Health Net Sees Not so Healthy Q4; Net Loss of $86M

Health Net Inc. announced 2004 fourth quarter net loss per diluted share of $.77 compared with earnings of $.77 per diluted share in the fourth quarter of 2003 and earnings of $.64 per diluted share in the third quarter of 2004.

Included in the results for the fourth quarter of 2004 is the full effect of a $252 million pretax charge comprised of the following:

* $169 million of expenses associated with provider settlements relating to claims processing and payment issues that have been or are being resolved;
* $65 million of expenses for prior period reserve developments;
* $18 million in asset impairment and restructuring charges and other expenses.

The provider settlement expenses, which reflect the majority of the charge, were recorded following a thorough review and management’s decision in the fourth quarter of 2004 to settle a large number of provider claims in the company’s California and Northeast health plans relating to claims issues from 2001 to 2004.

“In completing our review, we decided to address issues that restrained our performance in 2004 and put them in the past. We believe that pursuing resolution of the provider matters, including the completion of contract revisions, will assure ongoing network stability. We believe that our higher reserve levels reflect a higher cost trend related to changed payment practices seen in 2004 than was previously expected. As a result of our ongoing pricing discipline, we believe Health Net will be in a better position to achieve consistent and predictable performance in 2005,” said Jay Gellert, president and chief executive officer of Health Net.

Revenues

Health Net’s total revenues increased 3.2 percent in the fourth quarter of 2004 to $2,867,593,000 from $2,779,632,000 in the fourth quarter of 2003. Health plan services revenue climbed 3.0 percent to $2,363,786,000 in the fourth quarter of 2004 compared to $2,295,217,000 in the fourth quarter of 2003.

The gains in Health plan services revenue resulted from higher commercial and Medicare premium yields across the company’s health plans. In the fourth quarter of 2004, the overall health plan revenue per member per month (PMPM), including commercial, Medicare and Medicaid enrollment, rose 9.0 percent compared to the same period in 2003. Commercial premium yields climbed 10.7 percent compared to the fourth quarter of 2003.

“We continue to achieve our pricing goals,” said Buddy Piszel, executive vice president and chief financial officer of Health Net. “The pricing we achieved in the second half of 2004 positions us well for 2005 when we expect to complete the repricing of the entire commercial book in the first half of this year.”

Commercial enrollment, including both at-risk and Administrative Services Only (ASO) membership, was down 3.3 percent in the fourth quarter of 2004 compared with the third quarter of 2004.

“As expected, our disciplined pricing continues to result in lower commercial enrollment. In the fourth quarter of 2004, enrollment in California declined somewhat more than earlier expectations. The decline, however, was the result of our ongoing adherence to premium pricing that accurately reflects cost trends,” Piszel added.

Countering the overall enrollment trend, Oregon commercial enrollment increased by more than 5,400 members in the fourth quarter of 2004 over the third quarter of 2004, a 4.1 percent gain.

In the fourth quarter of 2004, Health Net’s Government contracts revenue rose 5.1 percent from the fourth quarter of 2003, reaching $487,823,000. This increase was due in part to the overlap of the new TRICARE North region contract being fully implemented and the continued provision of services under the old TRICARE Region 6 contract for one month in the fourth quarter of 2004.

“We completed the transition from the last of the old TRICARE contracts on October 31, 2004, and now solely operate in the TRICARE North region. We are proud to be providing support for the families of our troops in these 23 states and the District of Columbia,” Piszel noted.

Other income decreased by $4,383,000 in the fourth quarter of 2004 compared with the fourth quarter of 2003, due to lower revenue resulting from the sale of the company’s Employer Services division in the fourth quarter of 2003.

Health care costs

The health plan Medical Care Ratio (MCR) increased from 81.7 percent in the fourth quarter of 2003 to 94.0 percent in the fourth quarter of 2004. This rise in the health plan MCR reflects the impact of approximately $229 million, the portion of the fourth quarter charges attributable to health care costs.

“When we look at health care costs without the charges, we believe overall commercial health care costs PMPM rose in line with industry cost trends year-over-year,” Piszel commented.

The Government contracts cost ratio improved by 90 basis points to 95.6 percent for the fourth quarter of 2004 compared to the fourth quarter of 2003. This improvement is due in part to bid price adjustment and change order activity in the fourth quarter of 2004 associated with the old TRICARE contracts.

The company noted that its comprehensive systems consolidation project, known as Health Net One, continues to achieve key milestones. The company has decided to accelerate medical management system enhancements in 2005 and to defer the claims conversion in California and Oregon until 2006.

“In order to ensure a full year of claims payment stability in California, we have decided to postpone until 2006 the conversion of the California and Oregon claims systems,” Piszel explained.

Days claims payable decreased to 44.7 days for the fourth quarter of 2004 compared with 46.2 days for the third quarter of 2004, and declined by 4.7 days compared to the fourth quarter of 2003, a direct result of the substantially higher level of paid claims in 2004 compared to 2003.

Outlook

Health Net believes its earnings per diluted share for the full year 2005 will be between $2.30 and $2.50. The company believes that its earnings per diluted share in the first quarter of 2005 will be between $.50 and $.55.

“Our initial commercial pricing and enrollment results for 2005 are encouraging. We believe yields will increase by more than 11 percent for customers renewing in the first quarter. Enrollment is coming in somewhat better than we had planned,” Piszel commented.

“For the full year, we now believe that commercial enrollment will be down modestly overall; however, we expect to gain membership in several markets in the second half of the year,” he added.

The company’s HMO, POS, insured PPO and government contracts subsidiaries provide health benefits to approximately 6.5 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE programs. Health Net’s subsidiaries also offer managed health care products related to behavioral health and prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.