New Growth, New Costs For Health Net

The Affordable Care Act has helped boost Health Net's enrollment during the first quarter of 2014, but costs associated with a pricey hepatits drug and other issues have caused expenses to balloon, cutting into the Woodland Hills-based health plan's earnings.

Health Net reported net income of $28.8 million for the quarter ending March 31, a drop of 41% from the $50 million in net income it reported for the first quarter of 2013. Revenue for the 2014 quarter was $3 billion, up 7% from the $2.8 billion reported a year ago.

Overall enrollment reached 2.64 million during the quarter, up 8.1% from the fourth quarter of 2013, when enrollment through the state's health insurance exchanges began in earnest. It was up 6.7% from a year ago. Virtually all of the bump came from individual and small group enrollments, which were up 18.2% from the end of last year, and Medi-Cal and Medicaid, which was up 16.1%. Large group enrollments declined 11.2% since the fourth quarter of 2013.

Those numbers do not include members of the military and their dependents who use Health Net via the Tricare program.

Health Net Chief Executive Officer Jay Gellert said in a conference call announcing earnings that the plan had enrolled 153,000 new lives through the exchanges, including 54,000 during the month of April. It represents about one-third of the enrollments in Southern California via the Covered California health insurance exchange.

Meanwhile, some patient expenses have soared – particularly for the new drug that is being touted as a cure for hepatitis c. 

Gellert said filling prescriptions cost $10 million during the quarter, and is estimated to add $35 million in additional expenses for all of 2014.

General and administrative expenses soared for the quarter, reaching $361 million, up nearly 50% from the year-ago quarter, when they were only $245.2 million. Gellert attributed that to taxes, new hires and other extra expenses related to the ACA.

“We had to onboard approximately 300,000 new ACA members, and prepare for substantial future growth throughout the year,” Gellert said. “What's encouraging on G&A is that we expect the first quarter level of absolute expenditures to remain approximately the same for each of the last three quarters since the associates who are serving and preparing for these new members are already on board.”

Despite the lower net income reported for the quarter, Health Net’s stock has been on a tear since its earnings were announced earlier this month. It was trading at around $34 a share on the New York Stock Exchange prior to the earnings release, but is now trading at around $40 a share -- its highest price since April 2012.