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Moody’s Investor Service, the credit rating agency of Moody’s Corporation. (MCO - Analyst Report) has affirmed the ratings assigned to Health Net Inc.’s (HNT - Analyst Report) debt instruments and its operating company, Health Net of California, Inc. The senior notes were assigned a “Ba3” while Health Net of California was given “Baa3” insurance financial strength (IFS) rating. Alongside, the outlook on the ratings was revised up to positive from stable.

The upward revision in the outlook came on the back of Health Net’s impressive earnings growth for the last 12 months and an improved financial performance. Health Net has taken part in the individual; health exchanges, Medicaid expansion and dual–eligibles pilot program in California. As per Moody’s these initiatives create growth opportunities for Health Net as it has already been losing membership in one of its segment– the group commercial segment. A healthy EBITDA margin also keeps the rating agency affirmative in its ratings.

Nevertheless, Moody’s is aware of the health risks associated with Health Net’s growth strategies for the next few quarters. The main risk in this regard is that the new health care exchanges are untested and thus might end up in poor enrollment levels. Additionally, adverse selection by new insureds and the potential financial impact from this business are some added risks.

To deal with the risk associated with the California Medicaid business and the new dual eligible program, Health Net and the State of California’s Department of Health Care Services (DHCS) had inked a deal to cover all of Health Net's state-sponsored programs, including any potential future Medicaid expansion under federal health care reform. 

As per Moody’s, this is expected to provide the company with more financial flexibility and predictability in the long run. Also the huge membership base of the company including the TRICARE members is expected to boost the credit profile of Health Net.    

Moody’s stated that an upward revision in the ratings might take place if EBITDA margin is maintained above 2%, membership growth remains constant or increases or the debt-to-capital ratio is below 35%.  However in the near term, the outlook might be downgraded if there is deterioration in the EBITDA margins, membership or consolidated risk based capital (RBC) ratio.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that Health Net’s present score with the credit rating agency will help it write more business going forward.

Health Net currently carries a Zacks Rank #3 (Hold). Among other healthcare companies, Aetna Inc. (AET - Analyst Report) and Centene Corp. (CNC - Snapshot Report) carry a Zacks rank #2 (Buy).

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