Exhibit 99.1

 

Investor Contact:		Media Contact:
Angie McCabe		Brad Kieffer
(818) 676-8692		(818) 676-6833
angie.mccabe@healthnet.com		brad.kieffer@healthnet.com

HEALTH NET REPORTS SECOND QUARTER 2013 GAAP NET INCOME

OF $33.5 MILLION, OR $0.42 PER DILUTED SHARE

WESTERN REGION OPERATIONS AND GOVERNMENT CONTRACTS SEGMENTS

PRODUCE COMBINED NET INCOME OF $0.52 PER DILUTED SHARE

LOS ANGELES, July 25, 2013 – Health Net, Inc. (NYSE: HNT) today announced 2013 second quarter GAAP net income of $33.5 million, or $0.42 per diluted share, compared with $124.6 million, or $1.48 per diluted share, for the second quarter of 2012.

The company’s second quarter 2012 financial results included in this release and the attached financial tables reflect the treatment of the company’s Medicare stand-alone Part D (Medicare PDP) business that was sold on April 1, 2012, as discontinued operations. In the second quarter of 2012, the company recorded a $119.4 million net gain, or $1.42 per diluted share, from the sale of the Medicare PDP business.

The second quarter 2013 GAAP results include approximately $12.9 million in Corporate/Other pretax expenses, primarily severance costs resulting from the company’s continuing efforts to address scale issues.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $41.4 million, or $0.52 per diluted share, in the second quarter of 2013 compared with $15.9 million, or $0.19 per diluted share, in the second quarter of 2012.

Highlights from the second quarter of 2013 include:

 

1.

the commercial medical care ratio (MCR) continued to improve as a result of the company’s efforts to reposition its commercial book, lower health care costs and the absence of adverse prior period reserve development in the second quarter of 2013;

 

2.

the Medicare Advantage (MA) MCR improved sequentially and quarter-over-quarter primarily due to lower health care cost trends;

---

3.

the Medicaid MCR improved sequentially and quarter-over-quarter as a result of better performance in the company’s Seniors and Persons with Disabilities (SPDs) membership and the impact of reinstated California Medicaid premium taxes on premium revenues;

 

4.

the company was selected to participate in 13 regions in Covered California, the California individual health insurance exchange, and in Cover Oregon, the Oregon individual health insurance exchange, with coverage in both states scheduled to begin on January 1, 2014;

 

5.

CalPERS selected Health Net tailored network HMO products as part of its offerings to its members effective January 1, 2014; and

 

6.

as part of its budget process, the state of California reinstated Medicaid premium taxes on June 27, 2013, retroactive to July 1, 2012. This raised the company’s general and administrative (G&A) ratio by 120 basis points to 11.0 percent and lowered the Medicaid MCR by 510 basis points in the second quarter of 2013. The reinstated Medicaid premium taxes and related incremental premium revenue did not impact pretax or net income in the second quarter of 2013.

“We produced solid operating improvement in each line of business in the second quarter of 2013. G&A costs were higher than our expectations primarily due to the reinstated Medicaid premium tax expenses and increased spending to prepare for health care reform and the implementation of California’s Coordinated Care Initiative,” said Jay Gellert, Health Net’s chief executive officer.

“We believe we can sustain our current operating performance throughout the remainder of this year. For the full year 2013, we now expect GAAP earnings per diluted share of $2.10 to $2.20. In addition, we expect full year 2013 earnings per diluted share from the combined Western Region and Government Contracts segments to be in a range of $2.20 to $2.30 despite higher G&A expenses that now include costs to prepare for the state of California’s Coordinated Care Initiative,” Gellert added.

CONSOLIDATED RESULTS

Health Net’s total revenues decreased 3.6 percent in the second quarter of 2013 to $2.7 billion from $2.8 billion in the second quarter of 2012.

Health plan services premium revenues decreased by 1.5 percent from the second quarter of 2012 to approximately $2.6 billion in the second quarter of 2013.

Health plan services expenses decreased 7.1 percent to approximately $2.2 billion in the second quarter of 2013 compared with $2.4 billion in the second quarter of 2012.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at June 30, 2013 was approximately 2.5 million members, a decrease of 3.2 percent from enrollment at June 30, 2012.

Total enrollment in the company’s California health plans at June 30, 2013 decreased 1.7 percent from enrollment at June 30, 2012.

Western Region commercial enrollment at June 30, 2013 was approximately 1.1 million members, a decrease of 11.6 percent compared with enrollment at June 30, 2012.

“The decrease in our commercial membership was primarily the result of the repositioning of our commercial book away from larger accounts,” said Jim Woys, Health Net’s chief operating officer.

Membership in tailored network products represented 37.3 percent of the company’s Western Region commercial membership at June 30, 2013 compared with 35.2 percent at June 30, 2012. In California, enrollment in small group tailored network products grew by 11.5 percent from June 30, 2012 to June 30, 2013.

 

2

---

“We believe the affordability of our tailored network products continues to attract small group customers,” said Woys. “We believe this positions us well as we prepare for the exchanges in 2014.”

Enrollment in the company’s MA plans was 236,000 members at June 30, 2013, which represents a 3.5 percent increase compared with enrollment of 228,000 members at June 30, 2012.

Medicaid enrollment increased 5.5 percent to 1.1 million members at June 30, 2013 compared with June 30, 2012.

Revenues

Total revenues in the Western Region declined 2.0 percent from $2.7 billion in the second quarter of 2012 to approximately $2.6 billion in the second quarter of 2013.

Net investment income in the Western Region was $17.1 million in the second quarter of 2013 compared with $24.7 million in the second quarter of 2012 and $29.6 million in the first quarter of 2013. The company recorded $5.6 million in realized investment gains in the second quarter of 2013 compared with $12.4 million in the second quarter of 2012.

The company expects investment income in 2013 of approximately $70 million compared with previous expectations of approximately $80 million due to lower anticipated realized investment gains in the second half of 2013.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.2 billion in the second quarter of 2013 compared with approximately $2.4 billion in the second quarter of 2012.

Commercial Premium Yields and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 2.0 percent to $380 in the second quarter of 2013 compared with $373 in the second quarter of 2012.

Commercial health care costs PMPM in the Western Region decreased by 2.3 percent to approximately $323 in the second quarter of 2013 compared with $331 in the second quarter of 2012.

“The changing mix of our commercial business to tailored network products and a shift away from large employer group accounts continued to produce improvement in our commercial premium yields to health care costs spread and is consistent with our outlook,” said Woys.

Medical Care Ratios

The health plan services MCR in the Western Region was 85.0 percent in the second quarter of 2013 compared with 90.1 percent in the second quarter of 2012.

The Western Region commercial MCR was 84.9 percent in the second quarter of 2013 compared with 88.7 percent in the second quarter of 2012.

The MA MCR in the Western Region was 89.9 percent in the second quarter of 2013 compared with 92.0 percent in the second quarter of 2012. The 210 basis point improvement in the MA MCR was consistent with the company’s expectations.

 

3

---

The Medicaid MCR was 79.5 percent in the second quarter of 2013 compared with 91.3 percent in the second quarter of 2012. In addition to the impact of the reinstated Medicaid premium tax revenue, the company noted that the Medicaid MCR in the second quarter of 2013 also benefited from improved performance of its SPD population due to moderating health care cost trends.

Consistent with its historical practice, the state of California increased the company’s Medicaid premium revenues by the same amount, $35.7 million, as the company’s Medicaid premium tax expense. Approximately $25.4 million of Medicaid premium revenue recorded in the second quarter of 2013 was attributable to the nine months ended March 31, 2013, with the balance of approximately $10.3 million attributable to the second quarter of 2013. The $35.7 million in additional Medicaid premium revenue favorably impacted the Medicaid MCR by 510 basis points in the second quarter of 2013.

G&A Expenses

G&A expense in the Western Region was $284.1 million in the second quarter of 2013 compared with $218.7 million in the second quarter of 2012 and $245.2 million in the first quarter of 2013. The G&A expense ratio was 11.0 percent in the second quarter of 2013 compared with 8.3 percent in the second quarter of 2012 and 9.3 percent in the first quarter of 2013.

The reinstated Medicaid premium tax expense was recorded in G&A expenses. In the second quarter of 2013, this expense was approximately $35.7 million, of which approximately $25.4 million is attributable to the nine months ended March 31, 2013 and approximately $10.3 million is attributable to the second quarter of 2013.

“We are increasing our full year 2013 guidance for the G&A ratio by approximately 100 basis points to a range of 10.0 percent to 10.5 percent due to three factors,” said Woys. “First, we expect the impact from the reinstatement of California Medicaid premium taxes to be approximately $70 million for the full year 2013. In addition, for the full year 2013, we expect to spend approximately $20 million in preparation for the California Coordinated Care Initiative and approximately $10 million to prepare for other future opportunities, including our participation in Arizona Medicaid and CalPERS.”

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues were $139.9 million in the second quarter of 2013 compared with $176.2 million in the second quarter of 2012.

Government Contracts expenses were $121.8 million in the second quarter of 2013 compared with $152.7 million in the second quarter of 2012.

“We now expect Government Contracts’ full year 2013 pretax income to be in a range of approximately $55 million to $60 million, primarily due to certain adjustments pursuant to our TRICARE contract,” said Woys.

BALANCE SHEET

Cash and investments as of June 30, 2013 were $1.9 billion compared with $2.1 billion as of June 30, 2012.

Reserves for claims and other settlements were $1.0 billion as of June 30, 2013 compared with $1.0 billion as of June 30, 2012 and $1.1 billion as of March 31, 2013. The sequential decline was due to provider shared-risk payments of approximately $23.0 million and a claims inventory reduction of $58.0 million.

 

4

---

Days claims payable (DCP) for the second quarter of 2013 was 42.1 days compared with 39.0 days in the second quarter of 2012 and 43.5 days in the first quarter of 2013.

On an adjusted¹ basis, DCP in the second quarter of 2013 was 58.4 days compared with 54.3 days in the second quarter of 2012 and 62.1 days in the first quarter of 2013. The sequential decline in GAAP and adjusted DCP was due to the sequential decline in reserves for claims and other settlements.

The company’s debt-to-total capital ratio was 25.6 percent as of June 30, 2013 compared with 24.6 percent as of March 31, 2013 and 24.1 percent as of June 30, 2012. The increase in the debt-to-total capital ratio was primarily due to a $25.0 million increase in the company’s borrowings under its revolving credit facility during the second quarter of 2013.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $106.3 million in the second quarter of 2013. The negative operating cash flow was primarily the result of delayed June 2013 Medicaid payments of approximately $121.5 million, a claims inventory reduction of approximately $58.7 million and provider shared-risk payments of approximately $23.4 million. The company noted that it received the June Medicaid payments in early July 2013.

“We continue to expect operating cash flow for the full year to be at least equal to net income plus depreciation and amortization,” said Joseph Capezza, Health Net’s chief financial officer.

The company noted that cash at the parent was approximately $7.0 million at June 30, 2013.

 

 

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.

 

5

---

DIVESTED OPERATIONS AND SERVICES SEGMENT

The company’s second quarter 2012 financial results for its Divested Operations and Services segment included in this release and the attached financial tables include items related to the run-out of the Northeast business and transition-related revenues and expenses related to the Medicare PDP business that was sold on April 1, 2012.

2013 GUIDANCE

The following table has specific 2013 guidance metrics.

 

Metric		2013 Guidance
Year-end membership(a)(c)		Commercial: -8% to -9% Medicaid: +4% to +6% Medicare Advantage: +1% to +2%   Total health plan membership: -1% to -2%
Consolidated revenues(b)		~$10.7 billion to $11.2 billion
Commercial premium yields PMPM(a)(c)		~ +2.0%
Commercial health care costs PMPM(a)(c)		~ 460 basis points < premium yields PMPM
Selling cost ratio(a)		~2.3% to 2.4%
G&A expense ratio(a)		~10.0% to 10.5% (previously: ~9.0% to 9.4%)
Tax rate(b)		38.0% to 38.5% (previously: 38.0% to 39.0%)
Weighted-average fully diluted shares outstanding		~80.0 million to 81.0 million (previously: ~80.0 million)
GAAP EPS		$2.10 to $2.20 (previously: $2.20 to $2.30)
Western Region and Government Contracts EPS		$2.20 to $2.30

 

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

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

(c)	These estimates are in comparison to reported 2012 amounts.

 

6

---

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s second quarter 2013 financial results during a conference call on Thursday, July 25, 2013, 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 99882018. A replay of the conference call will be available through July 30, 2013. 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 or webcast will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2012, Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, 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 5.4 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, U.S. Department of Defense, including TRICARE, and Veterans Affairs programs. Through its subsidiaries, Health Net also offers behavioral health, substance abuse and employee assistance programs, managed health care products related to prescription drugs, managed health care product coordination for multi-region employers, and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company’s 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 and statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,”

 

7

---

“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), and 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; Health Net’s ability to successfully participate in California’s Coordinated Care Initiative, the Covered California health insurance exchange and/or Arizona’s Medicaid program; 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; liabilities incurred in connection with Health Net’s divested operations; impairment of Health Net’s goodwill or other intangible assets; 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 Report on Form 10-Q filed with the SEC and the other risks discussed in Health Net’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, Health Net undertakes no obligation to address or publicly update any of its guidance, the assessment of underlying assumptions or forward-looking statements to reflect events or circumstances that arise after the date of this press 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 June 30, 2013.

Eight pages of tables follow.

#    #    #

 

8

---

Health Net, Inc.

Enrollment Data - By State

(In thousands)

 

														Change from
														March 31, 2013								June 30, 2012
		June 30, 2013				March 31, 2013				June 30, 2012				Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
California
Large Group			608				628				745				(20	)			(3.2	)%			(137	)			(18.4	)%
Small Group and Individual			339				325				303				14				4.3	%			36				11.9	%
Commercial Risk			947				953				1,048				(6	)			(0.6	)%			(101	)			(9.6	)%
Medicare Advantage			146				143				141				3				2.1	%			5				3.5	%
Medi-Cal			1,118				1,100				1,060				18				1.6	%			58				5.5	%
Total California			2,211				2,196				2,249				15				0.7	%			(38	)			(1.7	)%
Arizona
Large Group			64				69				84				(5	)			(7.2	)%			(20	)			(23.8	)%
Small Group and Individual			56				57				61				(1	)			(1.8	)%			(5	)			(8.2	)%
Commercial Risk			120				126				145				(6	)			(4.8	)%			(25	)			(17.2	)%
Medicare Advantage			43				43				43				0				0.0	%			0				0.0	%
Total Arizona			163				169				188				(6	)			(3.6	)%			(25	)			(13.3	)%
Northwest
Large Group			23				21				32				2				9.5	%			(9	)			(28.1	)%
Small Group and Individual			43				45				56				(2	)			(4.4	)%			(13	)			(23.2	)%
Commercial Risk			66				66				88				0				0.0	%			(22	)			(25.0	)%
Medicare Advantage			47				47				44				0				0.0	%			3				6.8	%
Total Northwest			113				113				132				0				0.0	%			(19	)			(14.4	)%
Total Health Plan Enrollment
Large Group			695				718				861				(23	)			(3.2	)%			(166	)			(19.3	)%
Small Group and Individual			438				427				420				11				2.6	%			18				4.3	%
Commercial Risk			1,133				1,145				1,281				(12	)			(1.0	)%			(148	)			(11.6	)%
Medicare Advantage			236				233				228				3				1.3	%			8				3.5	%
Medi-Cal/Medicaid			1,118				1,100				1,060				18				1.6	%			58				5.5	%
Western Region Operations			2,487				2,478				2,569				9				0.4	%			(82	)			(3.2	)%
TRICARE - North Contract Eligibles			2,865				2,883				2,884				(18	)			(0.6	)%			(19	)			(0.7	)%

 

9

---

Health Net, Inc.

Enrollment Data - Line of Business

(In thousands)

 

														Change from
														March 31, 2013								June 30, 2012
		June 30, 2013				March 31, 2013				June 30, 2012				Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
Large Group
California			608				628				745				(20	)			(3.2	)%			(137	)			(18.4	)%
Arizona			64				69				84				(5	)			(7.2	)%			(20	)			(23.8	)%
Northwest			23				21				32				2				9.5	%			(9	)			(28.1	)%
			695				718				861				(23	)			(3.2	)%			(166	)			(19.3	)%
Small Group and Individual
California			339				325				303				14				4.3	%			36				11.9	%
Arizona			56				57				61				(1	)			(1.8	)%			(5	)			(8.2	)%
Northwest			43				45				56				(2	)			(4.4	)%			(13	)			(23.2	)%
			438				427				420				11				2.6	%			18				4.3	%
Commercial Risk
California			947				953				1,048				(6	)			(0.6	)%			(101	)			(9.6	)%
Arizona			120				126				145				(6	)			(4.8	)%			(25	)			(17.2	)%
Northwest			66				66				88				0				0.0	%			(22	)			(25.0	)%
			1,133				1,145				1,281				(12	)			(1.0	)%			(148	)			(11.6	)%
Medicare Advantage
California			146				143				141				3				2.1	%			5				3.5	%
Arizona			43				43				43				0				0.0	%			0				0.0	%
Northwest			47				47				44				0				0.0	%			3				6.8	%
			236				233				228				3				1.3	%			8				3.5	%
Medi-Cal/Medicaid
California			1,118				1,100				1,060				18				1.6	%			58				5.5	%
Total Health Plan Enrollment
Large Group			695				718				861				(23	)			(3.2	)%			(166	)			(19.3	)%
Small Group and Individual			438				427				420				11				2.6	%			18				4.3	%
Commercial Risk			1,133				1,145				1,281				(12	)			(1.0	)%			(148	)			(11.6	)%
Medicare Advantage			236				233				228				3				1.3	%			8				3.5	%
Medi-Cal/Medicaid			1,118				1,100				1,060				18				1.6	%			58				5.5	%
Western Region Operations			2,487				2,478				2,569				9				0.4	%			(82	)			(3.2	)%
TRICARE - North Contract Eligibles			2,865				2,883				2,884				(18	)			(0.6	)%			(19	)			(0.7	)%

 

10

---

Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

		Quarter Ended June  30, 2013				Quarter Ended March 31, 2013				Quarter Ended June  30, 2012
REVENUES:
Health plan services premiums		$	2,578,874			$	2,632,069			$	2,618,927
Government contracts			139,942				134,512				176,248
Net investment income			17,143				29,551				24,697
Administrative services fees and other income			2,472				905				8,662
Divested operations and services revenue			—				—				12,805
Total revenues			2,738,431				2,797,037				2,841,339
EXPENSES:
Health plan services			2,191,918				2,268,736				2,358,455
Government contracts			127,400				125,475				153,406
General and administrative			291,437				245,235				228,756
Selling			57,769				58,561				58,390
Depreciation and amortization			9,514				9,439				7,385
Interest			8,365				8,288				8,246
Divested operations and services expense			—				—				19,290
Adjustment to loss on sale of Northeast subsidiaries			—				—				—
Total expenses			2,686,403				2,715,734				2,833,928
Income from continuing operations before income taxes			52,028				81,303				7,411
Income tax provision			18,545				31,253				2,241
Income from continuing operations			33,483				50,050				5,170
Discontinued operation:
Loss from discontinued operation, net of tax			—				—				—
Gain on sale of discontinued operation, net of tax			—				—				119,440
Income on discontinued operation, net of tax			—				—				119,440
Net income		$	33,483			$	50,050			$	124,610
Net income per share-basic:
Income from continuing operations		$	0.42			$	0.63			$	0.06
Gain on sale of discontinued operation, net of tax			—				—				1.44
Net income per share-basic		$	0.42			$	0.63			$	1.50
Net income per share-diluted:
Income from continuing operations		$	0.42			$	0.62			$	0.06
Gain on sale of discontinued operation, net of tax			—				—				1.42
Net income per share-diluted		$	0.42			$	0.62			$	1.48
Weighted average shares outstanding:
Basic			79,367				79,508				83,255
Diluted			80,085				80,489				84,037

 

11

---

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 

		June 30, 2013				March 31, 2013				June 30, 2012
ASSETS
Current Assets
Cash and cash equivalents		$	279,618			$	230,335			$	633,144
Investments - available for sale			1,632,466				1,767,156				1,515,200
Premiums receivable, net			579,206				519,287				350,750
Amounts receivable under government contracts			205,168				207,891				247,405
Other receivables			52,283				66,520				220,293
Deferred taxes			80,382				62,027				69,409
Other assets			119,015				120,233				128,340
Total current assets			2,948,138				2,973,449				3,164,541
Property and equipment, net			190,394				188,038				166,379
Goodwill			565,886				565,886				565,886
Other intangible assets, net			15,556				16,414				18,985
Deferred taxes			5,503				8,006				8,261
Investments - available for sale - noncurrent			18,332				—				—
Other noncurrent assets			137,644				123,514				109,400
Total Assets		$	3,881,453			$	3,875,307			$	4,033,452
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements		$	1,013,086			$	1,097,744			$	1,010,493
Health care and other costs payable under government contracts			76,231				77,380				86,187
Unearned premiums			124,205				139,584				368,699
Accounts payable and other liabilities			392,647				302,171				298,307
Total current liabilities			1,606,169				1,616,879				1,763,686
Senior notes payable			399,197				399,146				398,992
Borrowings under revolving credit facility			125,000				100,000				90,000
Deferred taxes			—				—				—
Other noncurrent liabilities			226,863				230,666				241,734
Total Liabilities			2,357,229				2,346,691				2,494,412
Stockholders’ Equity
Common stock			150				150				149
Additional paid-in capital			1,360,749				1,352,458				1,318,004
Treasury common stock, at cost			(2,178,121	)			(2,177,840	)			(2,056,272	)
Retained earnings			2,377,055				2,343,572				2,269,483
Accumulated other comprehensive (loss) income			(35,609	)			10,276				7,676
Total Stockholders’ Equity			1,524,224				1,528,616				1,539,040
Total Liabilities and Stockholders’ Equity		$	3,881,453			$	3,875,307			$	4,033,452
Debt-to-Total Capital Ratio			25.6	%			24.6	%			24.1	%

 

12

---

Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

		Quarter Ended June  30, 2013				Quarter Ended March 31, 2013				Quarter Ended June  30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	33,483			$	50,050			$	124,610
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation			9,514				9,439				7,385
Share-based compensation expense			6,942				9,935				5,683
Deferred income taxes			9,169				3,579				6,476
Excess tax benefits from share-based compensation			(36	)			(394	)			(163	)
Gain on sale of discontinued operation			—				—				(119,440	)
Adjustment to loss on sale of business			—				—				—
Net realized gain on sale on investments			(5,647	)			(17,289	)			(12,431	)
Other changes			6,845				8,679				884
Changes in assets and liabilities:
Premiums receivable and unearned premiums			(75,298	)			(157,482	)			115,142
Other current assets, receivables and noncurrent assets			20,054				7,427				(26,672	)
Amounts receivable/payable under government contracts			3,160				25,891				(6,029	)
Reserves for claims and other settlements			(84,658	)			59,771				52,369
Accounts payable and other liabilities			(29,813	)			(27,791	)			(28,048	)
Net cash (used in) provided by operating activities			(106,285	)			(28,185	)			119,766
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments			218,593				354,813				364,420
Maturities of investments			21,346				30,068				30,142
Purchases of investments			(194,361	)			(365,081	)			(459,328	)
Purchases of property and equipment			(13,075	)			(13,690	)			(22,287	)
Net cash received for sale of businesses			—				—				248,238
Sales and purchases of restricted investments and other			(1,418	)			(1,171	)			4,185
Net cash provided by investing activities			31,085				4,939				165,370
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases			1,216				6,957				2,174
Repurchases of common stock			(70	)			(77,394	)			(9,556	)
Excess tax benefits from share-based compensation			36				394				163
Borrowings under financing arrangements			233,000				90,000				—
Repayment of borrowings under financing arrangements			(208,000	)			(90,000	)			(22,500	)
Net increase (decrease) in checks outstanding, net of deposits			99,368				(23,816	)			—
Customer funds administered			(1,067	)			7,330				(13,305	)
Net cash provided by (used in) financing activities			124,483				(86,529	)			(43,024	)
Net increase (decrease) in cash and cash equivalents			49,283				(109,775	)			242,112
Cash and cash equivalents, beginning of period			230,335				340,110				391,032
Cash and cash equivalents, end of period		$	279,618			$	230,335			$	633,144

 

 

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 June 30, 2013																		Quarter Ended March 31, 2013																Quarter Ended June 30, 2012
										Divested																		Divested																Divested
		Western Region Operations1				Government Contracts2				Operations and Services		Corporate/ Other4				Consolidated				Western Region Operations1				Government Contracts2				Operations and Services		Corporate/ Other		Consolidated				Western Region Operations1				Government Contracts2				Operations and Services3				Corporate/ Other5				Consolidated
Commercial premiums		$	1,298,569													$	1,298,569			$	1,325,414											$	1,325,414			$	1,436,447															$	1,436,447
Medicare premiums			688,579														688,579				706,398												706,398				691,396																691,396
Medicaid premiums			591,726														591,726				600,257												600,257				491,084																491,084
Health plan services premiums			2,578,874														2,578,874				2,632,069												2,632,069				2,618,927																2,618,927
Government contracts							139,942										139,942								134,512								134,512								176,248												176,248
Net investment income			17,143														17,143				29,551												29,551				24,697																24,697
Administrative services fees and other income			2,472														2,472				905												905				8,662																8,662
Divested operations and services revenue																																													12,805								12,805
Total revenues			2,598,489				139,942										2,738,431				2,662,525				134,512								2,797,037				2,652,286				176,248				12,805								2,841,339
Health plan services			2,191,918														2,191,918				2,268,736												2,268,736				2,358,400								14				41				2,358,455
Government contracts							121,826						5,574				127,400								125,475								125,475								152,705								701				153,406
G&A excluding insurance, taxes and fees			225,615										7,324				232,939				230,137												230,137				196,907								(353	)			10,074				206,628
Insurance, taxes and fees			58,498														58,498				15,098												15,098				21,782								346								22,128
G&A including insurance, taxes and fees			284,113										7,324				291,437				245,235												245,235				218,689								(7	)			10,074				228,756
Selling			57,769														57,769				58,561												58,561				58,390																58,390
Depreciation and amortization			9,514														9,514				9,439												9,439				7,385																7,385
Interest			8,365														8,365				8,288												8,288				8,246																8,246
Divested operations and services expense																																													19,290								19,290
Total expenses			2,551,679				121,826						12,898				2,686,403				2,590,259				125,475								2,715,734				2,651,110				152,705				19,297				10,816				2,833,928
Income (loss) from continuing operations before income taxes			46,810				18,116						(12,898	)			52,028				72,266				9,037								81,303				1,176				23,543				(6,492	)			(10,816	)			7,411
Income tax provision (benefit)			16,023				7,537						(5,015	)			18,545				27,629				3,624								31,253				(452	)			9,305				(2,537	)			(4,075	)			2,241
Income (loss) from continuing operations		$	30,787			$	10,579					$	(7,883	)		$	33,483			$	44,637			$	5,413							$	50,050			$	1,628			$	14,238			$	(3,955	)		$	(6,741	)		$	5,170
Basic earnings (loss) per share from continuing operations		$	0.39			$	0.13					$	(0.10	)		$	0.42			$	0.56			$	0.07							$	0.63			$	0.02			$	0.17			$	(0.05	)		$	(0.08	)		$	0.06
Diluted earnings (loss) per share from continuing operations		$	0.39			$	0.13					$	(0.10	)		$	0.42			$	0.55			$	0.07							$	0.62			$	0.02			$	0.17			$	(0.05	)		$	(0.08	)		$	0.06
Basic weighted average shares outstanding			79,367				79,367						79,367				79,367				79,508				79,508								79,508				83,255				83,255				83,255				83,255				83,255
Diluted weighted average shares outstanding			80,085				80,085						79,367				80,085				80,489				80,489								80,489				84,037				84,037				83,255				83,255				84,037
Pretax margin			1.8	%																	2.7	%															0.04	%
Commercial premium yield			2.0	%																	2.9	%															4.6	%
Commercial premium PMPM		$	380.30																	$	385.29															$	372.91
Commercial health care cost trend			-2.3	%																	-3.3	%															8.2	%
Commercial health care cost PMPM		$	322.98																	$	331.13															$	330.71
Commercial MCR			84.9	%																	85.9	%															88.7	%
Medicare Advantage MCR			89.9	%																	91.9	%															92.0	%
Medicaid MCR			79.5	%																	80.0	%															91.3	%
Health plan services MCR			85.0	%																	86.2	%															90.1	%
G&A expense ratio			11.0	%																	9.3	%															8.3	%
Selling costs ratio			2.2	%																	2.2	%															2.2	%

 

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 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. Financial results for the quarter ended June 30, 2012 also include amounts related to the completion of the prior TRICARE contract.

3	Includes items related to the run-out of the Northeast business sold in 2009 and transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012.

4	Primarily severance expense.

5	Includes litigation reserve true-ups related to previous accruals for lawsuits and related legal expenses and costs related to the company’s G&A cost reduction efforts.

 

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, provider and other claims settlements 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.

 

		Q2 2013				Q1 2013				Q2 2012
Reconciliation of Days Claims Payable:
(1) Reserve for Claims and Other Settlements—GAAP		$	1,013.1			$	1,097.7			$	1,010.5
Less: Capitation, Provider and Other Claim Settlements, and MAPD Payables			(143.1	)			(132.9	)			(106.5	)
(2) Reserve for Claims and Other Settlements—Adjusted		$	870.0			$	964.8			$	904.0
(3) Health Plan Services Cost—GAAP		$	2,191.9			$	2,268.7			$	2,358.5
Less: Capitation, Provider and Other Claim Settlements, and MAPD Costs			(836.9	)			(869.8	)			(842.9	)
(4) Health Plan Services Cost—Adjusted		$	1,355.0			$	1,398.9			$	1,515.6
(5) Number of Days in Period			91				90				91
= (1) / (3) * (5) Days Claims Payable—GAAP Basis (using end of period reserve amount)			42.1				43.5				39.0
= (2) / (4) * (5) Days Claims Payable—Adjusted Basis (using end of period reserve amount)			58.4				62.1				54.3

 

15

---

Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

($ in millions)

 

		Health Plan Services
		YTD 6/2013				FY 2012				FY 2011
Reserve for claims (a), beginning of period		$	808.7			$	720.8			$	727.5
Incurred claims related to:
Current Year			2,358.4				4,950.9				4,733.0
Prior Years (c)			(54.0	)			34.5				(96.5	)
Total Incurred (b)			2,304.4				4,985.4				4,636.5
Paid claims related to:
Current Year			1,643.4				4,156.6				4,024.4
Prior Years			698.2				740.9				618.8
Total Paid (b)			2,341.6				4,897.5				4,643.2
Reserve for claims (a), end of period			771.5				808.7				720.8
Add:
Claims Payable (d)			72.6				91.6				111.0
Other (e)			169.0				137.7				80.3
Reserves for claims and other settlements, end of period		$	1,013.1			$	1,038.0			$	912.1

 

(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. 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.

 

16