Cheap policies are adding up to higher stock prices for one of the Valley’s most successful public companies over the past year. Shares of Health Net Inc. have jumped 15 percent since the insurer released first quarter results this month – even though the numbers fell short of analysts’ expectations. The unusual market reaction stems from the fact that the Woodland Hills company has succeeded in signing up new buyers on the Covered California online exchange established to help people get coverage as required under the Affordable Care Act, also known as ObamaCare. New policies incur upfront costs – including sales commissions and administrative time to set up accounts – that depress near-term profits. But Health Net investors are apparently focusing on the long term, where the company has emerged as low-cost leader for insurance, especially in Southern California. Brad Kieffer, a spokesman for Health Net, said most of the new policies are for CommunityCare, a “tailored” HMO plan with a limited network of doctors, hospitals and clinics that have agreed to keep prices low. “CommunityCare is consistently one of the most affordable plans on the exchange,” he said. “It strikes the right balance between affordability and quality. What you are seeing is its acceptance in Southern California, where we have roughly one third of the market.” Joseph France, an analyst at Cantor Fitzgerald in New York, said Health Net’s strategy of working with Covered California is yielding dividends for investors in the form of new customers. “We believe that Health Net’s 2014 results will continue to reflect heavy startup costs … but we expect accelerating earnings growth over the next two years as it achieves greater scale and produces better margins,” France wrote in a note to clients on May 7. In its first-quarter filing, Health Net reported net income of $28.8 million (36 cents a share), up significantly from $19.8 million (25 cents) for the same quarter a year ago. Revenue increased nearly 11 percent to $3 billion. Analysts on average expected net income of 42 cents a share on revenue of $3.25 billion, according to Thomson Financial Network. But the numbers look good when combined with data released in late April by Covered California, which show Health Net sold 264,079 policies on the exchange during the first open enrollment period, which ended April 15. And Chief Executive Jay Gellert told analysts during a conference call that he expects to sell another 90,000 to 100,000 new policies in May, and more as the year progresses. He even believes additional competitors in the low-end of the market will expand the number of consumers who want such policies. “If the whole market moves there, it expands the market so much that it works to our benefit,” he said. “Our best dream is that everyone gets in the pool with us and we expand the pool to be an ocean.” The stock closed at $39.14 on May 14. That’s 54 percent higher than a 52-week low of $25.40 in early November before ObamaCare rolled out. Tough competition Statewide, Health Net claimed 18.9 percent of the policies sold on the Covered California exchange, which placed it third. Thousand Oaks-based Anthem, a unit of WellPoint Inc. in Indianapolis, finished first with 30.5 percent of the market, followed by Blue Shield with a 27.3 percent market share. However, figures from Covered California show that Health Net fared much better in Los Angeles County. The exchange divides the state into geographical regions that reflect local differences in health care pricing. In Region 15, which stretches across northern L.A. County, Health Net sold 60,841 policies or 34.2 percent of the market to place second behind Anthem. In the southern part of the county, Health Net placed first with a 31.7 percent market share, or 70,774 policies. The geographical dominance stems from the insurer’s local provider network, said Sherrie Zenter, senior vice president at Momentous Insurance Brokerage in Van Nuys. “They are doing extremely well in the L.A. area because their network offers both Cedars-Sinai and UCLA hospitals, while some of the other carriers don’t,” she said. “Because of that, we have transitioned a lot of clients into Health Net.” In fact, Zenter said that among individual clients looking to buy insurance under the health reform mandates, she estimated 90 out of every 100 went with Health Net, largely because of the low premiums. “Their pricing is the most competitive in the market,” she said. For example, according to the Covered California website, a hypothetical four-person family with household income of $60,000 in the San Fernando Valley could buy a silver HMO Health Net plan for $371 a month after federal subsidies. Anthem and Molina Healthcare Inc. plans at the same level cost $410, while Kaiser Permanente tops out the options at $557. Zenter said Health Net faces two challenges in the market. First, with its low premiums and high-quality provider network, it remains to be seen whether the model will hold up once claims for coverage start piling up. Second, the company needs the infrastructure and staff to service the new customers. “The challenge would be staying on top of good service to handle the flow,” she said. “Their billing needs to have a good turnaround, with premiums coming in and payments out on time to keep the system running. But that’s not just true for Health Net – all the insurance companies are working on overload with not a lot of manpower.” Kieffer, the Health Net spokesman, said the company has a successful track record running tailored HMO networks, and it has been conservative in calculating utilization rates, or how much people will use their new insurance. “Health Net is the pioneer in tailored networks,” he said. “It’s a tried and true approach for us. We’ll strive to continue our efforts to develop programs that preserve affordability in a way that allows access to quality care.” Next: SHOP As for the service challenge, Kieffer said the company is analyzing the mad rush this year to help it prepare for the fall, when open enrollment starts again. He noted that the statistics about sales includes only individual and family policies. Covered California’s market for small business insurance, called the Small Business Health Options Program or SHOP, wasn’t a factor this year because in February the federal government announced an extension that allowed companies to keep their health policies, even if not compliant with reform’s minimum coverage requirements, for one more year. In the fall, “SHOP is going to ramp up,” Kieffer said. “For next year, we are taking lessons learned from this year.” France, the analyst at Cantor Fitzgerald, said he expects a clearer idea of Health Net’s future by the second half of this year. For now, he maintains a “hold” rating on the stock and a target price of $35 as investors take greater interest. “If this performance is sustained as (health reform) is rolled out through 2016, we believe the stock’s traditional discount could narrow,” France wrote in his note to investors. “The company’s longer-term earnings power is greater than what it has been in recent years.”
