Exhibit 99.1
| | |
 | | Health Net, Inc. 21650 Oxnard Street Woodland Hills, CA 91367 818.676.6000 800.291.6911 www.healthnet.com |
| | |
| Investor Contact | | Media Contact |
| Angie McCabe | | Margita Thompson |
| 818.676.8692 | | 818.676.7912 |
| angie.mccabe@healthnet.com | | margita.thompson@healthnet.com |
HEALTH NET REPORTS ADJUSTED FOURTH QUARTER 2008
NET INCOME OF $63.1 MILLION, OR $0.61 PER DILUTED SHARE1
FULL YEAR 2008 ADJUSTED NET INCOMEWAS $199.1 MILLION,
OR $1.85PER DILUTED SHARE1
LOS ANGELES, February 3, 2009 – Health Net, Inc. (NYSE:HNT) today announced 2008 fourth quarter net income of $35.5 million, or $0.34 per diluted share, compared with fourth quarter 2007 net income of $116.9 million, or $1.04 per diluted share. The fourth quarter 2008 results include the effect of a $47.8 million pretax charge for severance and other expenses primarily relating to the company’s operations strategy that is designed to reduce general and administrative (G&A) expenses.
Adjusted1 net income in the fourth quarter of 2008 was $63.1 million, or $0.61 per diluted share. Adjusted1 net income in the fourth quarter of 2007 was $123.4 million, or $1.10 per diluted share.
For the full year 2008, Health Net reported net income of $95.0 million, or $0.88 per diluted share. Adjusted1 net income for the full year of 2008 was $199.1 million, or $1.85 per diluted share.
Health Net’s full year 2007 net income was $193.7 million, or $1.70 per diluted share. Adjusted1 net income for the full year 2007 was $416.1 million, or $3.66 per diluted share.
“Last November, we outlined a plan to improve operational performance and increase shareholder value. The fourth quarter results were consistent with that plan and set a solid foundation for 2009,” said Jay Gellert, president and chief executive officer of Health Net. “We are encouraged by the initial progress in Medicare and our California commercial business.
1 | Detailed explanations of the non-GAAP financial measures referred to in this release and reconciliations to the comparable GAAP measures are included in the attached financial tables. |
“In addition, we are actively engaged in the process we began late last year related to our businesses in Arizona and the Northeast,” Gellert added.
Membership
Total health plan enrollment as of December 31, 2008 was 3.7 million members, a decrease of 34,000 members, or approximately 1.0 percent, compared to December 31, 2007. Sequentially, total health plan enrollment decreased by 22,000 members, or nearly 1.0 percent.
Commercial risk enrollment declined by 201,000 members, or 9.0 percent, to more than 2.0 million members as of December 31, 2008 compared to December 31, 2007 and decreased by 54,000 members, or 2.6 percent, compared to September 30, 2008.
Enrollment in the company’s Medicare Advantage plans grew by 59,000 members, or 25.0 percent, to 295,000 members as of December 31, 2008 compared to December 31, 2007. During the fourth quarter of 2008, Medicare Advantage membership increased by 2,000 members, or approximately 1.0 percent compared with the third quarter of 2008. Membership in the company’s Medicare Part D plans as of December 31, 2008 was 545,000, an increase of 166,000 members, or 43.8 percent, from December 31, 2007. Sequentially, Medicare Part D membership increased by 7,000 members, or 1.3 percent.
Medicaid enrollment at December 31, 2008 was 812,000 members, a decrease of 34,000 members, or approximately 4.0 percent, since December 31, 2007. This year-over-year decrease primarily was the result of the company’s exit from the Connecticut Medicaid business in April 2008. Sequentially, Medicaid enrollment increased by 24,000 members, or 3.0 percent, with 23,000 new members in state programs in California.
Revenues, Health Care Costs and G&A Expenses
Health Net’s total revenues increased 8.0 percent in the fourth quarter of 2008 to $3.9 billion from $3.6 billion in the fourth quarter of 2007. Health plan services premium revenues increased 5.7 percent to $3.1 billion in the fourth quarter of 2008 compared to $2.9 billion in the fourth quarter of 2007.
Health Net’s Government contracts revenues increased 21.3 percent in the fourth quarter of 2008 to $751.6 million from $619.4 million in the fourth quarter of 2007. The increase was a result of higher Option Period 5 pricing for the company’s TRICARE contract, recognition of increased Option Period 5 health care costs, and growth in the Military Family Life Counseling contract with the Department of Defense that is administered by Health Net’s behavioral health subsidiary.
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The adjusted1 health plan medical care ratio (MCR) in the fourth quarter of 2008 was 85.5 percent compared to 82.6 percent in the fourth quarter of 2007.
The adjusted1commercial MCR in the fourth quarter of 2008 was 84.4 percent compared to 81.8 percent in the fourth quarter of 2007 and improved by 230 basis points sequentially from the 2008 third quarter MCR of 86.7 percent.
Commercial premium yields per member per month (PMPM) increased by 7.9 percent compared to the fourth quarter of 2007.
Adjusted1 total commercial health care costs PMPM increased by 11.3 percent in the fourth quarter of 2008 compared to the fourth quarter of 2007.
Compared to the full year 2007, commercial premium yields PMPM increased by 8.6 percent in 2008 while adjusted1 commercial health care costs PMPM increased by 11.7 percent.
“The MCR, premium yields and commercial health care cost trends are consistent with the plan we outlined in November,” said Jim Woys, Health Net’s chief operating officer.
“For 2009, we expect commercial premium yields PMPM to be approximately 9.0 percent based on the business that has renewed to-date. In addition, we continue to believe we will achieve a positive spread of approximately 50 basis points in commercial premium yields versus health care costs in 2009,” added Woys.
The Government contracts cost ratio was 95.6 percent in the fourth quarter of 2008 compared to 89.9 percent in the fourth quarter of 2007 and 95.0 percent in the third quarter of 2008. “The higher costs reflect some increased usage of the TRICARE benefit by the eligible population. The ability to reset cost targets with each new Option Period allowed us to incorporate these costs into our 2009 expectations,” said Woys.
Total adjusted1 G&A expense was $293.6 million in the fourth quarter of 2008 compared with $307.1 million in the fourth quarter of 2007. “Health Net’s adjusted1 G&A ratio improved 100 basis points quarter-over-quarter and 80 basis points year-over-year as we continue to focus on reducing costs through our operations strategy,” said Joseph Capezza, Health Net’s chief financial officer.
Health Net’s selling expenses of $92.3 million in the fourth quarter of 2008 increased by approximately $2.0 million compared to the fourth quarter of 2007.
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Balance Sheet
Cash and investments as of December 31, 2008 were $2.2 billion compared with $2.2 billion as of September 30, 2008 and $2.6 billion as of December 31, 2007.
Reserves for claims and other settlements increased by $37.7 million to $1.3 billion at December 31, 2008 from December 31, 2007.
Days claims payable (DCP), including provider and other claim settlements, capitation payments and Medicare Part D expenses, decreased by 2.9 days to 47.0 days in the fourth quarter of 2008 compared to 49.9 days in the fourth quarter of 2007 and increased by 0.7 days compared to the third quarter of 2008.
Excluding provider and other claim settlements, capitation payments and Medicare Part D, DCP in the fourth quarter of 2008 decreased by 0.1 days to 54.8 days compared to the 2007 fourth quarter and increased by 2.1 days sequentially.2
The company’s debt-to-total capital ratio was 27.9 percent as of December 31, 2008 compared to 22.5 percent as of December 31, 2007 and 27.6 percent on September 30, 2008.
Interest expense increased by $2.8 million in the fourth quarter of 2008 compared to the fourth quarter of 2007 due to higher debt levels.
Cash Flow
Operating cash flow was negative $53.6 million in the fourth quarter of 2008. This decrease was primarily driven by an increase of approximately $150 million in a receivable for Medicare Part D catastrophic reinsurance.
“Because the Medicare Part D receivable will be paid in 2009, the company currently expects operating cash flow to be approximately 1.5 times net income in 2009,” said Capezza.
Outlook
Including the impact of $60 million to $70 million in expected pretax operations strategy-related charges in 2009, Health Net expects full-year 2009 GAAP earnings per diluted share of $1.85 to $2.10 based on expected diluted weighted average shares outstanding of 104 million to 105 million shares. Excluding the charges, the company expects full-year 2009 earnings per diluted share of $2.25 to $2.40. The following table updates previously issued full-year 2009 guidance on a number of operating metrics.
2 | See footnote (a) in the Notes to Consolidated Financial Statements in the financial schedules attached to this release for a reconciliation of this information to the comparable GAAP financial measure. |
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Full-Year 2009 Guidance Table
| | |
| | | 2009 Guidance |
| | |
Year-end Membership | | Commercial Risk: -3% to -5% Medicaid: +2% to +3% Medicare Advantage: -1% to -2% PDP: -15% to -20% |
| | |
Consolidated Revenues | | $15.5 billion to $16.0 billion |
| | |
Commercial Yields | | ~ 9.0% |
| | |
Commercial Health Care Cost Trends | | ~ 8.5% |
| | |
Selling Cost Ratio Government Contracts Ratio G&A Expense Ratio* | | ~ 2.9% ~ 95.0% to 95.5% ~ 9.6% to 9.8% |
| | |
Tax Rate | | 38.5% to 38.7% |
| | |
Weighted-average Fully Diluted Shares Outstanding | | 104 million to 105 million |
| | |
GAAP EPS Non-GAAP EPS* | | $1.85 to $2.10 $2.25 to $2.40 |
| * | Excludes the impact of expected operations strategy-related pretax charges of $60 million to $70 million in 2009. |
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Conference Call
As previously announced, Health Net will discuss the company’s fourth quarter and full year 2008 results during a conference call on Tuesday, February 3, 2009, 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:
| | |
| 877.857.6161 (Domestic) | | 888.203.1112 (Replay – Domestic) |
| |
| 719.325.4820 (International) | | 719.457.0820 (Replay – International) |
The access code for both the live conference call and the replay is 3548771. A replay of the conference call will be available through 2:00 p.m. Eastern time on February 8, 2009. A live webcast and replay of the conference call also will be available atwww.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, 2007, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008, June 30, 2008, and September 30, 2008, and other reports filed by the company from time to time with the Securities and Exchange Commission.
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 6.9 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 atwww.healthnet.com.
Cautionary Statements
All statements in this press release, other than statements of historical information provided herein, may be deemed to be forward-looking statements and as such are subject to a number of risks and uncertainties. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, rising health care costs, negative prior period claims reserve developments, additional investment portfolio impairment charges, changes in the economy, volatility in the financial markets, trends in medical care ratios,
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unexpected utilization patterns or unexpectedly severe or widespread illnesses, membership declines, rate cuts affecting our Medicare or Medicaid business, issues relating to provider contracts, litigation costs, regulatory issues, operational issues, health care reform 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 the company’s most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise any of its forward-looking statements to reflect events or circumstances that arise after the date of this release.
# # #
[Nine pages of tables follow]
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Health Net, Inc.
Enrollment Data—By State
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Change from | |
| | | | | | | | | September 30, 2008 | | | December 31, 2007 | |
| | | Dec 31,
2008 | | Sept 30,
2008 | | Dec 31,
2007 | | Increase/
(Decrease) | | | %
Change | | | Increase/
(Decrease) | | | %
Change | |
California | | | | | | | | | | | | | | | | | | |
Large Group | | 938 | | 954 | | 991 | | (16 | ) | | (1.7 | )% | | (53 | ) | | (5.3 | )% |
Small Group and Individual | | 414 | | 431 | | 477 | | (17 | ) | | (3.9 | )% | | (63 | ) | | (13.2 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 1,352 | | 1,385 | | 1,468 | | (33 | ) | | (2.4 | )% | | (116 | ) | | (7.9 | )% |
ASO | | 5 | | 5 | | 6 | | 0 | | | 0.0 | % | | (1 | ) | | (16.7 | )% |
| | | | | | | | | | | | | | | | | | |
Total Commercial | | 1,357 | | 1,390 | | 1,474 | | (33 | ) | | (2.4 | )% | | (117 | ) | | (7.9 | )% |
Medicare Advantage | | 133 | | 131 | | 112 | | 2 | | | 1.5 | % | | 21 | | | 18.8 | % |
Medi-Cal | | 765 | | 742 | | 712 | | 23 | | | 3.1 | % | | 53 | | | 7.4 | % |
| | | | | | | | | | | | | | | | | | |
Total California | | 2,255 | | 2,263 | | 2,298 | | (8 | ) | | (0.4 | )% | | (43 | ) | | (1.9 | )% |
| | | | | | | | | | | | | | | | | | |
Connecticut | | | | | | | | | | | | | | | | | | |
Large Group | | 114 | | 117 | | 136 | | (3 | ) | | (2.6 | )% | | (22 | ) | | (16.2 | )% |
Small Group and Individual | | 25 | | 26 | | 25 | | (1 | ) | | (3.8 | )% | | 0 | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 139 | | 143 | | 161 | | (4 | ) | | (2.8 | )% | | (22 | ) | | (13.7 | )% |
ASO | | 25 | | 25 | | 32 | | 0 | | | 0.0 | % | | (7 | ) | | (21.9 | )% |
| | | | | | | | | | | | | | | | | | |
Total Commercial | | 164 | | 168 | | 193 | | (4 | ) | | (2.4 | )% | | (29 | ) | | (15.0 | )% |
Medicare Advantage | | 57 | | 57 | | 45 | | 0 | | | 0.0 | % | | 12 | | | 26.7 | % |
Medicaid | | 0 | | 0 | | 90 | | 0 | | | 0.0 | % | | (90 | ) | | (100.0 | )% |
| | | | | | | | | | | | | | | | | | |
Total Connecticut | | 221 | | 225 | | 328 | | (4 | ) | | (1.8 | )% | | (107 | ) | | (32.6 | )% |
| | | | | | | | | | | | | | | | | | |
New York | | | | | | | | | | | | | | | | | | |
Large Group | | 101 | | 101 | | 116 | | 0 | | | 0.0 | % | | (15 | ) | | (12.9 | )% |
Small Group and Individual | | 103 | | 107 | | 118 | | (4 | ) | | (3.7 | )% | | (15 | ) | | (12.7 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 204 | | 208 | | 234 | | (4 | ) | | (1.9 | )% | | (30 | ) | | (12.8 | )% |
ASO | | 11 | | 11 | | 13 | | 0 | | | 0.0 | % | | (2 | ) | | (15.4 | )% |
| | | | | | | | | | | | | | | | | | |
Total Commercial | | 215 | | 219 | | 247 | | (4 | ) | | (1.8 | )% | | (32 | ) | | (13.0 | )% |
Medicare Advantage | | 6 | | 6 | | 3 | | 0 | | | 0.0 | % | | 3 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | |
Total New York | | 221 | | 225 | | 250 | | (4 | ) | | (1.8 | )% | | (29 | ) | | (11.6 | )% |
| | | | | | | | | | | | | | | | | | |
New Jersey | | | | | | | | | | | | | | | | | | |
Large Group | | 19 | | 20 | | 30 | | (1 | ) | | (5.0 | )% | | (11 | ) | | (36.7 | )% |
Small Group and Individual | | 54 | | 55 | | 60 | | (1 | ) | | (1.8 | )% | | (6 | ) | | (10.0 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 73 | | 75 | | 90 | | (2 | ) | | (2.7 | )% | | (17 | ) | | (18.9 | )% |
ASO | | 3 | | 4 | | 17 | | (1 | ) | | (25.0 | )% | | (14 | ) | | (82.4 | )% |
| | | | | | | | | | | | | | | | | | |
Total Commercial | | 76 | | 79 | | 107 | | (3 | ) | | (3.8 | )% | | (31 | ) | | (29.0 | )% |
Medicaid | | 47 | | 46 | | 44 | | 1 | | | 2.2 | % | | 3 | | | 6.8 | % |
| | | | | | | | | | | | | | | | | | |
Total New Jersey | | 123 | | 125 | | 151 | | (2 | ) | | (1.6 | )% | | (28 | ) | | (18.5 | )% |
| | | | | | | | | | | | | | | | | | |
Arizona | | | | | | | | | | | | | | | | | | |
Large Group | | 77 | | 80 | | 81 | | (3 | ) | | (3.8 | )% | | (4 | ) | | (4.9 | )% |
Small Group and Individual | | 46 | | 50 | | 56 | | (4 | ) | | (8.0 | )% | | (10 | ) | | (17.9 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 123 | | 130 | | 137 | | (7 | ) | | (5.4 | )% | | (14 | ) | | (10.2 | )% |
Medicare Advantage | | 67 | | 67 | | 51 | | 0 | | | 0.0 | % | | 16 | | | 31.4 | % |
| | | | | | | | | | | | | | | | | | |
Total Arizona | | 190 | | 197 | | 188 | | (7 | ) | | (3.6 | )% | | 2 | | | 1.1 | % |
| | | | | | | | | | | | | | | | | | |
Oregon | | | | | | | | | | | | | | | | | | |
Large Group | | 93 | | 99 | | 101 | | (6 | ) | | (6.1 | )% | | (8 | ) | | (7.9 | )% |
Small Group and Individual | | 40 | | 38 | | 34 | | 2 | | | 5.3 | % | | 6 | | | 17.6 | % |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 133 | | 137 | | 135 | | (4 | ) | | (2.9 | )% | | (2 | ) | | (1.5 | )% |
Medicare Advantage | | 22 | | 22 | | 21 | | 0 | | | 0.0 | % | | 1 | | | 4.8 | % |
| | | | | | | | | | | | | | | | | | |
Total Oregon | | 155 | | 159 | | 156 | | (4 | ) | | (2.5 | )% | | (1 | ) | | (0.6 | )% |
| | | | | | | | | | | | | | | | | | |
Other States | | | | | | | | | | | | | | | | | | |
Medicare Advantage | | 10 | | 10 | | 4 | | 0 | | | 0.0 | % | | 6 | | | 150.0 | % |
| | | | | | | | | | | | | | | | | | |
Medicare PDP (stand-alone) | | 545 | | 538 | | 379 | | 7 | | | 1.3 | % | | 166 | | | 43.8 | % |
| | | | | | | | | | | | | | | | | | |
Total Health Plan Enrollment | | | | | | | | | | | | | | | | | | |
Large Group | | 1,342 | | 1,371 | | 1,455 | | (29 | ) | | (2.1 | )% | | (113 | ) | | (7.8 | )% |
Small Group and Individual | | 682 | | 707 | | 770 | | (25 | ) | | (3.5 | )% | | (88 | ) | | (11.4 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 2,024 | | 2,078 | | 2,225 | | (54 | ) | | (2.6 | )% | | (201 | ) | | (9.0 | )% |
ASO | | 44 | | 45 | | 68 | | (1 | ) | | (2.2 | )% | | (24 | ) | | (35.3 | )% |
| | | | | | | | | | | | | | | | | | |
Total Commercial | | 2,068 | | 2,123 | | 2,293 | | (55 | ) | | (2.6 | )% | | (225 | ) | | (9.8 | )% |
Medicare Advantage | | 295 | | 293 | | 236 | | 2 | | | 0.7 | % | | 59 | | | 25.0 | % |
Medicare PDP (stand-alone) | | 545 | | 538 | | 379 | | 7 | | | 1.3 | % | | 166 | | | 43.8 | % |
Medi-Cal/Medicaid | | 812 | | 788 | | 846 | | 24 | | | 3.0 | % | | (34 | ) | | (4.0 | )% |
| | | | | | | | | | | | | | | | | | |
Total Health Plans | | 3,720 | | 3,742 | | 3,754 | | (22 | ) | | (0.6 | )% | | (34 | ) | | (0.9 | )% |
| | | | | | | | | | | | | | | | | | |
TRICARE—North Contract Eligibles | | 3,004 | | 2,951 | | 2,895 | | 53 | | | 1.8 | % | | 109 | | | 3.8 | % |
| | | | | | | | | | | | | | | | | | |
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Health Net, Inc.
Enrollment Data—Line of Business
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Change from | |
| | | | | | | | | September 30, 2008 | | | December 31, 2007 | |
| | | Dec 31,
2008 | | Sept 30,
2008 | | Dec 31,
2007 | | Increase/
(Decrease) | | | %
Change | | | Increase/
(Decrease) | | | %
Change | |
Large Group | | | | | | | | | | | | | | | | | | |
California | | 938 | | 954 | | 991 | | (16 | ) | | (1.7 | )% | | (53 | ) | | (5.3 | )% |
Connecticut | | 114 | | 117 | | 136 | | (3 | ) | | (2.6 | )% | | (22 | ) | | (16.2 | )% |
New York | | 101 | | 101 | | 116 | | 0 | | | 0.0 | % | | (15 | ) | | (12.9 | )% |
New Jersey | | 19 | | 20 | | 30 | | (1 | ) | | (5.0 | )% | | (11 | ) | | (36.7 | )% |
Arizona | | 77 | | 80 | | 81 | | (3 | ) | | (3.8 | )% | | (4 | ) | | (4.9 | )% |
Oregon | | 93 | | 99 | | 101 | | (6 | ) | | (6.1 | )% | | (8 | ) | | (7.9 | )% |
| | | | | | | | | | | | | | | | | | |
| | 1,342 | | 1,371 | | 1,455 | | (29 | ) | | (2.1 | )% | | (113 | ) | | (7.8 | )% |
| | | | | | | | | | | | | | | | | | |
Small Group and Individual | | | | | | | | | | | | | | | | | | |
California | | 414 | | 431 | | 477 | | (17 | ) | | (3.9 | )% | | (63 | ) | | (13.2 | )% |
Connecticut | | 25 | | 26 | | 25 | | (1 | ) | | (3.8 | )% | | 0 | | | 0.0 | % |
New York | | 103 | | 107 | | 118 | | (4 | ) | | (3.7 | )% | | (15 | ) | | (12.7 | )% |
New Jersey | | 54 | | 55 | | 60 | | (1 | ) | | (1.8 | )% | | (6 | ) | | (10.0 | )% |
Arizona | | 46 | | 50 | | 56 | | (4 | ) | | (8.0 | )% | | (10 | ) | | (17.9 | )% |
Oregon | | 40 | | 38 | | 34 | | 2 | | | 5.3 | % | | 6 | | | 17.6 | % |
| | | | | | | | | | | | | | | | | | |
| | 682 | | 707 | | 770 | | (25 | ) | | (3.5 | )% | | (88 | ) | | (11.4 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | | | | | | | | | | | | | | | | | |
California | | 1,352 | | 1,385 | | 1,468 | | (33 | ) | | (2.4 | )% | | (116 | ) | | (7.9 | )% |
Connecticut | | 139 | | 143 | | 161 | | (4 | ) | | (2.8 | )% | | (22 | ) | | (13.7 | )% |
New York | | 204 | | 208 | | 234 | | (4 | ) | | (1.9 | )% | | (30 | ) | | (12.8 | )% |
New Jersey | | 73 | | 75 | | 90 | | (2 | ) | | (2.7 | )% | | (17 | ) | | (18.9 | )% |
Arizona | | 123 | | 130 | | 137 | | (7 | ) | | (5.4 | )% | | (14 | ) | | (10.2 | )% |
Oregon | | 133 | | 137 | | 135 | | (4 | ) | | (2.9 | )% | | (2 | ) | | (1.5 | )% |
| | | | | | | | | | | | | | | | | | |
| | 2,024 | | 2,078 | | 2,225 | | (54 | ) | | (2.6 | )% | | (201 | ) | | (9.0 | )% |
| | | | | | | | | | | | | | | | | | |
ASO | | | | | | | | | | | | | | | | | | |
California | | 5 | | 5 | | 6 | | 0 | | | 0.0 | % | | (1 | ) | | (16.7 | )% |
Connecticut | | 25 | | 25 | | 32 | | 0 | | | 0.0 | % | | (7 | ) | | (21.9 | )% |
New York | | 11 | | 11 | | 13 | | 0 | | | 0.0 | % | | (2 | ) | | (15.4 | )% |
New Jersey | | 3 | | 4 | | 17 | | (1 | ) | | (25.0 | )% | | (14 | ) | | (82.4 | )% |
| | | | | | | | | | | | | | | | | | |
| | 44 | | 45 | | 68 | | (1 | ) | | (2.2 | )% | | (24 | ) | | (35.3 | )% |
Total Commercial | | | | | | | | | | | | | | | | | | |
California | | 1,357 | | 1,390 | | 1,474 | | (33 | ) | | (2.4 | )% | | (117 | ) | | (7.9 | )% |
Connecticut | | 164 | | 168 | | 193 | | (4 | ) | | (2.4 | )% | | (29 | ) | | (15.0 | )% |
New York | | 215 | | 219 | | 247 | | (4 | ) | | (1.8 | )% | | (32 | ) | | (13.0 | )% |
New Jersey | | 76 | | 79 | | 107 | | (3 | ) | | (3.8 | )% | | (31 | ) | | (29.0 | )% |
Arizona | | 123 | | 130 | | 137 | | (7 | ) | | (5.4 | )% | | (14 | ) | | (10.2 | )% |
Oregon | | 133 | | 137 | | 135 | | (4 | ) | | (2.9 | )% | | (2 | ) | | (1.5 | )% |
| | | | | | | | | | | | | | | | | | |
| | 2,068 | | 2,123 | | 2,293 | | (55 | ) | | (2.6 | )% | | (225 | ) | | (9.8 | )% |
Medicare Advantage | | | | | | | | | | | | | | | | | | |
California | | 133 | | 131 | | 112 | | 2 | | | 1.5 | % | | 21 | | | 18.8 | % |
Connecticut | | 57 | | 57 | | 45 | | 0 | | | 0.0 | % | | 12 | | | 26.7 | % |
New York | | 6 | | 6 | | 3 | | 0 | | | 0.0 | % | | 3 | | | 100.0 | % |
Arizona | | 67 | | 67 | | 51 | | 0 | | | 0.0 | % | | 16 | | | 31.4 | % |
Oregon | | 22 | | 22 | | 21 | | 0 | | | 0.0 | % | | 1 | | | 4.8 | % |
Other States | | 10 | | 10 | | 4 | | 0 | | | 0.0 | % | | 6 | | | 150.0 | % |
| | | | | | | | | | | | | | | | | | |
| | 295 | | 293 | | 236 | | 2 | | | 0.7 | % | | 59 | | | 25.0 | % |
Medi-Cal/Medicaid | | | | | | | | | | | | | | | | | | |
California | | 765 | | 742 | | 712 | | 23 | | | 3.1 | % | | 53 | | | 7.4 | % |
Connecticut | | 0 | | 0 | | 90 | | 0 | | | 0.0 | % | | (90 | ) | | (100.0 | )% |
New Jersey | | 47 | | 46 | | 44 | | 1 | | | 2.2 | % | | 3 | | | 6.8 | % |
| | | | | | | | | | | | | | | | | | |
| | 812 | | 788 | | 846 | | 24 | | | 3.0 | % | | (34 | ) | | (4.0 | )% |
| | | | | | | |
Medicare PDP (stand-alone) | | 545 | | 538 | | 379 | | 7 | | | 1.3 | % | | 166 | | | 43.8 | % |
| | | | | | | | | | | | | | | | | | |
|
| | |
Total Health Plan Enrollment | | | | | | | | | | | | | | | | | | |
Large Group | | 1,342 | | 1,371 | | 1,455 | | (29 | ) | | (2.1 | )% | | (113 | ) | | (7.8 | )% |
Small Group and Individual | | 682 | | 707 | | 770 | | (25 | ) | | (3.5 | )% | | (88 | ) | | (11.4 | )% |
| | | | | | | | | | | | | | | | | | |
Commercial Risk | | 2,024 | | 2,078 | | 2,225 | | (54 | ) | | (2.6 | )% | | (201 | ) | | (9.0 | )% |
ASO | | 44 | | 45 | | 68 | | (1 | ) | | (2.2 | )% | | (24 | ) | | (35.3 | )% |
| | | | | | | | | | | | | | | | | | |
Total Commercial | | 2,068 | | 2,123 | | 2,293 | | (55 | ) | | (2.6 | )% | | (225 | ) | | (9.8 | )% |
Medicare Advantage | | 295 | | 293 | | 236 | | 2 | | | 0.7 | % | | 59 | | | 25.0 | % |
Medicare PDP (stand-alone) | | 545 | | 538 | | 379 | | 7 | | | 1.3 | % | | 166 | | | 43.8 | % |
Medi-Cal/Medicaid | | 812 | | 788 | | 846 | | 24 | | | 3.0 | % | | (34 | ) | | (4.0 | )% |
| | | | | | | | | | | | | | | | | | |
Total Health Plans | | 3,720 | | 3,742 | | 3,754 | | (22 | ) | | (0.6 | )% | | (34 | ) | | (0.9 | )% |
| | | | | | | | | | | | | | | | | | |
TRICARE—North Contract Eligibles | | 3,004 | | 2,951 | | 2,895 | | 53 | | | 1.8 | % | | 109 | | | 3.8 | % |
| | | | | | | | | | | | | | | | | | |
Page 9
Health Net, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share, PMPM and ratio data)
| | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended
December 31,
2007 | | | Year Ended
December 31,
2007 | | | Quarter Ended
September 30,
2008 | | | Quarter Ended
December 31,
2008 | | | Year Ended
December 31,
2008 | |
REVENUES: | | | | | | | | | | | | | | | | | | | | |
Health plan services premiums | | $ | 2,916,718 | | | $ | 11,435,314 | | | $ | 3,072,717 | | | $ | 3,082,133 | | | | 12,392,006 | |
Government contracts | | | 619,423 | | | | 2,501,677 | | | | 724,323 | | | | 751,604 | | | | 2,835,261 | |
Net investment income | | | 31,630 | | | | 120,176 | | | | 10,204 | | | | 24,536 | | | | 91,042 | |
Administrative services fees and other income | | | 15,482 | | | | 51,104 | | | | 11,607 | | | | 11,209 | | | | 48,280 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 3,583,253 | | | | 14,108,271 | | | | 3,818,851 | | | | 3,869,482 | | | | 15,366,589 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
EXPENSES: | | | | | | | | | | | | | | | | | | | | |
Health plan services | | | 2,409,332 | | | | 9,762,896 | | | | 2,689,790 | | | | 2,629,398 | | | | 10,762,657 | |
Government contracts | | | 556,648 | | | | 2,307,610 | | | | 687,848 | | | | 718,893 | | | | 2,702,573 | |
General and administrative | | | 317,099 | | | | 1,275,555 | | | | 294,178 | | | | 347,128 | | | | 1,291,059 | |
Selling | | | 90,332 | | | | 327,827 | | | | 93,232 | | | | 92,314 | | | | 360,381 | |
Depreciation and amortization | | | 13,598 | | | | 42,982 | | | | 17,255 | | | | 17,271 | | | | 59,878 | |
Interest | | | 7,712 | | | | 32,497 | | | | 10,413 | | | | 10,523 | | | | 42,909 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 3,394,721 | | | | 13,749,367 | | | | 3,792,716 | | | | 3,815,527 | | | | 15,219,457 | |
Income from operations before income taxes | | | 188,532 | | | | 358,904 | | | | 26,135 | | | | 53,955 | | | | 147,132 | |
Income tax provision | | | 71,605 | | | | 165,207 | | | | 7,665 | | | | 18,420 | | | | 52,129 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 116,927 | | | $ | 193,697 | | | $ | 18,470 | | | $ | 35,535 | | | $ | 95,003 | |
| | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 1.06 | | | $ | 1.74 | | | $ | 0.17 | | | $ | 0.34 | | | $ | 0.89 | |
Diluted earnings per share | | $ | 1.04 | | | $ | 1.70 | | | $ | 0.17 | | | $ | 0.34 | | | $ | 0.88 | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 110,087 | | | | 111,316 | | | | 105,915 | | | | 103,694 | | | | 106,532 | |
Diluted | | | 112,255 | | | | 113,829 | | | | 106,869 | | | | 104,063 | | | | 107,610 | |
Pretax margin | | | 5.3 | % | | | 2.5 | % | | | 0.7 | % | | | 1.4 | % | | | 1.0 | % |
Health plan services MCR | | | 82.6 | % | | | 85.4 | % | | | 87.5 | % | | | 85.3 | % | | | 86.9 | % |
Government contracts cost ratio | | | 89.9 | % | | | 92.2 | % | | | 95.0 | % | | | 95.6 | % | | | 95.3 | % |
G&A expense ratio | | | 10.8 | % | | | 11.1 | % | | | 9.5 | % | | | 11.2 | % | | | 10.4 | % |
Selling costs ratio | | | 3.1 | % | | | 2.9 | % | | | 3.0 | % | | | 3.0 | % | | | 2.9 | % |
Days claims payable(a) | | | 49.9 | | | | 43.9 | | | | 46.3 | | | | 47.0 | | | | 44.9 | |
Days claims payable—adjusted(a) | | | 54.9 | | | | 54.1 | | | | 52.7 | | | | 54.8 | | | | 52.2 | |
Effective tax rate | | | 38.0 | % | | | 46.0 | % | | | 29.3 | % | | | 34.1 | % | | | 35.4 | % |
Health plan services premiums PMPM | | $ | 266.88 | | | $ | 263.54 | | | $ | 276.29 | | | $ | 279.47 | | | $ | 277.79 | |
Health plan services costs PMPM | | $ | 220.45 | | | $ | 225.00 | | | $ | 241.86 | | | $ | 238.42 | | | $ | 241.27 | |
Page 10
Health Net, Inc.
Reconciliation of Non-GAAP Financial Measures
Operating Results Excluding Charges
(Amounts in thousands, except per share, PMPM and ratio data)
| | |
Note: | | This table presents the company’s consolidated operations for the periods presented below and the charges recorded in the consolidated statement of operations. Management believes that the presentation of certain financial information in the attached press release (such as Net investment income, Administrative services fees and other income, Health plan services expense, General and administrative expense, Income before income taxes, Income tax provision, Net income, Basic and diluted earnings per share, Pretax margin, MCR, G&A expense ratio, and effective tax rate), excluding the charges that were recorded, all of which are non-GAAP financial information, are important to investors as they exclude special items that are not indicative of our core operating results. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended December 31, 2007 | | | Year Ended December 31, 2007 | |
| | | As Reported | | | Impact of
Charge1 | | | Excluding
Impact of
Charge | | | As Reported | | | Impact of
Charge2 | | | Excluding
Impact of
Charge | |
REVENUES: | | | | | | | | | | | | | | | | | | | | | | | | |
Health plan services premiums | | $ | 2,916,718 | | | | | | | $ | 2,916,718 | | | $ | 11,435,314 | | | | | | | $ | 11,435,314 | |
Government contracts | | | 619,423 | | | | | | | | 619,423 | | | | 2,501,677 | | | | | | | | 2,501,677 | |
Net investment income | | | 31,630 | | | | | | | | 31,630 | | | | 120,176 | | | | | | | | 120,176 | |
Administrative services fees and other income | | | 15,482 | | | | | | | | 15,482 | | | | 51,104 | | | | | | | | 51,104 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,583,253 | | | | — | | | | 3,583,253 | | | | 14,108,271 | | | | — | | | | 14,108,271 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
Health plan services | | | 2,409,332 | | | | | | | | 2,409,332 | | | | 9,762,896 | | | $ | 201,449 | | | | 9,561,447 | |
Government contracts | | | 556,648 | | | | | | | | 556,648 | | | | 2,307,610 | | | | | | | | 2,307,610 | |
General and administrative | | | 317,099 | | | $ | 10,000 | | | | 307,099 | | | | 1,275,555 | | | | 105,308 | | | | 1,170,247 | |
Selling | | | 90,332 | | | | | | | | 90,332 | | | | 327,827 | | | | | | | | 327,827 | |
Depreciation and amortization | | | 13,598 | | | | | | | | 13,598 | | | | 42,982 | | | | | | | | 42,982 | |
Interest | | | 7,712 | | | | | | | | 7,712 | | | | 32,497 | | | | | | | | 32,497 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,394,721 | | | | 10,000 | | | | 3,384,721 | | | | 13,749,367 | | | | 306,757 | | | | 13,442,610 | |
(Loss) income from operations before income taxes | | | 188,532 | | | | (10,000 | ) | | | 198,532 | | | | 358,904 | | | | (306,757 | ) | | | 665,661 | |
Income tax (benefit) provision | | | 71,605 | | | | (3,544 | ) | | | 75,149 | | | | 165,207 | | | | (84,321 | ) | | | 249,528 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | 116,927 | | | $ | (6,456 | ) | | $ | 123,383 | | | $ | 193,697 | | | $ | (222,436 | ) | | $ | 416,133 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic (loss) earnings per share | | $ | 1.06 | | | $ | (0.06 | ) | | $ | 1.12 | | | $ | 1.74 | | | $ | (2.00 | ) | | $ | 3.74 | |
Diluted (loss) earnings per share | | $ | 1.04 | | | $ | (0.06 | ) | | $ | 1.10 | | | $ | 1.70 | | | $ | (1.96 | ) | | $ | 3.66 | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 110,087 | | | | | | | | 110,087 | | | | 111,316 | | | | | | | | 111,316 | |
Diluted | | | 112,255 | | | | | | | | 112,255 | | | | 113,829 | | | | | | | | 113,829 | |
Pretax margin | | | 5.3 | % | | | -0.2 | % | | | 5.5 | % | | | 2.5 | % | | | -2.2 | % | | | 4.7 | % |
Health plan services MCR | | | 82.6 | % | | | — | | | | 82.6 | % | | | 85.4 | % | | | 1.8 | % | | | 83.6 | % |
Government contracts cost ratio | | | 89.9 | % | | | — | | | | 89.9 | % | | | 92.2 | % | | | — | | | | 92.2 | % |
G&A expense ratio | | | 10.8 | % | | | 0.3 | % | | | 10.5 | % | | | 11.1 | % | | | 0.9 | % | | | 10.2 | % |
Selling costs ratio | | | 3.1 | % | | | — | | | | 3.1 | % | | | 2.9 | % | | | — | | | | 2.9 | % |
Effective tax rate | | | 38.0 | % | | | 0.1 | % | | | 37.9 | % | | | 46.0 | % | | | 8.5 | % | | | 37.5 | % |
| 1 | Includes a $10 million pretax charge relating to rescission included in G&A expenses. |
| 2 | Includes a $296.8 million pretax litigation charge primarily related to the settlement of the McCoy,et al., lawsuits and regulatory issues with the New Jersey Department of Banking and Insurance taken in the third quarter of 2007 and a $10.0 million pretax charge relating to the above-referenced (footnote 1) rescission case taken in the fourth quarter of 2007. $201.5 million was included in health plan services expenses and $105.3 million was included in G&A expenses. |
Page 11
Health Net, Inc.
Reconciliation of Non-GAAP Financial Measures
Operating Results Excluding Charges
(Amounts in thousands, except per share, PMPM and ratio data)
(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended September 30, 2008 | | | Quarter Ended December 31, 2008 | | | Year Ended December 31, 2008 | |
| | | As Reported | | | Impact of
Charge3 | | | Excluding
Impact of
Charge | | | As Reported | | | Impact of
Charge4 | | | Excluding
Impact of
Charge | | | As Reported | | | Impact of
Charge5 | | | Excluding
Impact of
Charge | |
REVENUES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Health plan services premiums | | $ | 3,072,717 | | | | | | | $ | 3,072,717 | | | $ | 3,082,133 | | | | | | | $ | 3,082,133 | | | $ | 12,392,006 | | | | | | | $ | 12,392,006 | |
Government contracts | | | 724,323 | | | | | | | | 724,323 | | | | 751,604 | | | | | | | | 751,604 | | | | 2,835,261 | | | | | | | | 2,835,261 | |
Net investment income | | | 10,204 | | | $ | (14,642 | ) | | | 24,846 | | | | 24,536 | | | | | | | | 24,536 | | | | 91,042 | | | $ | (14,642 | ) | | | 105,684 | |
Administrative services fees and other income | | | 11,607 | | | | | | | | 11,607 | | | | 11,209 | | | | | | | | 11,209 | | | | 48,280 | | | | (3,400 | ) | | | 51,680 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,818,851 | | | | (14,642 | ) | | | 3,833,493 | | | | 3,869,482 | | | | — | | | | 3,869,482 | | | | 15,366,589 | | | | (18,042 | ) | | | 15,384,631 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Health plan services | | | 2,689,790 | | | | | | | | 2,689,790 | | | | 2,629,398 | | | $ | (5,700 | ) | | | 2,635,098 | | | | 10,762,657 | | | | 37,496 | | | | 10,725,161 | |
Government contracts | | | 687,848 | | | | | | | | 687,848 | | | | 718,893 | | | | | | | | 718,893 | | | | 2,702,573 | | | | | | | | 2,702,573 | |
General and administrative | | | 294,178 | | | | 17,145 | | | | 277,033 | | | | 347,128 | | | $ | 53,535 | | | | 293,593 | | | | 1,291,059 | | | | 119,540 | | | | 1,171,519 | |
Selling | | | 93,232 | | | | | | | | 93,232 | | | | 92,314 | | | | | | | | 92,314 | | | | 360,381 | | | | | | | | 360,381 | |
Depreciation and amortization | | | 17,255 | | | | | | | | 17,255 | | | | 17,271 | | | | | | | | 17,271 | | | | 59,878 | | | | | | | | 59,878 | |
Interest | | | 10,413 | | | | | | | | 10,413 | | | | 10,523 | | | | | | | | 10,523 | | | | 42,909 | | | | | | | | 42,909 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,792,716 | | | | 17,145 | | | | 3,775,571 | | | | 3,815,527 | | | | 47,835 | | | | 3,767,692 | | | | 15,219,457 | | | | 157,036 | | | | 15,062,421 | |
(Loss) income from operations before income taxes | | | 26,135 | | | | (31,787 | ) | | | 57,922 | | | | 53,955 | | | | (47,835 | ) | | | 101,790 | | | | 147,132 | | | | (175,078 | ) | | | 322,210 | |
Income tax (benefit) provision | | | 7,665 | | | | (12,498 | ) | | | 20,163 | | | | 18,420 | | | | (20,227 | ) | | | 38,647 | | | | 52,129 | | | | (70,951 | ) | | | 123,080 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | 18,470 | | | $ | (19,289 | ) | | $ | 37,759 | | | $ | 35,535 | | | $ | (27,608 | ) | | $ | 63,143 | | | $ | 95,003 | | | $ | (104,127 | ) | | $ | 199,130 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic (loss) earnings per share | | $ | 0.17 | | | $ | (0.19 | ) | | $ | 0.36 | | | $ | 0.34 | | | $ | (0.27 | ) | | $ | 0.61 | | | $ | 0.89 | | | $ | (0.98 | ) | | $ | 1.87 | |
Diluted (loss) earnings per share | | $ | 0.17 | | | $ | (0.18 | ) | | $ | 0.35 | | | $ | 0.34 | | | $ | (0.27 | ) | | $ | 0.61 | | | $ | 0.88 | | | $ | (0.97 | ) | | $ | 1.85 | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 105,915 | | | | | | | | 105,915 | | | | 103,694 | | | | | | | | 103,694 | | | | 106,532 | | | | | | | | 106,532 | |
Diluted | | | 106,869 | | | | | | | | 106,869 | | | | 104,063 | | | | | | | | 104,063 | | | | 107,610 | | | | | | | | 107,610 | |
Pretax margin | | | 0.7 | % | | | -0.8 | % | | | 1.5 | % | | | 1.4 | % | | | -1.2 | % | | | 2.6 | % | | | 1.0 | % | | | -1.1 | % | | | 2.1 | % |
Health plan services MCR | | | 87.5 | % | | | — | | | | 87.5 | % | | | 85.3 | % | | | -0.2 | % | | | 85.5 | % | | | 86.9 | % | | | 0.4 | % | | | 86.5 | % |
Government contracts cost ratio | | | 95.0 | % | | | — | | | | 95.0 | % | | | 95.6 | % | | | — | | | | 95.6 | % | | | 95.3 | % | | | — | | | | 95.3 | % |
G&A expense ratio | | | 9.5 | % | | | 0.5 | % | | | 9.0 | % | | | 11.2 | % | | | 1.7 | % | | | 9.5 | % | | | 10.4 | % | | | 1.0 | % | | | 9.4 | % |
Selling costs ratio | | | 3.0 | % | | | — | | | | 3.0 | % | | | 3.0 | % | | | — | | | | 3.0 | % | | | 2.9 | % | | | — | | | | 2.9 | % |
Effective tax rate | | | 29.3 | % | | | -5.5 | % | | | 34.8 | % | | | 34.1 | % | | | -3.8 | % | | | 38.0 | % | | | 35.4 | % | | | -2.8 | % | | | 38.2 | % |
| 3 | Includes a $14.6 million pretax investment impairment charge which was included in net investment income as well as a $17.1 million pretax charge for severance and other expenses related to the company’s operations strategy and included in G&A expenses. |
| 4 | Includes a $5.7 million pretax benefit for a litigation reserve true-up included in health plan services expenses and a $53.5 million pretax charge primarily for severance and other expenses related to the company’s operations strategy and included in G&A expenses. |
| 5 | Includes a $175.1 million pretax charge in total of which: |
| | (a) | $119.6 million was primarily related to severance and other expenses associated with the company's operations strategy and included in G&A expenses |
| | (b) | $37.5 million was included in health plan services expenses for estimated litigation liability and regulatory actions for the company’s rescission practices in Arizona and California and for the execution of the settlement agreement for the McCoy,et al., lawsuits |
| | (c) | $14.6 million investment impairment charge taken in the third quarter of 2008 and included in net investment income |
| | (d) | $3.4 million pretax charge related to the estimated loss on the sale of the assets of a subsidiary taken in the first quarter of 2008 and included in other income |
Page 12
Health Net, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended
December 31,
2007 | | | Year Ended
December 31,
2007 | | | Quarter Ended
September 30,
2008 | | | Quarter Ended
December 31,
2008 | | | Year Ended
December 31,
2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | |
Net income | | $ | 116,927 | | | $ | 193,697 | | | $ | 18,470 | | | $ | 35,535 | | | $ | 95,003 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Amortization and depreciation | | | 13,598 | | | | 42,982 | | | | 17,255 | | | | 17,271 | | | | 59,878 | |
Share-based compensation expense | | | 6,457 | | | | 24,298 | | | | 8,216 | | | | 1,294 | | | | 24,065 | |
Deferred income taxes | | | 8,180 | | | | (98,629 | ) | | | 52,249 | | | | (11,942 | ) | | | 15,420 | |
Excess tax benefits from share-based compensation | | | (487 | ) | | | (17,987 | ) | | | (35 | ) | | | — | | | | (815 | ) |
Other changes | | | (3,498 | ) | | | (7,955 | ) | | | 10,748 | | | | 24,261 | | | | 35,530 | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
Premiums receivable and unearned premiums | | | 24,037 | | | | (74,184 | ) | | | 112,741 | | | | (29,008 | ) | | | (39,271 | ) |
Other receivables, deferred taxes and other assets | | | 30,704 | | | | 143,783 | | | | (61,547 | ) | | | (107,787 | ) | | | (150,347 | ) |
Amounts receivable/payable under government contracts | | | 1,213 | | | | 26,223 | | | | 5,977 | | | | 7,166 | | | | (50,431 | ) |
Reserves for claims and other settlements | | | (12,672 | ) | | | 251,636 | | | | (9,075 | ) | | | (10,532 | ) | | | 37,717 | |
Accounts payable and other liabilities | | | 72,508 | | | | 121,618 | | | | (62,558 | ) | | | 20,164 | | | | (185,711 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 256,967 | | | | 605,482 | | | | 92,441 | | | | (53,578 | ) | | | (158,962 | ) |
| | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | |
Sales of investments | | | 242,421 | | | | 807,649 | | | | 154,478 | | | | 514,047 | | | | 1,219,291 | |
Maturities of investments | | | 65,606 | | | | 213,833 | | | | 58,400 | | | | 62,117 | | | | 257,149 | |
Purchases of investments | | | (397,611 | ) | | | (1,180,854 | ) | | | (580,780 | ) | | | (218,258 | ) | | | (1,473,664 | ) |
Proceeds from sale of property and equipment | | | — | | | | 96,748 | | | | — | | | | — | | | | 4 | |
Purchases of property and equipment | | | (17,342 | ) | | | (64,850 | ) | | | (7,887 | ) | | | (12,911 | ) | | | (95,641 | ) |
Cash paid for acquisition of assets and businesses | | | — | | | | (80,277 | ) | | | — | | | | — | | | | — | |
Net sales and purchases of restricted investments and other | | | 7,127 | | | | (22,444 | ) | | | 7,661 | | | | 4,220 | | | | 24,990 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (99,799 | ) | | | (230,195 | ) | | | (368,128 | ) | | | 349,215 | | | | (67,871 | ) |
| | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | |
Proceeds from exercise of stock options and employee stock purchases | | | 2,525 | | | | 72,622 | | | | 235 | | | | — | | | | 6,636 | |
Repurchases of common stock | | | (27,052 | ) | | | (232,220 | ) | | | (100,110 | ) | | | (17 | ) | | | (243,172 | ) |
Excess tax benefits from share-based compensation | | | 487 | | | | 17,987 | | | | 35 | | | | — | | | | 815 | |
Borrowings under financing arrangements | | | 175,000 | | | | 668,535 | | | | 200,000 | | | | 175,000 | | | | 520,000 | |
Repayment of borrowings under financing arrangements | | | — | | | | (600,000 | ) | | | (245,000 | ) | | | (142,540 | ) | | | (396,262 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided (used in) by financing activities | | | 150,960 | | | | (73,076 | ) | | | (144,840 | ) | | | 32,443 | | | | (111,983 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 308,128 | | | | 302,211 | | | | (420,527 | ) | | | 328,080 | | | | (338,816 | ) |
Cash and cash equivalents, beginning of period | | | 698,889 | | | | 704,806 | | | | 760,648 | | | | 340,121 | | | | 1,007,017 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 1,007,017 | | | $ | 1,007,017 | | | $ | 340,121 | | | $ | 668,201 | | | $ | 668,201 | |
| | | | | | | | | | | | | | | | | | | | |
Page 13
Health Net, Inc.
Consolidated Balance Sheet
(Amounts in thousands, except ratio data)
| | | | | | | | | | | | |
| | | December 31,
2007 | | | September 30,
2008 | | | December 31,
2008 | |
ASSETS | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,007,017 | | | $ | 340,121 | | | $ | 668,201 | |
Investments—available for sale | | | 1,557,278 | | | | 1,838,951 | | | | 1,504,658 | |
Premiums receivable, net | | | 264,691 | | | | 295,854 | | | | 307,529 | |
Amounts receivable under government contracts | | | 189,976 | | | | 235,064 | | | | 241,269 | |
Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract | | | 266,767 | | | | 307,970 | | | | 302,022 | |
Other receivables | | | 72,518 | | | | 107,032 | | | | 254,026 | |
Deferred taxes | | | 132,818 | | | | 111,266 | | | | 87,712 | |
Other assets | | | 210,039 | | | | 238,615 | | | | 179,649 | |
| | | | | | | | | | | | |
Total current assets | | | 3,701,104 | | | | 3,474,873 | | | | 3,545,066 | |
Property and equipment, net | | | 178,758 | | | | 228,256 | | | | 202,356 | |
Goodwill, net | | | 751,949 | | | | 751,949 | | | | 751,949 | |
Other intangible assets, net | | | 109,386 | | | | 96,122 | | | | 91,289 | |
Deferred taxes | | | 47,765 | | | | 58,555 | | | | 81,771 | |
Other noncurrent assets | | | 144,093 | | | | 132,427 | | | | 143,919 | |
| | | | | | | | | | | | |
Total Assets | | $ | 4,933,055 | | | $ | 4,742,182 | | | $ | 4,816,350 | |
| | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | |
Reserves for claims and other settlements | | $ | 1,300,432 | | | $ | 1,348,681 | | | $ | 1,338,149 | |
Health care and other costs payable under government contracts | | | 69,014 | | | | 56,505 | | | | 69,876 | |
IBNR health care costs payable under TRICARE North contract | | | 266,767 | | | | 307,970 | | | | 302,022 | |
Unearned premiums | | | 176,981 | | | | 197,881 | | | | 180,548 | |
Borrowings under amortizing financing facility | | | 35,000 | | | | 26,693 | | | | 27,335 | |
Accounts payable and other liabilities | | | 463,823 | | | | 285,016 | | | | 294,840 | |
| | | | | | | | | | | | |
Total current liabilities | | | 2,312,017 | | | | 2,222,746 | | | | 2,212,770 | |
Senior notes payable | | | 398,071 | | | | 398,224 | | | | 398,276 | |
Borrowings under amortizing financing facility | | | 112,363 | | | | 119,900 | | | | 103,992 | |
Borrowings under revolving credit facility | | | — | | | | 100,000 | | | | 150,000 | |
Other noncurrent liabilities | | | 235,022 | | | | 206,187 | | | | 199,186 | |
| | | | | | | | | | | | |
Total Liabilities | | | 3,057,473 | | | | 3,047,057 | | | | 3,064,224 | |
| | | | | | | | | | | | |
Stockholders’ Equity | | | | | | | | | | | | |
Common stock and additional paid-in capital | | | 1,151,395 | | | | 1,181,481 | | | | 1,182,211 | |
Treasury common stock, at cost | | | (1,123,750 | ) | | | (1,367,302 | ) | | | (1,367,319 | ) |
Retained earnings | | | 1,849,097 | | | | 1,908,565 | | | | 1,944,100 | |
Accumulated other comprehensive loss | | | (1,160 | ) | | | (27,619 | ) | | | (6,866 | ) |
| | | | | | | | | | | | |
Total Stockholders’ Equity | | | 1,875,582 | | | | 1,695,125 | | | | 1,752,126 | |
| | | | | | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 4,933,055 | | | $ | 4,742,182 | | | $ | 4,816,350 | |
| | | | | | | | | | | | |
Debt-to-Total Capital Ratio | | | 22.5 | % | | | 27.6 | % | | | 27.9 | % |
Page 14
Health Net, Inc.
Notes to Consolidated Financial Statements
Notes:
| (a) | Management believes that days claims payable (excluding capitation, provider and other claim settlements and Medicare Part D), a non-GAAP financial measure, provides useful information to investors because, in excluding those health care costs for which no or minimal reserves are maintained, it is a more accurate reflection of days claims payable calculated from claims-based reserves than is days claims payable, which does not exclude such costs. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. The following table provides a reconciliation of the differences between days claims payable (excluding capitation, provider and other claim settlements and Medicare Part D) and days claims payable, the most directly comparable financial measure calculated and presented in accordance with GAAP: |
| | | | | | | | | | | | | | | | | | | | |
| | | Q4 2007 | | | FY 2007 | | | Q3 2008 | | | Q4 2008 | | | FY 2008 | |
| | | (Dollars in millions) | |
Reserve for Claims and Other Settlements | | $ | 1,300.4 | | | $ | 1,300.4 | | | $ | 1,348.7 | | | $ | 1,338.1 | | | $ | 1,338.1 | |
Less: Capitation Payable, Provider and Other Claim Settlements and Medicare Part D | | | (299.3 | ) | | | (299.3 | ) | | | (245.3 | ) | | | (233.8 | ) | | | (233.8 | ) |
| | | | | | | | | | | | | | | | | | | | |
Adjusted Reserve for Claims and Other Settlements | | | 1,001.1 | | | | 1,001.1 | | | | 1,103.4 | | | | 1,104.3 | | | | 1,104.3 | |
(1) Average Reserve for Claims and Other Settlements | | | 1,306.8 | | | | 1,174.6 | | | | 1,353.2 | | | | 1,343.4 | | | | 1,319.3 | |
(2) Average Adjusted Reserve for Claims and Other Settlements | | | 1,011.8 | | | | 982.3 | | | | 1,084.0 | | | | 1,103.8 | | | | 1,052.7 | |
(3) Health Plan Services Cost | | | 2,409.3 | | | | 9,762.9 | | | | 2,689.8 | | | | 2,629.4 | | | | 10,762.7 | |
Less: Capitation Payable, Provider and Other Claim Settlements and Medicare Part D | | | (715.2 | ) | | | (3,129.7 | ) | | | (796.5 | ) | | | (776.8 | ) | | | (3,378.1 | ) |
| | | | | | | | | | | | | | | | | | | | |
(4) Adjusted Health Plan Services Cost | | | 1,694.1 | | | | 6,633.2 | | | | 1,893.3 | | | | 1,852.6 | | | | 7,384.6 | |
(5) Number of Days in Period | | | 92 | | | | 365 | | | | 92 | | | | 92 | | | | 366 | |
= (1) / (3) * (5) Days Claims Payable | | | 49.9 | | | | 43.9 | | | | 46.3 | | | | 47.0 | | | | 44.9 | |
= (2) / (4) * (5) Days Claims Payable—Adjusted | | | 54.9 | | | | 54.1 | | | | 52.7 | | | | 54.8 | | | | 52.2 | |
Page 15
Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
(In millions)
| | | | | | | | | | | |
| | | Health Plan Services | |
| | | Year 2008 | | | Year 2007 | | Year 2006 | |
Reserve for claims (a), beginning of period | | $ | 838.7 | | | $ | 754.2 | | $ | 768.7 | |
Incurred claims related to: | | | | | | | | | | | |
Current Year | | | 6,372.2 | | | | 5,790.7 | | | 5,222.0 | |
Prior Years (c) | | | (8.3 | ) | | | 0.6 | | | (77.3 | ) |
| | | | | | | | | | | |
Total Incurred (b) | | | 6,363.9 | | | | 5,791.3 | | | 5,144.7 | |
Paid claims related to: | | | | | | | | | | | |
Current Year | | | 5,443.2 | | | | 4,972.3 | | | 4,485.7 | |
Prior Years | | | 802.3 | | | | 734.5 | | | 673.5 | |
| | | | | | | | | | | |
Total Paid (b) | | | 6,245.5 | | | | 5,706.8 | | | 5,159.2 | |
Reserve for claims (a), end of period | | | 957.1 | | | | 838.7 | | | 754.2 | |
Add: | | | | | | | | | | | |
Claims Payable (d) | | | 284.8 | | | | 365.6 | | | 203.9 | |
Other (e) | | | 96.2 | | | | 96.1 | | | 90.7 | |
| | | | | | | | | | | |
Reserves for claims and other settlements, end of period | | $ | 1,338.1 | | | $ | 1,300.4 | | $ | 1,048.8 | |
| | | | | | | | | | | |
| (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 quarter-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. |
Page 16
