Health Net Reports 45% Drop in Q2 Earnings Because of Inaccurate Hospital Cost Predictions

Woodland Hills-based Health Net on Tuesday reported that second-quarter net income decreased by nearly 45% to $41.4 million, or 36 cents per share, from earnings of $74.8 million, or 63 cents per share, a year earlier because of severance costs related to a workforce reduction and higher overall health care costs, the Wall Street Journal reports. The company's second-quarter revenue increased by 6% to $2.92 billion from $2.75 billion a year earlier, in part because of increased commercial and Medicare premium yields, the Journal reports. Total health care costs for the managed care company's health plans increased by 11% for the quarter (Wall Street Journal, 8/4).

The second-quarter earnings results included a $15 million charge for severance costs related to the laying off of 500 employees, or 5% of company personnel. The company attributed the reduced earnings to premium increases resulting from a miscalculation of hospital costs, which contributed to an approximately 3% drop in health plan enrollees. Health Net currently has about 3.76 million members.

Health Net in May "disappointed investors" by forecasting 2004 earnings "significantly" lower than analysts' estimates, Reuters/Los Angeles Times reports. Analysts had estimated second-quarter net income of 50 cents per share for the company, according to Reuters Estimates. However, Health Net re-affirmed its full-year earnings guidance of $2.15 to $2.50 per share, excluding items, despite analysts' full-year forecasts of $2.06, according to Reuters/Times. The company said it expects third-quarter earnings of between 67 cents and 77 cents per share. Analysts' average third-quarter earnings forecast for the company is 68 cents per share.

Merrill Lynch analyst Doug Simpson lowered his full-year earnings estimates for the company based on the second-quarter results, saying that the company is "in a transition period" with low "earnings visibility."

Health Net officials said hospital costs remained its most important spending issue, adding that those costs are expected to grow at a slower rate than in the past (Reuters/Los Angeles Times, 8/4). Health Net said it "believes strengthened medical-management practices and new provider-contracting strategies are starting to have an impact on health care cost trends," the Journal reports (Wall Street Journal, 8/4).