They are California’s sickest and poorest. They suffer from multiple chronic health diseases. And they cost the state and federal governments more than $20 billion a year by bouncing from one doctor to another, one emergency room to the next. They are 1.1 million patients who qualify for both Medicare and Medi-Cal coverage, and while they represents a huge burden to taxpayers, taking care of them might be the biggest opportunity in years for Woodland Hills-based Health Net Inc. — potentially worth as much as $4 billion a year in new revenues. The Valley’s fourth largest public company saw revenues and profits slide last year, but that may all change if the company succeeds in its bid to enroll these patients in managed care programs. Analysts say if Health Net can turn the opportunity into a real business, its stock could soar by as much as $10 a share to $48. “The market hasn’t fully appreciated how important the dual opportunity could be for Health Net,” Citi Investment Research Analyst Carl McDonald wrote in a recent report. Another analyst Joshua Raskin of Barclay’s Capital, called these patients the “largest and most underappreciated opportunity for managed care companies in recent memory.” Under a new program approved by the California legislature, these patients are about to be enrolled in managed care programs. The first wave will affect 10 counties starting in January 2013, and by the end of 2015, the hope is that all 1.1 million will be enrolled, said Jane Ogle, deputy director of health care delivery systems in the California Department of Health Care Services. “These people are left on their own to manage the fee-for-service system,” Ogle said. “They are low-income elderly and have numerous illnesses. We believe that by using the managed care system with all the requisite access to care, member service support and due process of grievances, they will have better opportunities to receive care in a more timely manner while also reducing inappropriate hospitalizations and use of emergency rooms.” Health Net submitted its bid for the contracts on Feb. 24, hoping to get a significant slice of the 1.1 million, thanks in part to its experience with both Medicare Advantage programs and Medi-Cal. But there are major challenges with pursing this patient demographic, which is probably the single most expensive group for federal and state governments. Health Net must be able to capture the potential business and deliver the expected savings to California, while also making the margin that Wall Street expects. If the cost of taking care of this very sick cohort proves higher than anticipated, it could raise the company’s medical loss ratio and squeeze margins. To succeed, Health Net will have to bring to bear much of its experience coordinating care for the elderly and the poor, as it currently does with its Medi-Cal patient group. Analysts think it’s precisely this experience that makes Health Net a strong candidate for the new business. Goldman Sachs Analyst Matthew Borsch expects Health Net to capture 200,000 new patients by 2014, adding $4.3 billion in new revenue. HealthNet CEO Jay Gellert has been noticeably subdued about the potential benefits, however. On a recent conference call with analysts, he said, “I think there are some really decent opportunities for us in this program.” Health Net spokesman Brad Kieffer said the company believes “it is well positioned for this business as we currently serve both the Medicare and Medi-Cal populations…We look forward to working and collaborating with the state on this.” The company declined to comment further. Health Net saw profits slip 25 percent to $60.2 million, or 71 cents per share, in the fourth quarter of 2011 compared to the same period a year ago, due in part to a change in the way the U.S. military contracts with the company. Revenues fell 17 percent to $2.81 billion in the fourth quarter compared to a year ago, and slid 13 percent for the full year 2011 to $11.90 billion. Health Net’s strategy Health Net has retooled in recent months and sharpened its focus, shedding less profitable businesses such as its standalone prescription drug business, which it has agreed to sell to CVS-Caremark, effective the second quarter this year. It has focused its efforts on growing its tailored networks, which significantly limit the number of providers in a plan in order to achieve costs savings for buyers of commercial health insurance policies. The company passes the savings to businesses, which can obtain insurance for as much as 25 percent less as result. Health Net has also begun an aggressive share-buyback program. The stock has begun to move in response, up from a three-month low of $28.31 on Dec. 14, closing at $38.83 a share on Thursday, March 1. But analysts think it could get much better, if the company captures the so-called “dual eligibles,” or patients who qualify for both Medicare and Medi-Cal coverage. In an extensive report, McDonald said Health Net is well positioned to get much of California’s dual eligibles based on its experience with this population. McDonald said the total value of the dual eligibles in California to health insurance plans is about $25 billion. Health Net currently has 33 percent of the Medi-Cal market in Los Angeles. “If it maintains that share as the duals convert (to managed care) in L.A., the company would pick up nearly $3 billion in revenue. The same math across six of its Medi-Cal counties would yield a total of $4 billion in revenue,” under a best-case scenario, McDonald wrote. If Health Net can squeeze a 2 percent margin from that business, it would mean an additional $80 million in profits for the company, he added. Even if the company only captures half that business, or $2 billion worth, total revenues would climb to $14.4 billion in 2014, making the stock worth about $52 a share, McDonald wrote. In its analysis, Goldman Sachs said Health Net could capture $4.2 billion in new business and if Los Angeles County is chosen in the 2013 demonstration, Health Net should be off to a strong start since the plan has a large market share in the county. Ogle said she expects that the managed care initiative will deliver $679 million in savings to the state in 2013 and $1 billion in 2014. The hope is that with more coordinated care, the health plans can shift some of the cost from acute care to preventive care, offering patients more access, better outcomes and less costly care. On a recent conference call with analysts, Geller acknowledged that delivering such savings to the state will mean tight margins for the company. “We have to come up with a solution that meets (California’s) budgetary needs, which we believe we can; I wouldn’t anticipate greater margins than we’ve historically had,” he said. Despite this, Health Net is happy to have the new business. Its commercial business —health plans sold to businesses — is growing slowly. Though businesses like the company’s new tailored plans, which saw a 35 percent increase in members to 428,000 at the end of last year, Health Net’s overall commercial business was just about flat last year at about 3 million members. To contend with the slow volume, the company’s been cutting costs. Because of those moves, Health Net has increased gross margins by 27 percent since 2009, Gellert has told investors and analysts. The cost-cutting has led to criticism of Health Net services. A recent report by Temkin Group in Waban, Mass., said Health Net’s customer experience ranked among the lowest in 18 industries and was among the poorest in health plans. It will be up to state officials to watch for the kind of cost-cutting that could hurt services as patients are moved to managed care. “We have to make sure the plans the networks are putting together are adequate and people have good access to care and make sure beneficiaries are protected in terms of their rights and the appeal processes,” Ogle said.
