Health Net to Shed PDP Business

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On Monday, Health Net Life Insurance Company, a subsidiary of Health Net Inc. (NYSE:HNT - News), announced an agreement to sell its Medicare stand-alone Prescription Drug Plan (NYSEArca:PDP - News) business to a unit of CVS Caremark Corporation (NYSE:CVS - News).

The company expects to complete the divestiture in the second quarter of 2012, subject to the required approvals from the Centers for Medicare and Medicaid Services and other regulatory bodies and other customary closing conditions.

Although the deal is valued at $160 million, Health Net anticipates net cash inflow of $140 million from the transaction, after deducting taxes, transaction costs, transition costs and the effect of freed-up capital. As CVS Caremark already provides some services to the company’s clientele, Health Net expects that its policyholders will not face any inconvenience or disruption in services due to the switch.

However, subsequent to the divestiture, Health Net will continue to offer Prescription Drugs Plans as a part of its Medicare Advantage plans. The company currently earns about $490 million annually from the PDP business and has over 400,000 policyholders under the PDP.

We expect the asset disposition to be beneficial for Health Net as the company has been witnessing a steady decline in its PDP enrolment, while the Medical Care Ratio (NYSE:MCR - News) for the business has been on the rise.

Although the figures for the fourth quarter of 2011 are not available as yet, Health Net recorded year-over-year PDP membership declines of 11.8%, 10.4% and 12.3%, respectively, in the third, second and first quarter of the year. Moreover, MCR increased by 1380 basis points (bps), 150 bps and 420 bps, respectively in the third, second and first quarter of 2011.

On the other hand, CVS Caremark aims to take advantage of the ageing population in the US, 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 carries a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

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