http://www.morningstar.com/earnings/41787422-health-net-inc-hnt-q2-2012.aspx

Health Net Inc HNT
Q2 2012 Earnings Call Transcript

Transcript Call Date 08/03/2012

Operator: Good morning, everyone, and welcome to this Health Net Incorporated Second Quarter 2012 conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Angie McCabe, Vice President of Investor Relations. Please go ahead.

Angie McCabe - VP, IR: Thank you, Christie and thank you all for joining us for a discussion of Health Net's second quarter 2012 results.

During this call, we will make forward-looking statements that are subject to certain risks and uncertainties. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC as well as the cautionary statements in our press release issued in advance of this call.

In today's call, we will refer to adjusted days claims payable. This adjusted metric is not being presented in accordance with generally accepted accounting principles or GAAP.

Please refer to today's press release, which is available on the Company's website for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure; days claims payable.

I will now turn the call over to Jay Gellert, Health Net's CEO.

Jay M. Gellert - President and CEO: Thank you, Angie and good morning. I want to answer three basic questions this morning. One, how did this happen, two how do you know we've gotten it all and three, can we give you confidence, we can fix this for 2013. So first, how did this happen? Two factors had the greatest influence on second quarter results, commercial large group full network products and SPD experience particularly outside Los Angeles County. Let me talk first about commercial. Our lower than expected, second quarter was largely driven by factors arising from a select number of our largest groups, mostly multistage using our whole network products.

In total, these accounts are running MCRs above 100% they include about 100,000 members and were the primary factor driving 150 basis point change in commercial spread guidance. The deterioration is largely driven by adverse risk selection. As we’ve noted in the past, price competitions has been particularly intense in these large groups and the move to ASO continues to grow. ASO offerings tend to have lower benefits and/or higher out-pocket costs.

As a result, the traditional full network HMO products tends to retain a disproportionate number of high-cost members, when offered by side-by-side with these ASO plans in Kaiser in (slice) accounts. This trend has exacerbated in recent years. The key in these specific groups is pricing to the risk profile without regard to retention. We will not sell or renew (group’s flow cost) in 2013.

We are taking other steps as well. We’ve modified provider network configurations and intensified medical management. We’re also offering our tailored network products as an alternative. These products have done remarkably well in smaller and midmarket accounts and in the few large groups where they been adopted. Because of these steps, we could lose up to 50,000 members among these largest groups next year. In the rest of our commercial book, midmarkets and small groups, as well as tailored network product in large group, we believe we're doing well. Recent regulatory filings show that our small group MCRs are among the lowest in California helped by the rapid growth of tailored network products. To further support this, if we put prior period development back into the proper periods, we see year-over-year improvement in the overall California commercial MCR for the first half of 2012 even with the large group headwinds.

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