Health Net 2000 Annual Report Download - page 25

Management’s Discussion and Analysis of Financial Condition and Results of Operations HEALTH NET 23
1999 Charges
During the fourth quarter of 1998, the Company initi-
ated a formal plan to dispose of certain health plans of
the Company’s then Central Division included in the
Company’s Health Plan Services segment in accordance
with its anticipated divestitures program. In this connec-
tion, the Company announced in 1999 its plan to close
the Colorado regional processing center, terminate
employees and transfer its operations to the Company’s
other administrative facilities. In addition, the Company
also announced its plans to consolidate certain adminis-
trative functions in its Oregon and Washington health
plan operations. During the year ended December 31,
1999, the Company recorded pretax charges for restruc-
turing and other charges of $21.1 million (the “1999
Charges”) and $6.2 million, respectively.
Severance and Benefit Related Costs –The 1999 Charges
included $18.5 million for severance and benefit costs
related to executives and operations employees at the
Colorado regional processing center and operations
employees at the Northwest health plans.The operations
functions include premium accounting, claims, medical
management, customer service, sales and other related
departments.The 1999 Charges included the termina-
tion of a total of 773 employees.As of December 31,
2000, termination of the employees was completed and
$17.2 million had been paid.There are no expected
future cash outlays. Modifications to the initial estimate
of $1.3 million were recorded during the year ended
December 31, 1999.
Asset Impairment Costs – During the fourth quarter
ended December 31, 1999, the Company recorded asset
impairment costs totaling $6.2 million related to impair-
ment of certain long-lived assets held for disposal.
Real Estate Lease Termination and Other Costs – The 1999
Charges included $2.6 million related to termination of
real estate obligations and other costs to close the
Colorado regional processing center.
The 1999 restructuring plan was completed as of
December 31, 2000.
1998 Charges
In connection with the Company’s 1998 restructuring
plans, severance, asset impairment and other costs totaling
$240.1 million were recorded during the year ended
December 31, 1998. As of December 31, 1999, the 1998
restructuring plans were completed.
Severance and Benefit Related Costs – During the year ended
December 31, 1998, the Company recorded severance
costs of $21.2 million related to staff reductions in selected
health plans and the corporate centralization and consoli-
dation.This plan included the termination of 683 employ-
ees in seven geographic locations primarily relating to
corporate finance and human resources functions and
California operations. As of December 31, 1999, the termi-
nation of employees had been completed and $20.1 mil-
lion had been recorded as severance under this plan.
FPA Medical Management – 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 medical groups, provided services to
approximately 190,000 of the Company’s affiliated members
in Arizona and California 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 manage-
ment 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 deter-
mined based on the estimated sales prices less the related
costs to sell the assets. Management believed that the net pro-
ceeds 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 impairments, $10.0 million impairment
adjustment of a note received as consideration in connection
with the 1996 sale of the Company’s physician practice man-
agement 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 bank-
ruptcy, 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 $ 9.9 million at December 31, 2000.There have been
no further adjustments to the carrying value of these assets
held for disposal. As of December 31, 2000, 12 properties
have been sold which has resulted in net gains of $5.0 mil-
lion during 1999 and $3.6 million in 1998 which are
included in net gains on sale of businesses and buildings.The
remaining properties are expected to be sold during 2001.
The effects of the suspension of real estate depreciation on
the respective properties had an impact of approximately $2.0
million in 1998 and were immaterial during 2000 and 1999.
The results of operations attributable to FPA real estate assets
were immaterial during 1998, 1999 and 2000.
Asset Impairment and Other Charges – During the fourth
quarter ended December 31, 1998, the Company
recorded impairment and other charges totaling $118.4
million. Of this amount, $112.4 million related to
impairment of certain long-lived assets held for dis-
posal and $6 million related to the FPA bankruptcy.