Health Net, Inc. (HNT) provides health plan coverage through private and government programs, ranking 13th in total enrollment among all U.S. health plan providers. HNT also ranks among the top 10 health plan providers by managed Medicaid enrollment and commercial HMO enrollment. Its business is heavily concentrated in California, with 42% of revenues coming from California operations.
HNT's profitability is measured by the benefits cost ratio (BCR), which is the percentage of medical claims the company paid divided by the premiums it received. By aggressively increasing premiums on private health plans and dropping unprofitable members, HNT improved (decreased) its BCR by 400 basis points to 85.4% in 2005 and by another 130 basis points to 83.0% in 2006. However, HNT's BCR increased to 85.4% in 2007, reflecting an increase in the cost of health care services On March 11, 2008, HNT's share price fell 20% from $41.50 to $34.58 after WellPoint, a competing managed care organization, cut its earnings outlook for 2008, citing higher than expected medical costs, lower than expected enrollment, and a difficult economic environment.
Health Net administers health maintenance organization (HMO), insured preferred provider organization (PPO), and point-of-service (POS) plans for more than 6.6 million individuals through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. The company's behavioral health subsidiary, Managed Health Net, provides behavioral health, substance abuse and employee assistance programs to approximately 7.0 million individuals, including its own health plan members. HNT also owns subsidiaries which are licensed to sell life, accidental death and disability insurance in 33 states and the District of Columbia as well as provide pharmacy coverage under the Medicare Part D prescription drug benefit program.
HNT divides its operations into two segments: Health Plan Services, which was responsible for 81% of total revenue in 2007, and Government Contracts, which brought in 18% of total revenue in 2007. In addition to members enrolled in private health plans and the activities of it subsidiaries providing life insurance and mental health services, the Health Plan Services segment also includes contracts the company has negotiated with the federal Center for Medicare Services and individual state Medicaid agencies to provide health coverage to Medicaid and Medicare recipients. As of December 31, 2007, Health Net had approximately 3.8 million members in its Health Plan Services segement, with 3.3 million at-risk (fully covered), 0.1 million administrative services only (ASO) and 0.4 million Medicare stand-alone Part D prescription drug benefit members.
Source: HNT 2007 10-K
The Government Contracts segment is exclusively comprised of military-related government contracts, most importantly the company's contract to provide health coverage for TRICARE enrollees in the North Region, which covers approximately 2.9 million Military Health System (MHS) eligible beneficiaries. TRICARE is the U.S. Military health plan for military personnel, military retirees and their dependents. This segments also includes other health plans the company administers for the Department of Defense and the Department of Veterans Affairs.
The company operates health plans in two regions: the West and the Northeast. The West is comprised of California, Arizona, and Oregon, while the Northeast encompasses Connecticut, New Jersey, New York and Pennsylvania. Approximately 70% of the company's health plan membership comes from the West region, with the majority from California.
HNT's business is heavily concentrated in California, with 42% of revenues coming from California operations. Negative publicity stemming from a California Department of Managed Health Care (DMHC) investigation into HNT's discontinuation of coverage for members with serious illnesses has resulted in an increasingly hostile regulatory environment for managed care organizations in that state. In October 2007, the California DMHC and California Department of Insurance (DOI) announced they would be placing restrictions on the ability of managed care organizations to rescind coverage and would be requiring the companies to pay health care providers, such as hospitals, for care given to a members whose coverage was rescinded after the care was provided. 
In 2007, the company focused on adding more small group (employees from companies with less than 50 employees) and individual members to its commercial health plans. On May 31, 2007, the company acquired 100% ownership of its HealthCare Solutions business, buying out the 50% stake held previously by The Guardian Life Insurance company for $83 million. HealthCare Solutions encompasses all of HNT's small group and individual members in Connecticut, New Jersey and New York.
HNT's profitability is impacted by various factors, including its ability to forecast health care costs for its members, attract new members and negotiate favorable contracts with health care providers. In its 2007 annual report, management identified hospital-based products and services as the company's fastest growing cost, citing an aging population, growing rates of uninsured individuals and relatively low levels of competition among hospitals in some areas due to consolidation as driving factors.
|Health Plan Services premiums||11,435,314||10,364,740||9,506,865|
|Net Investment Income||120,176||111,042||72,751|
|Administrative Services Fees and Other Income||51,104||56,544||53,434|
|Health Plan Services||9,762,896||8,600,443||8,013,017|
|SG&A, Depreciation & Amortization , Interest Expense||1,678,861||1,487,387||1,256,990|
|Total Expenses, excluding one-time charges
such as debt refinancing and litigation
Source: HNT 2007 10-K
Approximately 46% of HNT's revenues relate to federal or state health care programs, such as Medicaid, Medicare and TRICARE. Funding levels for Medicaid programs are determined by individual states, which control payments made to Medicaid service providers like HNT and institute additional regulations. Among state Medicaid programs, changes to the California program, known as Medi-Cal, have the greatest impact on HNT's revenues.
As of April 1, 2008, HNT withdrew from the Connecticut Medicaid program after a decision by the Connecticut Freedom of Information Commission would have required the company to disclose the reimbursement rates it pays to health providers as well as its list of preferred drugs. The company said the requested information was proprietary and cited persistent underfunding from the state legislature as reason for its departure.
Federal Medicare programs account for a significant portion of HNT's business, representing 20% of the company's revenue in 2007. In 2007, HNT expanded its offerings under the Medicare Part D and Medicare Advantage programs, in which Medicare beneficiaries get their benefits through private health insurers who receive payments from Medicare. HNT and other managed care organizations have benefited from the Bush Administration's efforts to increase the role of the private sector in government-sponsored health care programs, but Medicare program trustees warned in March 2008 of the need to rein in expenses as the program expects to pay out more than it collects in payroll taxes in 2008, as the continued aging of the population has increased the number of enrollees in Medicare programs and the cost of providing care to beneficiaries. Medicare programs are more costly and less profitable for HNT than its commercial health plan business. The company's benefits cost ratio for Medicare programs was 89.3% in 2007, compared to 88.5% for its non-government sponsored health plans.
Persons applying for medical insurance are typically required to provide information about their medical history as well as that of family members for whom they are seeking coverage. Prior to 2008, if a health plan or insurance provider such as HNT determined that a member misrepresented their medical history it was allowed to rescind the member's coverage and refuse payment to health providers. However, regulations imposed by California's Department of Managed Health Care (DMHC) now require that HNT and other health plan providers must, under certain circumstances, pay providers for services rendered to a member whose coverage was later rescinded.
In a high-profile February 2008 case, a California judge ruled against HNT after one of its members sued, claiming the company had rescinded coverage once she began treatment for breast cancer. HNT said it rescinded coverage because she had misrepresented her weight and failed to disclose a heart murmur. The judge awarded the woman $9.4 million, calling HNT's conduct "reprehensible." HNT is also a subject of a California DMHC inquiry into its rescinding policies and the defendant in a class action lawsuit brought by members who feel the company illegally rescinded their coverage. The resulting media attention and regulatory scrutiny make it difficult for the company to rescind policies, thereby increasing its expenses on health services and decreasing its net income. Approximately 42% of HNT's revenues come from its California operations, with 65% of its commercial members and 85% of its Medicaid members residing in the state. 
HNT collects premiums in advance of providing services, so it is important that the company accurately forecast the cost of health services and supplies it will deliver to members. An outbreak of pandemic disease can significantly impact net income by causing the company to incur expenses that were not taken into account when calculating its premiums for the upcoming year. As an example, an unusually active flu season during the first quarter of 2008 reduced pretax income for that period by $20 million.
HNT competes with other managed care organizations (MCOs), such as UnitedHealth Group (UNH), Coventry Health Care (CVH), Humana (HUM) and WellPoint Health Networks (WLP). Managed care organizations compete largely based on the price of their offerings, although scope of coverage provided is also an important factor. Size, market share, and the corresponding advantage in securing favorable contracts with health providers and suppliers give an MCO a competitive advantage. In the market for private health insurance in California, Health Net's primary competitors are Kaiser Permanente (the state's largest HMO by enrollment), UnitedHealth Group (UNH) , and Blue Cross and Blue Shield of North Carolina (the state's largest PPO provider by enrollment). HNT's comparably small size and market share in the HMO and PPO private health insurance market put it at a competitive disadvantage when negotiating contracts with providers and attracting new members.
In January 2004, Congress passed legislation allowing for the creation of Health Savings Account (HSA) plans, in which members can use tax-free savings accounts to pay for plan deductibles and out-of-pocket health care expenses. These plans typically have high deductibles and are designed to save companies and employees money on health care costs. Health Net has been slower to introduce and market its HSA-compatible plans, and HSA plans represented a very small percentage of revenue in 2007. This puts HNT at a competitive disadvantage relative to some peers, such as Aetna (AET) and Blue Cross/Blue Shield, who have aggressively moved into this area and taken significant market share.
A key metric used to evaluate the profitability of MCOs is the benefits expense ratio, which is essentially a ratio of (cost of goods sold / sales revenue) with cost of goods sold being expenses on health care services for members and sales revenue being premiums collected from members. This ratio is also referred to as the medical loss ratio or medical care ratio.
|Coventry Health Care (CVH)||79.6%||79.3%||79.4%|
|WellPoint Health Networks (WLP)||82.4%||81.2%||80.1%|
|Health Net (HNT)||85.4%||83.0%||84.3%|
|WellPoint Health Networks (WLP)||30,242,907||1|
|UnitedHealth Group (UNH)||17,080,995||2|
|Health Care Service Corporation||12,109,624||4|
|CIGNA Corporation (CI)||9,081,140||6|
|Blue Cross Blue Shield of Michigan||4,570,981||9|
|HIP Health Plan of New York||4,002,227||10|
|Independence Blue Cross||3,420,610||11|
|Horizon Blue Cross Blue Shield||3,377,000||12|
|Medical Mutual of Ohio||3,056,234||14|
|Blue Cross and Blue Shield of Florida||2,987,955||15|
Source: AIS Market Data. Includes enrollment in HMOs, PPOs, POS, Medicare, Medicaid and FFS managed medical plans, for companies that offer fully insured managed care products; does not include specialty benefit enrollment.