By James Gutman - February 10, 2012

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If there is a "hot potato" that Medicare Advantage plans want to avoid catching, it might just be non-HMO beneficiaries in Northern California. And if one leading securities analyst is right, Health Net, Inc. may have to take a bite out of that hot potato in 2012.

The history began, as securities analyst Carl McDonald of Citigroup Global Markets writes in a Feb. 9 research note, in 2010 when Cigna Corp., in an apparent better-late-than-never strategy, introduced an MA private-fee-for-service product (during the last year before the mandated end of network "deeming" for PFFS networks in most counties) in Sacramento County. The product enrolled 3,440 beneficiaries but lost money, and Cigna dropped its PFFS product nationwide for 2011, McDonald notes. So those members needed a new home and found it with WellPoint, Inc., which went from 2,250 in its regional PPO in Sacramento at the end of 2010 to 7,100 at the end of last year. It helped contribute to a 104% medical loss ratio for the regional PPO in the first nine months of 2011, but that includes profitable members in southern California, so McDonald figures the Northern California regional PPO membership might have had a loss margin of 20% to 25%. Not surprisingly, WellPoint dropped the regional PPO at the end of 2011.

Now enter Health Net. It doesn't have a regional PPO in either Sacramento or Contra Costa County, where WellPoint had 2,600 PPO lives, but it does have a local PPO with a premium of just $30 a month in Contra Costa (it has no premium in Sacramento), the lowest MA premium in the market, and a low annual out-of-pocket maximum of $3,400. This seemed to prove attractive during the 2012 Annual Election Period, and McDonald estimates that Health Net therefore grew by 3,100 PPO lives in Sacramento and 850 in Contra Costa for Feb. 1 versus the end of last December. He figures the company could lose $8 million on the Sacramento area members and have additional red ink in Contra Costa. While he doesn't say why, many observers say there is little hospital competition in Northern California, and one market leader, Sutter Health, is known for high costs.

But Health Net is not ready to be branded as a hot-potato holder. During the company's Feb. 3 fourth-quarter earnings conference call, President and CEO Jay Gellert emphasized in response to questions that its PPO arrangements in the counties are "not like WellPoint's." Among other things, he noted, the company moved more to capitated arrangements with providers, "so we're protected against utilization upticks."

What do you think? Will the different contracting arrangements and somewhat different benefit structure yield a different result for Health Net? Or is it next to be scalded by the hot potato?