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4th UPDATE: Health Net Hits More Cost Troubles, Cuts Outlook

Date : 08/03/2012 @ 3:31PM
Source : Dow Jones News
Stock : Health Net, Inc. (HNT)
Quote : 54.29  -0.05 (-0.09%) @ 3:59PM
Health Net share price Chart

4th UPDATE: Health Net Hits More Cost Troubles, Cuts Outlook

Health Net (NYSE:HNT)
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--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

Subscribe to WSJ: http://online.wsj.com?mod=djnwires




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