Health Net 1999 Annual Report Download - page 21

1998 Charges
On July 19, 1998, FPA Medical Management, Inc. (“FPA”)
filed for bankruptcy protection under Chapter 11 of the
Federal Bankruptcy Code. FPA, through its affiliated med-
ical groups, provided services to approximately 190,000 of
the Company’s affiliated members in Arizona and Califor-
nia and also leased health care facilities from the Company.
FPA has discontinued its medical group operations in these
markets and the Company has made other arrangements for
health care services to the Company’s affiliated members.
The FPA bankruptcy and related events and circumstances
caused management to re-evaluate the decision to continue
to operate the facilities and management determined to sell
the 14 properties, subject to bankruptcy court approval.
Management immediately commenced the sale process
upon such determination.The estimated fair value of the
assets held for disposal was determined based on the esti-
mated sales prices less the related costs to sell the assets.
Management believed that the net proceeds from a sale
of the facilities would be inadequate to enable the Company
to recover their carrying value. Based on management’s best
estimate of the net realizable values, the Company recorded
charges totaling approximately $84.1 million.These charges
were comprised of $63.0 million for real estate asset impair-
ments, $10.0 million impairment adjustment of a note
received as consideration in connection with the 1996 sale of
the Company’s physician practice management business and
$11.1 million for other items.These other items included
payments made to Arizona physician specialists totaling $3.4
million for certain obligations that FPA had assumed but was
unable to pay due to its bankruptcy, advances to FPA to fund
certain operating expenses totaling $3.0 million, and other
various costs totaling $4.7 million.The carrying value of the
assets held for disposal totaled $11.3 million and $24.3 mil-
lion at December 31, 1999 and 1998, respectively.There has
been no further adjustment to the carrying value of the assets
held for disposal. As of December 31, 1999, 12 properties
have been sold.The remaining properties are expected to be
sold during the second half of 2000.The suspension of
depreciation on these properties held for disposal has an
annual impact of approximately $2.0 million.
During the third quarter ended September 30, 1998,
the Company recorded severance and benefit costs totaling
$21.2 million related to staff reductions in selected health
plans and the centralization and consolidation of corporate
functions, and other costs for amounts due from a third-
party hospital system that filed for bankruptcy which were
not related to the normal business of the Company totaling
$18.6 million, and other charges of $3.8 million related to
fees for consulting services from one of the Company’s for-
mer executives and costs related to exiting certain rural
Medicare markets.
In addition to the above, other charges totaling $103.3
million were recorded in the third quarter ended September
30, 1998.These charges mostly related to contractual adjust-
ments of $13 million, equitable adjustments relating to gov-
ernment contracts of $17 million, payment disputes with
contracted provider groups of $24 million, premium defi-
ciency reserves of $35 million, and other legal and relocation
costs of $14.3 million and were primarily included in health
care costs within the consolidated statement of operations.
As mentioned previously, during the fourth quarter of
1998, the Company initiated a formal plan to dispose of
certain Central Division health plans included in the Com-
pany’s Health Plan Services segment in accordance with its
previously disclosed anticipated divestitures program.The
Company sold most of these health plans during 1999. Pur-
suant to SFAS No. 121,“Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of,” the Company evaluated the carrying value of the assets
for these health plans and the related service center and
holding company, and determined that the carrying value of
these assets exceeded the estimated fair value of these assets.
Estimated fair value was determined by the Company based
on the then current stages of sales negotiations, including
letters of intent, definitive agreements and sales discussions,
net of expected transaction costs. In the case of the service
center and holding company operations, buildings, furniture,
fixtures, equipment and software development projects were
determined by management to have no continuing value to
the Company, due to abandoning plans for development of
this location and its systems and programs as a centralized
operations center. Accordingly, in the fourth quarter of
1998, the Company adjusted the carrying value of these
long-lived assets to their estimated fair value, resulting in a
non-cash asset impairment charge of approximately $112.4
million.This asset impairment charge of $112.4 million con-
sisted of $40.3 million for write-downs of abandoned furni-
ture, equipment and software development projects, $20.9
million for write-down of buildings and improvements,
$30.0 million for write-down of goodwill and $21.2 million
for other impairments and other charges.The fair value was
FOUNDATION HEALTH SYSTEMS, INC. 19