Health Net's prescription for recovery: raising premiums: company blames poor economy for drop in subscriber rolls.

Look out employers. Health Net Inc. is feeling pinched and plans to make up for it by raising premiums next year.

The Woodland Hills-based health insurer has been battered by the economy, which it said has pushed sicker and costlier patients into its Medicare programs while lowering the number of subscribers in its commercial health plans.

The result: The company last week chopped its projected 2008 adjusted earnings per share more than 40 percent at the same time it released disappointing quarterly earnings.

"We believe in the strength of our diversified business portfolio, especially in light of the current economic and regulatory environments," said Chief Executive Jay Gellert in a prepared statement. "However, based on factors that emerged during the second quarter Hat will impact the second half of 2008, we are lowering our full-year 2008 outlook."

The company has not said how much of a premium increase it will seek, but Geller did note that bids it has sent out to commercial customers for the 2009 coverage year already reflect the company' s weaker financial position.

The company reported second quarter net income of $76.7 million, or 71 cents per share, down 17 percent from $92 million, or 80 cents per share, the same period a year earlier. Revenue rose 11 percent to $3.84 billion.

The Aug. 6 report failed to meet analysts' expectations and sent shares tumbling before they settled at $26.40 on Aug. 7. That was down less than 4 percent since the day prior to the report but off nearly 50 percent since last September.

Last week's earning report could mean that Health Net customers are in for a whammy.

Hewitt Associates, a human resources consultancy based in Lincolnshire, Ill., forecasts that HMO rates in 2009 will increase 9.4 percent on average nationwide, down from an average increase of 11.8 percent this year. However, that estimate may better apply to other health care insurers, which generally reported positive second quarter results.

Indeed, the need to raise premiums potentially higher than competitors is a challenge for Health Net which could drive away more subscribers and cut into profits and revenue. The predicament wasn't lost on the market last week, with the poor earnings reviving talk that the company may be a target for an acquisition by a competitor such as Blue Shield of California.

Matt Perry, an analyst at Wachovia Securities, said in a harsh note to clients that he didn't expect Health Net's poor results to be a harbinger of problems to come for all insurers.

"Health Net is not large enough nor well-managed enough, in our view, to cause us to worry that it's a leading indicator for further earnings per share reductions at other companies," Perry wrote in the note.

Health Net Inc.

Woodland Hills

(NYSE; HNT)

CEO: Jay Gellert

Employees: 9,910

Market Cap: $2.9 billion

P/E *: 4.5

EPS *: $0.62

* Twelve months trailing.

Source: Yahoo Finance

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