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Health Net Forecast Hurts Stock

February 12, 2004|Lisa Girion | Times Staff Writer

Health Net Inc. reported Wednesday that its fourth-quarter profit doubled, but the health insurer's stock tumbled as much as 14% on a downbeat forecast for the first quarter and all of 2004.

Woodland Hills-based Health Net said earnings would be 51 to 55 cents a share in the first quarter and $2.92 to $3.07 a share for the full year -- both below Wall Street's estimates.

The company said the gloomy forecast reflected the expense of consolidating its claims systems. Health Net also expects an estimated gap of $30 million this year between what it charges many of its 350,000 members in New Jersey and what it has agreed to pay hospitals and doctors there. In addition, the extra day in February -- because 2004 is a leap year -- will cost the company $20 million in the first quarter.

"That alone is worth a dime a share," Chief Executive Jay Gellert said of the extra day.

Disappointed investors dumped Health Net's stock, which fell as much as $4.65 before closing down $4.13, or 12.7%, at $28.31 on the New York Stock Exchange, where it was the day's third-biggest percentage decliner.

The forecast overshadowed a doubling of fourth-quarter profit from a year earlier, largely because of sales gains and some success in reining in medical cost increases. The company posted net income of $90.3 million, or 78 cents a share, compared with net income of $45.2 million, or 36 cents, in the last three months of 2002.

Health Net reported a 5% increase in fourth-quarter revenue to $2.78 billion. Defense contracts brought in $464.2 million in the fourth quarter, 15% more than a year earlier. The company cited the growing need for military families to venture into the private sector for healthcare as military doctors and nurses are sent abroad to tend to American troops.

Gellert spent much of a conference call with analysts explaining the company's problem in New Jersey, which he said stemmed from its purchase several years ago of a physician-owned health plan.

Most of the doctor and hospital provider contracts in the statewide network came up for renewal in the second half of 2003. The company didn't realize how much its costs would jump under the new contracts, Gellert said. As a result, those cost increases weren't reflected in the contracts Health Net negotiated last summer with members.

Gellert said Health Net would realign its expenses and premiums in New Jersey when contracts are renewed this year, and the company was working to correct the problems that led to the disconnect.

"We view this as a huge embarrassment and an error we take very personally," Gellert told analysts.

Goldman Sachs' Matthew Borsch said the company's failure to adequately gauge the New Jersey market was a concern.

"What we've seen in the past is when a company misprices in one market, it may have mispriced in other markets as well," Borsch said. "We don't know that. But that's an issue for caution."

Health Net, which has 2.5 million members in California and 5.3 million altogether -- said medical cost increases were starting to slow. That helped the company hold healthcare cost increases to 5.3% in the fourth quarter compared with a year earlier. Enrollment growth was down last year, largely due to the Jan. 1, 2003, loss of the California Public Employees' Retirement System and its 175,000 members.

For the full year, Health Net reported net income of $235.1 million, or $2.03 a share, on revenue of $11.1 billion, compared with $228.6 million, or $1.82, on revenue of $10.2 billion in 2002. The company said it restated results for the first three quarters of 2003, in part to reflect workers' compensation expenses. The restatements boosted 2003 income by 3 cents a share.

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