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Health Net Beats on Earnings, Revises Outlook


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Health Net Inc.’s (HNT - Analyst Report) third-quarter 2013 operating income, which comprises combined net earnings from the Western Region Operations and Government Contracts segments, came in at 83 cents per share, breezing past the Zacks Consensus Estimate of 59 cents. The result also improved significantly from the year-ago quarter’s earnings of 38 cents per share.

Health Net’s total revenues improved 1.3% year over year to $2.78 billion. Revenues surpassed the Zacks Consensus Estimate of $2.72 billion.

Health plan services premium revenues of Health Net came in at $2.6 billion, down 1.1% from the third quarter of 2012. Meanwhile, total health plan services expense declined 3.7% to $2.2 billion from $2.3 billion in the year-ago quarter. Total expenses for Health Net declined 3% year over year to $2.67 billion from $2.75 billion.

Segment Performance

Western Region Operations: This segment of Health Net posted revenues of $2.6 billion in the quarter, almost flat year over year. Net investment income for the segment declined to $11.3 million from $16.4 million in the year-ago quarter. Health plan services expenses declined 4.3% year over year to $2.2 billion.

Total enrollment in the segment dropped 3.4% year over year to 2.5 million members as of Sep 30, 2013. Western Region commercial enrollment dipped 12.1% to 1.1 million members, while that under the company’s California health plans declined 1.6% year over year. However, enrollment increased 3.5% to 0.24 million in Medicare Advantage plans. Medicaid enrollment also increased 5.3% to 1.1 million in the reported quarter.

Medical care ratio (MCR) for Health Net’s health plan services in the segment improved to 84.3% from 88.5% in the year-ago quarter, while Commercial MCR fell to 84.2% from 86.7% in the prior-year quarter. Medicare Advantage MCR improved to 89.9% from 90.1% a year ago. Medicaid MCR amounted to 79.4%, plunging from 91.6% in the year-ago quarter.

Government Contracts: Revenues from this segment of Health Net declined to $149.3 million from $169.8 million in the third quarter of 2012. The segment’s expenses also plummeted to $125.8 million from $148.7 million in the prior-year quarter.

Financial Update

As of Sep 30, 2013, Health Net had cash and investments of approximately $2.3 billion, declining from $2.0 billion as of Sep 30, 2012. The company’s debt-to-total capital ratio improved to 23.8% from 24.4% as of Sep 30, 2012.       
Health Net’s operating cash flow stood at $302.2 million in the reported quarter compared with outflow of $169.4 million in the year-ago quarter.

Total assets of Health Net were worth $4.04 billion as of Sep 30, 2013, up from $3.81 billion as of Sep 30, 2012. Stockholder equity increased to $1.60 billion from $1.55 billion as of Sep 30, 2012.

Outlook for 2013 Revised

Health Net reiterated its reported net income guidance for 2013 at $2.10–$2.20 per share. Operating income is expected in the range of $2.20–$2.30 per share.

Health Net estimates total health plan membership in the Western Region Operations in 2013 is likely to decline 2% to 3% over 2012. Previously, it had estimated the same to decline 1% to 2%.

The expected decline is primarily due to an 11%−12% (earlier decline of 8%−9%) estimated downturn in commercial enrollment, partially offset by a 2%−3% (earlier increase of 1%-2%) anticipated improvement in the Medicare Advantage enrollment and a 4%−6% rise predicted in Medicaid enrollment.

Additionally, consolidated revenues for the combined Western Region Operations and Government Contracts segments are reiterated between $10.7 billion and $11.2 billion.

Moreover, the commercial premium yields per member per month (PMPM) for the Western Region Operations segment in 2013 is projected to grow 2.5% year over year, up from 2% growth projected earlier.

Meanwhile, the tax rate for Health Net is expected to be 38%−38.5%.

The company also expects selling cost ratio in the range of 2.3%−2.4% and general and administrative expense ratio in the range of 10%−10.5%. Outstanding share count is expected to be around 80–81 million at the end of 2013.

Other Healthcare Companies

Another health maintenance organization (HMO), WellPoint Inc. (WLP - Analyst Report) reported third-quarter 2013 adjusted income of $2.10 per share, beating the Zacks Consensus Estimate of $1.83 per share. Adjusted income was a penny higher than the year-ago earnings of $2.09 per share.

UnitedHealth Group Inc. (UNH - Analyst Report) reported its third-quarter 2013 earnings of $1.53 per share, missing the Zacks Consensus Estimate by a penny. Earnings, however, grew 2.0% year over year.

Molina Healthcare Inc. (MOH - Analyst Report) reported third-quarter 2013 operating earnings per share of 31 cents that missed the Zacks Consensus Estimate by a penny. However, earnings per share surpassed the year-ago quarter’s earnings of 8 cents per share.

Zacks Rank

Health Net presently carries a Zacks Rank #2 (Buy).

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