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 FOURTH QUARTER 2013 GAAP NET INCOME

OF $19.8 MILLION, OR $0.25 PER DILUTED SHARE

WESTERN REGION OPERATIONS AND GOVERNMENT CONTRACTS SEGMENTS PRODUCE

COMBINED NET INCOME OF $0.24 PER DILUTED SHARE IN FOURTH QUARTER 2013

COMPANY ISSUES 2014 GAAP GUIDANCE OF AT LEAST $3.00 PER DILUTED SHARE

LOS ANGELES, February 11, 2014 – Health Net, Inc. (NYSE: HNT) today announced 2013 fourth quarter GAAP net income of $19.8 million, or $0.25 per diluted share, compared with GAAP net income of $6.0 million, or $0.07 per diluted share, for the fourth quarter of 2012.

The fourth quarter 2013 GAAP net income includes an approximately $0.6 million benefit primarily related to a reduction in a legal settlement reserve.

For the full year 2013, the company reported GAAP net income of approximately $170.1 million, or $2.12 per diluted share, compared with approximately $122.1 million, or $1.47 per diluted share, for the full year 2012.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $19.1 million, or $0.24 per diluted share, in the fourth quarter of 2013 compared with $29.0 million, or $0.35 per diluted share, in the fourth quarter of 2012.

The company’s Western Region and Government Contracts segments produced combined net income of approximately $177.4 million, or $2.21 per diluted share, for the full year 2013, and approximately $84.3 million, or $1.01 per diluted share, for the full year 2012.

“We are pleased with all that we accomplished in 2013,” said Jay Gellert, Health Net’s chief executive officer. “Consistent with the plan that we laid out at the beginning of 2013, our efforts produced significant improvement in profitability in our commercial and Medicaid businesses compared with 2012. In addition, there was no adverse prior year development in 2013.

“At the same time, we undertook substantial initiatives to prepare for the implementation of the Affordable Care Act (ACA) and California’s Coordinated Care Initiative (CCI),” continued Gellert. “Our

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general and administrative expenses in the fourth quarter of 2013 related to the implementation of the ACA were slightly higher than we anticipated to support better than expected individual health insurance exchange and Medicaid expansion enrollment growth for January 1, 2014 effective dates.

“Our 2014 GAAP earnings per diluted share guidance of at least $3.00 is based primarily on our expectation of an approximate 30 percent increase in total revenues, primarily driven by new and expanded programs that are expected to add approximately 600,000 new members by the end of 2014, lower medical care ratios in our commercial and Medicare Advantage businesses and a lower tax rate compared with 2013,” said Gellert.

CONSOLIDATED RESULTS

Health Net’s total revenues decreased 3.3 percent in the fourth quarter of 2013 to $2.7 billion from $2.8 billion in the fourth quarter of 2012.

Health plan services premium revenues decreased by 3.1 percent in the fourth quarter of 2013 to approximately $2.6 billion compared with approximately $2.6 billion in the fourth quarter of 2012.

Administrative services fees and other income was approximately $23.8 million in the fourth quarter of 2013 compared with approximately $1.7 million in the fourth quarter of 2012 and approximately $7.7 million in the third quarter of 2013.

“As we anticipated, administrative services fees and other income in the fourth quarter of 2013 increased sequentially and quarter-over-quarter due to a settlement related to a pharmacy contract and Medicaid revenue from the state of California related to the administration of the primary care physician parity reimbursement mandated by the ACA. We expect to realize additional Medicaid revenue and incur related costs in 2014,” said Jim Woys, Health Net’s chief operating officer.

Health plan services expenses decreased by approximately 4.4 percent in the fourth quarter of 2013 to approximately $2.2 billion compared with $2.3 billion in the fourth quarter of 2012.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at December 31, 2013 was 2.4 million members, a decrease of 4.1 percent from enrollment at December 31, 2012.

Total enrollment in the company’s California health plans decreased 2.8 percent from December 31, 2012 to December 31, 2013.

Western Region commercial enrollment at December 31, 2013 was approximately 1.1 million members, a 12.0 percent decrease compared with enrollment at December 31, 2012.

“Tailored network commercial membership represented approximately 38 percent of total Western Region commercial membership at December 31, 2013 compared with 35 percent at December 31, 2012,” said Woys. “This increase is consistent with our commercial strategy to improve the mix of our business in 2013, and we are pleased that we were able to accomplish this.”

Enrollment in the company’s Medicare Advantage plans in the Western Region at December 31, 2013 was 244,000 members, an increase of 4.3 percent compared with December 31, 2012.

Medicaid enrollment at December 31, 2013 was 1.1 million members, an increase of 3.0 percent, from December 31, 2012.

 

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Revenues

Total revenues for the Western Region in the fourth quarter of 2013 were approximately $2.6 billion compared with $2.7 billion in the fourth quarter of 2012.

Net investment income for the Western Region was $11.6 million in the fourth quarter of 2013 compared with $19.1 million in the fourth quarter of 2012 and approximately $11.3 million in the third quarter of 2013.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.2 billion in the fourth quarter of 2013 compared with approximately $2.3 billion in the fourth quarter of 2012.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 3.4 percent to approximately $388 in the fourth quarter of 2013 compared with approximately $376 in the fourth quarter of 2012.

Commercial health care costs PMPM in the Western Region increased by 2.0 percent to approximately $340 in the fourth quarter of 2013 compared with approximately $333 in the fourth quarter of 2012.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 87.1 percent in the fourth quarter of 2013 compared with 88.2 percent in the fourth quarter of 2012. The full year 2013 Western Region health plan services MCR was 85.6 percent compared with 89.1 percent for the full year 2012.

The Western Region commercial MCR was 87.4 percent in the fourth quarter of 2013 compared with 88.6 percent in the fourth quarter of 2012 and 84.2 percent in the third quarter of 2013. The full year 2013 Western Region commercial MCR was 85.6 percent compared with 88.8 percent for the full year 2012.

“The fourth quarter 2013 commercial MCR was approximately 40 basis points higher than what was implicit in our guidance that we revised in the third quarter of 2013. This was due to higher than expected physician, outpatient and pharmacy utilization among individual members whose policies were cancelled due to the ACA,” said Woys.

The Medicare Advantage (MA) MCR was 90.5 percent in the fourth quarter of 2013 compared with 87.4 percent in the fourth quarter of 2012. The full year 2013 MA MCR in the Western Region was 90.6 percent compared with 89.3 percent for the full year 2012.

 

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General and Administrative (G&A) Expenses

G&A expense in the Western Region was approximately $280.4 million in the fourth quarter of 2013 compared with $235.2 million in the fourth quarter of 2012. The G&A expense ratio was 10.9 percent in the fourth quarter of 2013 compared with 8.9 percent in the fourth quarter of 2012 and 10.2 percent in the third quarter of 2013. The G&A expense ratio for the full year 2013 was 10.3 percent compared with 8.6 percent for the full year 2012.

“The G&A expense ratio in the fourth quarter of 2013 increased 200 basis points compared with the fourth quarter of 2012 primarily as a result of reinstated California Medicaid premium taxes and our investments in preparing for the ACA, CCI and other initiatives. These administrative investments helped us smoothly add many new members in January 2014,” commented Woys.

In the fourth quarter of 2013, California Medicaid premium taxes were $24.4 million and contributed 90 basis points to the G&A expense ratio. There were no such comparable premium taxes in the fourth quarter of 2012.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues in the fourth quarter of 2013 were approximately $148.5 million compared with $161.7 million in the fourth quarter of 2012.

Government Contracts expenses in the fourth quarter of 2013 were $124.6 million compared with approximately $138.5 million in the fourth quarter of 2012.

The decrease in revenues and expenses was primarily due to the new Military and Family Life Counseling contract that began in the fourth quarter of 2012.

BALANCE SHEET

Cash and investments as of December 31, 2013 were $2.1 billion compared with approximately $2.2 billion as of December 31, 2012.

Reserves for claims and other settlements as of December 31, 2013 were approximately $984.1 million compared with $1.0 billion as of December 31, 2012 and approximately $990.2 million as of September 30, 2013.

Days claims payable (DCP) for the fourth quarter of 2013 was 40.6 days compared with 40.9 days in the fourth quarter of 2012 and 41.5 days in the third quarter of 2013.

On an adjusted¹ basis, DCP in the fourth quarter of 2013 was 57.9 days compared with 58.3 days in the fourth quarter of 2012 and 61.1 days in the third quarter of 2013. Adjusted¹ DCP in the fourth quarter of 2013 declined sequentially primarily due to the $15.5 million sequential decline in claims payables and an accelerated claims paydown in anticipation of new members with January 1, 2014 effective dates. In addition, incurred but not reported reserves (IBNR) increased sequentially from the third quarter of 2013 by $6.3 million.

The company’s debt-to-total capital ratio was 23.5 percent as of December 31, 2013 compared with 24.3 percent as of December 31, 2012 and 23.8 percent as of September 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.

 

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CASH FLOW FROM OPERATIONS

Cash and investments at the parent were $209.0 million at December 31, 2013.

Operating cash flow was negative $71.9 million in the fourth quarter of 2013. For the full year 2013, operating cash flow was positive $95.8 million.

“Operating cash flow in the fourth quarter of 2013 was negatively impacted by the timing of payments related to state and federal health programs,” said Joseph Capezza, Health Net’s chief financial officer.

SHARE REPURCHASE UPDATE

For the full year 2013, Health Net repurchased approximately 2.7 million shares of its common stock for approximately $70.0 million at an average price of $26.34 per share. At December 31, 2013, approximately $280.0 million of authorization under the company’s existing $400 million share repurchase program remained.

2014 GUIDANCE

The company expects GAAP earnings per diluted share of at least $3.00 for the full year 2014. The year-over-year increase in earnings per diluted share is based primarily on the company’s expectation of an approximate 30 percent increase in total revenues, primarily driven by new and expanded programs that are expected to add approximately 600,000 new members by the end of 2014, lower medical care ratios in the company’s commercial and Medicare Advantage businesses and a lower tax rate compared with 2013. The table included in this release provides specific metrics.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2013 earnings results during a conference call on Tuesday, February 11, 2014, 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 toll-free)		(855) 859-2056 (Replay – Domestic toll-free)
(706) 643-5711 (International)		(404) 537-3406 (Replay – International)

The access code for the live conference call and replay is 31392501. A replay of the conference call will be available through February 16, 2014. 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, 2012, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013, June 30, 2013, and September 30, 2013, and other reports filed by the company from time to time with the Securities and Exchange Commission.

 

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ABOUT HEALTH NET

Health Net, Inc. is a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Its mission is to help people be healthy, secure and comfortable. Health Net provides and administers health benefits to approximately 5.3 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 Health Net’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

The company and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act (“PSLRA”) of 1995, including statements in this and other press releases, in presentations, filings with the Securities and Exchange Commission (“SEC”), reports to stockholders and in meetings with investors and analysts. All statements in this press release, other than statements of historical information provided herein, including the guidance for future periods and the assumptions underlying such projections, may be deemed to be forward-looking statements and as such are intended to be covered by the safe harbor for “forward-looking statements” provided by PSLRA. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to changes in circumstances and a number of risks and uncertainties. Without limiting the foregoing, the guidance as to expected future period results and statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend,” “feels,” “will,” “projects” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied or projected by the forward-looking information and statements due to, among other things, health care reform and other increased government participation in and taxation or regulation of health benefits and managed care operations, including but not limited to the implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) and related fees, assessments and taxes; the company’s ability to successfully participate in California’s Coordinated Care Initiative, which is subject to a number of risks inherent in untested health care initiatives and requires the company to adequately predict the costs of providing benefits to individuals that are generally among the most chronically ill within each of Medicare and Medi-Cal and implement delivery systems for benefits with which the company has limited operating experience; the company’s ability to successfully participate in the federal and state health insurance exchanges under the ACA, which have experienced technical challenges in implementation and which involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of our premium rates and may not be sufficiently offset by the risk apportionment provisions of the ACA; increasing health care costs; our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance; negative prior period claims reserve developments; rate cuts and other risks and uncertainties affecting the company’s Medicare or Medicaid businesses; the company’s ability to successfully participate in Arizona’s Medicaid program; trends in medical care ratios; membership declines or negative changes in our health care product mix; unexpected utilization patterns or unexpectedly severe or widespread illnesses; the timing of collections on amounts receivable from state and federal governments and agencies, including collections of amounts owed under the T-3 contract; 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

 

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Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance; operational issues; changes in economic or market conditions including a further decline in the economy; failure to effectively oversee our third-party vendors; noncompliance by the company or the company’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; impairment of the company’s goodwill or other intangible assets; investment portfolio impairment charges; volatility in the financial markets; liabilities incurred in connection with the company’s divested operations; 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 the company’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the SEC and the other risks discussed in the company’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, the company undertakes no obligation to address or publicly update any of its guidance, the assessment of the underlying assumptions or forward-looking statements to reflect events or circumstances that arise after the date of this release.

The financial information presented in this press release is unaudited and is subject to change, including as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Ten pages of tables follow.

#     #     #

 

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Health Net, Inc.

2014 GAAP Guidance⁽¹⁾

 

MEMBERSHIP at 12/31/2014
		Enrollment				% Change
		at 12/31/2014				from 12/31/2013
Commercial
Large Group			580,000				-11.0	%
Small Group			300,000				-6.0	%
Individual			270,000				135.0	%
Total Commercial			1,150,000				6.0	%
Medicare Advantage			260,000				7.0	%
Medicaid			1,590,000				42.0	%
Dual Eligibles			38,000				n/a
Total Health Plan Membership			3,040,000				24.0	%

 

Premium Revenues		FY2014
Commercial		$	5.4 billion
Medicare Advantage		$	3.0 billion
State Health Plans		$	5.1 billion
Dual Eligibles		$	342 million
Total Health Plans		$	13.8 billion
Total Consolidated Revenues		$	14.4 billion
Medical Care Ratios (MCR)		FY2014
Commercial			83.0%
Medicare Advantage			89.6%
Medicaid			85.2%
Dual Eligibles			86.9%
G&A Expense Ratio			10.8%
Tax Rate(2)			34.2%
Weighted-average fully diluted shares outstanding			77 million
Earnings per Diluted Share (EPS)(2)			At least $3.00

 

(1)	All guidance metrics are approximations

 

(2)	Includes a $60 million tax benefit

 

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Health Net, Inc.

Enrollment Data - By State

(In thousands)

 

														Change from
														September 30, 2013								December 31, 2012
		December 31,				September 30,				December 31,				Increase/				%				Increase/				%
		2013				2013				2012				(Decrease)				Change				(Decrease)				Change
California
Large Group			565				576				696				(11	)			(1.9	)%			(131	)			(18.8	)%
Small Group and Individual			344				346				313				(2	)			(0.6	)%			31				9.9	%
Commercial Risk			909				922				1,009				(13	)			(1.4	)%			(100	)			(9.9	)%
Medicare Advantage			153				149				145				4				2.7	%			8				5.5	%
Medi-Cal			1,113				1,126				1,084				(13	)			(1.2	)%			29				2.7	%
Total California			2,175				2,197				2,238				(22	)			(1.0	)%			(63	)			(2.8	)%
Arizona
Large Group			57				59				82				(2	)			(3.4	)%			(25	)			(30.5	)%
Small Group and Individual			51				54				59				(3	)			(5.6	)%			(8	)			(13.6	)%
Commercial Risk			108				113				141				(5	)			(4.4	)%			(33	)			(23.4	)%
Medicare Advantage			43				43				43				0				0.0	%			0				0.0	%
Medicaid			4												4								4
Total Arizona			155				156				184				(1	)			(0.6	)%			(29	)			(15.8	)%
Northwest
Large Group			29				24				26				5				20.8	%			3				11.5	%
Small Group and Individual			39				42				57				(3	)			(7.1	)%			(18	)			(31.6	)%
Commercial Risk			68				66				83				2				3.0	%			(15	)			(18.1	)%
Medicare Advantage			48				47				46				1				2.1	%			2				4.3	%
Total Northwest			116				113				129				3				2.7	%			(13	)			(10.1	)%
Total Health Plan Enrollment
Large Group			651				659				804				(8	)			(1.2	)%			(153	)			(19.0	)%
Small Group and Individual			434				442				429				(8	)			(1.8	)%			5				1.2	%
Commercial Risk			1,085				1,101				1,233				(16	)			(1.5	)%			(148	)			(12.0	)%
Medicare Advantage			244				239				234				5				2.1	%			10				4.3	%
Medi-Cal/Medicaid			1,117				1,126				1,084				(9	)			(0.8	)%			33				3.0	%
Western Region Operations			2,446				2,466				2,551				(20	)			(0.8	)%			(105	)			(4.1	)%
TRICARE - North Contract Eligibles			2,851				2,865				2,883				(14	)			(0.5	)%			(32	)			(1.1	)%

 

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Health Net, Inc.

Enrollment Data - Line of Business

(In thousands)

 

														Change from
														September 30, 2013								December 31, 2012
		December 31,				September 30,				December 31,				Increase/				%				Increase/				%
		2013				2013				2012				(Decrease)				Change				(Decrease)				Change
Large Group
California			565				576				696				(11	)			(1.9	)%			(131	)			(18.8	)%
Arizona			57				59				82				(2	)			(3.4	)%			(25	)			(30.5	)%
Northwest			29				24				26				5				20.8	%			3				11.5	%
			651				659				804				(8	)			(1.2	)%			(153	)			(19.0	)%
Small Group and Individual
California			344				346				313				(2	)			(0.6	)%			31				9.9	%
Arizona			51				54				59				(3	)			(5.6	)%			(8	)			(13.6	)%
Northwest			39				42				57				(3	)			(7.1	)%			(18	)			(31.6	)%
			434				442				429				(8	)			(1.8	)%			5				1.2	%
Commercial Risk
California			909				922				1,009				(13	)			(1.4	)%			(100	)			(9.9	)%
Arizona			108				113				141				(5	)			(4.4	)%			(33	)			(23.4	)%
Northwest			68				66				83				2				3.0	%			(15	)			(18.1	)%
			1,085				1,101				1,233				(16	)			(1.5	)%			(148	)			(12.0	)%
Medicare Advantage
California			153				149				145				4				2.7	%			8				5.5	%
Arizona			43				43				43				0				0.0	%			0				0.0	%
Northwest			48				47				46				1				2.1	%			2				4.3	%
			244				239				234				5				2.1	%			10				4.3	%
Medi-Cal/Medicaid
California			1,113				1,126				1,084				(13	)			(1.2	)%			29				2.7	%
Arizona			4				0				0				4								4
			1,117				1,126				1,084				(9	)			(0.8	)%			33				3.0	%
Total Health Plan Enrollment
Large Group			651				659				804				(8	)			(1.2	)%			(153	)			(19.0	)%
Small Group and Individual			434				442				429				(8	)			(1.8	)%			5				1.2	%
Commercial Risk			1,085				1,101				1,233				(16	)			(1.5	)%			(148	)			(12.0	)%
Medicare Advantage			244				239				234				5				2.1	%			10				4.3	%
Medi-Cal/Medicaid			1,117				1,126				1,084				(9	)			(0.8	)%			33				3.0	%
Western Region Operations			2,446				2,466				2,551				(20	)			(0.8	)%			(105	)			(4.1	)%
TRICARE - North Contract Eligibles			2,851				2,865				2,883				(14	)			(0.5	)%			(32	)			(1.1	)%

 

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Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

		Quarter Ended				Quarter Ended				Quarter Ended				Year Ended				Year Ended
		December 31,				September 30,				December 31,				December 31,				December 31,
		2013				2013				2012				2013				2012
REVENUES:
Health plan services premiums		$	2,559,376			$	2,606,754			$	2,640,533			$	10,377,073			$	10,459,098
Government contracts			148,470				149,342				161,700				572,266				689,121
Net investment income			11,643				11,276				19,078				69,613				82,434
Administrative services fees and other income			23,755				7,659				1,668				34,791				17,968
Divested operations and services revenue			—				—				14,803				—				40,471
Total revenues			2,743,244				2,775,031				2,837,782				11,053,743				11,289,092
EXPENSES:
Health plan services			2,229,332				2,196,561				2,332,811				8,886,547				9,316,313
Government contracts			124,709				125,334				137,543				502,918				605,074
General and administrative			279,339				267,683				251,483				1,083,694				939,940
Selling			63,600				59,498				64,921				239,428				245,925
Depreciation and amortization			10,234				9,402				8,424				38,589				31,146
Interest			7,988				7,973				8,325				32,614				33,220
Divested operations and services expense			—				—				25,851								85,824
Total expenses			2,715,202				2,666,451				2,829,358				10,783,790				11,257,442
Income from continuing operations before income taxes			28,042				108,580				8,424				269,953				31,650
Income tax provision			8,289				41,740				257				99,827				5,969
Income from continuing operations			19,753				66,840				8,167				170,126				25,681
Discontinued operation:
Loss from discontinued operation, net of tax			—				—				—				—				(18,452	)
(Loss) gain on sale of discontinued operation, net of tax			—				—				(2,156	)			—				114,834
(Loss) gain on discontinued operation, net of tax			—				—				(2,156	)			—				96,382
Net income		$	19,753			$	66,840			$	6,011			$	170,126			$	122,063
Net income per share-basic:
Income from continuing operations		$	0.25			$	0.84			$	0.10			$	2.14			$	0.31
(Loss) income on discontinued operation, net of tax			—				—				(0.03	)			—				1.18
Net income per share-basic		$	0.25			$	0.84			$	0.07			$	2.14			$	1.49
Net income per share-diluted:
Income from continuing operations		$	0.25			$	0.83			$	0.10			$	2.12			$	0.31
(Loss) income on discontinued operation, net of tax			—				—				(0.03	)			—				1.16
Net income per share-diluted		$	0.25			$	0.83			$	0.07			$	2.12			$	1.47
Weighted average shares outstanding:
Basic			79,511				79,432				81,282				79,455				82,158
Diluted			80,600				80,441				82,111				80,404				83,112

 

11

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Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 

		December 31,				September 30,				December 31,
		2013				2013				2012
ASSETS
Current Assets
Cash and cash equivalents		$	433,155			$	686,139			$	340,110
Investments - available for sale			1,567,020				1,580,032				1,812,512
Premiums receivable, net			430,012				343,502				373,269
Amounts receivable under government contracts			194,041				194,820				228,316
Other receivables			68,919				69,885				113,875
Deferred taxes			94,060				78,257				51,086
Other assets			132,683				103,685				130,796
Total current assets			2,919,890				3,056,320				3,049,964
Property and equipment, net			201,395				195,954				183,793
Goodwill			565,886				565,886				565,886
Other intangible assets, net			13,842				14,699				17,271
Deferred taxes			5,793				3,394				13,583
Investments - available for sale - noncurrent			59,768				52,637				—
Other noncurrent assets			162,551				152,611				103,893
Total Assets		$	3,929,125			$	4,041,501			$	3,934,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements		$	984,075			$	990,195			$	1,037,973
Health care and other costs payable under government contracts			72,098				55,532				75,649
Unearned premiums			123,969				129,081				151,048
Accounts payable and other liabilities			397,036				544,704				373,426
Total current liabilities			1,577,178				1,719,512				1,638,096
Senior notes payable			399,300				399,248				399,095
Deferred taxes			10,409				1,746				—
Borrowings under revolving credit facility			100,000				100,000				100,000
Other noncurrent liabilities			213,427				220,404				240,169
Total Liabilities			2,300,314				2,440,910				2,377,360
Stockholders’ Equity
Common stock			150				150				149
Additional paid-in capital			1,377,624				1,370,744				1,329,000
Treasury common stock, at cost			(2,179,744	)			(2,179,503	)			(2,092,625	)
Retained earnings			2,463,648				2,443,895				2,293,522
Accumulated other comprehensive (loss) income			(32,867	)			(34,695	)			26,984
Total Stockholders’ Equity			1,628,811				1,600,591				1,557,030
Total Liabilities and Stockholders’ Equity		$	3,929,125			$	4,041,501			$	3,934,390
Debt-to-Total Capital Ratio			23.5	%			23.8	%			24.3	%

 

12

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Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

		Quarter Ended				Quarter Ended				Quarter Ended				Year Ended				Year Ended
		December 31,				September 30,				December 31,				December 31,				December 31,
		2013				2013				2012				2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	19,753			$	66,840			$	6,011			$	170,126			$	122,063
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation			10,234				9,402				8,424				38,589				31,146
Share-based compensation expense			6,542				6,511				5,480				29,930				28,893
Deferred income taxes			(9,676	)			5,573				(15,959	)			8,645				8,924
Excess tax benefits from share-based compensation			(169	)			(21	)			(30	)			(620	)			(6,089	)
Loss (gain) on sale of discontinued operation			—				—				2,156				—				(114,834	)
Net realized gain on sale on investments			(755	)			(370	)			(7,019	)			(24,061	)			(36,680	)
Other changes			7,975				8,040				8,326				31,539				15,158
Changes in assets and liabilities:
Premiums receivable and unearned premiums			(91,622	)			240,580				(39,611	)			(83,822	)			(212,998	)
Other current assets, receivables and noncurrent assets			(24,528	)			(1,528	)			49,829				1,425				(28,374	)
Amounts receivable/payable under government contracts			(10,168	)			2,013				(12,207	)			20,896				(8,989	)
Reserves for claims and other settlements			(6,120	)			(22,891	)			50,321				(53,898	)			164,306
Accounts payable and other liabilities			26,648				(11,954	)			22,249				(42,910	)			70,014
Net cash (used in) provided by operating activities			(71,886	)			302,195				77,970				95,839				32,540
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments			42,748				80,380				217,167				696,534				1,350,003
Maturities of investments			20,415				21,396				37,579				93,225				135,394
Purchases of investments			(70,179	)			(92,602	)			(395,355	)			(722,223	)			(1,678,582	)
Proceeds from sale of property and equipment			—				—				24				—				24
Purchases of property and equipment			(16,929	)			(15,831	)			(18,071	)			(59,525	)			(73,101	)
Net cash received from sale of business			—				—				—				—				248,238
Sales and purchases of restricted investments and other			(2,735	)			(2,108	)			(558	)			(7,432	)			5,466
Net cash (used in) provided by investing activities			(26,680	)			(8,765	)			(159,214	)			579				(12,558	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases			120				2,469				352				10,762				16,941
Repurchases of common stock			(241	)			(105	)			(166	)			(77,810	)			(69,496	)
Excess tax benefits from share-based compensation			169				21				30				620				6,089
Borrowings under financing arrangements			22,000				—				—				345,000				110,000
Repayment of borrowings under financing arrangements			(22,000	)			(25,000	)			—				(345,000	)			(122,500	)
Net increase (decrease) in checks outstanding, net of deposits			—				(99,394	)			23,808				(23,842	)			23,842
Customer funds administered			(154,466	)			235,100				84,751				86,897				124,999
Net cash (used in) provided by financing activities			(154,418	)			113,091				108,775				(3,373	)			89,875
Net (decrease) increase in cash and cash equivalents			(252,984	)			406,521				27,531				93,045				109,857
Cash and cash equivalents, beginning of period			686,139				279,618				312,579				340,110				230,253
Cash and cash equivalents, end of period		$	433,155			$	686,139			$	340,110			$	433,155			$	340,110

 

13

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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 December 31, 2013																Quarter Ended September 30, 2013																Quarter Ended December 31, 2012
																																										Divested
		Western Region Operations1				Government Contracts2				Corporate/ Other3				Consolidated				Western Region Operations1				Government Contracts2				Corporate/ Other3				Consolidated				Western Region Operations1				Government Contracts2				Operations and Services4				Corporate/ Other5				Consolidated
Commercial premiums		$	1,271,553											$	1,271,553			$	1,279,834											$	1,279,834			$	1,395,473															$	1,395,473
Medicare premiums			691,114												691,114				685,340												685,340				701,127																701,127
Medicaid premiums			596,709												596,709				641,580												641,580				543,933																543,933
Health plan services premiums			2,559,376												2,559,376				2,606,754												2,606,754				2,640,533																2,640,533
Government contracts							148,470								148,470								149,342								149,342								161,700												161,700
Net investment income			11,643												11,643				11,276												11,276				19,078																19,078
Administrative services fees and other income			23,755												23,755				7,659												7,659				1,668								—								1,668
Divested operations and services revenue															—																—												14,803								14,803
Total revenues			2,594,774				148,470								2,743,244				2,625,689				149,342								2,775,031				2,661,279				161,700				14,803								2,837,782
Health plan services			2,229,332												2,229,332				2,196,561												2,196,561				2,327,791								—				5,020				2,332,811
Government contracts							124,638				71				124,709								125,841				(507	)			125,334								138,478								(935	)			137,543
G&A excluding insurance, taxes and fees			242,444								(1,044	)			241,400				227,196								597				227,793				220,116								(304	)			16,236				236,048
Insurance, taxes and fees			37,939												37,939				39,890												39,890				15,133								302								15,435
G&A including insurance, taxes and fees			280,383								(1,044	)			279,339				267,086								597				267,683				235,249								(2	)			16,236				251,483
Selling			63,600												63,600				59,498												59,498				64,921																64,921
Depreciation and amortization			10,234												10,234				9,402												9,402				8,424																8,424
Interest			7,988												7,988				7,973												7,973				8,325																8,325
Divested operations and services expense																																											25,851								25,851
Total expenses			2,591,537				124,638				(973	)			2,715,202				2,540,520				125,841				90				2,666,451				2,644,710				138,478				25,849				20,321				2,829,358
Income (loss) from continuing operations before income taxes			3,237				23,832				973				28,042				85,169				23,501				(90	)			108,580				16,569				23,222				(11,046	)			(20,321	)			8,424
Income tax provision (benefit)			(2,215	)			10,148				356				8,289				32,184				9,591				(35	)			41,740				1,463				9,324				(4,529	)			(6,001	)			257
Income (loss) from continuing operations		$	5,452			$	13,684			$	617			$	19,753			$	52,985			$	13,910			$	(55	)		$	66,840			$	15,106			$	13,898			$	(6,517	)		$	(14,320	)		$	8,167
Basic earnings (loss) per share from continuing operations		$	0.07			$	0.17			$	0.01			$	0.25			$	0.67			$	0.18			$	—			$	0.84			$	0.19			$	0.17			$	(0.08	)		$	(0.18	)		$	0.10
Diluted earnings (loss) per share from continuing operations		$	0.07			$	0.17			$	0.01			$	0.25			$	0.66			$	0.17			$	—			$	0.83			$	0.18			$	0.17			$	(0.08	)		$	(0.18	)		$	0.10
Basic weighted average shares outstanding			79,511				79,511				79,511				79,511				79,432				79,432				79,432				79,432				81,282				81,282				81,282				81,282				81,282
Diluted weighted average shares outstanding			80,600				80,600				80,600				80,600				80,441				80,441				79,432				80,441				82,111				82,111				81,282				81,282				82,111
Pretax margin			0.1	%															3.2	%															0.62	%
Commercial premium yield			3.4	%															2.6	%															4.3	%
Commercial premium PMPM		$	388.41															$	386.69															$	375.65
Commercial health care cost trend			2.0	%															-0.3	%															8.9	%
Commercial health care cost PMPM		$	339.53															$	325.62															$	332.86
Commercial MCR			87.4	%															84.2	%															88.6	%
Medicare Advantage MCR			90.5	%															89.9	%															87.4	%
Medicaid MCR			82.7	%															79.4	%															87.9	%
Health plan services MCR			87.1	%															84.3	%															88.2	%
G&A expense ratio			10.9	%															10.2	%															8.9	%
Selling costs ratio			2.5	%															2.3	%															2.5	%

 

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.

 

3	Includes litigation reserve true-up related to previous accrual for lawsuit and related legal expenses. Also includes severance expense.

 

4

Includes items related to the run-out of the Northeast business sold in 2009 and/or transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012, including lease impairment in the fourth quarter 2012 related to the company’s divested Northeast business.

 

5	Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy. Includes expenses related to the termination of a medical management contract, litigation-related expenses and severance.

 

14

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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, 2013																Year Ended December 31, 2012
																										Divested
		Western Region Operations1				Government Contracts2				Corporate/ Other3				Consolidated				Western Region Operations1				Government Contracts2				Operations and Services4				Corporate/ Other5				Consolidated
Commercial premiums		$	5,175,370											$	5,175,370			$	5,705,497															$	5,705,497
Medicare premiums			2,771,431												2,771,431				2,790,497																2,790,497
Medicaid premiums			2,430,272												2,430,272				1,963,104																1,963,104
Health plan services premiums			10,377,073												10,377,073				10,459,098								—								10,459,098
Government contracts							572,266								572,266								689,121												689,121
Net investment income			69,613												69,613				82,434																82,434
Administrative services fees and other income			34,791												34,791				17,957								11								17,968
Divested operations and services revenue															—												40,471								40,471
Total revenues			10,481,477				572,266				—				11,053,743				10,559,489				689,121				40,482				—				11,289,092
Health plan services			8,886,547												8,886,547				9,316,922								174				(783	)			9,316,313
Government contracts							497,780				5,138				502,918								599,211								5,863				605,074
G&A excluding insurance, taxes and fees			925,392								6,877				932,269				828,648								(1,445	)			36,892				864,095
Insurance, taxes and fees			151,425												151,425				74,494								1,351								75,845
G&A including insurance, taxes and fees			1,076,817								6,877				1,083,694				903,142								(94	)			36,892				939,940
Selling			239,428												239,428				245,925																245,925
Depreciation and amortization			38,589												38,589				31,145								1								31,146
Interest			32,614												32,614				33,220																33,220
Divested operations and services expense															—												85,824								85,824
Total expenses			10,273,995				497,780				12,015				10,783,790				10,530,354				599,211				85,905				41,972				11,257,442
Income (loss) from operations before income taxes			207,482				74,486				(12,015	)			269,953				29,135				89,910				(45,423	)			(41,972	)			31,650
Income tax provision (benefit)			73,621				30,900				(4,694	)			99,827				(1,034	)			35,777				(17,858	)			(10,916	)			5,969
Income (loss) from continuing operations		$	133,861			$	43,586			$	(7,321	)		$	170,126			$	30,169			$	54,133			$	(27,565	)		$	(31,056	)		$	25,681
Basic earnings (loss) per share from continuing operations		$	1.69			$	0.55			$	(0.09	)		$	2.14			$	0.37			$	0.66			$	(0.34	)		$	(0.38	)		$	0.31
Diluted earnings (loss) per share from continuing operations		$	1.67			$	0.54			$	(0.09	)		$	2.12			$	0.36			$	0.65			$	(0.34	)		$	(0.38	)		$	0.31
Basic weighted average shares outstanding			79,455				79,455				79,455				79,455				82,158				82,158				82,158				82,158				82,158
Diluted weighted average shares outstanding			80,404				80,404				79,455				80,404				83,112				83,112				82,158				82,158				83,112
Pretax margin			2.0	%															0.3	%
Commercial premium yield			2.7	%															4.7	%
Commercial premium PMPM		$	385.13															$	374.99
Commercial health care cost trend			-1.0	%															9.1	%
Commercial health care cost PMPM		$	329.75															$	333.17
Commercial MCR			85.6	%															88.8	%
Medicare Advantage MCR			90.6	%															89.3	%
Medicaid MCR			80.4	%															89.4	%
Health plan services MCR			85.6	%															89.1	%
G&A expense ratio			10.3	%															8.6	%
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 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. For the year ended December 31, 2012, 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.

 

3	Includes litigation reserve true-up related to previous accrual for lawsuit and related legal expenses. Also includes severance expense.

 

4

Includes items related to the run-out of the Northeast business sold in 2009 and/or transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012, including lease impairment in the fourth quarter 2012 related to the company’s divested Northeast business.

 

5

Includes legal expenses and litigation reserve true-ups related to previous accruals for lawsuits. Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy. Includes expenses related to the termination of a medical management contract, litigation-related expenses and severance.

 

15

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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.

 

		Q4 2013				Q3 2013				Q4 2012				FY 2013				FY 2012
Reconciliation of Days Claims Payable:
(1) Reserve for Claims and Other Settlements—GAAP		$	984.1			$	990.2			$	1,038.0			$	984.1			$	1,038.0
Less: Capitation, Provider and Other Claim Settlements, and MAPD Payables			(93.9	)			(80.1	)			(105.0	)			(93.9	)			(105.0	)
(2) Reserve for Claims and Other Settlements—Adjusted		$	890.2			$	910.1			$	933.0			$	890.2			$	933.0
(3) Health Plan Services Cost—GAAP		$	2,229.3			$	2,196.6			$	2,332.8			$	8,886.5			$	9,316.3
Less: Capitation, Provider and Other Claim Settlements, and MAPD Costs			(815.0	)			(827.3	)			(861.0	)			(3,348.9	)			(3,386.3	)
(4) Health Plan Services Cost—Adjusted		$	1,414.3			$	1,369.3			$	1,471.8			$	5,537.6			$	5,930.0
(5) Number of Days in Period			92				92				92				365				366
= (1) / (3) * (5) Days Claims Payable—GAAP Basis (using end of period reserve amount)			40.6				41.5				40.9				40.4				40.8
= (2) / (4) * (5) Days Claims Payable—Adjusted Basis (using end of period reserve amount)			57.9				61.1				58.3				58.7				57.6

 

16

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Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

($ in millions)

 

		Health Plan Services
		FY 2013				FY 2012				FY 2011
Reserve for claims (a), beginning of period		$	808.7			$	720.8			$	727.5
Incurred claims related to:
Current Year (f)			4,666.0				4,950.9				4,733.0
Prior Years (c)			(56.2	)			34.5				(96.5	)
Total Incurred (b)			4,609.8				4,985.4				4,636.5
Paid claims related to:
Current Year			3,872.5				4,156.6				4,024.4
Prior Years			738.6				740.9				618.8
Total Paid (b)			4,611.1				4,897.5				4,643.2
Reserve for claims (a), end of period			807.4				808.7				720.8
Add:
Claims Payable (d)			67.0				91.6				111.0
Other (e)			109.7				137.7				80.3
Reserves for claims and other settlements, end of period		$	984.1			$	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. Negative amounts in this line represent favorable development in estimated prior years’ health care costs. Positive amounts in this line represent unfavorable development in estimated prior years’ health care costs. The favorable development related to prior years that was recorded in the twelve months ended December 31, 2013 and in 2011 resulted from claims being settled for amounts less than originally estimated. In 2013, this was primarily due to the absence of moderately adverse conditions. In 2011, this was primarily due to lower than expected health care cost trends. The favorable developments related to prior years that were recorded in 2013 and 2011 do not directly correspond to an increase in our operating results for those periods because any favorable prior period reserve development increases current period net income only to the extent that the current period provision for adverse deviation (see footnote (f)) is less than the benefit recognized from the prior period favorable development. The unfavorable development in estimated prior years’ health care costs for 2012 primarily resulted from significant delays in claims submissions for the fourth quarter of 2011 arising from issues related to a new billing format required by HIPAA combined with an unanticipated flattening of commercial trends.

 

(d)	Includes amount accrued for litigation and regulatory-related expenses.

 

(e)	Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

 

(f)

Our IBNR estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. Such amounts were $53 million, $53 million and $48 million as of December 31, 2013, December 31, 2012, and December 31, 2011, respectively.

 

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