Health Net Posts 79% Profit Drop, Sets Layoff Plans
Health Net Inc. said Tuesday that its first-quarter profit fell 79% largely because of unexpected hospital claims. The Woodland Hills-based health insurer also cut its full-year earnings estimate and said that it would lay off about 6% of its workforce, primarily in the Northeast.
The news drove Health Net’s stock to a 52-week low of $22.58 on Tuesday before closing at $23.72, down $1.78, or 7%, for the day on the New York Stock Exchange.
Health Net’s earnings for the quarter were $15 million, or 13 cents a share, compared with $72.1 million, or 60 cents, a year earlier, when the managed care industry reaped high profits.
The company’s revenue rose 7.8% to $2.92 billion.
“Clearly we are disappointed with what we are reporting today,” Health Net Chief Executive Jay Gellert said in a conference call. “We have already begun to raise prices. We will start to see some effect in the second quarter.”
Other insurers, such as Humana Inc., also have warned of tougher times ahead.
Health Net will take a charge of $15 million in the second quarter to cover severance costs for the 500 workers who will be laid off. The company also reduced its earnings estimate for the year to $2.15 to $2.50 a share, from the $2.92 to $3.07 a share it predicted in February.
But even the new projections “require a leap of faith that everyone is not likely to make,” said Banc of America Securities analyst Joseph D. France. “You would have to assume a dramatic change in pricing or a dramatic change in costs.”
Health Net executives said they discovered in March that the company had underestimated medical costs by about $64 million for hospital care provided in 2003 and earlier. They blamed the error in part on efforts to put the company’s healthcare data on a single computer system.
One piece of good news for Health Net is there was a modest increase in the company’s 3.8 million health plan members when compared with the first and the last quarters of 2003.
Health Net also recorded an 11% increase in revenue to $503.9 million for the quarter from its Tricare contract with the federal government.
Health Net’s Tricare contract calls for it to provide dependents of military members and retirees with most of their healthcare at military facilities.
But at the moment, with many medical personnel overseas, dependents and retirees must seek more expensive private care at facilities with whom Health Net has contracts, which generates higher profits for Health Net.
