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Health Net, Inc. (NYSE:HNT)

Q4 2008 Earnings Call Transcript

February 3, 2009 11:00 am ET

Executives

Angie McCabe – VP, IR

Jay Gellert – President and CEO

Jim Woys – EVP and COO

Joe Capezza – EVP and CFO

Analysts

Matthew Borsch – Goldman Sachs

Carl Mcdonald – Oppenheimer

Kyle Smith – Jefferies & Company

Josh Raskin – Barclays Capital

Charles Boorady – Citi

Justin Lake – UBS

John Rex – J.P. Morgan

Greg Nersessian – Credit Suisse

Operator

Good day, everyone, and welcome to this Health Net, Inc. fourth quarter and full year 2008 conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Angie McCabe, Vice President of Investor Relations. Please go ahead, ma’am.

Angie McCabe

Thank you, Kayla. Good morning. During this call, we will make forward-looking statements that are subject to certain risks and uncertainties. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC as well as the cautionary statements in our press release issued in advance of this call.

Health Net reported earnings per diluted share of $0.34 in the fourth quarter of 2008, including approximately $47.8 million in charges. Excluding the charges Health Net’s earnings per diluted share was $0.61.

In today’s call, we’ll refer to various adjusted amounts that exclude the impact of the charges taken in the fourth quarter and throughout 2008. Unless otherwise noted, these adjusted amounts are in not accordance with Generally Accepted Accounting Principles. Today’s press release, which is available on the Company’s website includes a reconciliation of non-GAAP financial measures with operating results, excluding these charges.

In addition, a supplemental schedule showing a breakout of reserves and health care costs per capitation, provider settlements and the impact of Part D is included in the press release. These supplemental items provide the basis for discussion of operating metrics excluding the charges where appropriate and discussion of days claims payable, excluding the costs noted above.

Let me now turn the call over to our CEO, Jay Gellert. Jay?

Jay Gellert

Thank you, Angie and good morning everyone. In our Investor Day last November, we laid out a plan to improve our performance and increase shareholder value. The plan consisted of the following

First, hit our Q4 target. Second, realize adequate returns from the money we have invested in Northeastern Arizona. Third, achieve our 2009 plan through improved performance in Medicare and in our commercial businesses in California and Oregon, and through the continuation of our operation strategy. And fourth, to vision ourselves for the future with a strong balance sheet, targeted growth strategies in our California and Oregon markets, continued success in Medicare, Medicaid and TRICARE and a solid position from which we can respond changes in government policy and the environment.

We have made substantial progress since November with our plan. We met our fourth quarter expectations. Today, we reported an adjusted diluted EPS of $0.61. Our adjusted Health Plan MCR was 85.5%, while the adjusted commercial MCR was 84.4% and the adjusted G&A was 9.5%, in line or better than what we guided to in each category.

Our balance sheet is strong with approximately $150 million of cash as apparent, a current ratio of 1.6 times. Tangible net equity of $843 million and an increase in days claims payable between the third and fourth quarters of 2008.

We are encouraged by our 2009 prospects. January 1 enrollment is coming a little better than we thought with strong commercial yield increases of 9% PMPM and a positive yield to cost spread. We are particularly encouraged by the strength of our narrow networked commercial products. Our Medicare MA enrollment is coming in the right place where our network model plans are well established.

This will aid us in meeting our margin improvement goal of 150 basis points in MA MCR in 2009. Our Part D enrollment decreased in the places where we sustained losses last year, giving us increased confidence in our goal of the 500 basis point MCR improvement year over year. We slightly ahead of schedule with our operations strategy, and the acceleration in asset write offs reflects it.

Cash flow for 2009 is expected to be better than prior guidance as the Medicare Part D receivable that we accrued in Q4 due to our 2008 expense will be paid to us by CMS in 2009. The Part D receivable is impacted by the fact that our members are primarily dual eligible and the government’s owes us for both the members share in the doughnut hole as well as catastrophic reinsurance.

We are actively engaged in the Northeastern Arizona process, where we have more than $500 million in excess capital that is currently not producing an adequate return. Upon completion of this process, we believe we will be positioned for the future with solid commercial and Medicare operations, TRICARE, Medicaid and a more efficient G&A structure. It also will allow us to continue to develop products and services attuned to the changing environment.

With regard to the changing environment, the first round of activity under President Obama is starting to pick up. The federal stimulus plan enhances corporate by providing premium assistance and by extending the period of corporate coverage. This could lead to more corporate members in a more representative mix of corporate members. We also believe that the proposed FMAP increases will help secure funding for Medicare.

As we can see in Q4, the economy is placing additional demands on this program. In addition, Congress passed an extension of the SCHIP program, which is estimated to cover more than 4 million children on top of the 7 million who are currently enrolled. The President is expected to sign the extension next week. While it’s too early to tell what all this will mean, we are optimistic that additional opportunities will materialize for us.

Finally, we believe we are well-positioned for further reforms and for the volatile economic environment by leveraging our Medicare network, offering products that are designed around more narrow cost effective networks and through our Salud products, which are marketed to Latino population.

In conclusion, we laid out a plan that we believe will achieve improved performance in 2009 and increase value for our shareholders’. Our fourth quarter result was the first step. We have momentum in our commercial markets, improved performance in Medicare and continued solid performance in our DoD and Medicaid business.

I now will turn the call over to Jim Woys, our Chief Operating Officer. Jim will review the operations of the Company. Following Jim’s formal remarks, Joe Capezza, our CFO will discuss the financial results. Jim?

Jim Woys

Thank you, Jay and good morning. Q4 was a solid quarter for us. Our adjusted EPS of $0.61 was right in line with our November guidance. I can briefly summarize the results for the quarter as follows

First, commercial year end membership, yields and cost trends were in line with everybody’s expectations. Second, Medicare margins were as expected. Third, we saw slightly favorable Medicaid membership. Fourth, we experienced a slight deterioration in our government contract ratio. And finally, we had good progress in our operation strategy in G&A performance. I’ll discuss each of these items in more detail.

This quarter’s results combined with an early view of January membership and revenue yields gives us confidence in our ’09 EPS guidance from Investor Day. At the November Investor Conference, I introduced a new management team and made a commitment that we would focus our efforts on achieving the mark able improvements in three areas

profitable growth, health care cost trend management and operational performance.

We have made great progress over the last several months. These actions include reorganizing the underwriting function and alluring at the finance, reorganizing our sales efforts, adopting a unified sales and marketing approach that identifies specific markets and segments for targeted growth reconfiguring our medical management organization to more effectively manage care in local markets, successfully contracted providers under terms to support our health care quality goals and our cost objectives.

Continued consolidation and optimization of our G&A cost structure consistent with our operation strategy including the strategic outsourcing of IT and certain clients processing functions. And reducing variation and delivering consistent levels of high quality service. We are putting the Company on the right footing operationally.

We enter 2009 with strong pricing with more than 9% yield in January business. The commercial membership mix is moving to products and segments where we had solid margin improvement opportunities and we are better able to manage overall health care and administrative costs.

I would now like to comment on our commercial membership activity in Q4. Commercial risk enrollment at December 31, 2008 was just over 2 million members, a decline of 9% year over year. Sequentially, commercial risk enrollment declined by 2.6%. Part of this decrease was a direct result of pricing membership more conservatively in latter part of 2008. Both the year over year and sequentially, the rated decline in commercial risk enrollment in California was lower than the Company as a whole.

The economy is driving members towards weak spots, and we have seen a great deal of interest in our limited network products over the past year. For example, enrollment in our Silver Network HMO in more cost effective limited product in California grew by more than 40% in 2008 and is growing ahead of expectations in ’09.

Our preliminary look at January affirms our confidence in 2009 membership expectations. We are encouraged in a couple of areas. Our January enrollment is slightly better than we had expected, more heavily weighted in California. In addition, pricing appears rational in our markets.

We are seeing higher retention rates, good in-group growth and stronger than expected sales in our key segments. This should result in more profitable, more predictable and a more competitive commercial book. These and other factors put us on track to meet 2009 expectations of 3% to 5% decrease in our commercial risk enrollment.

Commercial premium yields on a per member per month basis rose 7.9% for the fourth quarter compared to the fourth quarter of 2007. Premium yields increases in California were higher than the total Company, further evidence of good pricing discipline in our most important market. Our preliminary look in January renewals gives us a high degree of confidence that we can achieve the approximate 9% in commercial yield in 2009.

The adjusted commercial MCR in the fourth quarter of 2008 was 84.4%, a 230 basis point improvement sequentially from the 2008 third quarter MCR. Adjusted total commercial health care costs per member per month increased by 11.3% in the fourth quarter of 2008 compared with the fourth quarter of 2007.

The 11.3% reported commercial health care cost trend was influenced by the factors I described in Investor Day, primarily higher period effects of Q4 of 2007. After adjusted Q4 of 2007 for these factors, the current Q4 trend is approximately 8.5%. The underlying commercial trend in Q4 is consistent with the full year guidance we gave in November.

Adjusted cost trend by component for Q4 was physician at about 7.5%, hospital at about 10% and pharmacy at about 7%. This supports our confidence in our ’09 commercial health care cost trends of approximately 50 basis points below our guided revenue yield of approximately 9%.

The Company’s Medicare Advantage enrollment was strong. MA grew by 25% to 295,000 as of December 31, 2008 compared to December 31, 2007. For Medicare membership, we are reaffirming the guidance we gave in November, MA down 1% to 2% and PDP down 15% to 20% based on what we have seen to day enrollment in network based MA plans is doing better than expected, and Medicare Part D while down is consistent with our expectation.

Consistent with our concern for Private Fee-For-Service, enrollment will decline year over year. As we indicated in our Investor Day comments, our bids for 2009 were priced to address and health care cost disparity we saw in 2008 and we expect to see an MA MCR improvement of greater than 150 basis points in 2009. Moreover, the PDP MCR should improve by approximately 500 basis points this year.

Now, I would like to turn your attention to our government contracts division. Our government contracts division which includes our TRICARE, Veterans Affairs, and DoD behavioral health business continues to lever high quality services in partnership with our customer to a very special group of Americans, our military family. We are very proud of the work we do here and look forward to a long, collaborative relationship with DoD and the VA.

First, an update on the status of the re-procurement of the TRICARE North contract. In late December, the government requested final proposal revisions from companies bidding on the TRICARE contracts. We submitted our response in early January. We firmly believe that our final proposal represents the best value to the government in the north region.

Operational performance under the current contract continues to be strong with extremely high levels of customer satisfaction. We currently expect an award to occur at the end of Q1 or during Q2.

Government contracts revenue for the quarter rose by 21% to approximately $752 million compared to the fourth quarter of 2007. Sequentially, revenue climbed by approximately 4%. Our government contracts ratio was 95.6% for the fourth quarter and 95.3% for the full year 2008. (inaudible) slightly higher than our previous guidance of 95%.

These metrics are driven by two factors, higher overall health care costs and a rise in the number elder beneficiaries using the TRICARE benefit, while the capacity in the military Direct Care system remains static.

Cost trends are predictable indicating continued success in managing our network. We expect that this trend will continue into Q1 of 2009, the last three months of Option Period 5. We are currently in a collaborative discussion of our customer on the improved Period health care cost target for our Option Period 6, which begins on April 1, 2009.

We expect no change from our full year cost ratio guidance for 2009 of between 95% and 95.5%. A very positive development in 2008 was a significant growth in our DoD Military Family Life Counseling contract administered by behavioral health subsidiary, MHN.

Revenues for this program which continues to expand in support of military families worldwide increased from $49 million in 2007 to more than $105 million in 2008. We anticipate continuous growth of the services provided in this contract in 2009.

I would like to close with a few comments on our G&A expenditures for the quarter. Total adjusted G&A expense was $293.6 million in the fourth quarter of 2008 compared with $307.1 million in the fourth quarter of 2007. The adjusted G&A ratio for the quarter was 9.5%, a 100 basis point improvement quarter over quarter. Sequentially, the adjusted G&A ratio was up 50 basis points, which is consistent due to the open enrollment and Medicare marketing.

The adjusted G&A ratio for the full year of 9.4%, improved 80 basis points over 2007 and it’s consistent with our November guidance. We did take the G&A related charges in the quarter. These will continue. Given the acceleration of charges in the fourth quarter, we now expect operation strategy related charges of between $60 million and $70 million in 2009.

We are encouraged by the progress we made this year and improving our cost structure and remain confident of realizing further cost reductions from the operation strategy in 2009 and 2010.

Last week, we announced the contract with Cognizant for a business process outsourcing relationship for clients’ process. This is the last large outsourcing arrangement in our operational strategy which will be executed over the next 18 months to 24 months.

And now let me turn the call over to Joe to review the details of our financial performance. Thank you. Joe?

Joe Capezza

Thanks Jim and good morning to everyone. As both Jim and Jay had noted, we are pleased with our fourth quarter performance and our ability to meet the expectations we laid out in Investor Day.

We are making good progress in a number of fronts. I’m personally pleased with our overall financial performance in the fourth quarter of 2008 and with the strength and stability of the balance sheet. Let me start with the highlights of our fourth quarter performance. All financial metrics that I will discuss exclude the impact of charges taken in the fourth quarter in 2008. Again please refer to our press release for a reconciliation of these measurements.

For the fourth quarter of 2008, we earned $0.61 per diluted share. Pretax income was $101.8 million and the adjusted pretax margin was 2.6%. Net income was $63.1 million. All these measures met our expectations. As a result of maintaining pricing discipline throughout the year, commercial premium yields was strong coming at 7.9% for the quarter and 8.6% for the full year. However, when combined with the adverse affect of the deteriorating economy, we experienced 9% decline in commercial risk enrollment in the year.

As Jim just mentioned, we encouraged our preliminary look at the January enrollment and have confidence in our commercial membership guidance for 2009. As you are aware, our Medicare Advantage and PDP membership grew significantly during 2008. Looking at our preliminary January enrollment, both our Medicare Advantage HMO and PDP products membership are running slightly favorable to our original expectations.

One of the more important developments during the fourth quarter of 2008 as Jim mentioned was the 230 basis point sequential improvement in our commercial MCR. Also as Jim noted, we maintained a strong focus on G&A expense management during the quarter. Our G&A ratio was 9.5% for the quarter and 9.4% for the year, down 100 basis points and 80 basis points respectively. Investment income was $24.5 million in the fourth quarter and was flat sequentially. The tax rate was 38%.

Let’s now turn our attention to the balance sheet. It remains strong and provides a solid foundation to support our strategic objectives. At December 31, total and investments remained sparsely changed from September at $2.2 billion with cash of $668 million and investments of $1.5 billion.

Our investment in the reserve fund is currently down to $51 million. We expect to monetize the remainder of this investment before the end of the year. The average credit quality of our portfolio remained at AA+.

At December 31, we had net unrealized losses of less than $12 million, which is less than 1% of our total cash invested assets. The market value of yields matured of the portfolio is 4.1% with an average coupon rate of 5.1% and an average duration of less than 3.7 years.

A few other balance sheet items worth mentioning. Other receivables are up by$147 million sequentially due to as Jay noted, an increase in our Medicare Part D receivables. Reserves to other claims and settlements were down slightly sequentially from September 30, primarily due to seasonality, and up $38 million from December 31 of 2007. However, it is worth noting that our (inaudible) was subsequent – sequentially by $33 million.

Adjusted days claims payable declined by more than 2 days sequentially from the third quarter of 2008. The fourth quarter level of 54.8 days was essentially flat with the fourth quarter of 2007. As always, I would like to refer you to the DCP reconciliation table accompanying the press release for further details.

Total outstanding debt as of December 31 was $680 million. This was up $35 million sequentially due to an additional draw in our revolver. As of today, our outstanding debt was back down to September 30th levels.

The debt to capital ratio was essentially ending the year at 27.9%. We also maintained our strong liquidity ratios with our current ratio improving to 160% and our cash ratio remaining constant at 98%.

We ended 2008 with stockholders’ equity of $1.75 billion and risk based capital at a regular – is estimated to be approximately 360%.

Total shares outstanding were approximately $104 million.

Cash flow for the quarter, cash flow from operations was negative by approximately $53 million due to the previously noted increase in our Part D receivables, a sum that we had paid in the fourth quarter, cash flow would have been equal to net income plus G&A in the quarter. We expect to receive this cash in fourth quarter of 2009. Therefore, we are increasing our cash flow guidance for 2009 to approximately 150% of net income.

Our cash position at the current level remains strong. At year end, we had approximately $165 million of cash at the parent and expect this amount to increase as the year progress – as the year progresses. We expect to end 2009 with cash at the parent of approximately $220 million.

Let me now summarize the key metrics guidance for 2009. We expect commercial membership to decline 3% to 5% due to the economy and our continued pricing discipline. Medicare Advantage enrollment will be down approximately 1% to 2%. Medicaid will be up 2% to 3% and Part D will be down 15% to 20% as previously indicated.

Commercial premium yields are expected to be approximately 9% and approximately 50 basis points higher with health care cost increases. This will support margin expansion. Our government contract ratio will be 95% to 95.5%. Investment income is estimated to be approximately $85 million due to the depressed economic and interest rate environment.

We expect the G&A ratio of approximately 9.6% to 9.8%. The tax rate for 2009 is expected to be approximately 38.6%. Our guidance is not predicated upon share repurchase. Therefore, excluding charges, our 2009 EPS is still expected to be in the range of $2.25 to $2.40 per share.

As we noted on Investor Day, we will not be providing quarterly guidance in 2009. If we achieve our goals in these areas, we will have a successful 2009. With that, let me thank you all for your time and we would now like to turn it back over to Angie.

Angie McCabe

Kayla, we would now like to open up the call for Q&A.

Question-and-Answer Session

Operator

Okay. Thank you. (Operator instructions) And we will take our first question from Matthew Borsch from Goldman Sachs.

Matthew Borsch – Goldman Sachs

Yes. Thanks. Good morning. I’m wondering if you can tell us anything more than what you said in your prepared remarks about the process that is underway for the Northeastern Arizona, anything may be on the timing and whether those are being contemplated as potentially going to one, sever or separately? And then the follow up is Jay, you referred to the $500 million excess capital in the Northeast. I just – I had a conversation with some of your team earlier on this. I just want to clarify my understanding, is that total capital as we are using the term total capital not excess capital, but correct me if you are looking at it differently?

Jay Gellert

Okay. To your first question, as we indicated, we are actively engaged in the process. We are encouraged by what we are seeing at this point and we are still on track as articulated. I don’t think we have anything more specific to say than that other than to indicate that we believe that what we have talked about in the past is realistic. With regard to capital, the capital that we are speaking about is excess in that. It’s not necessary to settle liabilities. It’s not excess in terms of the regulatory requirement to operate the business. So, being very clear that much more tangible equity than liability. So, we have paid out everything. It had that additional amount, but because of the regulatory requirements that amount is required if you are operating the business.

Operator

Moving on to our next question, we have Carl Mcdonald from Oppenheimer.

Carl Mcdonald – Oppenheimer

Thanks. Just wanted to follow up on the divestiture process which is, how do you think about the fixed costs that are currently allocated to the Northeast business in Arizona for that matter. So, assuming that the businesses do go away, how much of the administrative costs are going to have to now allocate to the remaining West coast and TRICARE business?

Jay Gellert

When we spoke about this, we said that we anticipated that if the Company operated absent those humanities, it would be neutral to slightly accretive. That assumed absorbing some of the administrative costs and eliminating others, all of which we believe is realistic, coincident with the transaction.

Carl Mcdonald – Oppenheimer

And then just if you would reinstate based upon where you are on the process, any indication in terms of total sale price will it be above or below that $500 million number?

Jay Gellert

As I said, I think we are encouraged by the process. I think it’s premature to be specific, but I think if there’s nothing that’s happened to this point that changed our expectation.

Operator

(Operator instructions) We’ll move on to our next question from Kyle Smith with Jefferies & Company.

Kyle Smith – Jefferies & Company

Hi, good morning. Two questions. First, I’m hearing that Medi-Cal may be considering a payment freeze or some other mechanism to help address California’s rather severe budget challenges. I’m sure you would be thinking about the possible working capital pressures and risk factors to your ’09 guidance that could arise from such an action?

Jay Gellert

The discussions that are going on in terms of the California state budget kind of bounce around in virtually every direction. There could be some limited cash flow effects if as the state moves to resolve the budget. We generally think though that since the stimulus package has a significant amount of money to support the state in Medi-Cal and increases in the federal matching amount that – well, there could be some changes in the Medi-Cal program. They won’t be nearly as dramatic as those being discussed by the state at this point because it doesn’t include consideration of stimulus. So, all in all, we produced a budget that doesn’t assume an increase in Medi-Cal payments. We believe that the cash reserves are easily managed and we think that the addition of stimulus will lead to a reasonable conclusion on the Medi-Cal front.

Kyle Smith – Jefferies & Company

Okay, great. That’s helpful. And then the second question, with respect to your senior note, could you give in 5 to using your cash flow to make repurchases in the open market. They do trade it at rather large discount so far?

Joe Capezza

I think that we are looking at all alternatives. We are considering our uses of capital but our first focus is response to the earlier questions which is completing the proposed transaction and then we will consider any options at that point and time.

Operator

And moving on to our next question from Josh Raskin from Barclays Capital.

Josh Raskin – Barclays Capital

Hi, thanks and good morning. Just shifting topics little bit, I want to talk about the cost trend and yield expectations. It looks like both came down, let’s call it 25 basis point to 50 basis points. I think you were saying 9% to 9.5%, but now it sounds not more than 9%. I guess they – I was wondering is it a mix issue because they are both moving or you’ve seen a decrease in cost trends that suggested you should bring your yield down or just curious what the driver was there?

Jim Woys

Hi, Josh, this is Jim. We are not expecting any change in trends, but we have seen little more clarity into 2009 is around mix and –. And those gives us a little more clarity that drives the number to 9% and 50 basis points below for the health care cost trend.

Josh Raskin – Barclays Capital

So, your 9% includes buy-downs.

Jim Woys

Yes.

Josh Raskin – Barclays Capital

Okay. That’s helpful. And then the second thing, Jim, you had mentioned in your presentation, your prepared remarks I’m sorry that you are seeing slightly better membership to the in-group growth, and I was curious if you could help us understand where that’s coming based on this economic situation?

Jim Woys

When we look at the early look at January enrollment, what we were – what we’ve got is a better expectation or less in-group losses than what we expected. So, we’ve had some in-group losses but they are much less than we expected and in some accounts we actually had in-group growth, primarily in southern California.

Operator

And we will take our next question from Charles Boorady from Citi.

Charles Boorady – Citi

Hi, thanks, good morning. The first question just you can update us on the key drivers of ’09 EPS improvement? Are there any changes from what you outlined at Investor Day, you had a page that showed $0.55 improvement from Medicare, $0.25 towards SG&A, $0.11 toward Medicaid etcetera and a few of those in the slide in front of you, but if you can highlight for us the key drivers of ’09 EPS for a minute?

Joe Capezza

The – there really aren’t no changes. We are still on track consistent with sum with what we presented at our Investor Day.

Charles Boorady – Citi

So, the $0.55 for Medicare, that’s something you are backing off from I thought some comments suggested less improvement on the Medicare loss ratio that you have –?

Joe Capezza

No. I we’ve been talking about MA improvements of 150, plus the improvement of 500 bids and we are comfortable with those.

Charles Boorady – Citi

Okay. And then in terms of the state budget shortfalls in California and New Jersey and elsewhere, how do you take those into consideration when considering your Medicaid results added in your guidance for 2009? And is minus $0.11 for Medicaid still reasonable and does that take any new cuts under consideration?

Joe Capezza

Yes. I think we did – we anticipated a negative Medicaid environment when we spoke in November. I believe particularly in California that as we have always said it’s the lowest cost Medicaid state in the nation and it’s a significant beneficiary of the FMAP changes included (inaudible). So, as a result of that and the inherent conservatism we originally built in the plan and we feel comfortable with the Medicaid guidance we have given.

Operator

(Operator instructions) And our next question is from Justin Lake from UBS.

Justin Lake – UBS

Thanks. Good morning. I do have two questions. First on the commercial membership guidance, can you give us an idea of where you expect to end the first quarter from enrollment standpoint?

Jim Woys

I still have that in front of you. Let’s get – next question we’ll get that for you – next question.

Justin Lake – UBS

Sure. And secondly, just a follow up on the divestiture discussions, you mentioned the $500 million of capital there. So, I guess what you are saying is that if you were to – if you were to unwind those businesses and if you had reserved correctly, you will be able to walk away with $500 million. Is that correct?

Jay Gellert

That’s right, Justin. That’s – the entities have intangible equity asset in excess of – tangible asset in excess of liabilities of approximately that amount. And so in the case that you close them down at this point and time, you have – you got much of them available liquid asset.

Justin Lake – UBS

And so, Jay, given the fact that you said there is fair amount of interest in the assets right now and you are progressing. Is it fair to say – I know you don’t want to speak specifically to what you have got but we shouldn’t expect you to receive cash of anything less than that, given that you could that get that margin, you could get that amount and just walk away from the business?

Jay Gellert

I guess I don’t want to comment on the situation. But I think that’s – you can draw a conclusion based on what I’ve said about the specific. The other point to bear in mind is that the tax basis is in fact higher than that. So, we – you could end up taking $500 million out even as it was in a lower number. So, I don’t want to comment specifically on the process but I think the conclusion you are drawing is mathematically or analytically correct.

Operator

And our final question comes from John Rex with J.P. Morgan.

John Rex – J.P. Morgan

Thanks. I just want to go back to some of the enrollment metrics. First, could you give us your sizing of the churn in the individual books, in particular I’m looking commercial insured in Medicare Advantage. So, may be gross adds and gross losses as you entered January so we can just think about how the complexion of books might change?

Jim Woys

Let me give you sort of Medicare growth. So, when we look at gross adds and gross losses around Medicare, we – the gross adds in the MA PD was about 16,700 and our gross churns was about 24,200 for a loss of about 7500 members, which is about 2000 better than we expected. That’s on our network model product. On Private Fee-For-Service, adds was about 2800 and loss is about 7400. So, a loss about 3600, which is – we are a bit okay because where we were with product and service. And PDP is, I don’t have the adds and so we are down about 100,000 a better than expected. In our commercial book, January enrollment we said was better than expected and it’s up by 10,000 to 12,000 members. I don’t have the gross adds and gross – all together. And if we look at the quarter, we probably expect to be down about 2%.

John Rex – J.P. Morgan

So, the 10,000 to 12,000, you said that that was gross or net number?

Jim Woys

That’s a net number.

John Rex – J.P. Morgan

So, net number. Can you give me any general sense on how much turnover might have been on that book in the closure book?

Jim Woys

I don’t have that with me. We can get back to you. It’s – we had – I’m sure we – the losses were greater than the adds. But we are about to 12,000 – 10,000 to 12,000 ahead of what we expected to be on January 1.

John Rex – J.P. Morgan

Okay. I was only trying to get a general sense if the book looks very different than it did last year just in terms of the types of members that accounts where they are, any kind of commentary like – ?

Jay Gellert

Let me try and make three general comments and I’ll let Jim respond. In terms of – let me go one by one. In terms of Part D, as we said all along there’s a pronounced reduction in the markets which weren’t economics like we are no longer in them. And they are due diligible markets. So, most of the churn in the reduction in terms of Part D occurred in specific targeted markets we bid much higher because we had bad economic performance. That’s why we had heightened confidence in terms of our guidance there. Classic example is Florida. It was a – technical term it was a train wreak [ph] in terms of Part D, and we ended up being well above the dual numbers. So, that’s Part D work. In terms of Medicare, I think that we – the data changes in mix are probably a movement as Jim said towards the West and towards the network models away from the East and that probably we are beginning to see a better mix in Connecticut at a lower number.

And that’s kind of a initial indication to that we are seeing in terms of the churn of the Medicare book and as Jim said a movement from Private Fee-For-Service to the MA products. So, that’s kind of directional where it’s going. In terms of commercial mix, continued movement in California from North to South, that’s also a movement from some degree from East to West and then the most important thing I think we are seeing is the movement towards products that are network products in low cost areas and narrow network products in particular. I think what we are seeing is the following that until above probably 12 months ago, we saw that people were making decisions I would say by more on a premium basis.

Now I think they are making decisions based on all the costs. So, there is a process going on where people are looking at what the aggregate cost is versus clearly the premium that that’s driving them towards tighter network products with – in some cases lower non-insured cost and we are seeing that trend exacerbate some in our market. So, that’s kind of the flow and flavor of the transition of our business.

Operator

(Operator instructions) And our final question is from Greg Nersessian from Credit Suisse.

Greg Nersessian – Credit Suisse

Hi, thanks. Good morning. My first question was just if you could give us a sense of what the contribution was in the quarter from the Northeastern Arizona business?

Jay Gellert

The Northeastern Arizona business was slightly negative in the quarter. It probably in the range of single digit negative.

Greg Nersessian – Credit Suisse

Okay. That’s helpful. And then if I heard you correctly it sounded like you are a little bit more confident that the TRICARE awards could be announced in the first half of the year. I guess is there any reason I think that sale of the Northeastern Arizona would be contingent on that decision or you might delay selling those businesses until you have to find the TRICARE outcome?

Jay Gellert

There is absolutely no correlation between the two. So, the TRICARE process has absolutely no effect on our Northeastern process and our Northeastern Arizona process. Our view whether – whatever we do, we have to make some strategic decisions that let us get our return on that cash in the first half of the year. And so, there is no relationship to the TRICARE outcome.

Operator

(Operator instructions) And we have no further questions at this time.

Angie McCabe

All right, I would like to thank every one for joining us this morning and we’ll speak with you later. Have a nice day.

Operator

And that does conclude today’s conference. Thank you for your participation. Have a nice day.

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Source: Health Net, Inc. Q4 2008 Earnings Call Transcript
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