Health Net, Inc. (HNT), a small player in the Medical Services Industry, provides health benefits to approximately six million people through Health Maintenance Organizations (HMO), insured Preferred Provider Organizations (PPO), Point-of-Service plans (POS), and indemnity plans.  With heavy government regulation, and fierce competition from industry behemoths like UnitedHealth Group (UNH) and WellPoint Inc. (WLP), as well as medium-sized firms, such as Humana Inc. (HUM) and Cigna Corp. (CI), profit margins tend to be narrow. That said, conservative investors might be interested in Health Net Stock because of the healthcare provider’s steady growth rates in revenues and earnings.

Health Net operates in three segments: Northeast Operations, Government Contracts, and Western Region Operations.  In December 2009, the Northeast Operations were sold, but Health Net retains some responsibility during the transition period, which will probably conclude by the end of 2011. Under its subsidiary Health Net Federal Services, the company acts as the managed care support contractor for the TRICARE North Region, which covers almost three million active and retired uniformed servicemen and their families. In an affirmation of the company’s success, the government awarded the new managed care support contract for the TRICARE North Region to Health Net this past May. The Western Region Operations segment is the breadwinner, and focuses on commercial, Medicare, and Medicaid health plans in California, Arizona, and Oregon.

The company, along with the majority of the industry, has struggled since the onset of the 2007-2009 economic downturn. Stubbornly high unemployment continues to pressure enrollment rates as laid-off workers struggle to maintain health insurance.  Moreover, businesses will face new excise taxes by 2013 for uninsured employees and high-cost employee plans. In response to the excise taxes, businesses will likely abandon premium plans in favor of more modestly priced middle-of-the-road options.   

Looking ahead, the industry faces numerous changes as a result of healthcare reform, which garners mixed results for health insurers. On a positive note, the recent legislation includes an individual mandate, which will swell the ranks of the insured, leading to greater revenues. Furthermore, a small business tax credit will most probably make employer-sponsored health insurance more affordable, which ought to boost enrollment, as well.

On the other hand, the government will have more say in premium increases, Medicare and Medicaid reimbursement rates, and benefit limits. Furthermore, health insurance providers will face higher fees and raised excise taxes on high premium policies. Moreover, increased competition from nonprofit health insurance issuers receiving federal grants will probably narrow margins and diminish the bottom lines of these for profit organizations.  In addition, implementation of this legislation will likely be a complex, costly process.

The company’s that succeed in this changing landscape will have to put up with greater competition. Thus, cost management will be vital.  If costs can be controlled, the greater volumes will translate to higher earnings per share in the future. Health Net has been proactive, shedding under-performing business units (Northeast Operations), and embracing technology in an attempt to improve efficiency. 

The company just released the Health Net Mobile App for the iPhone allowing customers to securely view their plan details such as ID numbers, effective dates, and schedule of benefits information. Additionally, users will be able to search for contracting health care providers and urgent care facilities by location, including directions to their address. Not only will the app likely be a hit with consumers, but it will probably improve efficiency as more transactions take place online.
Health benefit providers face a rapidly evolving environment. Efficiency will be paramount as the government has more control over premiums and reimbursement rates. Competition in the Medical Services Industry will likely be based on price. We believe the companies that capitalize on economies of scale and improving technology to streamline operations will be the winners.    

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.