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Health Net Inc. (NYSE:HNT)

Q1 2009 Earnings Call

May 5, 2009 11:00 am ET

Executives

Angie McCabe – Vice President of Investor Relations

Jay Gellert – Chief Executive Officer

Jim Woys – Chief Operating Officer

Joe Capezza – Chief Financial Officer

Analysts

[Christine Arnold] – Cohen & Company

Charles Boorady – Citigroup

Matthew Borsch – Goldman Sachs

Greg Nersessian – Credit Suisse

Carl McDonald – Oppenheimer

Josh Raskin – Barclays Capital

Scott Fidel – Deutsche Bank

Justin Lake – UBS

John Rex – JP Morgan

Operator

Welcome to the Health Net Inc. first quarter 2009 earnings conference call. (Operator Instructions) At this time, I will turn the call over to Angie McCabe, Vice President of Investor Relations.

Angie McCabe

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 filing with the SEC, as well as the cautionary statements in our press release issued in advance of this call.

In today's call, we will refer to various metrics that have been adjusted to exclude the impact of a $2.2 million pre-tax benefit for litigation reserve true-up, a $46.9 million pre-tax charge for severance and other expenses related to the company's operations strategy, and $6.3 million for the favorable outcome resulting from a tax audit in the first quarter of 2009. In addition metrics in the first quarter of 2008 have been adjusted to reflect previously announced litigation and operation strategy related charges.

These adjusted metrics are not being presented in accordance with GAAP. These metrics include health plan and commercial medical care ratios, commercial health care cost trends, general and administrative expense ratio, effective tax rate, net income and earnings per share. Please refer to today's press release which is available on the company's website for a reconciliation of these non-GAAP financial measures with operating results.

In addition, a supplemental schedule showing a breakout of reserves in healthcare costs for 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 claimed payable excluding the costs noted above.

Our speakers today are Jay Gellert, Health Net's CEO, Jim Woys, Health Net's Chief Operating Officer and Joe Capezza, Health Net's CFO. I will now turn the call over to Jay Gellert.

Jay Gellert

I'm pleased to report on a solid first quarter for Health Net. It's a very encouraging start to 2009. As the first quarter demonstrated, we've clearly taken a number of important steps, steps that we outlined at our Investor Day last November. At that time, we proposed the following yardsticks for '09 performance. One, significant improvement in Medicare PDP and MA, two, commercial margin expansion, three, ongoing success with TRICARE, four, G&A savings and five, value creation through our strategic review.

We have made real progress in each of these areas in the first quarter. First, our Medicare performance improved significantly consistent with our plan. When we developed our bids and submitted them last June, we knew that MA and Part D had to do better. They are doing better with substantial MCR improvement. When you compare Q1 '09 to Q1 '08 MCRs you see MA improved from 89.7% to 89.1% and PDP improved from 103.7% to 94.1%. We believe they'll continue to demonstrate year-over-year improvements through the balance of '09.

Second, we saw substantial improvement in our commercial performance. Gross margin PMPM rose 17% year-over-year as pricing was solid and healthcare cost trends moderated. Our enrollment declines were as expected given the current economic environment, but we are encouraged by the fact that new sales exceeded expectations driven by narrow network cost effective products.

Moving on to TRICARE, we continue to perform solidly and await the contract award announcements. Like many of you, we hear all kinds of rumors. We remain confident that our exemplary work for TRICARE over many years will be rewarded. Jim Woys will add color to this in his comments in a moment.

Our strategy to restructure operations and reduce G&A is gaining traction. The ratio dropped by 60 basis points on an adjusted basis. As many of you know, this continues to be an area of focus and we believe we'll continue to reduce these costs going forward.

Now, let me make a brief comment on our strategic review. It is progressing and we believe we will achieve our stated goals related to this review. We are working hard to complete the process. I now want to take just a moment to give you our view on healthcare reform. We believe there is a high likelihood of healthcare reform this year.

We think it's in the industry's interest and our interest to see sensible reform this year. We believe that reform will add a number of people to the commercial and Medicaid population, particularly in states such as California with a high number of uninsured. It will also free up the low end of small group and individual markets where we believe we have developed compelling offerings. The first quarter new sales achievement underscores this point. Sensible reform will need to include a strong emphasis on cost containment.

We believe we can play a constructive role as many of the key elements being discussed mimic the delegated models so prevalent here in California. While there will clearly be Medicare Advantage cuts, we believe it would be unwise to undermine the program where it operates in line with the new model being proposed.

Longer term, we believe there will be other places where we will be able to offer alternatives to help the government contain costs and improve quality so that everyone can be covered in a system that is stable financially for the long haul. Clearly, there are risks in this process. I am optimistic, however, that we can play a positive role in dealing with the most important national issue.

Let me know turn the call over to Jim Woys for the operating review.

Jim Woys

I believe our strong first quarter results demonstrate substantial operating progress and indicate we are definitely headed in the right direction. At our last Investor Day, we acknowledged some of the challenges we experienced in our commercial and Medicare books of business and discussed specific action steps we were taking to address these issues.

Now, let me go through some of these actions and the first quarter impact we are seeing with our commercial and Medicare book. On the commercial side, our focus is to develop and market plans that are attractive to customers in these troubled economic times. At the same time, we want to maintain pricing and underwriting discipline to achieve appropriate margins.

To accomplish this, we developed insurance products designed around more cost effective network providers like our Silver Network in California, and products for California's diverse population such as our Salud affordable product directed to the Latino market here in California. To improve pricing and underwriting discipline, we moved this function out of sales and put it in the finance division.

This has created a healthy tension between the sales and pricing functions and has improved the profitability and predictability of our book. These results of these actions are reflected in our first quarter results. During the quarter, we sold over 120,000 new commercial members, which represented the best commercial sales volume of any quarter in the past three years.

Membership in our California narrow network products increased by more than 30% year-over-year, and the Salud affordable product increased by 19% year-over-year. While we did have strong new commercial sales in the first quarter 2009, overall commercial membership declined quarter-over-quarter and sequentially, primarily due to larger than expected in-group losses of approximately 67,000. We believe that this is due to the weak economy and higher unemployment levels.

In order to blunt the economy's effects, we implemented programs to improve retention and mitigate off cycle lapses for small businesses. We also continue to develop new products that provide additional cost effective options in the current environment. Given our sales successes, we remain confident in our previous guidance of a 3% to 5% decrease in commercial risk enrollment for 2009 as we face the headwinds of the weak economy.

Along with sales, we're also showing improved commercial pricing discipline as demonstrated by commercial premium yields exceeding costs by 130 basis points on an adjusted basis in the quarter. Accordingly, the commercial gross margin per member per month was up 17% quarter-over-quarter.

We are selling, and selling at the right price, because of the shift in membership toward more cost effective plans, we are adjusting our full year premium yield to 8% to 8.5% and our cost trend to 7.5% to 8%, which still represents a 50 basis point positive spread between revenues and costs.

A look back at first quarter 2009 commercial healthcare costs components show physician services were up approximately about 5%, hospital services up 9% and pharmacy up 8%. These are all within our expectations. We believe these trends will remain steady throughout 2009.

Now, let me turn to Medicare where we really turned things around. In 2008, we had significant problems with certain Medicare MA and PDP plan designs. Through a combination of plan design modification and selected premium increases in our 2009 filings made last year, coupled with more focused and effective medical management, we believe the profitability of this book of business could be improved.

Based on the first quarter of 2009 results, these action steps have been successful with less than anticipated membership losses. Compared to the first quarter of 2008, the Medicare MCR in the first quarter of 2009 improved in both Medicare Advantage and Part D plans by 60 basis points and 960 basis points respectively. We achieved this higher profitability in Medicare Advantage with a membership sequential decline in the first quarter of 2009 of 13,000 members.

Actually, enrollment in our network-based MA plans in California and Oregon was solid as we retained its memberships sequentially. We are about 7,000 members ahead of our expectations in MAPD and about 12,000 members short of our expectations in our Private Fee-for-Service plan. The overall sequential decrease in our total MA book Q1 over Q4 was driven by enrollment declines in Connecticut and the Private Fee-for-Service plans.

With regard to Private Fee-for-Service plan, we decided last month to cease marketing Private Fee-For-Service and we intend to exit the program altogether in 2010. We prefer to focus our energy on network-based MA plans where we can truly add value. To achieve accessible profitability levels in Medicare Part D plans, we had to accept larger membership declines as membership declined 17.6% sequentially.

In our bidding, we made a conscience effort to focus on our best markets and to discontinue unprofitable products offered in 2008. The margin improvements we have seen in the first quarter of 2009 give us comfort we made the right decision. Actually, in the 15 states we focused our Part D bidding efforts on in 2009, we saw a 22.2% increase from 320,800 members to 392,000 members, and membership in Part D overall is actually higher by approximately 25,000 members than anticipated.

In our Medicaid business segment, the weak economy has helped enrollment trends due to an increase in the Medicaid eligible population. During the first quarter of 2009, Medicaid enrollment grew by 30,000 lives sequentially reaching 842,000 members by March 31st, 2009. The majority of this growth was in California with an increase of 28,000 members during the first quarter of 2009.

Now, turning your attention to the first quarter performance of our government and specialty services division, first, I'd like to update you on the status of the new TRICARE north region contract. We are awaiting an award decision form DOD. We remain confident that our proposal represents the best value to the government. We're very proud of our strong record of performance with DOD and continue to receive positive feedback on the service we provide.

For example, we recently were recognized by DOD for our anti-fraud efforts and were named the TRICARE Program Integrity Contractor of the Year. Our government contract ratio improved by 50 basis points quarter-over-quarter due to higher healthcare costs targets in this option period and increased revenue from the Military and Family Life Consultant Contract that provides family life counseling and other services to military families.

The Military Family Life Consultant Program revenue for the first quarter was $40.8 million compared to $16.2 million for the first quarter of 2008, an increase of $24.6 million. As military troops return home, we anticipate continuing demand for these services, both from military families and the government which should result in further growth in the program in 2009.

As I discussed at Investor Day and the fourth quarter call, my management team is extremely focused on improving the operating performance of the company by achieving demonstrable improvement in profitable growth, trend management, and operational excellence.

Going forward for the remainder of 2009 and into 2010, we will be successful if we sustain pricing discipline, manage medical cost trends effectively, and continue our relentless focus on reducing administrative expenses while improving the quality of our service.

With regard to managing medical trends, we have already shown the effective plan design like our Silver Network Plan to reduce medical costs and we continue to evaluate further plan design with cost containment features that will be attractive to our customers.

We are executing on the basics in our medical management and network contracting areas that we think will better allow us to contain medical costs within existing plan designs. These refocused efforts include case management, reducing ER visits, managing [ERD] based admission, moving treatment to more cost-effective settings, and similar actions.

This better coordination of our medial management activities has already started showing results in lower bed days per 1,000 members in the first quarter of 2009. Bed days per 1,000 commercial members declined approximately 5% from the first quarter of 2008. Within our Medicare population, admissions per 1,000 members are also declined by more than 5% during this timeframe. These metrics are right in line with our expectations.

On the unit cost front, we have locked down over 83% of our 2009 contract dollars, again, right at expected targets. On the administrative cost front, we remain convinced that our operation strategy effort will yield significant and sustainable cost reductions in the future. The charges in this quarter reflect this effort.

In the first quarter of 2009, G&A related charges were $47 million, which included severance and asset write-offs as we consolidate systems and facilities. While none of us like incurring these charges, they are necessary for us to continue to see the benefit of this strategy going forward in a lower G&A expense ratio.

Thank you for your attention this morning. I'll turn the call now over to Joe who will review the details of our first quarter financial performance.

Joe Capezza

As both Jay and Jim have noted, we are pleased with our strong performance in the first quarter, which gives us renewed confidence in our ability to meet our previous earnings guidance for 2009. Let me start with the highlights of our financial performance. For the first quarter of 2009, we earned $42.3 million or $0.41 per diluted share. This is a significant improvement from the $18 million or $0.16 per diluted share that we earned in the first quarter of 2008.

Investment income for the quarter of $24.3 million was flat sequentially but down approximately $11 million from a year ago due to declining interest rates. We believe we are doing a good job at maximizing yields in this very challenging environment while taking a conservative approach to the credit quality and duration of the portfolio.

Let me take a moment to discuss the GAAP effective tax rate of 8.5%. This rate was unusually low due to a favorable resolution of an audit relating to a prior reporting period. On an adjusted basis, the tax rate for the quarter was 38.6%.

Switching our attention to the balance sheet, we continue to maintain a strong balance sheet. At March 31, total cash and investments were $2.1 billion with cash of $740 million and investments of $1.4 billion. Cash in investments were down sequentially, mainly because we used $50 million to pay down a portion of our revolver during the quarter. The average credit quality of our portfolio remains at a double A plus.

Our portfolio is a mix of high quality fixed income securities with an average duration of 3.2 years. There were no impairments taken during the quarter. At March 31, we had net unrealized losses in the portfolio of only $13 million, which is less than 1% of our total cash and invested assets. The market value yield to maturity of the portfolio is 4.1% with an average coupon rate of 4.9%.

Reserves for claims and other settlements were down $9 million sequentially from December 31st and decreased $103 million from March 31, 2008, primarily as a result of enrollment declines. Adjusted days claims payable, however, increased by 3/10 of a day sequentially from the fourth quarter of 2008 and by 2.2 days from the first quarter of 2008 as well.

As in the past earnings call, I would like to refer you to the DCP reconciliation table accompanying the press release for further details. The total outstanding debt as of March 31 was $631.8 million, a decrease of $48 million sequentially due to revolver pay down. Our debt to capital ratio at March 31 was 26.3% down from 27.9 % at December and 27.5% as of March of last year.

We continue to maintain strong liquidity ratios, with our current ratio at 160% and our cash ratio remaining at 95%. Stockholders equity at March 31 was $1.8 billion and the risk-based capital our regulated entities is estimated to be approximately 365%. Total diluted shares outstanding were approximately 104 million down 7 million from the first quarter of 2008.

Turning now to cash flow, for the quarter cash flow from operations was negative by $5.8 million. This, however, was due to the State of California delaying the March Medical payment by a month. Had we received this $64 million payment in March, operating cash flow would have been approximately $60 million. Our cash position at the parent remains strong. At March 31, we had approximately $50 million of cash at the parent and expect this amount to increase as the year progresses. We expect to end the year with cash at the parent of approximately $200 million.

I would now like to summarize the key guidance metrics for 2009, most of which remain unchanged from previous guidance. While we experienced very strong new sales in the quarter, we also experienced higher than expected in-group losses. Therefore, we continue to expect commercial membership to decline 3% to 5% due to the economy and our continued underwriting and pricing disciplines.

Medicare Advantage enrollment will be down approximately 1% to 2% and Part D will be down 15% to 20%. This is consistent with the plan we laid out at our Investor Day. We now expect Medicaid enrollment to be up 4% to 5% in 2009, primarily due to the growth in the California program. As Jim noted, based on the growth in more cost effective lower premium products, commercial premium yields on a PMPM basis are expected to be approximately 8% to 8.5%.

With healthcare cost increases still running approximately 50 basis points lower than yields, this will be the primary driver of our margin expansion. Our government contract ratio remains unchanged at 95% to 95.5%. Investment income is estimated to be approximately $85 million and remains unchanged from previous guidance.

We expect a G&A ratio of approximately 9.6% to 9.8% on an adjusted basis, consistent with our 2009 goals of our operation strategy. Based on our first quarter results, we are on track to achieve our 2009 EPS guidance that we laid out on Investor Day of $2.25 to $2.40 per share. If we achieve our goals in these areas, we will continue to have a successful a 2009.

With that, I would like to thank you for your time and I'm now going to turn the call back over to Angie.

Angie McCabe

[Camille], we're now ready to open the call up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Christine Arnold] - Cohen & Company.

[Christine Arnold] - Cohen & Company

Yes, a couple of questions for you, the positive development in the roll forward looks real good versus a year ago. Can you tell us where you saw that positive development and if there was any net impact? And then secondly, how do you think about COBRA and how have you incorporated the impact potentially of the new COBRA provisions in your guidance?

Jay Gellert

[Christine], its Jay. With regard to your first question, last year's roll forward table reflects the PPIA we brought forward. This year's reflects the normal transfer as a result of bringing the margin down and then bringing it back up in the new year. So, it's consistent with our experiences that we've had a limited amount of positive PPIA in the quarter that's offset by some small adjustments in other areas. So, there's been no net affect on the quarter.

With regard to COBRA, we've seen a very, very slight uptick in COBRA that's not significant. Our anticipation is that the Federal subsidy will change the mix of COBRA, but until we see a more significant change in the number of people in COBRA, we really can't opine on what its implications will be.

[Christine Arnold] - Cohen & Company

Have you sent out the letters where people get to kind of show up retroactively?

Jay Gellert

Yes, we have.

[Christine Arnold] – Cohen & Company

You have?

Jay Gellert

Yes, and we've still not seen a dramatic change to it at this point in time and if we see anything we'll act upon it.

Operator

Your next question comes from Charles Boorady – Citigroup.

Charles Boorady – Citigroup

Can you comment on Medicaid? Perhaps, can you give us the loss ratio and what your expectations are in California? If there's any updates since you previously guided in terms of any budget related issues and if you expect a recurrence of the delayed payment in the Q1 to recur in the Q2 or beyond this year?

Jay Gellert

Well, let me take it one by one with the last one first. We anticipate that the state will push back the payment by a month to improve their cash flow through the rest of the year, so we're basically taking that into consideration. So it's a delay of basically a relatively small number of days, but it basically helps their cash flow numbers, so we're expecting that that will be the way they'll act through the rest of the year.

In terms of the budget, there's really been no budget discussion in the last couple of months, they passed the budget. There are a series of ballot initiatives that will be voted on, on May the 19th and really nothing significant has occurred in the interim. Maybe I'll just let Jim just speak to the MLR and Medicaid?

Jim Woys

Sure, Charles, this is Jim. We'll probably have a small deterioration in MLR and the Medicaid as a result of probably lower funding than we expected, but are clawing back through. That you can see the enrollment is up over 30,000 for the quarter and we've seen positive enrollment trends for April and May in enrollment dates. So, we believe this is not significant to our expectations as total profitability for Medicaid line, though. We'll watch that revenue opportunity very closely this year.

Charles Boorady – Citigroup

Lastly on the Northeast and Arizona processes, can you help us understand as to what extent that process might be impacted by what's going on in DC and the uncertainty there versus the changing fundamentals in the industry in light of the tough economy?

Jay Gellert

I don't think that the DC environment has had any significant effect on our review process. I mean, we've taken it into consideration, but we're going forward with the kind of same stated approach that we articulated before.

Operator

Your next question comes from Matthew Borsch - Goldman Sachs.

Matthew Borsch – Goldman Sachs

Apologies if you went over any of this before, but just your outlook at this point on the intensity of price competition that you're seeing and to the extent there's any variation between what you're seeing in California versus, let's say, the Northeast and how is it compared to maybe what you were seeing last year?

Jay Gellert

I think our sense is people are being prudent, probably a touch more prudent than last year at this time. I also think that our focus on some of the products that Jim described in terms of the narrow net were cost effective products have put us in a slightly better competitive position. So, it's a combination, I think, of some restraint on the part of everyone else given the uncertainties and some products focused on our part.

Matthew Borsch – Goldman Sachs

And just on California, one industry person who comments has made that a bit of an exaggeration but said employers were demanding to get a zero trend for 2010. And I guess the question there is do you think we're at sort of a tipping point, maybe where employers are willing to really think about different network configurations and willing to put up with network disruption to get to lower trend or not?

Jay Gellert

I think the idea of a zero trend is something that we're not seeing. But to the second part of your question, we are encouraged that people for the first time really are becoming open to different network configurations that can give them significant savings. So I think we're starting to see a willingness to be more restrictive in terms of networks.

Matthew Borsch – Goldman Sachs

And if I could ask a last question, the flipside of that, do you anticipate that you'll be able to improve your unit pricing trend going into 2010 in light of what seemed to be a less cost pressures on the hospitals, at least from the standpoint of their operating costs, if not from the top line?

Jay Gellert

I think the hospitals have a series of issues. I think that the upgrade has been fairly negative for them. I think there's been interest earning problems and some charitable contribution problems, so at this point I don't think we're ready to opine on where we think unit costs are going to go in '10.

Operator

Your next question comes from Greg Nersessian – Credit Suisse.

Greg Nersessian – Credit Suisse

The growth in these lower benefit design or less costly products, are those high deductible products and any change in the seasonality of your commercial MLR you're expecting this year because of that?

Jay Gellert

Actually, we're not seeing a change in the level of deductibility in the products. Instead we're seeing people migrate to the same level of coverage with the narrow network at a lower price point.

Greg Nersessian – Credit Suisse

So you expect the seasonality to stay relatively the same.

Jay Gellert

Yes, seasonality to stay relatively the same and the other advantage of those products for us is they have a little bit better cost predictability because the network is more focused.

Greg Nersessian – Credit Suisse

And then just a second question follow-up on the sale in Northeast and Arizona, it feels like this is taking them perhaps a little bit longer than you originally expected. I mean could you give us a sense of perhaps what the holdups are, or what the obstructions are in closing the transaction? And then is it fair to say there is still that $500 plus million of free cash in the regulated subsidiary, or excess cash in that regulated subsidiary still at the end of 2008?

Jay Gellert

I think that the reason that it's taking a little longer is just the fact that the times are a little more volatile, but we are still comfortable with the goals that we stated previously, and I think that's the best way to leave it.

Greg Nersessian – Credit Suisse

Okay and the excess cash?

Jay Gellert

I think that I'd rather not comment specifically on the process at this time, but we're comfortable with the articulation we made at Investor Day.

Operator

Your next question comes from Carl McDonald – Oppenheimer.

Carl McDonald – Oppenheimer

Have you brought on any new management or consultants in the past couple of months to assist in the strategic review and the effort to improve margins that I might be interested in?

Jay Gellert

It's very hard for me to know what interests you, Carl.

Carl McDonald – Oppenheimer

Wide ranging interests.

Jay Gellert

I know you have wide ranging interests, but I think that we've really brought in people who would combine with us to maximize our ability to think these issues through.

Carl McDonald – Oppenheimer

Any particular names to highlight?

Jay Gellert

Barack Obama, no. If the question is whether [Dave Colby] is working with us on a consulting basis, is that the question?

Carl McDonald – Oppenheimer

That is the question.

Jay Gellert

The answer is yes.

Carl McDonald – Oppenheimer

If it's possible to ask [Dave] a question, I'd love to get his thoughts on company and near-term opportunities.

Jay Gellert

He's not available right now to do that.

Carl McDonald – Oppenheimer

Final question, how many Private Fee-For-Service lives in total?

Jay Gellert

It's about 13,000 I believe.

Operator

Your next question comes from Josh Raskin – Barclays Capital.

Josh Raskin – Barclays Capital

First question just on the cost trend and premium yield guidance both ticking down 75 basis points. Last quarter you gave sort of spot on number understanding there would be pluses and minuses, now you're moving to a range. Should we interpret that to mean that the economic times are creating a little bit more uncertainty or was that just sort of semantics type of change?

Jay Gellert

I'd say its semantics. I think that we've seen an encouraging movement towards the products that Jim articulated and we're just giving ourselves a little room for product mix based on the economy in the second half of the year.

Josh Raskin – Barclays Capital

Just on the MLRs on the commercial side specifically, any differences in terms of improvement by geography? Was it sort of consistent over the book or did you see more improvement in California or Northeast or what have you?

Jay Gellert

It was pretty much across the board. I think we saw strength everywhere so there wasn't really a profound difference among the various areas in looking at it.

Josh Raskin – Barclays Capital

And then just this last question, I think Joe mentioned $150 million receivables from CMS related to the PDP insurance last quarter that came in late. I guess presumably that would have been the first quarter but maybe that still has not yet been received. I'm just curious was there a cash flow timing issue? Did that resolve itself this quarter or is that still pending?

Joe Capezza

No, that receivable was typically paid by the federal government late third quarter, early fourth quarter so it's still outstanding and we expect to collect it at that time.

Josh Raskin – Barclays Capital

I'm sorry last year's you think will take it…

Joe Capezza

Yes, the receivable that was outstanding just gets paid once a year from the government and that payment takes place late third quarter, early fourth quarter.

Jay Gellert

You remember, Josh, last year on our last call we said because of our poor PDP performance we had a pickup in the re-insurements that the federal government owed us. Ours is particularly high because we have mainly dual eligibles and they settle in late third quarter or early fourth quarter. That's what we're waiting for.

Operator

Your next question comes from Scott Fidel - Deutsche Bank.

Scott Fidel – Deutsche Bank

My first question, do you have exact enrollment in the Silver Network products in the first quarter and where that stood relative to 1/2008?

Jim Woys

Yes, the enrollment today at 3/31 is 87,000 members.

Scott Fidel – Deutsche Bank

Do you have the comps from a year ago, Jim?

Jim Woys

We'll get that in just a second.

Jay Gellert

We're getting it for you. Do you have another question?

Scott Fidel – Deutsche Bank

Second question just an update on the operating cash flow guidance. Are you [inaudible] for 1.5 times that income or do you think that delayed California payment will [inaudible] by that?

Jay Gellert

It could have a limited effect but it won't be strikingly different.

Scott Fidel – Deutsche Bank

I just had a question on the commercial risk membership in the Northeast. It was only down around 2% sequentially, which is less than the overall decline that you saw in the books. Just wondering on that, were you guys sort of pricing to retain the membership ahead of the sale or are you seeing a better pricing environment overall in the Northeast? Just wondering what was sort of helping out there?

Jay Gellert

I think what we're seeing a slightly better pricing environment and maybe the speculation is getting our name in the paper and helping our marketing. Seriously though, I think we're not changing our pricing strategy at all in terms of the business. I think Jim has the answer to your earlier question.

Jim Woys

The Silver Network HMO end of fourth quarter last year was at 78,000. It's now at 87,000 so it's up.

Scott Fidel – Deutsche Bank

And then just one last question just on, do you see anything around sort of intensity of your facility claims? I know you guys saw that last year, had a competitor or two cite that in the first quarter. Sounds like admissions were down but just what you're seeing on the sort of intensity of facility claims.

Jim Woys

I think we've booked things conservatively and we've built in some of that in the case that was to happen and we're not seeing it profoundly yet.

Operator

Your next question comes from Justin Lake – UBS.

Justin Lake – UBS

First question on the Medicare outlook, I think the previous guidance was for Medicare advantage you were going to improve MLR about 150 bips and then 500 on Part D. Notice that Part D came in better here and Medicare advantage was a little light, just curious if you've got any update there as far as what you're looking for.

Jay Gellert

The Medicare advantage came in consistent with our expectations for the 150 basis point improvement. The reason it was lower in this quarter had to do with the comps last year, not the performance this quarter. And our overall expectation would be at what 88-1 did you say is our MA target, and we're operating consistently with that. The PDP is slightly better than we expected and we think that there's a fairly good chance we'll do slightly better in that program.

Justin Lake – UBS

And on Medicare advantage, I think you mentioned last year specifically that improving your risk scores was going to be a big initiative and that was going to drive a lot of that 150 basis points. Have you seen that improvement or are you comfortable that that's kind of locked in that those risk scores are going to get there?

Jim Woys

Yes, this is Jim, we're using a third-party consultant to help us with those risk scoring determinations and what we're seeing today is right on in line of our expectations for this year.

Justin Lake – UBS

Then just a final question on the operating cost side, the initiatives that you've got out there, the special charges you took, can you give us an idea of what kind of run rate savings, I apologize if you mentioned this before, and also, can you tell us, is this run rate good on G&A or do you expect those savings to improve and G&A to decline through the year?

Jim Woys

Well, I think the guidance that we've given with regard to G&A for 2009 is we're right at that we don't expect that to change, and the charges that we have talked about today are consistent with what we expected in our 2009 charges. The overall run rate with regard to G&A savings as we get into 2010 and 2011 has increased and we talked about it at Investor Day, talked about $100 million run rate improvement in G&A. My feeling is we are north of that, probably closer to $125 million run rate going into future years.

Operator

Your next question comes from John Rex – JP Morgan

John Rex – JP Morgan

If you looked at your current network MA book can you kind of size for us where you would be running right now on that as a percent of traditional Part A, Part D costs, so if you were just providing only that component, where would you fall against that on average in your markets?

Jay Gellert

You know, can we get back to you on that, I think we have some general ideas that we've looked at, but let us get back to you on that specific number.

John Rex – JP Morgan

Well, so maybe get less specific, are there markets where you think you currently run at 75%, 80% of Part A, Part D cost, so you could configure add some extra benefit and still make a 5% pre-tax margin?

Jay Gellert

I think there are markets where we believe that there are adequate additional benefits particularly in a lot of California, where we could see an adjustment in the rates and still be able to maintain a competitive position. There are other parts of our business that can do that so we don't think we're as vulnerable. That's a question to some of the changes that are being proposed.

John Rex – JP Morgan

Yes, and I guess you're wondering if you think you're kind of already there on, and I know you don't have the number in front of you, but are you there 75%, 80% on 3/4 of your book, or would that be pushing it thinking you are running your costs that low compared to your traditional program.

Jay Gellert

Yes, I think that would be pushing it.

John Rex – JP Morgan

Maybe for below 50?

Jay Gellert

Let us look at it and get back to you I think you're asking a good question but let us get back on that.

John Rex – JP Morgan

Okay, and just follow up on the commentary on inpatient utilization, so I think you said you're down 5% on did you say on admissions or bed days?

Jim Woys

This is Jim, on commercial it's on bed days, on Medicare we did it on admissions, but most of our admissions in Medicare are DRG.

John Rex – JP Morgan

Okay, and then on the commercial component, did you say that was on a same product measure or was that taking into account some of the impact of moving to a more narrow network products.

Jim Woys

It gets on the entire book.

John Rex – JP Morgan

So if you were kind of sizing that when you think about that on a same product basis would it be about the same, so that is not so much about moving to more narrow network products but truly you're just seeing lower utilization?

Jim Woys

I think we're seeing lower utilization the inpatient side across all of our products pretty consistently, seen a slight uptick in outpatient of course it's moving as one of our challenges is moving so that inpatient to outpatient, but I think it's across all of our product lines.

Jay Gellert

Yes, product adjusted you still see the majority of that reduction.

John Rex – JP Morgan

I mean we'd still be close to 5% if your product adjusted?

Jim Woys

Yes.

John Rex – JP Morgan

Okay, and anything in particular that you can cite, I guess you gave it's better medical management but are there any more kind of environmental factors you could point to besides that that would be driving it?

Jim Woys

Probably nothing really in the environment, I think there is the whole industry is moving more on reducing outpatient moving out of inpatient and moving to outpatient, but I think for us the way we've organized our management teams and the way we're focused on our medical management sort of getting back to the basics and really trying to manage the trends really appropriately.

Jay Gellert

And bear in mind, too, last year was a bad hospital year, so some of the comparisons also reflect that, I mean it's a combination of focus and comparisons to bring that under control.

John Rex – JP Morgan

I mean if you were to roll it back and compare the bed days per thousand back to say the year prior, are you kind of more in line with those or would you still be net down?

Jay Gellert

No, I think we're still net down and there are still tangible results from the efforts, but if you're arguing over 2% one way or the other, I think that's more related to some of the comps. And so I think it shows some focus, it shows some places where we're out of line, but I don't think it's a dramatic meaning that we would yet say that there's something fundamental going on in terms of the overall market.

Operator

There are no further questions. I would now like to turn the call over to Angie McCabe.

Angie McCabe

We'd like to thank all of you for joining us today and we will be available for questions after the call.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Health Net Inc. Q1 2009 Earnings Call Transcript
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