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A Review and Effects of Health Net’s Third Quarter 2008 Earnings

By Amarendra Bhushan for CEOWORLD Magazine Updated:November 5, 2008

Health Net, Inc. Announces Changes in Senior Management Responsibilities

The Board of Directors of Health Net, Inc. announced changes in key senior management responsibilities, effective immediately. The board has directed Jay Gellert, president and chief executive officer, to focus his efforts on the company’s strategy, with particular emphasis on how best to deploy the company’s assets in the current competitive and economic environment. James Woys, chief operating officer, will assume responsibility for all operational matters of the company, including the commercial, Medicare and Medicaid lines of business, as well as the Government and Specialty Division and all company administrative functions. Stephen Lynch, currently president of the company’s Health Plan Division, will retire on Feb. 28, 2009, and report to Woys during this transition.

Roger Greaves, chairman of Health Net, Inc.’s board of directors said, “Health Net’s board is very concerned about the company’s recent financial performance. We believe that by refocusing management resources, we can address our challenges with greater intensity.

“Today’s decision reflects the board’s confidence in Jim Woys as a strong and effective leader of Health Net’s operations. In light of the economic uncertainty surrounding our industry and the likelihood of public policy changes, we have directed Jay to focus all of his attention and considerable expertise on the company’s strategic direction.”

Health Net Reports Third Quarter 2008 Earnings of $0.17 Per Diluted Share

Operating Results Adversely Impacted by Higher Than Expected Health Care Costs

The Company Recorded Two Charges in the Quarter:
$17.1 Million Related to the Company’s Operations Strategy and
$14.6 Million Related to the Company’s Investment Holdings

Company Repurchased 3.7 Million Shares in the Third Quarter and is Suspending Share Repurchases until Further Notice

These results include the effects of two charges:

A $17.1 million pretax charge for severance and other expenses relating to the company’s operations strategy that is designed to reduce general and administrative (G&A) expenses; and
A $14.6 million pretax charge for impairment of the company’s investment holdings as a result of recent adverse developments in the financial markets.

Excluding these two charges, diluted earnings per share would have been $0.35 in the third quarter of 2008.1

The company reported a loss of $0.93 per share in the third quarter of 2007, which included the full effect of $296.8 million pretax in litigation and regulatory charges.2 Excluding the impact of these charges, diluted earnings per share were $0.99 in the third quarter of 2007.

“We are disappointed by our third quarter results,” said Jay Gellert, president and chief executive officer of Health Net. “Our business and the market as a whole have been hit harder by the economy and related unit cost and utilization trends than we have experienced in the past. We are now assuming that these trends will continue into 2009.”

The company announced that it is reducing full-year 2008 guidance on a GAAP basis to a range of $0.96 to $1.02 per diluted share. This reduction in guidance is based on third quarter results as well as fourth quarter earnings per share expectations of $0.41 to $0.47 per diluted share, which includes the impact of operations strategy-related expenses of $30 to $35 million pretax. Excluding these items, the company expects to earn between $0.60 to $0.64 per diluted share in the fourth quarter of 2008 and $1.85 to $1.89 per diluted share for the full-year 2008. Previous full-year 2008 guidance was $2.85 to $2.95 per diluted share, excluding the impact of any charges.

The revised full-year 2008 earnings per diluted share estimates are based on a projected weighted average share count for the full year of 2008 of approximately 108 million.

Revenues

Health Net’s total revenues increased 5.1 percent in the third quarter of 2008 to $3.8 billion from $3.6 billion in the third quarter of 2007. Health plan services premium revenues increased 4.9 percent to approximately $3.1 billion in the third quarter of 2008 compared to $2.9 billion in the third quarter of 2007. The company’s Government contracts revenues increased 9.7 percent in the third quarter of 2008 to $724.3 million from $660.4 million in the third quarter of 2007.

Membership

Total health plan enrollment as of September 30, 2008 was more than 3.7 million members, a 4,000 member decrease from September 30, 2007 and a 35,000 member decrease since June 30, 2008.

Commercial risk enrollment as of September 30, 2008 decreased to approximately 2.1 million, or by 145,000 members, compared to September 30, 2007. Sequentially, commercial risk enrollment decreased by 63,000 members, or 2.9 percent, since June 30, 2008.

“The decrease in our commercial membership is a result of the continued competitiveness in the commercial market combined with the current economic environment,” Capezza said.

Enrollment in the company’s Medicare Advantage plans grew by 54,000 members, or 22.6 percent, to 293,000 members at the end of the third quarter of 2008 compared to the end of the third quarter of 2007. Sequentially, Medicare Advantage membership grew by 8,000 members, or 2.8 percent, from June 30, 2008. Membership in the company’s Medicare PDP plans was 538,000 at the end of the third quarter of 2008, an increase of 173,000 members, or 47.4 percent, compared to the end of the third quarter of 2007. Sequentially, PDP membership grew by 12,000 members, or 2.3 percent, from June 30, 2008.

Balance Sheet

As of September 30, 2008, the company had cash, cash equivalents and investments available for sale of approximately $2.2 billion compared with $2.2 billion as of September 30, 2007. In the third quarter of 2008, the company recorded other-than-temporary impairment charges of $14.6 million, or $0.08 per share. This amount includes $8.3 million for investments in Lehman Brothers Holdings Inc. as well as $6.3 million in other financial sector securities including investments in Federal Home Loan Mortgage Association (Freddie Mac) and Federal National Mortgage Association (Fannie Mae).

In the third quarter of 2008, the company reclassified approximately $372 million in estimated net asset value, which had been invested in The Reserve money market funds, from cash equivalents to investments available for sale as of September 30, 2008. This was a result of The Reserve’s announcement in September 2008 of its intention to liquidate all of its money market funds and freeze all redemptions until an orderly liquidation process could be implemented. As of October 31, 2008, the company received approximately $130 million of this investment.

After the company recognized the impairment charge of $14.6 million, the gross unrealized loss was $47 million, or approximately 2.5 percent of the investment portfolio’s fair value as of September 30, 2008.

About Health Net

Health Net, Inc. is among the nation’s largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company’s health plans and government contracts subsidiaries provide health benefits to approximately 6.7 million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net’s behavioral health subsidiary, MHN, provides mental health benefits to approximately 7.0 million individuals in all 50 states. The company’s subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company’s Web site at www.healthnet.com.

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