fourth quarter of 2011 compared with $15.1 million in the fourth quarter of 2010 and approximately $15.2 million in the third quarter of 2011.

Health Plan Services Expenses

Health plan services expenses in the Western Region were $2.2 billion in the fourth quarter of 2011 compared with $2.1 billion in the fourth quarter of 2010.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 4.7 percent to $360 in the fourth quarter of 2011 compared with $344 in the fourth quarter of 2010.

Commercial health care costs PMPM in the Western Region increased by 3.9 percent to $306 in the fourth quarter of 2011 compared with $294 in the fourth quarter of 2010.

“The commercial gross margin PMPM in the Western Region increased 9.7 percent in the fourth quarter of 2011 compared with the fourth quarter of 2010.

“Since 2009, the full year commercial gross margin PMPM is up approximately 27 percent. This sustained performance is the result of our continued focus on pricing discipline as well as further growth in our tailored network products,” said Woys.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 85.2 percent in the fourth quarter of 2011 compared with 85.2 percent in the fourth quarter of 2010. The full year 2011 health plan services MCR was 86.4 percent compared with 86.6 percent for the full year 2010.

 

3

---

The Western Region commercial MCR was 84.8 percent in the fourth quarter of 2011 compared with 85.5 percent in the fourth quarter of 2010 and 84.8 percent in the third quarter of 2011. The full year 2011 commercial MCR was 85.3 percent compared with 86.1 percent for the full year 2010.

The Medicare Advantage (MA) MCR in the Western Region was 90.5 percent in the fourth quarter of 2011 compared with 89.4 percent in the fourth quarter of 2010. The full year 2011 MA MCR in the Western Region was 90.3 percent compared with 88.8 percent for the full year 2010.

“The higher MA MCR resulted from our inability to add new MA members in 2011 due to sanctions by the Centers for Medicare & Medicaid Services (CMS). The results of the 2012 annual enrollment period in the fourth quarter of 2011 indicate that MA enrollment growth will be strong this year,” Woys commented.

The company’s Medicare PDP MCR was 59.0 percent in the fourth quarter of 2011 compared with 53.1 percent in the fourth quarter of 2010. The full year 2011 Medicare PDP MCR was 84.1 percent compared with 77.2 percent for the full year 2010.

G&A Expense

G&A expense in the Western Region was $240.9 million in the fourth quarter of 2011 compared with $230.9 million in the fourth quarter of 2010. The G&A expense ratio was 9.2 percent in the fourth quarter of 2011 compared with 9.3 percent in the fourth quarter of 2010 and 8.9 percent in the third quarter of 2011.

GOVERNMENT CONTRACTS SEGMENT

As previously described, health care administrative services under the company’s T-3 TRICARE North contract began on April 1, 2011.

The company’s Government Contracts revenues were $194.6 million in the fourth quarter of 2011 and $822.4 million in the fourth quarter of 2010.

BALANCE SHEET

Cash and investments as of December 31, 2011 were approximately $1.8 billion compared with approximately $2.0 billion as of December 31, 2010.

Reserves for claims and other settlements as of December 31, 2011 were $912.1 million compared with $942.0 million as of December 31, 2010 and $873.0 million as of September 30, 2011.

Days claims payable (DCP) for the fourth quarter of 2011 was 37.9 days compared with 41.3 days in the fourth quarter of 2010 and 36.1 days in the third quarter of 2011.

On an adjusted¹ basis, DCP in the fourth quarter of 2011 was 54.1 days compared with 57.3 days in the fourth quarter of 2010 and 51.7 days in the third quarter of 2011.

The company’s debt-to-total capital ratio was 26.2 percent as of December 31, 2011 compared with 19.0 percent as of December 31, 2010 and 27.4 percent as of September 30, 2011.

 

 

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.

 

4

---

CASH FLOW

Operating cash flow was negative $119.8 million in the fourth quarter of 2011 due to the timing of payments from CMS. The company received two monthly CMS payments in the fourth quarter of 2011 after having received four monthly payments in the third quarter of 2011. The company’s monthly payments from CMS averaged approximately $300 million in 2011.

“For 2011, operating cash flow was approximately $103.4 million, consistent with company expectations and approximately equal to net income plus depreciation and amortization. This amount includes the $136 million after tax effect from the AmCareco judgment that was paid in the second quarter of 2011.

“We expect full year 2012 operating cash flow to again be equal to our expectations for net income plus depreciation and amortization,” said Joseph Capezza, Health Net’s chief financial officer. “Cash at the parent at December 31, 2011 was approximately $88.0 million.”

NORTHEAST OPERATIONS SEGMENT

The administrative services agreements that the company entered into with UnitedHealthcare (United) and its affiliates on the closing date of the Northeast transaction terminated on July 1, 2011. Health Net will continue to administer run-out claims for the Northeast business pursuant to claims servicing agreements in place with United and its affiliates.

The company did not have any revenues associated with its Northeast Operations in the fourth quarter of 2011. Expenses associated with the company’s Northeast Operations in the fourth quarter of 2011 were approximately $26.8 million. These items are shown separately in the accompanying Segment Information table.

As expected, the company received an $80.0 million tangible net equity payment from United in the fourth quarter of 2011. This payment is recorded in “Cash Flows from Investing Activities” in the company’s financial statements.

“With this last payment from United and the anticipated run-out expenses in 2012, we expect the final value of the transaction to be approximately $525 million, consistent with our initial expectations,” Capezza added.

SHARE REPURCHASE UPDATE

In the fourth quarter of 2011, Health Net repurchased approximately 2.7 million shares of its common stock for $70.7 million at an average price of $26.63 per share. At December 31, 2011, approximately $76.3 million of authorization under the company’s existing $300 million share repurchase program remained.

2012 GUIDANCE

Following is a table with specific 2012 guidance metrics that do not include the potential impact of the proposed divestiture of the company’s Medicare PDP business. Health Net will provide more details regarding its 2012 expectations at its 2012 Investor Day, which is scheduled for February 16, 2012, in New York.

 

5

---

 

Metric		2012 Guidance
Year-end membership(a)		Commercial: -3% to -5% Medicaid: +3% to +5% Medicare Advantage: +8% to +10% Medicare PDP (stand-alone): +10% to +12% Total health plan membership: flat to +1%
Consolidated revenues(b)		~$11.5 billion to $12.0 billion
Commercial premium yields PMPM(a)		~ +4.3% to +4.8%
Commercial health care costs PMPM(a)		~40 to 60 basis points < premium yields PMPM
Selling cost ratio(a) G&A expense ratio(a)		~2.3% to 2.4% ~8.6% to 8.8%
Tax rate(b)		38.0% to 39.0%
Weighted-average fully diluted shares outstanding(c)		~82.0 million to 83.0 million
GAAP EPS(c)   Combined Western Region Operations and Government Contracts EPS(c)		$2.80 to $2.90   $3.30 to $3.40

 

(a)	For the company’s Western Region Operations segment

(b)	For the combined Western Region Operations and Government Contracts segments

(c)	The company’s guidance does not include the impact of share repurchases other than those to counter dilution.

 

6

---

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2011 results during a conference call on Friday, February 3, 2012, 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)		855.859.2056 (Replay – Domestic)
706.643.5711 (International)		404.537.3406 (Replay – International)

The access code for the live conference call and replay is 35863543. A replay of the conference call will be available through February 8, 2012. 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, 2010 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011 and September 30, 2011, and other reports filed by the company from time to time with the Securities and Exchange Commission.

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 6.0 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, Department of Defense, including TRICARE, and Veterans Affairs programs. Health Net’s behavioral health services subsidiary, Managed Health Network, Inc., provides behavioral health, substance abuse and employee assistance programs to approximately 5.0 million individuals, including Health Net’s own health plan members. Health Net’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 Health Net’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

Health Net, Inc. 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

 

7

---

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, among other things, health care reform and other increased government participation in and regulation of health benefits and managed care operations, including the ultimate impact of the Affordable Care Act, which could materially adversely affect Health Net’s financial condition, results of operations and cash flows through, among other things, reduced revenues, new taxes, expanded liability, and increased costs (including medical, administrative, technology or other costs), or require changes to the ways in which Health Net does business; rising health care costs; continued slow economic growth or a further decline in the economy; negative prior period claims reserve developments; trends in medical care ratios; membership declines; unexpected utilization patterns or unexpectedly severe or widespread illnesses; rate cuts and other risks and uncertainties affecting Health Net’s Medicare or Medicaid businesses; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care, 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; failure to effectively oversee our third party vendors; noncompliance by Health Net or Health Net’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; any liabilities of the Northeast business that were incurred prior to the closing of its sale as well as those liabilities incurred through the winding-up and running-out period of the Northeast business; Health Net’s ability to complete proposed dispositions on a timely basis or at all; investment portfolio impairment charges; volatility in the financial markets; 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 Health Net’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the SEC and the risks discussed in Health Net’s other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Health Net undertakes no obligation to address or publicly update its guidance, the assessment of the underlying assumptions or 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-K for the year ended December 31, 2011.

Nine pages of tables follow.

# # #

 

8

---

Health Net, Inc.

Enrollment Data—By State

(In thousands)

 

		Dec 31, 2011				Sept 30, 2011				Dec 31, 2010				Change from
														September 30, 2011								December 31, 2010
														Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
California
Large Group			826				837				843				(11	)			(1.3	)%			(17	)			(2.0	)%
Small Group and Individual			308				318				348				(10	)			(3.1	)%			(40	)			(11.5	)%
Commercial Risk			1,134				1,155				1,191				(21	)			(1.8	)%			(57	)			(4.8	)%
Medicare Advantage			125				124				133				1				0.8	%			(8	)			(6.0	)%
Medi-Cal			1,009				988				901				21				2.1	%			108				12.0	%
Total California			2,268				2,267				2,225				1				0.0	%			43				1.9	%
Arizona
Large Group			77				76				56				1				1.3	%			21				37.5	%
Small Group and Individual			63				61				41				2				3.3	%			22				53.7	%
Commercial Risk			140				137				97				3				2.2	%			43				44.3	%
Medicare Advantage			41				40				49				1				2.5	%			(8	)			(16.3	)%
Total Arizona			181				177				146				4				2.3	%			35				24.0	%
Oregon
Large Group			50				50				51				0				0.0	%			(1	)			(2.0	)%
Small Group and Individual			42				41				44				1				2.4	%			(2	)			(4.5	)%
Commercial Risk			92				91				95				1				1.1	%			(3	)			(3.2	)%
Medicare Advantage			39				39				40				0				0.0	%			(1	)			(2.5	)%
Total Oregon			131				130				135				1				0.8	%			(4	)			(3.0	)%
Total Health Plan Enrollment
Large Group			953				963				950				(10	)			(1.0	)%			3				0.3	%
Small Group and Individual			413				420				433				(7	)			(1.7	)%			(20	)			(4.6	)%
Commercial Risk			1,366				1,383				1,383				(17	)			(1.2	)%			(17	)			(1.2	)%
Medicare Advantage			205				203				222				2				1.0	%			(17	)			(7.7	)%
Medi-Cal/Medicaid			1,009				988				901				21				2.1	%			108				12.0	%
Medicare PDP (stand-alone)			382				381				427				1				0.3	%			(45	)			(10.5	)%
Western Region Operations			2,962				2,955				2,933				7				0.2	%			29				1.0	%
Northeast Operations			0				0				7				0				0.0	%			(7	)			(100.0	)%
			2,962				2,955				2,940				7				0.2	%			22				0.7	%
TRICARE—North Contract Eligibles			3,004				3,010				3,090				(6	)			(0.2	)%			(86	)			(2.8	)%

 

Page 9

---

Health Net, Inc.

Enrollment Data—Line of Business

(In thousands)

 

														Change from
														September 30, 2011								December 31, 2010
		Dec 31, 2011				Sept 30, 2011				Dec 31, 2010				Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
Large Group
California			826				837				843				(11	)			(1.3	)%			(17	)			(2.0	)%
Arizona			77				76				56				1				1.3	%			21				37.5	%
Oregon			50				50				51				0				0.0	%			(1	)			(2.0	)%
			953				963				950				(10	)			(1.0	)%			3				0.3	%
Small Group and Individual
California			308				318				348				(10	)			(3.1	)%			(40	)			(11.5	)%
Arizona			63				61				41				2				3.3	%			22				53.7	%
Oregon			42				41				44				1				2.4	%			(2	)			(4.5	)%
			413				420				433				(7	)			(1.7	)%			(20	)			(4.6	)%
Commercial Risk
California			1,134				1,155				1,191				(21	)			(1.8	)%			(57	)			(4.8	)%
Arizona			140				137				97				3				2.2	%			43				44.3	%
Oregon			92				91				95				1				1.1	%			(3	)			(3.2	)%
			1,366				1,383				1,383				(17	)			(1.2	)%			(17	)			(1.2	)%
Medicare Advantage
California			125				124				133				1				0.8	%			(8	)			(6.0	)%
Arizona			41				40				49				1				2.5	%			(8	)			(16.3	)%
Oregon			39				39				40				0				0.0	%			(1	)			(2.5	)%
			205				203				222				2				1.0	%			(17	)			(7.7	)%
Medi-Cal/Medicaid
California			1,009				988				901				21				2.1	%			108				12.0	%
Total Health Plan Enrollment
Large Group			953				963				950				(10	)			(1.0	)%			3				0.3	%
Small Group and Individual			413				420				433				(7	)			(1.7	)%			(20	)			(4.6	)%
Commercial Risk			1,366				1,383				1,383				(17	)			(1.2	)%			(17	)			(1.2	)%
Medicare Advantage			205				203				222				2				1.0	%			(17	)			(7.7	)%
Medi-Cal/Medicaid			1,009				988				901				21				2.1	%			108				12.0	%
Medicare PDP (stand-alone)			382				381				427				1				0.3	%			(45	)			(10.5	)%
Western Region Operations			2,962				2,955				2,933				7				0.2	%			29				1.0	%
Northeast Operations			0				0				7				0				0.0	%			(7	)			(100.0	)%
			2,962				2,955				2,940				7				0.2	%			22				0.7	%
TRICARE—North Contract Eligibles			3,004				3,010				3,090				(6	)			(0.2	)%			(86	)			(2.8	)%

 

Page 10

---

Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

		Quarter Ended December 31, 2011				Quarter Ended September 30, 2011				Quarter Ended December 31, 2010				Year Ended December 31, 2011				Year Ended December 31, 2010
REVENUES:
Health plan services premiums		$	2,602,790			$	2,582,385			$	2,491,124			$	10,364,278			$	9,996,888
Government contracts			194,632				175,845				822,388				1,416,619				3,344,483
Net investment income			10,047				15,188				15,226				74,161				71,181
Administrative services fees and other income			4,553				2,174				4,953				11,532				21,133
Northeast administrative services fees and other			—				10,976				39,643				34,446				186,167
Total revenues			2,812,022				2,786,568				3,373,334				11,901,036				13,619,852
EXPENSES:
Health plan services			2,211,266				2,223,471				2,099,969				8,948,349				8,609,117
Government contracts			157,020				127,884				770,487				1,237,884				3,168,160
General and administrative			249,163				233,632				245,861				1,128,185				956,264
Selling			61,827				58,110				64,333				238,199				238,759
Depreciation and amortization			7,274				7,154				9,012				32,209				34,800
Interest			8,507				7,783				8,085				32,148				34,880
Northeast administrative and claims services expenses			26,756				29,043				63,727				145,879				279,434
Adjustment to loss on sale of Northeast subsidiaries			7				315				(12,331	)			(40,815	)			(41,959	)
Asset impairments																			6,000
Early debt extinguishment																			3,532
Total expenses			2,721,820				2,687,392				3,249,143				11,722,038				13,288,987
Income from operations before income taxes			90,202				99,176				124,191				178,998				330,865
Income tax provision			29,999				37,364				43,787				106,878				126,622
Net income		$	60,203			$	61,812			$	80,404			$	72,120			$	204,243
Basic earnings per share		$	0.73			$	0.71			$	0.84			$	0.81			$	2.08
Diluted earnings per share		$	0.71			$	0.70			$	0.83			$	0.80			$	2.06
Weighted average shares outstanding:
Basic			82,721				87,675				95,697				88,524				98,232
Diluted			84,247				88,874				96,885				89,970				99,232

 

Page 11

---

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 

		December 31, 2011				September 30, 2011				December 31, 2010
ASSETS
Current Assets
Cash and cash equivalents		$	230,253			$	376,336			$	350,138
Investments—available for sale			1,557,997				1,656,895				1,663,218
Premiums receivable, net			251,911				276,995				298,892
Amounts receivable under government contracts			234,740				206,113				266,456
Incurred but not reported (IBNR) health care costs receivable
under TRICARE North contract											284,247
Other receivables			225,004				169,438				136,323
Deferred taxes			46,659				54,850				45,769
Other assets			117,876				212,747				182,252
Total current assets			2,664,440				2,953,374				3,227,295
Property and equipment, net			145,302				125,833				123,137
Goodwill, net			605,886				605,886				605,886
Other intangible assets, net			20,699				21,556				24,217
Deferred taxes			49,685				51,277				50,648
Investments—available for sale— noncurrent			2,147				2,614				8,756
Other noncurrent assets			119,510				111,238				91,754
Total Assets		$	3,607,669			$	3,871,778			$	4,131,693
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements		$	912,126			$	873,037			$	942,024
Health care and other costs payable under government contracts			88,440				47,546				113,865
IBNR health care costs payable under TRICARE North contract											284,247
Unearned premiums			176,733				442,164				158,493
Accounts payable and other liabilities			240,281				308,961				402,024
Total current liabilities			1,417,580				1,671,708				1,900,653
Senior notes payable			398,890				398,839				398,685
Borrowings under revolving credit facility			112,500				145,000				—
Other noncurrent liabilities			235,553				217,827				137,939
Total Liabilities			2,164,523				2,433,374				2,437,277
Stockholders’ Equity
Common stock			147				147				145
Additional paid-in capital			1,278,037				1,270,968				1,221,301
Treasury common stock, at cost			(2,023,129	)			(1,952,068	)			(1,626,856	)
Retained earnings			2,171,459				2,111,256				2,099,339
Accumulated other comprehensive income			16,632				8,101				487
Total Stockholders’ Equity			1,443,146				1,438,404				1,694,416
Total Liabilities and Stockholders’ Equity		$	3,607,669			$	3,871,778			$	4,131,693
Debt-to-Total Capital Ratio			26.2	%			27.4	%			19.0	%

 

Page 12

---

Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

		Quarter Ended December 31, 2011				Quarter Ended September 30, 2011				Quarter Ended December 31, 2010				Year Ended December 31, 2011				Year Ended December 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	60,203			$	61,812			$	80,404			$	72,120			$	204,243
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation			7,274				7,154				9,012				32,209				34,800
Share-based compensation expense			6,257				6,050				5,135				27,602				33,112
Deferred income taxes			22,171				(51,206	)			38,661				7,771				37,164
Excess tax benefits from share-based compensation			(70	)			(2	)			(98	)			(1,349	)			(571	)
Adjustment to loss on sale of business			7				315				(12,331	)			(40,815	)			(41,959	)
Asset impairment																			6,000
Net realized (gain) on sale on investments			(709	)			(5,369	)			(4,396	)			(33,029	)			(23,019	)
Other changes			10,675				4,029				(5,091	)			21,485				(21,413	)
Changes in assets and liabilities:
Premiums receivable and unearned premiums			(240,347	)			353,123				113,529				65,221				12,548
Other current assets, receivables and noncurrent assets			16,437				(22,535	)			32,798				(54,031	)			27,590
Amounts receivable/payable under government contracts			6,301				89,741				1,781				32,754				27,404
Reserves for claims and other settlements			39,089				(27,687	)			37,647				(29,898	)			(9,631	)
Accounts payable and other liabilities			(47,105	)			105,283				(9,528	)			3,340				21,770
Net cash (used in) provided by operating activities			(119,817	)			520,708				287,523				103,380				308,038
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments			128,299				434,236				210,533				1,760,336				1,118,957
Maturities of investments			40,941				30,299				43,224				189,137				199,425
Purchases of investments			(71,782	)			(532,032	)			(543,696	)			(1,814,431	)			(1,582,851	)
Proceeds from sale of property and equipment																			19
Purchases of property and equipment			(32,124	)			(11,124	)			(9,793	)			(64,260	)			(34,791	)
Purchase price adjustment on sale of Northeast Health Plans			80,000				41,065				80,000				162,101				76,126
Sales and purchases of restricted investments and other			(1,009	)			2,620				15,491				(10,656	)			22,522
Net cash provided by (used in) investing activities			144,325				(34,936	)			(204,241	)			222,227				(200,593	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases			1,047				513				2,030				13,356				3,644
Repurchases of common stock			(76,410	)			(123,551	)			(54,528	)			(389,850	)			(236,847	)
Excess tax benefits from share-based compensation			70				2				98				1,349				571
Borrowings under financing arrangements			281,000				230,000				—				978,500				100,000
Repayment of borrowings under financing arrangements			(319,712	)			(270,000	)			(100,000	)			(872,212	)			(316,771	)
Net (decrease) increase in checks outstanding, net of deposits			(5,901	)			(31,960	)			45,909				(46,718	)			45,909
Customer funds administered			(50,685	)			(80,943	)			(72,954	)			(129,917	)			(36,616	)
Net cash (used in) financing activities			(170,591	)			(275,939	)			(179,445	)			(445,492	)			(440,110	)
Net (decrease) increase in cash and cash equivalents			(146,083	)			209,833				(96,163	)			(119,885	)			(332,665	)
Cash and cash equivalents, beginning of period			376,336				166,503				446,301				350,138				682,803
Cash and cash equivalents, end of period		$	230,253			$	376,336			$	350,138			$	230,253			$	350,138

 

Page 13

---

Health Net, Inc.

SEGMENT INFORMATION (page 1)

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

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

 

		Quarter Ended December 31, 2011																				Quarter Ended September 30, 2011																				Quarter Ended December 31, 2010
		Western Region Opera- tions1				Govern- ment Contracts7				Northeast Opera- tions3				Cor- porate/ Other4, 5, 6				Consoli- dated				Western Region Opera- tions1				Govern- ment Contracts7				Northeast Opera- tions3				Cor- porate/ Other4, 5, 6				Consoli- dated				Western Region Opera- tions1				Govern- ment Contracts2				Northeast Opera- tions3				Cor- porate/ Other4, 5, 6				Consoli- dated
Health plan services premiums		$	2,602,790															$	2,602,790			$	2,582,372							$	13							$	2,582,385			$	2,481,121							$	10,003							$	2,491,124
Government contracts							194,632												194,632								175,845												175,845								822,388												822,388
Net investment income			10,047																10,047				15,188																15,188				15,138								88								15,226
Administrative services fees and other income			4,553																4,553				2,174																2,174				4,953								—								4,953
Northeast administrative services fees and other											0								—												10,976								10,976				—								39,643								39,643
Total revenues			2,617,390				194,632				—				—				2,812,022				2,599,734				175,845				10,989				—				2,786,568				2,501,212				822,388				49,734				—				3,373,334
Health plan services			2,217,616								(25	)			(6,325	)			2,211,266				2,223,430								213				(172	)			2,223,471				2,115,099								9,746				(24,876	)			2,099,969
Government contracts							155,580								1,440				157,020								127,707								177				127,884								770,321								166				770,487
G&A excluding insurance, taxes and fees			220,110								(450	)			8,231				227,891				209,463								(429	)			4,563				213,597				211,894								1,576				13,015				226,485
Insurance, taxes and fees			20,815								457				—				21,272				19,618								417				—				20,035				19,003								373				—				19,376
G&A including insurance, taxes and fees			240,925								7				8,231				249,163				229,081								(12	)			4,563				233,632				230,897								1,949				13,015				245,861
Selling			61,821								6								61,827				58,085								25								58,110				63,866								467								64,333
Depreciation and amortization			7,274																7,274				7,154																7,154				8,980								32								9,012
Interest			8,507																8,507				7,783																7,783				8,085								—								8,085
Early debt extinguishment															—				—																				—																				—
Asset impairments															—				—																				—												—								—
Northeast administrative and claims services expenses							26,756								26,756												29,043								29,043												63,727								63,727
Adjustment to loss on sale of Northeast health plans											7								7												315								315												(12,331	)							(12,331	)
Total expenses			2,536,143				155,580				26,751				3,346				2,721,820				2,525,533				127,707				29,584				4,568				2,687,392				2,426,927				770,321				63,590				(11,695	)			3,249,143
Income (loss) from operations before income taxes			81,247				39,052				(26,751	)			(3,346	)			90,202				74,201				48,138				(18,595	)			(4,568	)			99,176				74,285				52,067				(13,856	)			11,695				124,191
Income tax provision (benefit)			28,819				15,853				(11,968	)			(2,705	)			29,999				27,004				19,509				(7,236	)			(1,913	)			37,364				27,389				21,320				(9,830	)			4,908				43,787
Net income (loss)		$	52,428			$	23,199			$	(14,783	)		$	(641	)		$	60,203			$	47,197			$	28,629			$	(11,359	)		$	(2,655	)		$	61,812			$	46,896			$	30,747			$	(4,026	)		$	6,787			$	80,404
Basic earnings (loss) per share		$	0.63			$	0.28			$	(0.18	)		$	(0.01	)		$	0.73			$	0.54			$	0.33			$	(0.13	)		$	(0.03	)		$	0.71			$	0.49			$	0.32			$	(0.04	)		$	0.07			$	0.84
Diluted earnings (loss) per share		$	0.62			$	0.28			$	(0.18	)		$	(0.01	)		$	0.71			$	0.53			$	0.32			$	(0.13	)		$	(0.03	)		$	0.70			$	0.48			$	0.32			$	(0.04	)		$	0.07			$	0.83
Basic weighted average shares outstanding			82,721				82,721				82,721				82,721				82,721				87,675				87,675				87,675				87,675				87,675				95,697				95,697				95,697				95,697				95,697
Diluted weighted average shares outstanding			84,247				84,247				82,721				82,721				84,247				88,874				88,874				87,675				87,675				88,874				96,885				96,885				95,697				96,885				96,885
Pretax margin			3.1	%																			2.9	%																			3.0	%
Commercial premium yield			4.7	%																			5.1	%																			6.8	%
Commercial premium PMPM		$	360.12																			$	359.96																			$	343.85
Commercial health care cost trend			3.9	%																			3.2	%																			5.7	%
Commercial health care cost PMPM		$	305.52																			$	305.08																			$	294.08
Commercial MCR			84.8	%																			84.8	%																			85.5	%
Medicare Advantage MCR			90.5	%																			90.7	%																			89.4	%
Medicare PDP (stand-alone) MCR			59.0	%																			78.4	%																			53.1	%
Medicaid MCR			85.5	%																			86.0	%																			87.4	%
Health plan services MCR			85.2	%																			86.1	%																			85.2	%
G&A expense ratio			9.2	%																			8.9	%																			9.3	%
Selling costs ratio			2.4	%																			2.2	%																			2.6	%

 

1

Includes the operations of the company’s commercial, Medicare and Medicaid 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 the operations of government-sponsored managed care plans through the TRICARE program and other health care-related Department of Defense and Veterans Affairs government contracts.

 

3

Includes the operations of the company’s businesses that provided administrative services through June 30, 2011 pursuant to administrative services agreements (ASA) entered into with UnitedHealthcare (United) and its affiliates, as well as the operations of the company’s health and life insurance companies in Connecticut, New Jersey and New York. The ASA terminated on July 1, 2011, and the company began performing under the claims servicing agreements (CSA) with United and its affiliates. On and after July 1, 2011, includes the operations of the company’s businesses that provide claims run-out services pursuant to the CSA.

 

4	Includes a litigation reserve true-up related to a previous accrual for a class action lawsuit.

 

5	Includes expenses primarily related to litigation.

 

6	Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.

 

7

Includes administrative services provided under the new T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.

 

Page 14

---

Health Net, Inc.

SEGMENT INFORMATION (page 2)

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

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

 

		Year Ended December 31, 2011																				Year Ended December 31, 2010
		Western Region Operations1				Government Contracts7				Northeast Operations3				Corporate/ Other4, 5, 6				Consolidated				Western Region Operations1				Government Contracts2				Northeast Operations3				Corporate/ Other4, 5, 6				Consolidated
Health plan services premiums		$	10,361,934							$	2,344							$	10,364,278			$	9,925,738							$	71,150							$	9,996,888
Government contracts							1,416,619												1,416,619								3,344,483												3,344,483
Net investment income			74,092								69								74,161				70,279								902								71,181
Administrative services fees and other income			11,532																11,532				26,547								46				(5,460	)			21,133
Northeast administrative services fees and other											34,446								34,446												186,167								186,167
Total revenues			10,447,558				1,416,619				36,859				—				11,901,036				10,022,564				3,344,483				258,265				(5,460	)			13,619,852
Health plan services			8,954,218								930				(6,799	)			8,948,349				8,591,161								64,465				(46,509	)			8,609,117
Government contracts							1,231,388								6,496				1,237,884								3,165,747								2,413				3,168,160
G&A excluding insurance, taxes and fees			842,966								559				199,732				1,043,257				807,450								14,886				58,840				881,176
Insurance, taxes and fees			83,773								1,155								84,928				74,309								779				—				75,088
G&A including insurance, taxes and fees			926,739								1,714				199,732				1,128,185				881,759								15,665				58,840				956,264
Selling			237,997								202								238,199				235,608								3,151								238,759
Depreciation and amortization			32,197								12								32,209				34,634								166								34,800
Interest			31,963								185								32,148				34,880								—								34,880
Early debt extinguishment																			—																3,532				3,532
Asset impairments																			—												6,000								6,000
Northeast administrative and claims services expenses											145,879								145,879												279,434								279,434
Adjustment to loss on sale of Northeast health plans											(40,815	)							(40,815	)											(41,959	)							(41,959	)
Total expenses			10,183,114				1,231,388				108,107				199,429				11,722,038				9,778,042				3,165,747				326,922				18,276				13,288,987
Income (loss) from operations before income taxes			264,444				185,231				(71,248	)			(199,429	)			178,998				244,522				178,736				(68,657	)			(23,736	)			330,865
Income tax provision (benefit)			96,169				75,092				(34,444	)			(29,939	)			106,878				91,709				73,197				(29,256	)			(9,028	)			126,622
Net income (loss)		$	168,275			$	110,139			$	(36,804	)		$	(169,490	)		$	72,120			$	152,813			$	105,539			$	(39,401	)		$	(14,708	)		$	204,243
Basic earnings (loss) per share		$	1.90			$	1.24			$	(0.42	)		$	(1.91	)		$	0.81			$	1.56			$	1.07			$	(0.40	)		$	(0.15	)		$	2.08
Diluted earnings (loss) per share		$	1.87			$	1.22			$	(0.42	)		$	(1.91	)		$	0.80			$	1.54			$	1.06			$	(0.40	)		$	(0.15	)		$	2.06
Basic weighted average shares outstanding			88,524				88,524				88,524				88,524				88,524				98,232				98,232				98,232				98,232				98,232
Diluted weighted average shares outstanding			89,970				89,970				88,524				88,524				89,970				99,232				99,232				98,232				98,232				99,232
Pretax margin			2.5	%																			2.4	%
Commercial premium yield			5.1	%																			7.9	%
Commercial premium PMPM		$	358.04																			$	340.81
Commercial health care cost trend			4.0	%																			7.1	%
Commercial health care cost PMPM		$	305.27																			$	293.51
Commercial MCR			85.3	%																			86.1	%
Medicare Advantage MCR			90.3	%																			88.8	%
Medicare PDP (stand-alone) MCR			84.1	%																			77.2	%
Medicaid MCR			85.5	%																			87.7	%
Health plan services MCR			86.4	%																			86.6	%
G&A expense ratio			8.9	%																			8.9	%
Selling costs ratio			2.3	%																			2.4	%

 

1

Includes the operations of the company’s commercial, Medicare and Medicaid 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 the operations of government-sponsored managed care plans through the TRICARE program and other health care-related Department of Defense and Veterans Affairs government contracts.

 

3

Includes the operations of the company’s businesses that provided administrative services through June 30, 2011 pursuant to administrative services agreements (ASA) entered into with UnitedHealthcare (United) and its affiliates, as well as the operations of the company’s health and life insurance companies in Connecticut, New Jersey and New York. The ASA terminated on July 1, 2011, and the company began performing under the claims servicing agreements (CSA) with United and its affiliates. On and after July 1, 2011, includes the operations of the company’s businesses that provide claims run-out services pursuant to the CSA.

 

4	Includes a litigation reserve true-up related to a previous accrual for a class action lawsuit.

 

5	Includes expenses primarily related to litigation.

 

6	Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.

 

7

Includes administrative services provided under the new T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.

 

Page 15

---

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, provider and other claims settlements and Medicare Advantage-Prescription Drug (MAPD) and stand-alone Prescription Drug Plans (PDP) 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 calculated from claims-based reserves than does GAAP DCP, which includes 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.

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.

 

Reconciliation of Days Claims Payable:				Q4 2011				Q3 2011				Q4 2010				FY 2011				FY 2010
(1)		Reserve for Claims and Other Settlements		$	912.1			$	873.0			$	942.0			$	912.1			$	942.0
		Less: Capitation, Provider and Other Claim Settlements, and MAPD and PDP Payables			(90.7	)			(92.2	)			(108.7	)			(90.7	)			(108.7	)
(2)		Reserve for Claims and Other Settlements - Adjusted		$	821.4			$	780.8			$	833.3			$	821.4			$	833.3
(3)		Health Plan Services Cost		$	2,211.3			$	2,223.5			$	2,100.0			$	8,948.3			$	8,609.1
		Less: Capitation, Provider and Other Claim Settlements, and MAPD and PDP Costs			(815.3	)			(833.7	)			(762.6	)			(3,450.2	)			(3,291.1	)
(4)		Health Plan Services Cost - Adjusted		$	1,396.0			$	1,389.8			$	1,337.4			$	5,498.1			$	5,318.0
(5)		Number of Days in Period			92				92				92				365				365
= (1) / (3) * (5) Days Claims Payable - (using end of period reserve amount)					37.9				36.1				41.3				37.2				39.9
= (2) / (4) * (5) Days Claims payable - Adjusted (using end of period reserve amount)					54.1				51.7				57.3				54.5				57.2

 

Page 16

---

Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

($ in millions)

 

		Health Plan Services
		FY 2011				FY 2010				FY 2009
Reserve for claims (a), beginning of period		$	727.5			$	692.2			$	957.1
Incurred claims related to:
Current Year			4,733.0				4,644.2				6,422.8
Prior Years (c)			(96.5	)			(70.0	)			(80.0	)
Total Incurred (b)			4,636.5				4,574.2				6,342.8
Paid claims related to:
Current Year			4,024.4				3,929.3				5,572.2
Prior Years			618.8				609.6				857.8
Total Paid (b)			4,643.2				4,538.9				6,430.0
Less: Divested businesses			—				—				(177.7	)
Reserve for claims (a), end of period			720.8				727.5				692.2
Add:
Claims Payable (d)			111.0				123.6				165.6
Other (e)			80.3				90.9				93.9
Reserves for claims and other settlements, end of period		$	912.1			$	942.0			$	951.7

 

(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 period-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.

 

Page 17