--Earnings rise on business-unit sale, but core results miss
expectations
--Health Net cites higher-than-expected commercial and Medicaid
costs, slashes guidance
--Company believes it has found and is resolving issues that
hurt second-quarter results
(Adds analyst comment in 15th paragraph; updates stock price in
second.)
By Jon Kamp
Health Net Inc. (HNT) posted higher second-quarter earnings
after selling a business unit, but the company once again slashed
its full-year guidance as high health-care costs hurt results in
its core health-insurance businesses.
Shares of the Los Angeles-based insurer plunged on the news,
falling 17.8% to $18.66 in recent trading. Shares climbed from
early-morning lows as the company explained its expectations for
improvements on a conference call, but the stock remains down more
than 38% on the year as different cost-related issues have
pressured the company's financial results and forecasts.
Health Net on Friday highlighted two issues:
higher-than-expected commercial health-care costs "primarily
arising from a select number of large group accounts with
membership in full-network products," and Medicaid costs that are
also topping expectations. The company is seeking higher Medicaid
rates.
"We believe that we have identified and are on the path to
resolving the issues in the commercial and Medicaid businesses that
impacted our second-quarter performance," Chief Executive Jay
Gellert said.
On the commercial front, Mr. Gellert said Health Net had
identified specific big accounts that contributed to the higher
health costs.
Increasingly, big clients are looking to restrain costs by using
administrative-services contracts that offer weaker benefits and
higher prices for their members, Mr. Gellert said. That trend has
left insurers with full service plans like Health Net vulnerable to
getting high-cost patients because of what the CEO called "adverse
risk selection," industry jargon referring to when an insurer gets
more patients than expected that require significant medical
care.
On the commercial front, Mr. Gellert said Health Net had
identified specific big accounts that contributed to the higher
health costs.
Increasingly, big clients are looking to cuts their costs on
administrative-services contracts by accepting plans that offer
weaker benefits and higher prices for their members. That trend has
left insurers like Health Net vulnerable to getting high-cost
patients because of what Mr. Gellert called "adverse risk
selection," industry jargon referring to when an insurer gets more
patients than expected that require significant medical care.
The company is taking steps to correct the cost problem, such as
adjusting rates and trying to steer customers toward different
kinds of networks. But the CEO made clear on the call that Health
Net will walk away from business--it could lose 50,000 members next
year in these large-group accounts, and potentially another 50,000
if there is ongoing pricing pressure--to ensure improvement.
"We will not sell or renew groups at low cost in 2013," Mr.
Gellert told analysts.
He indicated per-share earnings for the company's core
businesses could at least double next year off the significantly
lowered target set for 2012 following two guidance cuts. He also
acknowledged that the small insurer sees a "scale issue" in
competing for big commercial accounts, but talked up the company's
success with smaller accounts and government-based health care.
He said the company has to incorporate the value of the
government business and concerns about California's commercial
market factors into "strategic considerations."
On the Medicaid side, the company is "actively engaged in what
we believe are productive discussions" with health officials in
California, Mr. Gellert said. The company, he said, believes
current rates for seniors and persons with disabilities there are
"inadequate." Medicaid is the health program for the poor funded
jointly by states and the federal government.
In May, Health Net posted an unexpected first-quarter loss after
miscalculating how much money it needed to cover medical claims.
The company blamed a government-mandated changeover to a new coding
system that caused delays in incoming claims last year, masking
actual health-cost trends in the market. Mr. Gellert said Friday
that the company believes this issue is in the rear-view
mirror.
Health Net's turnaround plans, coming after two rocky quarterly
reports, still left some open questions. "In our view, this is a
tall order and successful consummation of the plan is opaque at
best," Stifel Nicolaus analyst Thomas Carroll said.
The insurer reported a second-quarter profit of $124.6 million,
or $1.48 a share, up from $58.3 million, or 63 cents, a year
earlier. Earnings were boosted by the April sale of the company's
Medicare prescription drug-plan business to CVS Caremark Corp.
(CVS). Earnings from continuing operations dropped to six cents a
share from 62 cents.
Meantime, earnings in the company's core Western Region
Operations and Government Contracts businesses, which represent the
vast bulk of overall sales, dropped to 19 cents a share from 77
cents a year ago. Analysts said this was far below
expectations.
The company's lowered forecast calls for full-year earnings of
between $1 and $1.10 a share for the Western Region and Government
Contracts businesses, down from the May forecast of $2.35 to $2.50
a share.
-Melodie Warner contributed to this article.
Write to Jon Kamp at jon.kamp@dowjones.com
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