Health Net Inc.’s (HNT - Analyst Report) fourth-quarter 2012 operating income, which comprises combined net earnings from the Western Region Operations and Government Contracts segments, came in at $29.8 million or 36 cents per share, declining substantially from the year-ago level of $60.6 million or 72 cents per share. Operating income also lagged the Zacks Consensus Estimate of 37 cents per share.
Including a $13.8 million pre-tax loss in the Divested Operations and Services segment and $20.3 million in Corporate/Other pre-tax expenses, the company reported net income of $5.1 million or 6 cents per share in the fourth quarter of 2012, deteriorating considerably from $60.2 million or 71 cents per share in the year-ago quarter.
The disappointing performance in the reported quarter was primarily due to weak operating performance of the Government Contracts segment along with higher health plan services expenses.
The company’s total revenue improved 4.4% year over year to $2.8 billion in the reported quarter. Revenues came in line with the Zacks Consensus Estimate.
Health plan services premiums revenues came in at $2.6 billion, up 5.3% year over year. Meanwhile, total health plan services expenses increased 8% to $2.3 billion from $2.1 billion in the year-ago quarter. Total expenses increased 6.8% year over year to $2.82 billion from $2.64 billion.
Western Region Operations: The segment posted revenues of $2.6 billion in the quarter, up 4% year over year. Net investment income for the segment increased to $19.1 million from $10.0 million in the year-ago quarter. Health plan services expenses increased 4.6% year over year to $2.3 billion from $2.2 billion.
Total enrollment in the segment declined 1.1% year over year to 2.6 million members as of Dec 31, 2012. Western Region commercial enrollment declined 9.7% to 1.2 million members, while enrollment in the company’s California health plans dipped 1.3% year over year.
However, enrollment climbed 14.1% to 0.23 million in Medicare Advantage plans. Medicaid enrollment in California also increased 7.4% to 1.1 million in the reported quarter.
Medical care ratio (MCR) for Health Net’s health plan services in the segment increased to 88.1% during the reported quarter from 86.3% in the year-ago quarter, while Commercial MCR deteriorated to 87.4% from 84.8% in the prior-year quarter. Medicare Advantage MCR declined to 88.6% from 90.5% in the year-ago quarter.
Government Contracts: Revenues from the segment declined to $159.6 million from $194.6 million in the fourth quarter of 2011. The segment’s expenses also plummeted to $136.6 million from $155.6 million in the prior-year quarter. The decline in both revenues and expenses were due to the new Military and Family Life Counseling contract implemented in the reported quarter.
Full-Year 2012 Highlights
For full year 2012, Health Net's Western Region and Government Contracts segments produced combined net earnings of $85.1 million or $1.02 per share, declining from $278.7 million or $3.09 in 2011. Operating earnings lagged the Zacks Consensus Estimate of $1.04 per share.
However, Health Net’s reported net income came in at $121.2 million or $1.46 per share, surpassing $72.1 million or 80 cents per share in 2011.
Total revenue was $11.28 billion, down 1.2% year over year from $11.42 billion but marginally exceeding the Zacks Consensus Estimate of $11.20 billion. Moreover, total expenses inched down 0.1% from 2011 to $11.2 billion.
As of Dec 31, 2012, Health Net had cash and investments of approximately $2.2 billion, increasing from $1.8 billion as of Dec 31, 2011. However, the company’s debt-to-total capital ratio decreased to 24.3% from 26.2% as of Dec 31, 2011.
Health Net’s operating cash flow stood at $33.4 million in the reported quarter compared with an outflow of $119.8 million in the year-ago quarter. For 2012, operating cash flow amounted to $32.5 million, plunging from $103.4 million in 2011, due to the impact of the sale of Health Net’s Medicare PDP business.
Total assets of the company were $3.92 billion as of Dec 31, 2012, improving from $3.61 billion a year ago. Stockholders’ equity increased to $1.55 billion from $1.44 billion as of Dec 31, 2011.
Share Repurchase Update
During 2012, Health Net repurchased 2.1 million shares at an average price of $24.05, totaling $50 million. The company had $350 million remaining under its current $400 million share repurchase authorization as of Dec 31, 2012.
Outlook for 2013
Health Net affirmed its reported net income guidance of $2.00–$2.10 per share for 2013.
The company estimates total health plan membership in 2013 to dip 1%−2% over 2012. The expected decline is primarily due to an 8%−9% estimated downturn in commercial enrollment, partially offset by a 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 expected 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 3.6% year over year, driven by the shifts occurring in the product and geographic mix. The commercial membership is expected to be skewed toward the smaller accounts and tailored network products having premiums PMPM below the company-average.
Meanwhile, the tax rate for Health Net is expected to be 38%−39%. The company also expects selling cost ratio to be in the range of 2.3%−2.4% and general and administrative expense ratio to be in the range of 9.0%−9.4%.
Outstanding share count is expected to be around 80 million at the end of 2013. All the abovementioned guidance include operating expenses of $30 million related to the implementation of the health care reform but exclude costs related to Health Net’s participation in California’s dual eligible demonstration pilot programs
Other Healthcare Companies
WellPoint Inc. (WLP - Analyst Report) reported fourth-quarter 2012 adjusted income of $1.03 per share, beating the Zacks Consensus Estimate of 95 cents. Adjusted income also surpassed the year-ago earnings of 99 cents per share by 4%.
UnitedHealth Group Inc. (UNH - Analyst Report) reported fourth-quarter 2012 earnings of $1.20 per share, in line with the Zacks Consensus Estimate. Earnings, however, increased 2.6% on a year-over-year basis.
Health Net carries a Zacks Rank #3 (Hold). Another healthcare company Molina Healthcare, Inc. (MOH - Analyst Report), carrying a Zacks Rank #2 (Buy), is slated to release its earnings results on Feb 7.