HEALTH NET POSTS MIXED RESULTS SEVERANCE COSTS ATE INTO RATE HIKE.

Byline: Brent Hopkins Staff Writer

WOODLAND HILLS - Health Net Inc. charged more for insurance and cut its work force in the second quarter, leading the managed care company to announce mixed results on Tuesday.

The higher premiums bumped up total revenue to $2.92 billion from $2.75 billion in the same period a year ago, a 6 percent increase. Layoffs of up to 500 employees, part of the company's drive to cut administrative costs, ate into profits, which fell to $41 million, or 36 cents per share, from $74.8 million, or 63 cents per share, a year ago. The company took a charge of $17.4 million in one-time severance costs, while increased health care costs further drained earnings.

Citing improvements in work force efficiency, higher premiums and better estimation of reserves, President and Chief Executive Officer Jay Gellert said he was pleased with the results.

``We think we've weathered the worst of the storm and are getting back on course,'' Gellert said in a conference call with analysts. ``We've accomplished a lot in the second quarter, remain cautious as we look to the future and can now focus on showing all of you what we can do in the second half while preparing for a strong '05.''

The company said it expects earnings per share in the $2.15 to $2.50 range for the full year, with 67 cents to 77 cents coming in the third quarter. Shares slipped slightly, declining more than five percent to close at $23.52 on Tuesday, after the morning's release. Goldman Sachs analyst Matthew Borsch was less impressed with the news, terming the quarter a weak one and doubting that Health Net could hit even the bottom of the $2.15 target range for the year.

In a note to investors, Borsch said that increased premiums would bolster revenue but could hurt in the long run as customers turn to lower- cost insurers. He noted that it had already lost 50,000 customers, a two percent decline, as a result of higher prices.

``Health Net will need to exercise great care to avoid adverse selection (i.e., higher prices prompt the healthier, more profitable groups to leave for better deals with other carriers),'' he wrote. ``We believe adverse selection is a significantly greater risk in the current environment of intensifying price competition than it was two-to-three years ago when Aetna put through higher rate increases to restore profitability.''

Gellert said enrollment would likely decline in the second half of the year, as well. In California, enrollment fell during the quarter, but he said it was ahead of levels at the end of the year.

``Our pricing discipline in California will likely cause further declines through the balance of the year,'' he said. ``While the competitive pricing environ in California is pretty good, we're pricing toward the higher end of the market until we are convinced of our cost trends.''

While Gellert remained optimistic, analysts were less enthused. Joshua Raskin of Lehman Brothers wrote to investors that earnings per share, health plan and government revenues were all below his expectations. Still, he adopted only a lukewarm tone in his overall analysis.

``Our basic take on the quarter is that it could have been much worse,'' Raskin wrote. ``While on an absolute basis, we would hardly suggest that the quarter was impressive, we note that relative to expectations (which we believe were very low), it was likely in the ballpark.''

Brent Hopkins, [phone]

brent.hopkins(at)dailynews.com