Update: Health Net Shuffles Top Management Duties as 3Q Net Impacted by Costs

LOS ANGELES, Nov 04, 2008 (A. M. Best via COMTEX) -- HNT | Quote | Chart | News | PowerRating -- Health Net Inc. shifted the responsibilities of top management as it reported its third-quarter earnings results were impacted by higher-than-expected hospital costs.

Net income was $18.5 million, compared with a net loss of $103.8 million the same period a year ago when it took charges on litigation and regulatory matters. Health Net's current-quarter results included a $17.1 million charge for severance and other expenses related to its cost-cutting effort intended to slash administrative expenses, and a $14.6 million charge for impairing the company's investment holdings resulting from the turmoil in the financial markets.

But it blamed its results on higher health care costs, amounting to $55 million pretax. These were driven by adverse prior-period development in the first and second quarters from higher-cost hospital claims, mostly in its commercial book of business. In the third quarter, costs increased in its commercial and Medicare health plans, which it attributed to hospital inpatient and outpatient unit costs and utilization.

Effective immediately, Health Net's board of directors changed the responsibilities of key senior management. The board "is very concerned about the company?s recent financial performance," Roger Greaves, chairman of the board, said in a statement.

Jay Gellert, president and chief executive officer, will focus on the company?s strategy, while Chief Operating Officer James Woys is responsible for all of Health Net's operations, including commercial, Medicare and Medicaid plans, its government and specialty division and all administrative functions.

"Today?s decision reflects the board?s confidence in Jim 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 to focus all of his attention and considerable expertise on the company's strategic direction," Greaves said.

In a Nov. 4 conference call, Gellert dubbed it a "challenging time" for Health Net with the weak economy but nevertheless called the company's results "unacceptable."

"Considering our year-to-date performance, we cannot assume the adverse trends we've seen will abate in the near future," Gellert said, noting Health Net's guidance for the fourth quarter and next year incorporates these trends. "This is no way is meant to excuse or minimize the fact that this quarter's performance is unacceptable."

Gellert said the board directed him "to focus my energies entirely on assessing our strategic challenges and pursuing whatever is necessary to deal with the issues we face" and that "all day-to-day operations" of Health Net are now Woys' responsibility.

Woys "is a proven operator that many of you know and trust," Gellert said. "Every area of the company he's worked in has done well." Woys, who said all health plans now report to him, called the change a "positive step" because it centralizes all operations into a single management structure. "This should help us become more responsive to the changing business, economic and political environments," Woys said.

Like many of its peers in the same predicament, Health Net saw declines in membership, citing the current economic environment and a competitive market. Enrollment in its commercial health plans dropped by 145,000 members to 2.1 million.

Woys also outlined part of the company's cost-cutting strategy. In August, Health Net inked a deal with IBM where IBM will provide Health Net with IT infrastructure services, and at the end of September, Health Net signed an agreement with Cognizant Technology Solutions to outsource its software applications, he said.

By outsourcing these functions, Health Net expects to save about $120 million in the next four years, Woys said.

Total revenues for Health Net rose to $3.8 billion from $3.6 billion, helped by a 9.7% increase in government contracts revenues.

Meanwhile, Stephen Lynch, president of the health plan division, will retire Feb. 28, 2009, and report to Woys during the transition.

Health Net's stock closed at $10.88 a share on Nov. 4, down 18.32% from the previous close.

[This corrects the headline and first sentence].

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

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