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healthnet healthnet By SLAV KANDYBA Staff Reporter Workers at the Woodland Hills headquarters of Health Net Inc., will bear only a small burden of the layoffs the company plans to offset a decline in earnings. The managed care company said it would lay off a total of about 500 employees nationwide, about 5 percent of its workforce, but only 100 of that number will come from its headquarters operation. Health Net employs about 2,000 workers in Warner Center. The company expects to take a charge of $15 million to cover severance costs associated with the layoffs. “We’re reducing our workforce nationally, and as far as Woodland Hills, it’s going to affect fewer than 100 associates,” said a company spokesman. Health Net is still formulating its plan and was unable to provide further details concerning where the cuts would be made. Last week Health Net reported net income plummeted to about $15 million in the first quarter of 2004 from $72.1 million in the same quarter of 2003. Health Net is one of the nation’s largest publicly traded managed health care companies, with HMO, PPO and other services providing health benefits to about 5.3 million Americans in 14 states. The company pointed to an unexpected rise in costs as the reason for the dismal earnings. “What happened in the first quarter is that prior period costs of approximately $64 million pretax led to our coming up short of previously set expectations,” said Jay Gellert, Health Net president and CEO, in a conference call with analysts on May 4. “These prior period costs resulted from a large number of hospital claims and other items.” Some of the claims came from California, as well as Connecticut and New York. At the same time, Health Net’s decision to speed up claim payments in order to improve provider relations and reduce interest expenses on outstanding claims contributed to a higher than expected claim cost, Gellert said. “As we did so, the dollar value per claim came in higher in March than any historical pattern would have indicated,” Gellert said. “Our paid claims in the first quarter of ’04 were $120 million higher than in the fourth quarter of ’03, and much of it occurred in March, leading us to recognize these higher health care cost trends both for the quarter and the year.” Gellert added that so far April data suggests claims have fallen in line with past levels, but the company is nonetheless taking precautions. “We began raising prices at the start of the year, and we will start to see some effect in Q2,” Gellert said. The company also noted that it does not expect future enrollment and revenues to grow as much as it had previously anticipated, and as a result, Health Net made its decision to lay off a portion of its workforce. “Given all that’s transpired and knowing that our enrollment and revenues are not going to grow as much as we previously thought, we kew we had to address administrative costs,” said Gellert. “These reductions in enrollment and revenues were part of our earlier forecast, so we’d already begun the process of attacking administrative costs.” Health Net reported its Commercial Health Plan enrollment increased by 82,000 members, or three percent in the first quarter of the year, compared with the first quarter 2003, and by 25,000 members or one percent, over the previous quarter. In the first quarter, the nation’s ongoing military activity spurred revenue growth for Health Net’s government contracts, as more individuals enrolled in TRICARE, of Health Net’s offerings. Contracts revenue rose 11.1 percent from the first quarter of 2003, to nearly $504 million. The company has also postponed completion of its systems consolidation project called Health Net One, which was pushed back to the first half of 2005. Health Net shares closed at $23.40 on Friday, May 7, down from $25.50 on the day prior to the earnings report.