On Monday, Health Net Life Insurance Company, a subsidiary of Health Net Inc. (NYSE:HNT - News), announced that it has completed the divestiture of its Medicare stand-alone Prescription Drug Plan (:PDP) business to a unit of CVS Caremark Corporation (NYSE:CVS - News). The deal was announced by the company in January 2012.
Although the deal is valued at $160 million, Health Net anticipates net cash inflow of $145 million from the transaction, after deducting taxes, transaction costs, transition costs and the effect of freed-up capital.
However, subsequent to the divestiture, Health Net will continue to offer Prescription Drugs Plans as part of its Medicare Advantage plans. The company earned $490 million in 2011 from the PDP business and has over 425,000 policyholders under this product.
We expect the asset disposition to be beneficial for Health Net as the company has been witnessing a steady decline in PDP enrollment, while the Medical Care Ratio (:MCR) for the business has been on the rise. The MRC is the ratio of the health plan services expense to the health plan services premium. Hence, a rising MRC denotes a higher growth in expenses compared to premiums, which leads to a decline in the bottom line.
Health Net recorded year-over-year declines of 12.3%, 10.4%, 11.8% and 10.5%, respectively, in PDP membership in the four quarters of 2011. Moreover, the PDP MCR increased by 420 basis points (bps), 150 bps, 1380 bps and 590 bps, respectively, in the quarters.
On the other hand, CVS Caremark aims to take advantage of the ageing population in the U.S., which is expected to boost the demand for Medicare products. As a result, the company is expanding its Medicare business via acquisitions. Earlier, in April 2011, CVS Caremark acquired the Medicare PDP business of Universal American Corp. (NYSE:UAM - News).
Currently, Health Net carries a Zacks #3 Rank, implying a short-term ‘Hold’ rating, while CVS Caremark holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on both Health Net and CVS Caremark.
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