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Health Net shifts management after weak earnings report

Girion is a Times staff writer.

Woodland Hills-based insurer Health Net Inc. announced a management realignment Tuesday amid weak profit and a downward revision of its earnings projections for 2008 that sent shares sliding.

The company posted third-quarter earnings of 17 cents a share. Excluding charges, earnings would have been 35 cents a share -- well off the Thomson Reuters analysts’ consensus of 88 cents a share and down from 99 cents a year earlier.

Health Net’s shares fell $2.44, or 18%, to close at $10.88.

It is the latest health insurer to skid on deteriorating economic conditions roiling the industry. It said hospital costs were driven up by higher charges as well as a rise in hospitalization among members.

Chief Executive Jay Gellert said the company was disappointed by its results.

“Our business and the market as a whole have been hit harder by the economy and related unit cost and utilization trends than we have experienced in the past,” he said in a statement. “We are now assuming that these trends will continue into 2009.”

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Health Net also said its membership of more than 3.7 million at the end of the third quarter was down 4,000 from a year earlier and 35,000 from June 30. The company blamed the decline on losses to competitors as well as people dropping insurance altogether in the weak economy.

Net income for the third quarter was $18.5 million on revenue of $3.8 billion. By comparison, the company lost $103.8 million on revenue of $3.6 billion for the same quarter a year earlier, owing to charges related to litigation and regulation.

One-time charges for the quarter included $14.6 million in investment losses and $17.1 million in severance and other costs related to outsourcing. The company declined to say how many jobs were affected by the outsourcing of information technology work to IBM Corp. and Cognizant Technology Solutions Corp.

The board responded to the company’s financial results with a management realignment. Gellert was removed from the supervision of daily operations to focus on strategy and “how best to deploy the company’s assets in the current competitive and economic environment,” the board said in a statement.

Chief Operating Officer James Woys was given responsibility for all operational matters, including commercial, Medicare and Medicaid business, the board said. The board also said Stephen Lynch, president of the company’s health plan division, would retire in February.

Chairman Roger Greaves said in a statement that the board was “very concerned about the company’s recent financial performance. We believe that by refocusing management resources, we can address our challenges with greater intensity.”

Greaves said the changes reflected the board’s confidence in Woys “as a strong and effective leader of Health Net’s operations. In light of the economic uncertainty surrounding our industry and the likelihood of public policy changes, we have directed Jay [Gellert] to focus all of his attention and considerable expertise on the company’s strategic direction.”

The company also reduced its full-year expectations, excluding charges, to $1.85 to $1.89 a share, down from previous guidance of $2.85 to $2.95 a share.

The third quarter at Health Net was “very ugly” and “has taught us at least one lesson: The weakest operators in good times will still be the weakest operators in bad times,” Matt Perry, a vice president in equity research at Wachovia Capital Markets, wrote to clients.

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Diane Levick, a Hartford Courant staff writer, contributed to this report.

lisa.girion@latimes.com


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