Health Net's Operating Results Impress; High Attrition a Drag

Health Net's fourth-quarter 2015 earnings were in line with the Zacks Consensus Estimate. Earnings, however, improved year over year on higher memberships and moderate health care costs. Notably, this Zacks Rank #3 (Hold) health maintenance organization, delivered positive earnings surprise in two of the last four quarters with an average beat of 5.61%.

Health Net is due to be acquired by Centene Corporation in the first half of 2016. The merger should create a diversified multinational healthcare enterprise that will cater to more than 10 million members nationwide. Moreover, the company completed its transition to a single claims payment platform in the fourth quarter, which resulted in considerable reduction in claims inventory through more efficient claims processing.

Health Net has been witnessing improvement in premiums in Health Plan Services over the past few years and 2015 was no exception to this trend. The segment witnessed an increase of 16.4% in premiums in 2015 on higher membership fees. Moreover, in order to improve its bottom line, the company has been gradually disposing its non-profitable businesses.

Over the past few years Health Net has been strengthening its operating leverage through noticeable expense management. Also, the company’s strong operational performance is reflected by its robust operating cash flow. Improvement in liquidity, new program launches and strong ratings are other positives.

However, rebate payments with respect to medical loss ratio (MLR) are expected to affect the company’s cash flow adversely going forward and thus, weigh on liquidity. Additionally, the overall profitability of the company is likely to be affected by declining profits in the Government Contracts segment. Adverse effects of health insurer fee and high attrition in health plans also remain headwinds.

Stocks to Consider

Some better-ranked stocks from the same industry are Triple-S Management Corporation GTS, Molina Healthcare, Inc. MOH and UnitedHealth Group Incorporated UNH. While Triple-S Management sports a Zacks Rank #1 (Strong Buy), both Molina and UnitedHealth hold a Zacks Rank #2 (Buy).

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