Health Net Profit Falls 45%, Sales Rise

Health Net Inc. said Tuesday that quarterly net profit fell 45%, missing Wall Street expectations, as the health insurer lost members because of premium hikes that stemmed from its failure to accurately predict hospital costs.

The Woodland Hills-based company disappointed investors in May when it forecast 2004 earnings significantly below estimates, blaming the hospital issues.

Miscalculation of costs forced Health Net to hike premiums higher than anticipated, driving members away. Overall enrollment declined about 3% to 3.76 million.

Health Net said second-quarter profit fell to $41.4 million, or 36 cents a share, from $75 million, or 63 cents, a year earlier.

Results included a previously disclosed charge of $15 million for severance costs for 500 employees. The firm announced the cuts, which represented 5% of its workforce, in May.

Excluding the charge of 9 cents a share, the company earned 45 cents a share in the recent quarter. Analysts on average were expecting 50 cents, according to Reuters Estimates.

Revenue rose 5.5% to $2.9 billion.

Health Net said it still believed it could achieve its target of $2.15 to $2.50 a share for 2004, excluding items. That is higher than the average forecast of $2.06 by analysts polled by Reuters before the earnings release.

The company said it expected to earn 67 cents to 77 cents a share in the third quarter, excluding items. The average analyst forecast was 68 cents.

Yet analysts warned that Health Net’s estimates were a stretch at best.

In light of the weak second-quarter results, the 2004 guidance “seems even less credible,” Matthew Borsch, an analyst with Goldman, Sachs & Co., told investors in a research note.

Merrill Lynch analyst Doug Simpson lowered his 2004 estimate based on the quarterly results.

“Given that Health Net remains in a transition period, we believe earnings visibility remains low for the time being,” Simpson said in a research note.

Health Net said soaring hospital costs were still its No. 1 healthcare cost issue, but those costs would probably increase more slowly than in the past.

The company’s shares fell $1.31 to $23.52 on the New York Stock Exchange.