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Health Net Reports First Quarter 2015 GAAP Net Income of $30.0 Million, or $0.38 Per Diluted ShareHealth Net, Inc. (NYSE:HNT) today announced 2015 first quarter GAAP net income of $30.0 million, or $0.38 per diluted share, compared with GAAP net income of $28.8 million, or $0.36 per diluted share, for the first quarter of 2014 and $4.9 million, or $0.06 per diluted share, for the fourth quarter of 2014. In the first quarter of 2015, Health Net incurred $47.3 million of pretax expenses primarily related to its previously announced transaction with a wholly owned subsidiary of Cognizant Technology Solutions Corporation (Cognizant). The transaction remains subject to receipt of required regulatory approvals. The company's Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $58.3 million, or $0.74 per diluted share, in the first quarter of 2015 compared with $31.3 million, or $0.39 per diluted share, in the first quarter of 2014 and $47.4 million, or $0.60 per diluted share, in the fourth quarter of 2014. Highlights from the first quarter of 2015 include:
"We are pleased that our strong 2014 performance is continuing into 2015," said Jay Gellert, Health Net's president and chief executive officer. "Enrollment growth in Medicaid expansion and the California exchanges remained strong, we continued to experience moderate health care cost trends and our administrative expense ratio reflected successful cost management during a period of enrollment growth." CONSOLIDATED RESULTS Health Net's total revenues increased 28 percent in the first quarter of 2015 to $3.9 billion from $3.0 billion in the first quarter of 2014 and increased approximately 3 percent in the first quarter of 2015 from $3.8 billion in the fourth quarter of 2014. Total expenses increased approximately 28 percent in the first quarter of 2015 to $3.8 billion from $3.0 billion in the first quarter of 2014 and increased just over 2 percent in the first quarter of 2015 from $3.7 billion in the fourth quarter of 2014. Included in total expenses are $47.3 million, $72.1 million and $4.1 million of expenses primarily related to the transaction with Cognizant for the three months ended March 31, 2015, December 31, 2014 and March 31, 2014, respectively. The company continues to incur costs, as expected, in preparation for the implementation of its arrangement with Cognizant. Western Region Health Plan Services Health plan services premiums revenues in the Western Region of $3.7 billion in the first quarter of 2015 increased by approximately 29 percent compared with $2.9 billion in the first quarter of 2014 as a result of higher enrollment in the company's Medicaid and commercial lines of business in 2015. First quarter 2015 revenues were negatively impacted by an expected $63.4 million rebate related to the Medicaid expansion population. Health plan services expenses in the Western Region of $3.1 billion in the first quarter of 2015 increased by nearly 31 percent compared with $2.4 billion in the first quarter of 2014, also as a result of the company's Medicaid and commercial enrollment gains. Government Contracts Segment Government Contracts revenues in the first quarter of 2015 were $154.7 million compared with $144.1 million in the first quarter of 2014 and $159.6 million in the fourth quarter of 2014. Government Contracts expenses in the first quarter of 2015 were $141.7 million compared with $131.1 million in the first quarter of 2014 and $147.2 million in the fourth quarter of 2014. On March 27, 2015, the company announced that the U.S. Department of Defense (DoD) modified Health Net's TRICARE program contract in the North Region to, among other things, add three additional one-year option periods to the term of the contract. As part of the modification, the DoD awarded the first of the three option periods, allowing Health Net to continue providing access to health care services to TRICARE beneficiaries through at least March 31, 2016. WESTERN REGION OPERATIONS SEGMENT Health Plan Membership Total enrollment in the Western Region at March 31, 2015 was 3.2 million members, an increase of approximately 20 percent from enrollment at March 31, 2014 and essentially flat compared with enrollment at December 31, 2014. Total enrollment in the company's California health plans at March 31, 2015 increased approximately 20 percent to 2.8 million members at March 31, 2015 compared with enrollment at March 31, 2014 and increased by approximately 2 percent, or 45,000 members, compared with enrollment at December 31, 2014. Western Region commercial enrollment was 1.2 million members at March 31, 2015, an increase of approximately 7 percent compared with enrollment at March 31, 2014. Western Region commercial enrollment declined by approximately 2 percent from December 31, 2014 to March 31, 2015. Sequentially, commercial enrollment in California increased by 13,000 members while commercial enrollment in Arizona decreased by 30,000 members in the first quarter of 2015. Individual exchange membership in California increased in the first quarter of 2015 by nearly 47,000 members compared with the end of the fourth quarter of 2014. Reflective of our pricing discipline, individual exchange membership decreased sequentially by 18,000 members in Arizona, due largely to a migration of membership to a lower priced co-op plan. There also was some limited attrition in the large group market throughout the Western Region during the first quarter of 2015 as a result of continued pricing discipline. Medicaid enrollment increased by approximately 31 percent to 1.7 million members at March 31, 2015 compared with 1.3 million members as of March 31, 2014, primarily due to Medicaid expansion in California and Arizona. Sequentially, Medicaid enrollment increased by approximately 2 percent, or 28,000 members, from December 31, 2014 to March 31, 2015. Medicaid enrollment growth in the first quarter of 2015 was slower than previous quarters due to the state of California's efforts in redetermining enrollee eligibility for the state's Medicaid program and the commercial exchanges. However, Medicaid enrollment growth in the second quarter of 2015 is positive, with an additional 31,000 Medicaid members enrolled in April and 35,000 with May 1 effective dates. Membership in tailored network products represented 54.7 percent of the company's Western Region commercial membership at March 31, 2015 compared with 48.6 percent at March 31, 2014. "As the health care industry moves toward risk-based arrangements, as of March 31, 2015, more than 80 percent of Health Net's California membership was covered by risk-based arrangements," noted James Woys, the company's chief financial and operating officer and interim treasurer. "We believe our efficient tailored networks that are based on such provider risk-based arrangements provide both quality and access for those seeking affordable coverage through both public and private exchanges." Enrollment in Health Net's Medicare Advantage (MA) plans was 267,000 members at March 31, 2015, an approximately 5 percent increase compared with enrollment of 255,000 members at March 31, 2014. MA enrollment at March 31, 2015 declined sequentially by approximately 8,000 members, as expected, due to the company's strategic exits from underperforming counties in Arizona and California. Dual eligible enrollment at March 31, 2015 was 27,000 members, an increase of approximately 69 percent compared with enrollment of 16,000 members at December 31, 2014. There were no such dual eligible members at March 31, 2014. Investment Income Net investment income for the Western Region was $13.2 million in the first quarter of 2015 compared with $11.1 million in the first quarter of 2014 and $11.1 million in the fourth quarter of 2014. Commercial Premium Yields and Health Care Costs In the Western Region, commercial premiums per member per month (PMPM) decreased by approximately 3 percent to approximately $388 in the first quarter of 2015 compared with approximately $400 in the first quarter of 2014. This decrease was due to the ongoing shift of commercial enrollment from large group to individual and small group as individual and small group premium rates are generally lower than large group rates. Commercial health care costs PMPM in the Western Region decreased by 1.6 percent to approximately $319 in the first quarter of 2015 compared with approximately $324 in the first quarter of 2014. "Overall health care cost trends remained moderate in the first quarter of 2015, and the year-over-year decreases in commercial premiums PMPM and commercial health care costs PMPM also reflect the mix shift in our commercial business," Woys noted. "We saw no evidence of higher-than-expected utilization." Medical Care Ratios (MCR) The health plan services MCR in the Western Region was 84.5 percent in the first quarter of 2015 compared with 83.4 percent in the first quarter of 2014 and 84.7 percent in the fourth quarter of 2014, representing an increase of 110 basis points year-over-year and a sequential improvement of 20 basis points. This increase reflects the lower utilization experienced in the first quarter of 2014 for the new ACA membership. The Western Region commercial MCR was 82.1 percent in the first quarter of 2015 compared with 80.9 percent in the first quarter of 2014 and 84.6 percent in the fourth quarter of 2014, representing a 120 basis point increase year-over-year and a 250 basis point improvement sequentially. "In addition to the comparably lower utilization in the first quarter of 2014 for the new ACA members, the commercial MCR in the first quarter of 2015 was impacted by changes in prior year estimates for risk adjusters, reinsurance and risk corridors that resulted in a decrease in pretax income of $11.4 million," stated Woys. "We continue to expect the full year 2015 commercial MCR to be in line with our previous guidance." The MA MCR in the Western Region was 92.9 percent in the first quarter of 2015 compared with 91.8 percent in the first quarter of 2014 and 92.8 percent in the fourth quarter of 2014, representing a year-over-year increase of 110 basis points and an increase of 10 basis points sequentially. This increase in the MA MCR was primarily due to prior year changes to risk adjuster estimates. The Medicaid MCR in the Western Region was 81.9 percent in the first quarter of 2015 compared with 79.8 percent in the first quarter of 2014 and 80.0 percent in the fourth quarter of 2014, representing a 210 basis point increase year-over-year and a 190 basis point increase sequentially. The lower Medicaid MCR in the first quarter of 2014 was related to the lower utilization experienced in the ramp up of the company's Medicaid expansion business compared with the first quarter of 2015. The dual eligibles MCR in the Western Region was 88.3 percent in the first quarter of 2015 compared with 89.2 percent in the fourth quarter of 2014, representing an improvement of 90 basis points. General and Administrative (G&A) Expenses G&A expense in the Western Region was $409.6 million in the first quarter of 2015 compared with $357.9 million in the first quarter of 2014 and $404.7 million in the fourth quarter of 2014. The $51.7 million increase in the Western Region G&A expense year-over-year was primarily driven by a $35.8 million increase in premium taxes and the health insurer fee. The G&A expense ratio in the Western Region was 11.0 percent in the first quarter of 2015 compared with 12.4 percent in the first quarter of 2014 and 11.3 percent in the fourth quarter of 2014. The G&A expense ratio improved year-over-year by 140 basis points and sequentially by 30 basis points. The company's Western Region administrative expense ratio was 7.3 percent in the first quarter of 2015 compared with 8.9 percent in the first quarter of 2014 and 7.8 percent in the fourth quarter of 2014, representing an improvement of 160 basis points year-over-year and 50 basis points sequentially. "We remain focused on our ongoing efficiency efforts to help lower the company's administrative expense ratio," commented Woys. "These efforts are clearly reflected in the G&A expense ratio and administrative expense ratio reported for the first quarter of 2015." "We expect to receive the required regulatory approvals of the Cognizant agreement in mid-2015, and we believe this arrangement will position the company for expanded product development and service capabilities that will support and provide scale for incremental growth in the years ahead," added Gellert. BALANCE SHEET Cash and investments as of March 31, 2015 were $3.5 billion compared with $2.4 billion as of March 31, 2014 and $2.7 billion as of December 31, 2014. Reserves for claims and other settlements as of March 31, 2015 were $1.9 billion compared with $1.2 billion at March 31, 2014 and approximately equal to the $1.9 billion reported at December 31, 2014. Days claims payable (DCP) for the first quarter of 2015 was 54.8 days compared with 43.2 days for the first quarter of 2014 and 57.4 days for the fourth quarter of 2014. On an adjusted1 basis, DCP for the first quarter of 2015 was 66.3 days compared with 63.1 days for the first quarter of 2014 and 70.1 days for the fourth quarter of 2014. "As expected, adjusted DCP declined by 3.8 days sequentially to 66.3 days. This decline reflects the normal seasonality compared with the fourth quarter where claims inventory typically is higher. Even after the decrease, first quarter 2015 adjusted DCP is still strong relative to historic levels," Woys explained. The company's balance on its revolving credit facility at March 31, 2015 increased by $95 million sequentially compared with December 31, 2014. The increased borrowing was largely used to finance share repurchases in the first quarter of 2015. The increased borrowing caused the company's debt-to-total capital ratio to increase to 26.4 percent as of March 31, 2015 compared with 22.9 percent as of March 31, 2014 and 22.6 percent as of December 31, 2014. CASH FLOWS FROM OPERATIONS Operating cash flow was $860.6 million in the first quarter of 2015. "The company's strong cash flow in the first quarter of 2015 was primarily driven by the timing of the receipt of state health programs payments, including the receipt of the December 2014 California Medicaid payment of approximately $311 million in January 2015," said Woys. "Excluding this $311 million Medicaid payment, we expect operating cash flow for the full year 2015 to be at least equal to net income plus depreciation and amortization." The company noted that cash at the parent was approximately $30 million at March 31, 2015. SHARE REPURCHASE UPDATE During the first quarter of 2015, Health Net repurchased approximately 1.7 million shares of its common stock for approximately $94 million at an average price of $54.00 per share. At March 31, 2015, approximately $306 million of authorization under the company's existing $400 million share repurchase program remained. 2015 GUIDANCE "Based on our results for the first quarter of 2015, we are increasing our diluted earnings per share guidance for the combined Western Region and Government Contracts segments by $0.10 to a range of $3.25 to $3.35," commented Gellert. The company is maintaining its guidance for GAAP earnings per diluted share of at least $2.70 for the full year 2015 as it continues to incur transaction-related expenses for the Cognizant arrangement. The guidance table included in this earnings release provides specific metrics, including updates to expectations for the company's Medicaid MCR, dual eligibles MCR, health plan services MCR, and combined Western Region and Government Contracts EPS. CONFERENCE CALL As previously announced, Health Net will discuss the company's first quarter 2015 financial results during a conference call on Monday, May 4, 2015, beginning at approximately 12:00 noon Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:
An access code is not required for the live conference call on May 4, 2015. The access code for the replay is 13606499. The replay of the conference call will be available through May 10, 2015. 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, 2014, and other reports filed by the company from time to time with the Securities and Exchange Commission. ABOUT HEALTH NET Health Net, Inc. is a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Its mission is to help people be healthy, secure and comfortable. Health Net provides and administers health benefits to approximately 6.0 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as "Part D"), Medicaid, dual eligible, U.S. Department of Defense, including TRICARE, and U.S. Department of Veterans Affairs programs. Health Net also offers behavioral health, substance abuse and employee assistance programs, and managed health care products related to prescription drugs. For more information on Health Net, Inc., please visit the company'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 involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of the company's premium rates and may not be sufficiently offset by the risk apportionment provisions of the ACA; increasing health care costs, including but not limited to costs associated with the introduction of new treatments or therapies; the company's ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, including through the company's master services agreement with a subsidiary of Cognizant Technology Solutions Corporation (Cognizant); whether the company receives required regulatory approvals for Cognizant's provision of services to the company and any conditions imposed in order to obtain such regulatory approvals; the company's ability to recognize the intended cost savings and other intended benefits of the Cognizant transaction; the risk that Cognizant may not perform contracted functions and services in a timely, satisfactory and compliant manner; the recompetition of the company's T-3 contract for the TRICARE North region; negative prior period claims reserve developments; rate cuts and other risks and uncertainties affecting the company's Medicare or Medicaid businesses; trends in medical care ratios; membership declines or negative changes in the company's health care product mix; unexpected utilization patterns or unexpectedly severe or widespread illnesses; failure to effectively oversee the company's 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; the timing of collections on amounts receivable from state and federal governments and agencies; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care and Department of Health Care Services, the Arizona Health Care Cost Containment System, 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; changes in economic or market conditions; impairment of the company'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 the company's most recent Annual Report on Form 10-K 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 Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015. Tables follow.
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