Health Net lost $8.9 million in the third quarter, compared with a $66.8 million profit in the same period a year ago, as the health insurance company incurred millions of dollars in expenses tied to a new outsourcing contract.
Health Net inked a definitive seven-year deal Monday with Cognizant Healthcare Services after signing the letter of intent in August. Under the agreement, Cognizant will manage essentially all of Health Net's core administrative functions, including information technology and claims management. Health Net expects the contract will cut its expenses by up to $200 million by 2017.
However, the Cognizant contract hurt Health Net's bottom line in the short term. The Woodland Hills, Calif.-based insurer said it absorbed $106 million in one-time costs related to the deal in the third quarter.
Aside from the outsourcing deal, Health Net's core businesses performed well and were in line with many analysts' expectations. Revenue increased almost 37% year over year to $3.79 billion. Health Net's commercial, Medicare and Medicaid premiums were all up in the quarter, and the company also recorded $40 million in new premiums from California's dual-eligible program. Dual eligibles are people who qualify for both Medicare and Medicaid. California received approval from the CMS in 2013 to move those patients into private managed-care plans.
The individual market continues to be a source of growth for Health Net. The insurer was one of four dominant players on California's public exchange and had 269,000 enrollees on the individual market as of Sept. 30, an increase of 164,000 people since the same period in 2013.
The top-line growth led Moody's Investors Service to upgrade Health Net's senior debt last week ahead of the third-quarter earnings results. “In addition to improved financial results, Health Net has positioned itself for future growth through participation in the individual health exchanges, Medicaid expansion and the dual-eligibles pilot program in California,” Moody's analyst Steve Zaharuk said in a statement.
Health Net's third-quarter medical-loss ratio, which indicates how much in premiums was spent on medical care, decreased slightly in its commercial business from 84.2% last year to 83.9% this year. But the MLRs for its government businesses increased across the board. Health Net's Medicare Advantage MLR stood at 90.8% in the third quarter compared with 89.9% in the year-ago period, while the Medicaid MLR rose to 84.2% from 79.4%—risks that analysts said could hurt Health Net in the long term if medical costs are not controlled.
A vast majority of Health Net's business is in California. Of the insurer's nearly 3.08 million customers, 86% are California residents. Medicaid members account for more than 50% of Health Net's membership.
Follow Bob Herman on Twitter: @MHbherman
