Q3 2012 Earnings Call Transcript

Transcript Call Date 11/05/2012

Operator: Good morning, everyone, and welcome to this Health Net, Incorporated Third 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, McKenzie, and thank you all for joining us for a discussion of Health Net's third quarter 2012 results and agreement with the California Department of Healthcare Services covering our state sponsored health plans.

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. On our second quarter call in August we outlined a three step process to get Health Net back on track. I'd like to update you on that and discuss our third quarter performance.

First in terms of our recovery process we highlighted three items in August. One we had to address pricing issues in certain commercial full network large group accounts, totaling about 100,000 members. Second there had to be no additional negative prior period reserve development in 2013. Third we had to stabilize our relationship with the state of California in our medical plans including the FPDs.

We have made substantial progress on all three fronts since our last call. First, we acted on the issues in the large group accounts. These actions are effective January 1, 2013.

Accounts totaling 60,000 members have renewed at an average rate increase of more than 13%. Account totaling 35,000 members will not renew on January 1. We do expect some additional in-group attrition through 2013 due to our pricing discipline. As a result of these steps alone, the commercial MCR should improve by 50 basis points to 70 basis points in 2013.

In addition, we continue to be disciplined with all other renewals in the commercial book and are willing to absorb additional reductions in unprofitable membership. Second, we had no adverse prior period development in the third quarter. Our reserves are more than $150 million higher than 3Q '11 and $20 million higher than 2Q '12, adjusted days claims payable is up sequentially and year-over-year. Third, while we're still working with this date on our 2012, 2013 rates for the SPDs at initial rates for the dual-eligibles.

We have come to an agreement with the state on a comprehensive long-term arrangement regarding all state health plan contract. This arrangement addresses issues in Medi-Cal including the SPDs, the new dual eligible demonstration pilot and future Medi-Cal expansion. At its heart, this agreement removes a great deal of uncertainty regarding this program and stabilizes it for our current and future Medi-Cal beneficiaries. The agreement also includes provisions for the dismissal of all existing rate-related litigation prior to 2011.

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