Health Net Earnings Call NUGGETS: Meaningful Growth, California SPD

On Friday, Health Net Inc (NYSE:HNT) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Meaningful Growth

Joshua Raskin – Barclays Capital: Just want to I guess touch on where you left off in terms of 2013. So it sounds like you were putting together a path when you talked about meaningful growth in 2013. I guess, what exactly does that mean? Does that mean EPS growth off of, your combined Western $1 to $1.10 and then just so I understand, one of the key components is a 300 to 400 basis point improvement in Medicaid MCRs excluding the negative development and that’s coming despite the onset of California duals. Is that right?

Jay M. Gellert – President and CEO: Yes, let me go through the question. First of all, the three items I mentioned for 2013, will it be on top of the 2012 guidance, $1 to $1.10, the three items include as I said, about 50 to 70 basis points of commercial improvement that will result from the large group strategy I articulated and even build in some cushion for continued competitiveness in the market. Second, as I indicated, we believe through this third party process that we’ve dealt with the prior period development issue, as you’ll note, our DCP is up and we’ve had a significant increase in reserves for claims in the balance sheet. Then third, what we articulated was that the state has, in the rate setting methodology that it has established with CMS on targeted profit margins of 2% to 4% middle of the range, being 3%. The numbers we’ve articulated reflect that profit on a going forward basis. We’ve had discussions with the state and we believe that they’re committed to implementing that methodology and rectifying issues related to the SPDs.

Joshua Raskin – Barclays Capital: Okay I mean I apologize, I just didn’t have enough time to do the math, which is really rough back of the envelop, I mean you are talking about – is it something in the ballpark of a doubling of that dollar-to-dollar trend next year?

Jay M. Gellert – President and CEO: Those, when you do the math, you come to conclusions like that or maybe even a little more, but it’s roughly those numbers.

Joshua Raskin – Barclays Capital: Then sort of taking a step back and thinking about the Company, you guys have as you mentioned some valuable assets, tables TRICARE business, you got a Medicaid contract in California et cetera. How do you think about through the future of Health Net, it seems like the commercial book has been tough, is that a scale issue, I mean is that sort of long-term? Is that fixable in terms of longer-term improvement or is it just going to be one of these ebbs and flows over time. I’m just – how do you think about Heath Net and the grand scheme of things?

Jay M. Gellert – President and CEO: Fair question. I believe that the points you made about the government business are valid, strong TRICARE, strong Medicaid, new Medicaid opportunities, solid MA business and dual opportunities. I think that the California large group full network business won’t get that. So I think that does present scale issues. On the other hand when we look at the filings, our performance in small group and mid is really strong and as we said, are long been holding time to the individual business in anticipation of the exchange. We think there will be some opportunities there, but I do believe that the scale issue you raised, particularly in light of the other strong asset is something we really have to consider and thinner and particularly in light of what we anticipate to be continued competitive pressure in California in the commercial segment.

Joshua Raskin – Barclays Capital: Does that signal a change in what you’re doing as a member of the Board in terms of the direction of Health Net, is there something are you saying right now that you’ve made that decision and those actions in place to think about that?

Jay M. Gellert – President and CEO: I think that it reflects a recognition of the increased competitive environment in terms of the California market and the need for the Board to look at it and make a determination of what makes sense. I think it’s a change in the evaluation of the market, not per se a specific comment related to the approach which we take, and we’re always looking at what we should do, but I do believe it articulates two things. One, I believe an increased recognition of the value of the government’s businesses and some ongoing concern about the California commercial markets that we have to incorporate in the strategic considerations, and in that regard scale is an issue.

Joshua Raskin – Barclays Capital: Okay. So not a change – a change in the evaluation of the marketplace but not a change in the way you guys think about the company?

Jay M. Gellert – President and CEO: I think that we continue to on an ongoing basis look at what’s best for the shareholders in the context of those data, so obviously they will have an impact. I’m not saying anything more definitive than that but I would say that.

California SPD

Sarah James – Wedbush Securities Inc.: This is Sarah James. I just had a question. You mentioned that the cost issues on 100,000 members, but then later in the prepared remarks you said that you could lose up to about 50,000 of that because of the changes. So I was just wondering if you could explain a little bit more about what makes 50,000 the high end of that 100,000 (books) that you could be losing and then so does that assumption also reflect the fact that they’re going to increase competitive pricing environment in California that could cause enrollment pressure even if you weren’t making changes in your network?

Jay M. Gellert – President and CEO: What I was speaking to is specially those 100,000 accounts. We will maintain price discipline throughout the book. We agree with your point about competitiveness and we can see as much as an additional 50,000 in commercial loss in that context. So, let me now go back to the assessment of the 50,000 in large group. The estimate is premised on the experience we’ve already had with some groups shifting to narrow network products or shifting away from the vulnerable large group market, other groups making adjustments in contribution structuring related, so it makes it a viable product and still others accepting large enough increase that they give us confidence that the numbers work but it’s primarily groups that have been willing to adjust their benefit structure and/or their network structure to give us confidence that we can retain them economically, because they reflect structures that are more consistent with what the economic (forecast) and some of them have already been sold. So again, it’s not assuming business as usual. It’s assuming that if we maintain the discipline we talked about the willingness to walk away from the full 100,000 that half will adapt and that’s what the evidence seems to be and half will lose.

Sarah James – Wedbush Securities Inc.: Then a quick question on the California SPD, you gave a lot of detail in the prepared remarks about some negotiations going on with the state which is helpful, I was just wondering if there is any issues also going on that could relate to continuity of care issues or something that would run out and provide sort of a step up, as it runs out?

Jay M. Gellert – President and CEO: That’s a valid point. One of the actual errors I think we think were made was there was an assumption, utilization reduction and unit cost reduction in the context of continuity of care. We don’t have definitive data there, but we would expect some improvement as continuity of care work waves off. We also are seeing that a large number of the SPD population, much larger than we thought had access issues before, so they weren’t getting adequate and sufficient care and as we track those people now that they have access to primary care, particularly in certain suburban and rural counties that we’re seeing the cost begin to come down. So it’s a combination of the cost of continuity of care that weren’t effectively reflected in the rates and I’m quite honestly surprised at least for our team, that many of them have not – had adequate care and the fee for the services, that managed system is actually bring them greater care in the short term which will yield greater saving down the road and a better quality of care.

Sarah James – Wedbush Securities Inc.: What was the date for the continuity of care runs out?

Jay M. Gellert – President and CEO: Continuity of care runs three to six months from the point of initiation, so the way the process is working on – we started bringing people in June of 2011. We completed most of the enrollment by May of 2012, so we are nearing the end of the continuity process

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