Health Net weighs jettison of health plans in 4 states

Following a year of declining profits, the company wants to boost cash reserves.

By Emily Berry — Posted April 6, 2009

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Health Net President and Chief Executive Officer Jay Gellert told investors and analysts during a recent meeting that the California-based insurance company wants to "liberate the capital" tied up in some of its business in the Northeast and Arizona.

Translation: Health Net is considering selling a chunk of its commercial heath plan operations.

The goal is to boost its cash holdings and consolidate its business on the West Coast, where it has a larger share of the insurance marketplace.

With a buyer expected from the ranks of other large, publicly traded health insurers, any possible sale raises the specter of market concentration which, according to AMA data, is already the rule throughout most of the nation.

No Health Net operations have been officially put up for sale. "The strategic review continues, and we're looking at all our options," said company spokeswoman Margita Thompson. "Doctors' contracts will remain as they are until or if a transaction closes."

It's unclear what Health Net's departure from some of its current markets would have on physicians who contract with the plan.

The membership it is looking to sell is not insignificant to Health Net, even if it is small in comparison with the market heavyweights such as UnitedHealthcare and Aetna in the Northeast or the Blues in Arizona.

Gellert said Health Net's business in New York, New Jersey, Connecticut and Arizona brings about $3.8 billion in annual revenue, or about 24% of its total revenue for 2008.

The company's commercial membership for these four states was nearly 540,000 as of Dec. 31, 2008, or about one-quarter of its total commercial membership. However, it is not among the top two largest plans in New York, New Jersey and Arizona, according to an AMA study of health plan market share. Connecticut data were not available for the study.

Leaving those markets would free up at least $500 million in cash, Gellert said.

He said Health Net was considering other ways to "get an adequate return" on its membership in those areas, but noted that options other than a sale would be difficult. That's because administrative costs are about 5% higher in the Northeast, where operations are smaller, than for its core operations in California. Health Net has more than 1.3 million commercial members in California, and 132,520 in Oregon.

Health Net's membership leans more toward fully insured policies, under which a company pays a premium to an insurer to cover its claims, said Susanne Madden, president and CEO of The Verden Group, a Nyack, N.Y.-based consulting firm that studies plans' dealings with physicians.

That's opposed to the self-insured or administrative-only arrangements under which a company pays employee claims itself and hires a health plan to just administer claims. Fully-insured business is more profitable, but most large health plans now hold more than half their membership as administrative-only, Madden said.

Louisville, Ky.-based Humana is the most likely buyer, given its healthy cash reserves, an exception among health plans, she said.

Given Humana's relatively small market share in all of the areas Health Net wants to sell off, adding Health Net's business might elicit less of a backlash from physician organizations and others opposed to health plan consolidation, Madden said.

Humana declined to comment.

Health Net has few options for survival but to raise capital by selling parts of its business, Madden said. "They have just been slammed the last year or so."

Gellert called 2008 a "rough" year for the company. Health Net saw a more than 48% drop in profits from 2007 to 2008, even though revenue increased 9.2%.

Health Net had a sharper decline in earnings than five of the other six largest publicly traded companies.

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