Health Profit Disappoints, 500 Jobs Cut
Key points
- Insurer Health Net Inc. on Tuesday said quarterly profit fell by nearly 80 percent, sending its shares sharply lower, and said it will cut 500 jobs in an effort to turn itself around.
- The Los Angeles-based health insurer also forecast full-year earnings below Wall Street's and its own prior estimates, as it underestimated the cost of hospital claims.
- The dismal results reflect a worsening of the company's initial struggles gauging hospital costs in New Jersey.
- Analysts said even the revised, lowered earnings projections given on Tuesday may prove too optimistic.
Insurer Health Net Inc. on Tuesday said quarterly profit fell by nearly 80 percent, sending its shares sharply lower, and said it will cut 500 jobs in an effort to turn itself around.
The Los Angeles-based health insurer also forecast full-year earnings below Wall Street's and its own prior estimates, as it underestimated the cost of hospital claims.
The dismal results reflect a worsening of the company's initial struggles gauging hospital costs in New Jersey. The company discovered the problem is prevalent nationally.
Analysts said even the revised, lowered earnings projections given on Tuesday may prove too optimistic.
"We have little confidence in these new projections," Lehman Brothers analyst Josh Raskin wrote in an investor note, echoing the sentiment of other analysts.
Health Net said it earned $15 million, or 13 cents per share, in the first quarter, compared with $72 million, or 60 cents per share, in the year-earlier period.
That fell far short of the company's forecast given in March of between 51 cents and 55 cents per share. Analysts polled by Reuters Research, a unit of Reuters Group Plc., on average had expected 52 cents per share.
"When migrating from one system to another, that increases the likelihood of mispricing," said Doug Meyer, a Fitch Ratings analyst. "There are a lot of moving parts to this business."
JOB CUTS
Health Net said it would cut 500 jobs and take a $15 million charge in the second quarter for severance as part of its efforts to return to financial health.
Jay Gellert, chief executive of the HMO, told investors on a conference call the company will cut the jobs, representing more than 5 percent of its work force, to drive down administrative costs. He told analysts he is aware that the company needs to win back the confidence of investors.
Analysts were split on whether Health Net's woes were company-specific or a reflection of industry problems.
HMOs were a refuge for investors during the last market downturn, posting double-digit profit growth and surging stock prices.
Now, some believe premium pricing has hit its peak and a retreat is imminent, which will result in squeezed margins.
"We see Health Net results as a signal that a downturn in the industry underwriting cycle is finally at hand," Matthew Borsch, a Goldman Sachs analyst, told investors in a note.
Borsch cited First Health Group and Humana Inc. as examples of other companies with recent pricing woes. Both companies warned of increasing price competition in first-quarter conference calls.
Health Net said it is boosting premiums for the rest of the year to offset the expected earnings shortfall.
Written and revised by
David Cohen, M.D.
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