Health Net slashes profit forecast again as medical costs rise
Woodland Hills insurer Health Net Inc. slashed its full-year profit outlook for the second time this year as some of the company’s customers incurred higher-than-expected medical costs.
The news sent company shares tumbling $4.34, or 19%, to $18.36 in trading Friday. Health Net cut its 2012 profit forecast to a range of $1.45 to $1.55 a share, down from $2.85 to $3 a share.
Analysts said it will be difficult for management to regain investor confidence after two consecutive disappointing quarters. “Their stock is getting punished pretty badly and they will have to prove themselves again,” said David Windley, an analyst at Jefferies & Co.
The company’s second-quarter results underscored the challenges some insurers are experiencing as healthcare costs climb higher and many employers and government health programs press for lower premiums.
Health Net said its medical costs among employer accounts grew 8.2% during the quarter that ended June 30 while premiums rose only 4.6%. The company also said commercial enrollment declined 7.4% as price competition from rival insurers intensified.
Overall, Health Net has 2.6 million customers in private, Medicare and Medicaid health plans, with the bulk of those customers in California. The company also has nearly 3 million members across 23 states through TriCare, the federal health program for military members and their families.
In a bid to hold down costs, Health Net and other insurers are forging smaller networks of doctors and hospitals that further restrict workers’ access to some medical providers in exchange for lower premiums for employers. The company said enrollment in those plans, called tailored or narrow networks, grew 7% from a year earlier.
Another growth area for many insurers is Medicaid, the state and federal program for the poor and disabled. Health Net said its enrollment in Medi-Cal — California’s Medicaid program — grew 10%, or nearly 100,000 people, compared with a year earlier.
But Health Net Chief Executive Jay Gellert said the cost of caring for some of those Medi-Cal patients increased more than expected, and as a result the company is seeking rate increases from state officials.
“Nobody will take this on with insufficient rates, and the state realizes that,” Gellert said on a conference call with analysts and investors. A spokesman for the California Department of Health Care Services confirmed that those negotiations were ongoing.
Health Net’s second-quarter earnings more than doubled to $124.6 million, or $1.48 a share, compared with $58.3 million, or 63 cents, a year earlier. But excluding a one-time gain from the sale of its Medicare prescription-drug business, adjusted earnings last quarter were 6 cents a share. That fell far short of analyst expectations.
Revenue in the quarter increased to $2.8 billion, up 7% from a year earlier.
