Exhibit 99.1

 

		Health Net, Inc. 21650 Oxnard St. Woodland Hills, CA 91367 (818) 676-6000 www.healthnet.com

News Release

 

Investor Contact: Angie McCabe (818) 676-8692 angie.mccabe@healthnet.com		Media Contact: Brad Kieffer (818) 676-6833 brad.kieffer@healthnet.com

HEALTH NET REPORTS FOURTH QUARTER 2012 GAAP NET INCOME

OF $5.1 MILLION, OR $0.06 PER DILUTED SHARE

WESTERN REGION OPERATIONS AND GOVERNMENT CONTRACTS SEGMENTS PRODUCE

COMBINED NET EARNINGS OF $0.36 PER DILUTED SHARE IN FOURTH QUARTER 2012

LOS ANGELES, January 30, 2013 – Health Net, Inc. (NYSE: HNT) today announced 2012 fourth quarter GAAP net income of $5.1 million, or $0.06 per diluted share, compared with GAAP net income of $60.2 million, or $0.71 per diluted share, for the fourth quarter of 2011.

The 2011 and 2012 financial results included in this release and the attached financial tables reflect the treatment of the company’s Medicare stand-alone Part D (Medicare PDP) business that was sold on April 1, 2012 as discontinued operations.

The fourth quarter 2012 GAAP results include $20.3 million in Corporate/Other pretax expenses, primarily driven by:

 

1.

approximately $5.0 million related to the early termination of a medical management contract and approximately $5.2 million for severance expenses; and

 

2.

approximately $7.1 million in litigation-related expenses.

The company also incurred a $13.8 million pretax loss in the company’s Divested Operations and Services segment, resulting primarily from a lease impairment related to the company’s divested Northeast business.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $29.8 million, or $0.36 per diluted share, in the fourth quarter of 2012 compared with $60.6 million, or $0.72 per diluted share, in the fourth quarter of 2011.

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For the full year 2012, Health Net reported GAAP net income of approximately $121.2 million, or $1.46 per diluted share, compared with $72.1 million, or $0.80 per diluted share, for the full year 2011.

The company’s Western Region and Government Contracts segments produced combined net income of $85.1 million, or $1.02 per diluted share, for the full year 2012, and approximately $278.7 million, or $3.09 per diluted share, for the full year 2011.

“While the first half of 2012 presented us with challenges, our performance in the second half of 2012 demonstrated stability as we continued to prepare for 2013 and 2014,” said Jay Gellert, Health Net’s chief executive officer.

“We are reiterating our 2013 earnings per diluted share guidance of $2.00 to $2.10,” commented Gellert. “This guidance includes approximately $30 million of operating expenses in preparation for health care reform implementation but excludes any costs related to the company’s expected participation in the state of California’s duals demonstration.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 4.4 percent in the fourth quarter of 2012 to $2.8 billion from $2.7 billion in the fourth quarter of 2011.

Health plan services premium revenues increased by 5.3 percent in the fourth quarter of 2012 to $2.6 billion compared with approximately $2.5 billion in the fourth quarter of 2011.

Health plan services expenses increased by approximately 8.0 percent in the fourth quarter of 2012 to $2.3 billion compared with $2.1 billion in the fourth quarter of 2011.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at December 31, 2012 was approximately 2.6 million members, a decrease of approximately 1.1 percent from enrollment at December 31, 2011.

Total enrollment in the company’s California health plans decreased 1.3 percent from December 31, 2011 to December 31, 2012.

Western Region commercial enrollment at December 31, 2012 was 1.2 million members, a 9.7 percent decrease compared with enrollment at December 31, 2011.

“Membership in our commercial tailored network products continues to grow. We ended the year with approximately 432,000 members in our tailored network products, representing 35 percent of our Western Region commercial membership,” said Jim Woys, chief operating officer of Health Net. “We believe these cost-effective products will play a critical role as health care reform is implemented.”

Enrollment in the company’s Medicare Advantage plans in the Western Region at December 31, 2012 was 234,000 members, an increase of 14.1 percent compared with December 31, 2011.

Medicaid enrollment in California at December 31, 2012 was approximately 1.1 million members, an increase of 75,000 members, or 7.4 percent, from December 31, 2011. This increase was due to both enrollment gains in Medicaid membership and approximately 34,000 new members from the seniors and persons with disabilities (SPD) population.

 

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Revenues

Total revenues for the Western Region in the fourth quarter of 2012 were $2.6 billion compared with $2.5 billion in the fourth quarter of 2011.

Net investment income for the Western Region was approximately $19.1 million in the fourth quarter of 2012 compared with $10.0 million in the fourth quarter of 2011 and approximately $16.4 million in the third quarter of 2012.

Health Plan Services Expenses

Health plan services expenses in the Western Region were $2.3 billion in the fourth quarter of 2012 compared with approximately $2.2 billion in the fourth quarter of 2011.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 4.3 percent to approximately $376 in the fourth quarter of 2012 compared with $360 in the fourth quarter of 2011.

Commercial health care costs PMPM in the Western Region increased by 7.5 percent to approximately $328 in the fourth quarter of 2012 compared with approximately $306 in the fourth quarter of 2011.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 88.1 percent in the fourth quarter of 2012 compared with 86.3 percent in the fourth quarter of 2011. The full year 2012 Western Region health plan services MCR was 89.1 percent compared with 86.5 percent for the full year 2011.

The Western Region commercial MCR was 87.4 percent in the fourth quarter of 2012 compared with 84.8 percent in the fourth quarter of 2011 and 86.7 percent in the third quarter of 2012. The full year 2012 Western Region commercial MCR was 88.6 percent compared with 85.3 percent for the full year 2011.

“The commercial MCR increased 70 basis points sequentially in the fourth quarter of 2012, primarily due to two factors. First, utilization increased among members in large group accounts that terminated on December 31, 2012. This was expected as part of the repositioning of the commercial book,” said Woys. “Also, risk-sharing adjustments with certain providers impacted the commercial MCR. These risk-sharing factors are a result of better than expected performance in our tailored network products throughout 2012.”

The Medicare Advantage (MA) MCR in the Western Region was 88.6 percent in the fourth quarter of 2012 compared with 90.5 percent in the fourth quarter of 2011. The full year 2012 MA MCR in the Western Region was 89.6 percent compared with 90.3 percent for the full year 2011.

 

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G&A Expense

G&A expense in the Western Region was $235.2 million in the fourth quarter of 2012 compared with $222.1 million in the fourth quarter of 2011. The G&A expense ratio was 8.9 percent in the fourth quarter of 2012 compared with 8.9 percent in the fourth quarter of 2011 and 8.5 percent in the third quarter of 2012.

“The sequential increase in G&A expenses was primarily due to increased marketing costs, consistent with our expectations,” commented Woys.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues in the fourth quarter of 2012 were $159.6 million compared with $194.6 million in the fourth quarter of 2011.

Government Contracts expenses in the fourth quarter of 2012 were approximately $136.6 million compared with $155.6 million in the fourth quarter of 2011.

The decrease in revenues and expenses was primarily due to the new Military and Family Life Counseling contract that was effective in the fourth quarter of 2012.

BALANCE SHEET

Cash and investments as of December 31, 2012 were approximately $2.2 billion compared with approximately $1.8 billion as of December 31, 2011.

Reserves for claims and other settlements as of December 31, 2012 were $1.0 billion compared with $912.1 million as of December 31, 2011 and $1.0 billion as of September 30, 2012.

Days claims payable (DCP) for the fourth quarter of 2012 was 40.7 days compared with 39.0 days in the fourth quarter of 2011 and 41.6 days in the third quarter of 2012.

On an adjusted¹ basis, DCP in the fourth quarter of 2012 was 58.2 days compared with 54.1 days in the fourth quarter of 2011 and 57.7 days in the third quarter of 2012.

The company’s debt-to-total capital ratio was 24.3 percent as of December 31, 2012 compared with 26.2 percent as of December 31, 2011 and 24.4 percent as of September 30, 2012.

CASH FLOW FROM OPERATIONS

Operating cash flow was approximately $33.4 million in the fourth quarter of 2012. For the full year 2012, operating cash flow was $32.5 million.

“Operating cash flow in the quarter was greater than net income plus depreciation and amortization,” said Joseph Capezza, Health Net’s chief financial officer. “Full year 2012 operating cash flow would have been greater than net income plus depreciation and amortization if we excluded the impact of the sale of our Medicare PDP business. The cash benefit of the transaction is reflected in Cash Flows from Investing Activities on the Statement of Cash Flows.

 

 

1	See “Disclosures Regarding Non-GAAP Financial Information” attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.

 

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“We expect full year 2013 operating cash flow to be at least equal to our expectations for net income plus depreciation and amortization,” said Capezza. “Cash at the parent at December 31, 2012 was approximately $106 million.”

DIVESTED OPERATIONS AND SERVICES SEGMENT

The company’s Divested Operations and Services segment includes items related to the run-out of the Northeast business and transition-related revenues and expenses related to the Medicare PDP business that was sold on April 1, 2012. Health Net continues to provide run-out support services for the Northeast business pursuant to claims servicing agreements in place with UnitedHealthcare and its affiliates.

SHARE REPURCHASE UPDATE

For the full year 2012, Health Net repurchased approximately 2.1 million shares of its common stock for approximately $50.0 million at an average price of $24.05 per share. At December 31, 2012, approximately $350 million of authorization under the company’s existing $400 million share repurchase program remained.

2013 GUIDANCE

The following table has specific 2013 guidance metrics. This guidance includes the impact of approximately $30 million of operating expenses related to the implementation of health care reform, but excludes any impact from the company’s expected participation in the state of California’s duals demonstration.

 

Metric		2013 Guidance
Year-end membership(a)(c)		Commercial: -8% to -9%   Medicaid: +4% to +6%   Medicare Advantage: +1% to +2%   Total health plan membership: -1% to -2%
Consolidated revenues(b)		~$10.7 billion to $11.2 billion
Commercial premium yields PMPM(a)(c)		~ +3.6%
Commercial health care costs PMPM(a)(c)		~350 basis points < premium yields PMPM
Selling cost ratio(a)		~2.3% to 2.4%

 

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G&A expense ratio(a)		~9.0% to 9.4%
Tax rate(b)		38.0% to 39.0%
Weighted-average fully diluted shares outstanding		~80 million
Earnings per share		$2.00 to $2.10

 

(a)	For the company’s Western Region Operations segment

(b)	For the combined Western Region Operations and Government Contracts segments

(c)	These estimates are in comparison to reported 2012 amounts.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2012 earnings results during a conference call on Wednesday, January 30, 2013, beginning at approximately 11:00 a.m. Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:

 

(866) 393-1637 (Domestic toll-free)		(855) 859-2056 (Replay – Domestic toll-free)
(706) 643-5711 (International)		(404) 537-3406 (Replay – International)

The access code for the live conference call and replay is 89643769. A replay of the conference call will be available through February 4, 2013. A live webcast and replay of the conference call also will be available at www.healthnet.com under “Investor Relations.” The conference call webcast is open to all interested parties. Anyone listening to the company’s conference call will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2011, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012, and September 30, 2012, and other reports filed by the company from time to time with the Securities and Exchange Commission.

ABOUT HEALTH NET

Health Net, Inc. is a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Its mission is to help people be healthy, secure and comfortable. Health Net provides and administers health benefits to approximately 5.4 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, Department of Defense, including TRICARE, and Veterans Affairs programs. Through its subsidiaries, Health Net also offers behavioral health, substance abuse and employee assistance programs, managed health care products related to prescription drugs, managed health care product coordination for multi-region employers, and administrative services for medical groups and self-funded benefits programs.

 

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For more information on Health Net, Inc., please visit Health Net’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

Health Net, Inc. and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act (“PSLRA”) of 1995, including statements in this and other press releases, in presentations, filings with the Securities and Exchange Commission (“SEC”), reports to stockholders and in meetings with investors and analysts. All statements in this press release, other than statements of historical information provided herein, including the guidance for future periods and the assumptions underlying such projections, may be deemed to be forward-looking statements and as such are intended to be covered by the safe harbor for “forward-looking statements” provided by PSLRA. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to changes in circumstances and a number of risks and uncertainties. Without limiting the foregoing, the guidance as to expected future period results and statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend,” “feels,” “will,” “projects” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied or projected by the forward-looking information and statements due to, among other things, health care reform and other increased government participation in and regulation of health benefits and managed care operations, including the ultimate impact of the Affordable Care Act, which could materially adversely affect Health Net’s financial condition, results of operations and cash flows through, among other things, reduced revenues, new taxes, expanded liability, and increased costs (including medical, administrative, technology or other costs), or require changes to the ways in which Health Net does business; rising health care costs; continued slow economic growth or a further decline in the economy; negative prior period claims reserve developments; trends in medical care ratios; membership declines; unexpected utilization patterns or unexpectedly severe or widespread illnesses; rate cuts and other risks and uncertainties affecting Health Net’s Medicare or Medicaid businesses; Health Net’s ability to successfully participate in the dual-eligibles pilot programs; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care, the Centers for Medicare & Medicaid Services, the Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance; operational issues; failure to effectively oversee our third-party vendors; noncompliance by Health Net or Health Net’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; liabilities incurred in connection with Health Net’s divested operations; impairment of Health Net’s goodwill or other intangible assets; investment portfolio impairment charges; volatility in the financial markets; and general business and market conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section included within Health Net’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the SEC, and the other risks discussed in Health Net’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Health Net undertakes no obligation to address or publicly update any of its guidance, the assessment of the underlying assumptions or forward-looking statements to reflect events or circumstances that arise after the date of this release.

 

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The financial information presented in this press release is unaudited and is subject to change, including as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Nine pages of tables follow.

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Health Net, Inc.

Enrollment Data—By State

(In thousands)

 

														Change from
														September 30, 2012								December 31, 2011
		December 31, 2012				September 30, 2012				December 31, 2011				Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
California
Large Group			696				714				826				(18	)			(2.5	)%			(130	)			(15.7	)%
Small Group and Individual			313				307				308				6				2.0	%			5				1.6	%
Commercial Risk			1,009				1,021				1,134				(12	)			(1.2	)%			(125	)			(11.0	)%
Medicare Advantage			145				143				125				2				1.4	%			20				16.0	%
Medi-Cal			1,084				1,069				1,009				15				1.4	%			75				7.4	%
Total California			2,238				2,233				2,268				5				0.2	%			(30	)			(1.3	)%
Arizona
Large Group			82				84				77				(2	)			(2.4	)%			5				6.5	%
Small Group and Individual			59				59				63				0				0.0	%			(4	)			(6.3	)%
Commercial Risk			141				143				140				(2	)			(1.4	)%			1				0.7	%
Medicare Advantage			43				43				41				0				0.0	%			2				4.9	%
Total Arizona			184				186				181				(2	)			(1.1	)%			3				1.7	%
Oregon
Large Group			26				30				50				(4	)			(13.3	)%			(24	)			(48.0	)%
Small Group and Individual			57				58				42				(1	)			(1.7	)%			15				35.7	%
Commercial Risk			83				88				92				(5	)			(5.7	)%			(9	)			(9.8	)%
Medicare Advantage			46				45				39				1				2.2	%			7				17.9	%
Total Oregon			129				133				131				(4	)			(3.0	)%			(2	)			(1.5	)%
Total Health Plan Enrollment
Large Group			804				828				953				(24	)			(2.9	)%			(149	)			(15.6	)%
Small Group and Individual			429				424				413				5				1.2	%			16				3.9	%
Commercial Risk			1,233				1,252				1,366				(19	)			(1.5	)%			(133	)			(9.7	)%
Medicare Advantage			234				231				205				3				1.3	%			29				14.1	%
Medi-Cal/Medicaid			1,084				1,069				1,009				15				1.4	%			75				7.4	%
Western Region Operations			2,551				2,552				2,580				(1	)			0.0	%			(29	)			(1.1	)%
Medicare PDP (stand-alone)			0				0				382				0				0.0	%			(382	)			(100.0	)%
Total			2,551				2,552				2,962				(1	)			0.0	%			(411	)			(13.9	)%
TRICARE—North Contract Eligibles			2,883				2,884				3,004				(1	)			0.0	%			(121	)			(4.0	)%

 

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Health Net, Inc.

Enrollment Data—Line of Business

(In thousands)

 

														Change from
														September 30, 2012								December 31, 2011
		December 31, 2012				September 30, 2012				December 31, 2011				Increase/ (Decrease)				% Change				Increase/ (Decrease)				% Change
Large Group
California			696				714				826				(18	)			(2.5	)%			(130	)			(15.7	)%
Arizona			82				84				77				(2	)			(2.4	)%			5				6.5	%
Oregon			26				30				50				(4	)			(13.3	)%			(24	)			(48.0	)%
			804				828				953				(24	)			(2.9	)%			(149	)			(15.6	)%
Small Group and Individual
California			313				307				308				6				2.0	%			5				1.6	%
Arizona			59				59				63				0				0.0	%			(4	)			(6.3	)%
Oregon			57				58				42				(1	)			(1.7	)%			15				35.7	%
			429				424				413				5				1.2	%			16				3.9	%
Commercial Risk
California			1,009				1,021				1,134				(12	)			(1.2	)%			(125	)			(11.0	)%
Arizona			141				143				140				(2	)			(1.4	)%			1				0.7	%
Oregon			83				88				92				(5	)			(5.7	)%			(9	)			(9.8	)%
			1,233				1,252				1,366				(19	)			(1.5	)%			(133	)			(9.7	)%
Medicare Advantage
California			145				143				125				2				1.4	%			20				16.0	%
Arizona			43				43				41				0				0.0	%			2				4.9	%
Oregon			46				45				39				1				2.2	%			7				17.9	%
			234				231				205				3				1.3	%			29				14.1	%
Medi-Cal/Medicaid
California			1,084				1,069				1,009				15				1.4	%			75				7.4	%
Total Health Plan Enrollment
Large Group			804				828				953				(24	)			(2.9	)%			(149	)			(15.6	)%
Small Group and Individual			429				424				413				5				1.2	%			16				3.9	%
Commercial Risk			1,233				1,252				1,366				(19	)			(1.5	)%			(133	)			(9.7	)%
Medicare Advantage			234				231				205				3				1.3	%			29				14.1	%
Medi-Cal/Medicaid			1,084				1,069				1,009				15				1.4	%			75				7.4	%
Western Region Operations			2,551				2,552				2,580				(1	)			0.0	%			(29	)			(1.1	)%
Medicare PDP (stand-alone)			0				0				382				0				0.0	%			(382	)			(100.0	)%
Total			2,551				2,552				2,962				(1	)			0.0	%			(411	)			(13.9	)%
TRICARE—North Contract Eligibles			2,883				2,884				3,004				(1	)			0.0	%			(121	)			(4.0	)%

 

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Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

		Quarter Ended December 31, 2012				Quarter Ended September 30, 2012				Quarter Ended December 31, 2011				Year Ended December 31, 2012				Year Ended December 31, 2011
REVENUES:
Health plan services premiums		$	2,631,645			$	2,578,689			$	2,498,736				10,450,210			$	9,878,687
Government contracts			159,604				169,811				194,632				687,025				1,416,619
Net investment income			19,078				16,355				10,047				82,434				74,161
Administrative services fees and other income			1,668				1,854				4,549				17,968				11,523
Divested operations and services revenue			14,803				12,863				—				40,471				34,446
Total revenues			2,826,798				2,779,572				2,707,964				11,278,108				11,415,436
EXPENSES:
Health plan services			2,322,282				2,281,388				2,149,873				9,305,784				8,539,754
Government contracts			135,649				151,815				157,020				603,180				1,237,884
General and administrative			251,483				222,425				230,375				939,940				1,052,458
Selling			64,921				61,053				61,615				245,925				237,562
Depreciation and amortization			8,424				7,907				7,086				31,146				31,152
Interest			8,325				8,021				8,499				33,220				32,131
Divested operations and services expense			28,644				17,587				29,988				88,617				163,546
Adjustment to loss on sale of Northeast subsidiaries			—				—				7				—				(40,815	)
Total expenses			2,819,728				2,750,196				2,644,463				11,247,812				11,253,672
Income from continuing operations before income taxes			7,070				29,376				63,501				30,296				161,764
Income tax (benefit) provision			(228	)			8,898				20,440				5,484				100,708
Income from continuing operations			7,298				20,478				43,061				24,812				61,056
Discontinued operation:
Income (loss) from discontinued operation, net of tax			—				—				17,142				(18,452	)			11,064
(Loss) gain on sale of discontinued operation, net of tax			(2,156	)			(2,450	)			—				114,834				—
(Loss) gain on discontinued operation, net of tax			(2,156	)			(2,450	)			17,142				96,382				11,064
Net income		$	5,142			$	18,028			$	60,203			$	121,194			$	72,120
Net income per share-basic:
Income from continuing operations		$	0.09			$	0.25			$	0.52			$	0.30			$	0.69
(Loss) gain on discontinued operation, net of tax			(0.03	)			(0.03	)			0.21				1.18				0.12
Net income per share-basic		$	0.06			$	0.22			$	0.73			$	1.48			$	0.81
Net income per share-diluted:
Income from continuing operations		$	0.09			$	0.25			$	0.51			$	0.30			$	0.68
(Loss) gain on discontinued operation, net of tax			(0.03	)			(0.03	)			0.20				1.16				0.12
Net income per share-diluted		$	0.06			$	0.22			$	0.71			$	1.46			$	0.80
Weighted average shares outstanding:
Basic			81,282				81,607				82,721				82,158				88,524
Diluted			82,111				82,039				84,247				83,112				89,970

 

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Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 

		December 31, 2012				September 30, 2012				December 31, 2011
ASSETS
Current Assets
Cash and cash equivalents		$	340,110			$	312,579			$	230,253
Investments—available for sale			1,812,512				1,671,678				1,557,997
Premiums receivable, net			364,386				310,804				251,911
Amounts receivable under government contracts			224,895				206,560				234,740
Other receivables			113,875				244,924				225,004
Deferred taxes			48,380				40,647				46,659
Other assets			128,195				151,042				117,876
Total current assets			3,032,353				2,938,234				2,664,440
Property and equipment, net			183,793				174,932				145,302
Goodwill			565,886				565,886				605,886
Other intangible assets, net			17,271				18,128				20,699
Deferred taxes			16,435				5,737				49,685
Investments—available for sale—noncurrent			—				—				2,147
Other noncurrent assets			101,743				107,386				119,510
Total Assets		$	3,917,481			$	3,810,303			$	3,607,669
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements		$	1,027,444			$	1,032,248			$	912,126
Health care and other costs payable under government contracts			75,649				58,410				88,440
Unearned premiums			151,052				128,194				176,733
Accounts payable and other liabilities			373,428				325,636				240,281
Total current liabilities			1,627,573				1,544,488				1,417,580
Senior notes payable			399,095				399,044				398,890
Borrowings under revolving credit facility			100,000				100,000				112,500
Other noncurrent liabilities			236,949				220,489				235,553
Total Liabilities			2,363,617				2,264,021				2,164,523
Stockholders’ Equity
Common stock			149				149				147
Additional paid-in capital			1,329,000				1,323,150				1,278,037
Treasury common stock, at cost			(2,092,625	)			(2,092,459	)			(2,023,129	)
Retained earnings			2,292,653				2,287,511				2,171,459
Accumulated other comprehensive income			24,687				27,931				16,632
Total Stockholders’ Equity			1,553,864				1,546,282				1,443,146
Total Liabilities and Stockholders’ Equity		$	3,917,481			$	3,810,303			$	3,607,669
Debt-to-Total Capital Ratio			24.3	%			24.4	%			26.2	%

 

12

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Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

		Quarter Ended				Quarter Ended				Quarter Ended				Year Ended				Year Ended
		December 31,				September 30,				December 31,				December 31,				December 31,
		2012				2012				2011				2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,142			$	18,028			$	60,203			$	121,194			$	72,120
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization and depreciation			8,424				7,907				7,086				31,146				31,152
Share-based compensation expense			5,480				5,346				6,257				28,893				27,602
Deferred income taxes			(18,402	)			15,430				22,171				6,481				7,771
Excess tax benefits from share-based compensation			(30	)			—				(70	)			(6,089	)			(1,349	)
Gain on sale of discontinued operation			2,156				2,450				—				(114,834	)			—
Adjustment to loss on sale of business			—				—				7				—				(40,815	)
Net realized gain on sale on investments			(7,019	)			(4,272	)			(709	)			(36,680	)			(33,029	)
Other changes			8,326				(215	)			10,863				15,158				22,542
Changes in assets and liabilities:
Premiums receivable and unearned premiums			(30,724	)			(200,559	)			(240,347	)			(204,111	)			65,221
Other current assets, receivables and noncurrent assets			52,622				(25,847	)			16,437				(25,581	)			(54,031	)
Amounts receivable/payable under government contracts			(8,786	)			23,972				6,301				(5,568	)			32,754
Reserves for claims and other settlements			(4,804	)			21,755				39,089				153,777				(29,898	)
Accounts payable and other liabilities			20,989				11,238				(47,105	)			68,754				3,340
Net cash provided by (used in) operating activities			33,374				(124,767	)			(119,817	)			32,540				103,380
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments			217,167				117,584				128,299				1,350,003				1,760,336
Maturities of investments			37,579				28,715				40,941				135,394				189,137
Purchases of investments			(395,355	)			(272,614	)			(71,782	)			(1,678,582	)			(1,814,431	)
Proceeds from sale of property and equipment			24				—				—				24				—
Purchases of property and equipment			(18,071	)			(17,370	)			(32,124	)			(73,101	)			(64,260	)
Net cash received for sale of businesses			—				—				—				248,238				—
Purchase price adjustment on sale of Northeast health plans			—				—				80,000				—				162,101
Sales and purchases of restricted investments and other			(558	)			(871	)			(1,009	)			5,466				(10,656	)
Net cash (used in) provided by investing activities			(159,214	)			(144,556	)			144,325				(12,558	)			222,227
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases			352				—				1,047				16,941				13,356
Repurchases of common stock			(166	)			(40,536	)			(76,410	)			(69,496	)			(389,850	)
Excess tax benefits from share-based compensation			30				—				70				6,089				1,349
Borrowings under financing arrangements			—				10,000				281,000				110,000				978,500
Repayment of borrowings under financing arrangements			—				—				(319,712	)			(122,500	)			(872,212	)
Net (decrease) increase in checks outstanding, net of deposits			23,808				34				(5,901	)			23,842				(46,718	)
Customer funds administered			129,347				(20,740	)			(50,685	)			124,999				(129,917	)
Net cash provided by (used in) financing activities			153,371				(51,242	)			(170,591	)			89,875				(445,492	)
Net increase (decrease) in cash and cash equivalents			27,531				(320,565	)			(146,083	)			109,857				(119,885	)
Cash and cash equivalents, beginning of period			312,579				633,144				376,336				230,253				350,138
Cash and cash equivalents, end of period		$	340,110			$	312,579			$	230,253			$	340,110			$	230,253

 

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Health Net, Inc.

SEGMENT INFORMATION (page 1)

($ in thousands, except per share and PMPM data)

The following table presents Health Net’s operating segment information.

 

		Quarter Ended December 31, 2012																				Quarter Ended September 30, 2012																				Quarter Ended December 31, 2011
		Western Region Opera- tions1				Gover- nment Cont- racts2				Divested Opera- tions and Services3				Corpo- rate/ Other  5, 7				Consoli- dated				Western Region Opera- tions1				Govern- ment Cont- racts2				Divested Opera- tions and Services3				Corpo- rate/ Other 5				Consoli- dated				Western Region Opera- tions1				Gover- nment Cont- racts6				Divested Opera- tions and Services3				Corpo- rate/ Other4,  5				Consoli- dated
Health plan services premiums		$	2,631,645															$	2,631,645			$	2,578,689															$	2,578,689			$	2,498,736															$	2,498,736
Government contracts						$	159,604												159,604							$	169,811												169,811								194,632												194,632
Net investment income			19,078																19,078				16,355																16,355				10,047																10,047
Administrative services fees and other income			1,668																1,668				1,843								11								1,854				4,549																4,549
Divested operations and services revenue										$	14,803								14,803											$	12,863								12,863												0								—
Total revenues			2,652,391				159,604				14,803				—				2,826,798				2,596,887				169,811				12,874				—				2,779,572				2,513,332				194,632				—				—				2,707,964
Health plan services			2,317,262												5,020				2,322,282				2,281,354								34								2,281,388				2,156,223								(25	)			(6,325	)			2,149,873
Government contracts							136,584								(935	)			135,649								148,705								3,110				151,815								155,580								1,440				157,020
G&A excluding insurance, taxes and fees			220,116								(304	)			16,236				236,048				201,845								(332	)			4,115				205,628				201,918								(450	)			8,231				209,699
Insurance, taxes and fees			15,133								302								15,435				16,555								242								16,797				20,219								457				—				20,676
G&A including insurance, taxes and fees			235,249								(2	)			16,236				251,483				218,400								(90	)			4,115				222,425				222,137								7				8,231				230,375
Selling			64,921																64,921				61,053																61,053				61,609								6								61,615
Depreciation and amortization			8,424																8,424				7,907																7,907				7,086																7,086
Interest			8,325																8,325				8,021																8,021				8,499																8,499
Divested operations and services expense											28,644								28,644												17,587								17,587												29,988								29,988
Adjustment to loss on sale of Northeast health plans																			—																				—												7								7
Total expenses			2,634,181				136,584				28,642				20,321				2,819,728				2,576,735				148,705				17,531				7,225				2,750,196				2,455,554				155,580				29,983				3,346				2,644,463
Income (loss) from operations before income taxes			18,210				23,020				(13,839	)			(20,321	)			7,070				20,152				21,106				(4,657	)			(7,225	)			29,376				57,778				39,052				(29,983	)			(3,346	)			63,501
Income tax (benefit) provision			2,142				9,246				(5,615	)			(6,001	)			(228	)			1,640				8,372				(1,946	)			832				8,898				20,417				15,853				(13,125	)			(2,705	)			20,440
Income (loss) from continuing operations		$	16,068			$	13,774			$	(8,224	)		$	(14,320	)		$	7,298			$	18,512			$	12,734			$	(2,711	)		$	(8,057	)		$	20,478			$	37,361			$	23,199			$	(16,858	)		$	(641	)		$	43,061
Basic earnings (loss) per share from continuing operations		$	0.20			$	0.17			$	(0.10	)		$	(0.18	)		$	0.09			$	0.23			$	0.16			$	(0.03	)		$	(0.10	)		$	0.25			$	0.45			$	0.28			$	(0.20	)		$	(0.01	)		$	0.52
Diluted earnings (loss) per share from continuing operations		$	0.19			$	0.17			$	(0.10	)		$	(0.18	)		$	0.09			$	0.23			$	0.15			$	(0.03	)		$	(0.10	)		$	0.25			$	0.44			$	0.28			$	(0.20	)		$	(0.01	)		$	0.51
Basic weighted average shares outstanding			81,282				81,282				81,282				81,282				81,282				81,607				81,607				81,607				81,607				81,607				82,721				82,721				82,721				82,721				82,721
Diluted weighted average shares outstanding			82,111				82,111				81,282				81,282				82,111				82,039				82,039				81,607				81,607				82,039				84,247				84,247				82,721				82,721				84,247
Pretax margin			0.69	%																			0.78	%																			2.3	%
Commercial premium yield			4.3	%																			4.7	%																			4.7	%
Commercial premium PMPM		$	375.65																			$	376.89																			$	360.12
Commercial health care cost trend			7.5	%																			7.1	%																			3.9	%
Commercial health care cost PMPM		$	328.44																			$	326.60																			$	305.52
Commercial MCR			87.4	%																			86.7	%																			84.8	%
Medicare Advantage MCR			88.6	%																			90.1	%																			90.5	%
Medicaid MCR			88.9	%																			91.6	%																			85.5	%
Health plan services MCR			88.1	%																			88.5	%																			86.3	%
G&A expense ratio			8.9	%																			8.5	%																			8.9	%
Selling costs ratio			2.5	%																			2.4	%																			2.5	%

 

1

Includes the operations of the company’s commercial, Medicare and Medicaid health plans in California, Arizona, Oregon and Washington, as well as the operations of the company’s health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the company’s behavioral health and pharmaceutical services subsidiaries in several states including California, Arizona and Oregon.

 

2	Includes administrative services provided under the T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts.

 

3

Includes items related to the run-out of the Northeast business sold in 2009 and/or transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012, including lease impairment in the fourth quarter 2012 related to the company’s divested Northeast business.

 

4	Includes legal expenses and litigation reserve true-ups related to previous accruals for lawsuits.

 

5	Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.

 

6

Includes administrative services provided under the T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.

 

7	Includes expenses related to the termination of a medical management contract, litigation-related expenses and severance.

 

14

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Health Net, Inc.

SEGMENT INFORMATION (page 2)

($ in thousands, except per share and PMPM data)

The following table presents Health Net’s operating segment information.

 

		Year Ended December 31, 2012																				Year Ended December 31, 2011
		Western  Region Operations1				Government Contracts2				Divested Operations and Services3				Corporate/ Other 4, 5, 6				Consolidated				Western  Region Operations1				Government Contracts2				Divested Operations and Services3				Corporate/ Other4, 5				Consolidated
Health plan services premiums		$	10,450,210							$	—							$	10,450,210			$	9,876,343							$	2,344							$	9,878,687
Government contracts							687,025												687,025								1,416,619												1,416,619
Net investment income			82,434																82,434				74,092								69								74,161
Administrative services fees and other income			17,957								11								17,968				11,523																11,523
Divested operations and services revenue											40,471								40,471												34,446								34,446
Total revenues			10,550,601				687,025				40,482				—				11,278,108				9,961,958				1,416,619				36,859				—				11,415,436
Health plan services			9,306,393								174				(783	)			9,305,784				8,545,623								930				(6,799	)			8,539,754
Government contracts							597,317								5,863				603,180								1,231,388								6,496				1,237,884
G&A excluding insurance, taxes and fees			828,648								(1,445	)			36,892				864,095				768,314								559				199,732				968,605
Insurance, taxes and fees			74,494								1,351								75,845				82,698								1,155								83,853
G&A including insurance, taxes and fees			903,142								(94	)			36,892				939,940				851,012								1,714				199,732				1,052,458
Selling			245,925																245,925				237,360								202								237,562
Depreciation and amortization			31,145								1								31,146				31,140								12								31,152
Interest			33,220																33,220				31,946								185								32,131
Divested operations and services expense											88,617								88,617												163,546								163,546
Adjustment to loss on sale of Northeast health plans																			—												(40,815	)							(40,815	)
Total expenses			10,519,825				597,317				88,698				41,972				11,247,812				9,697,081				1,231,388				125,774				199,429				11,253,672
Income (loss) from operations before income taxes			30,776				89,708				(48,216	)			(41,972	)			30,296				264,877				185,231				(88,915	)			(199,429	)			161,764
Income tax provision (benefit)			(355	)			35,699				(18,944	)			(10,916	)			5,484				96,324				75,092				(40,769	)			(29,939	)			100,708
Income (loss) from continuing operations		$	31,131			$	54,009			$	(29,272	)		$	(31,056	)		$	24,812			$	168,553			$	110,139			$	(48,146	)		$	(169,490	)		$	61,056
Basic earnings (loss) per share from continuing operations		$	0.38			$	0.66			$	(0.36	)		$	(0.38	)		$	0.30			$	1.90			$	1.24			$	(0.54	)		$	(1.91	)		$	0.69
Diluted earnings (loss) per share from continuing operations		$	0.37			$	0.65			$	(0.36	)		$	(0.38	)		$	0.30			$	1.87			$	1.22			$	(0.54	)		$	(1.91	)		$	0.68
Basic weighted average shares outstanding			82,158				82,158				82,158				82,158				82,158				88,524				88,524				88,524				88,524				88,524
Diluted weighted average shares outstanding			83,112				83,112				82,158				82,158				83,112				89,970				89,970				88,524				88,524				89,970
Pretax margin			0.3	%																			2.7	%
Commercial premium yield			4.7	%																			5.1	%
Commercial premium PMPM		$	374.99																			$	358.04
Commercial health care cost trend			8.8	%																			4.0	%
Commercial health care cost PMPM		$	332.09																			$	305.27
Commercial MCR			88.6	%																			85.3	%
Medicare Advantage MCR			89.6	%																			90.3	%
Medicaid MCR			89.7	%																			85.5	%
Health plan services MCR			89.1	%																			86.5	%
G&A expense ratio			8.6	%																			8.6	%
Selling costs ratio			2.4	%																			2.4	%

 

1

Includes the operations of the company’s commercial, Medicare and Medicaid health plans in California, Arizona, Oregon and Washington, as well as the operations of the company’s health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the company’s behavioral health and pharmaceutical services subsidiaries in several states including California, Arizona and Oregon.

 

2

Includes administrative services provided under the T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.

 

3

Includes items related to the run-out of the Northeast business sold in 2009 and/or transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012, including lease impairment in the fourth quarter 2012 related to the company’s divested Northeast business.

 

4	Includes legal expenses and litigation reserve true-ups related to previous accruals for lawsuits.

 

5	Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.

 

6	Includes expenses related to the termination of a medical management contract, litigation-related expenses and severance.

 

15

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Health Net, Inc.

Disclosures Regarding Non-GAAP Financial Information

($ in millions)

Set forth below is a reconciliation of adjusted days claims payable (DCP), a non-GAAP financial measure, to the comparable GAAP financial measure, DCP. DCP is calculated by dividing the amount of reserve for claims and other settlements (claims reserve) by health plan services cost (health plan costs) during the quarter and multiplying that amount by the number of days in the quarter. In this press release, management presents an adjusted DCP metric which subtracts capitation, provider and other claims settlements and Medicare Advantage-Prescription Drug (MAPD) payables/costs from the claims reserve and health plan costs. For the fourth quarter and full year 2011, adjusted DCP also subtracts reserve for claims and other settlements related to discontinued operations from the claims reserve.

Management believes that adjusted DCP provides useful information to investors because the adjusted DCP calculation excludes from both claims reserve and health plan costs amounts related to health care costs for which no or minimal reserves are maintained. In addition, solely with respect to the fourth quarter and full year 2011, adjusted DCP excludes from claims reserve the reserves relating to discontinued operations. Therefore, management believes that adjusted DCP may present a more accurate reflection of DCP than does GAAP DCP, which includes such amounts. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP.

You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future.

Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

 

Reconciliation of Days Claims Payable:				Q4 2012				Q3 2012				Q4 2011				FY 2012				FY 2011
(1)		Reserve for Claims and Other Settlements—GAAP		$	1,027.4			$	1,032.2			$	912.1			$	1,027.4			$	912.1
		Less: Reserve for Claims and Other Settlements related to discontinued operations			—				—				(31.7	)			—				(31.7	)
		Reserve for Claims and Other Settlements excluding discontinued operations		$	1,027.4			$	1,032.2			$	880.4			$	1,027.4			$	880.4
		Less: Capitation, Provider and Other Claim Settlements, and MAPD Payables			(100.4	)			(126.3	)			(59.0	)			(100.4	)			(59.0	)
(2)		Reserve for Claims and Other Settlements—Adjusted		$	927.0			$	905.9			$	821.4			$	927.0			$	821.4
(3)		Health Plan Services Cost—GAAP		$	2,322.3			$	2,281.4			$	2,149.9			$	9,305.8			$	8,539.8
		Less: Capitation, Provider and Other Claim Settlements, and MAPD Costs			(856.3	)			(835.9	)			(753.9	)			(3,381.6	)			(3,041.7	)
(4)		Health Plan Services Cost—Adjusted		$	1,466.0			$	1,445.5			$	1,396.0			$	5,924.2			$	5,498.1
(5)		Number of Days in Period			92				92				92				366				365
= (1) / (3) * (5) Days Claims Payable on GAAP Basis—(using end of period reserve amount)					40.7				41.6				39.0				40.4				39.0
= (2) / (4) * (5) Days Claims Payable—Adjusted Basis (using end of period reserve amount)					58.2				57.7				54.1				57.3				54.5

 

16

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Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

($ in millions)

 

		Health Plan Services
		FY 2012				FY 2011				FY 2010
Reserve for claims (a), beginning of period		$	720.8			$	727.5			$	692.2
Incurred claims related to:
Current Year			4,947.5				4,733.0				4,644.2
Prior Years (c)			32.0				(96.5	)			(70.0	)
Total Incurred (b)			4,979.5				4,636.5				4,574.2
Paid claims related to:
Current Year			4,156.6				4,024.4				3,929.3
Prior Years			740.9				618.8				609.6
Total Paid (b)			4,897.5				4,643.2				4,538.9
Reserve for claims (a), end of period			802.8				720.8				727.5
Add:
Claims Payable (d)			91.6				111.0				123.6
Other (e)			133.0				80.3				90.9
Reserves for claims and other settlements, end of period		$	1,027.4			$	912.1			$	942.0

 

(a)	Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses.

(b)	Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included.

(c)

This line represents the change in reserves attributable to the difference between the original estimate of incurred claims for prior years and the revised estimate. In developing the revised estimate, there have been no changes in the approach used to determine the key actuarial assumptions, which are the completion factor and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally accepted accounting principles. The majority of the reserve balance held at each period-end is associated with the most recent months’ incurred services because these are the services for which the fewest claims have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months’ incurred services. Revised estimates for prior years are determined in each quarter based on the most recent updates of paid claims for prior years.

(d)	Includes amount accrued for litigation and regulatory-related expenses.

(e)	Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

 

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