Woodland Hills-based Health Net Inc. is selling its Medicare standalone prescription drug business to CVS Caremark Corp. as part of its ongoing efforts to focus more narrowly on its West Coast and California managed health care businesses and to shore up shareholder returns. Its Health Net Life Insurance Co. subsidiary plans to sell the standalone Medicare Prescription Drug Plan (PDP) business to a subsidiary of CVS Caremark for approximately $160 million in cash. Analysts said the move — which will raise $140 million in net cash — should help Health Net buy back about 4 million shares of common stock and boost earnings about 10 cents a share this year. “We think we have other, better opportunities,” Jay Gellert, president and CEO of Health Net told investors and analysts at the J.P. Morgan HealthCare Conference held in San Francisco earlier this month. “We think this is an opportunity for us basically to get additional cash and continue our share repurchase program.” Wall Street hailed this move and others by the company to get back to its core business and reduce expenses. The stock, which hit a 52-week low of $20.07 a share in September, has steadily climbed and reached a 52-week high of $35.67 on Jan. 10, a day after the company announced the sale. The company said in December that it expects to report full year 2011 earnings per share of $2.80 to $2.90 a share on revenues of $11.5 billion to $12 billion, up from $2.06 a share on revenues of $13.6 billion in 2010. The stand-alone Medicare Prescription Drug Plan (PDP) was part of the 2003 Medicare Prescription Drug Modernization Act that went into effect in 2006, allowing Medicare recipients to purchase standalone prescription drug benefits, subsidized by the federal government. Other insurers, UnitedHealthcare and Humana Inc., for example, are much larger players in the segment, with 4.5 million and 2 million subscribers, respectively, according to Sally Rosen, managing senior financial analyst with A.M. Best Co. The business generated $490 million in revenue last year for Health Net. But relative to its competitors, Health Net was among the smaller players with 400,000 subscribers and falling. According to Zack’s Investment Research, enrollment in the program dropped 11.8 percent, 10.4 percent and 12.3 percent, respectively in the third, second and first quarter of 2011. Meanwhile, the medical care ratio, or medical cost as a percentage of premium revenue, has been rising throughout the year. What’s more, Health Net subscribers are spread out in 49 states and Health Net has stopped doing business in many of those states. Rosen said scale helps make the standalone prescription drug plan more profitable. Health Net’s relative small size made it hard for the company to compete with the likes of Humana and UnitedHealthcare, both of which have better name recognition nationally, he said. The sale also furthers Health Net longstanding goal to focus on its West Coast managed health care business. The company shed its East Coast operations in December 2009 for $350 million in cash. Health Net has spent the last two years building its commercial businesses, especially tailored or narrow networks, which limit the choice of providers but cost up to 25 percent less than traditional insurance plans. Health Net expects these plans to account for half of its business soon. The company has also worked to reduce costs and expenses. The company expects that ratio to be between 8.6 and 8.8 percent in 2012, down from a ratio of 8.7 to 8.9 percent in 2011, Gellert told the financial community. He emphasized that in the years ahead, the mantra for everyone in health care will be cost reductions. The industry is moving from a revenue-driven to a cost-driven business model with important and dramatic consequences for all, including health insurers. “We are moving into an era of real cost accountability,” he told investors. “It’s important for us to bring G&A (general and administrative expenses) down and focus on our core businesses.” Carl McDonald, an equities analyst with Citigroup Investment Research, said the standalone prescription business contributed an estimated 10 cents a share to earnings in 2011. The $140 million net cash proceeds from the sale should boost 2011 earnings by 20 cents a share, giving the sale a net impact of an added 10 cents a share. McDonald estimates that Health Net received just $400 per member for the business, less than the $560 per member that CVS paid recently for the standalone prescription business of Universal American Corp., a New York area Medicare insurance company, which is the only other significant insurer to exit the standalone Medicare prescription business. Universal sold its business to Woonsocket, R.I.-based CVS for $1.25 billion. The company is now one of the largest pharmacy benefits managers in the country, and is building that business as more people transition to Medicare because of the aging population. In a research note following the Health Net announcement, McDonald said the prescription business was little more than a headache for Health Net. “In our view, the decision to sell probably had more to with the opportunity to offload a business that had been a bit of a headache in recent years.”
