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Mixed 2013 Guidance from Health Net

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Yesterday, Health Net Inc. revealed its financial guidance for 2013. The company expects reported net income in the range of $2.00–$2.10 per share in 2013, increasing substantially from $1.45–$1.55 expected in 2012.

Additionally, consolidated revenues for the combined Western Region Operations and Government Contracts segments, which are the main operating segments of the company, are expected between $10.7 billion and $11.2 billion. This is marginally below $11.0−$11.5 billion expected in 2012.

The projected year-over-year decline in consolidated revenues is likely due to the expected fall in membership in the Western Region Operations segment. Health Net estimates its 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.

Moreover, the commercial premium yields per member per month (PMPM) for the Western Region Operations segment in 2013 is projected to witness a 3.6% hike over 2012, 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.

Additionally, the pre-tax contribution from the Government Contracts segment is estimated to be in the range of $75−$84 million. Further, the general and administrative (G&A) expense ratio for the Western Region Operations segment is projected to be in the 9.0%−9.4% range, compared with 8.5%−8.7% in 2012. None of the abovementioned guidance has been adjusted for the impact of Health Net’s participation in California’s dual eligible demonstration pilot programs on its membership, revenues, costs or earnings.

Health Net did not disclose its guidance for operating earnings per share and total revenue. The Zacks Consensus Estimate for the company’s 2013 revenue is $11.99 billion, while the same for operating earnings is $2.10 per share.

Health Net currently carries a Zacks #2 Rank (Buy). We maintain a long term ‘Neutral’ recommendation. Peer WellPoint Inc. also carries a Zacks #2 Rank.

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