Health Net 2000 Annual Report Download - page 26

24 HEALTH NET 2000 Annual Report
Other Costs – The Company recorded other costs of
$22.4 million which included the adjustment of amounts
due from a third-party hospital system that filed for
bankruptcy which were not related to the normal busi-
ness of the Company totaling $18.6 million, and $3.8
million related to other items such as fees for consulting
services from one of the Company’s prior executives and
costs related to exiting certain rural Medicare markets.
During 1999, modifications of $12.6 million to the
initial estimates were recorded.These credits to the 1998
charges included: $10.7 million from reductions to asset
impairment costs and $1.9 million from reductions to
initially anticipated involuntary severance costs and other
adjustments.
net gain (loss) on sale of
businesses and properties
Net loss on sale of businesses and properties for the year
ended December 31, 2000 was comprised of the following:
• Gain on sale of a building in California of $1.1 million,
and
• Loss on sale of HMO operations in Washington due to
purchase price adjustment of $1.5 million.
Net gain on sale of businesses and properties for the
year ended December 31, 1999 was comprised of the
following:
• Gain on sale of pharmacy benefits management opera-
tions of $60.6 million,
• Net loss on sale of non-core operations of $9.1 million,
and
• Gain on sale of buildings of $6.8 million.
Gain on sale of businesses and properties for the year
ended December 31, 1998 was comprised of a net gain
on the sale of buildings of $4.4 million and a gain on the
sale of certain call center operations of $1.2 million.
income tax provision and benefit
The effective income tax rate was 37.7% for the year
ended December 31, 2000 compared with 39.4% for the
same period in 1999.The rate declined primarily due to
tax minimization strategies and related to the Company’s
change in business mix after divestiture of non-core
operations.
The effective income tax rate was 39.4% for the year
ended December 31, 1999 compared with a tax benefit
rate of 35.0% for the same period in 1998.The change
was mainly due to non-deductible impairment charges
incurred in 1998.
impact of inflation and other elements
The managed health care industry is labor intensive and
its profit margin is low; hence, it is especially sensitive to
inflation. Increases in medical expenses or contracted
medical rates without corresponding increases in premi-
ums could have a material adverse effect on the Company.
Various federal and state legislative initiatives regard-
ing the health care industry continue to be proposed dur-
ing legislative sessions. If further health care reform or
similar legislation is enacted, such legislation could impact
the Company. Management cannot at this time predict
whether any such initiative will be enacted and, if
enacted, the impact on the financial condition or results
of operations of the Company.
The Company’s ability to expand its business is
dependent, in part, on competitive premium pricing and
its ability to secure cost-effective contracts with providers.
Achieving these objectives is becoming increasingly diffi-
cult due to the competitive environment. In addition, the
Company’s profitability is dependent, in part, on its ability
to maintain effective control over health care costs while
providing members with quality care. Factors such as
health care reform, regulatory changes, increased cost of
medical services, utilization, new technologies and drugs,
hospital costs, major epidemics and numerous other
external influences may affect the Company’s operating
results.Accordingly, past financial performance is not nec-
essarily a reliable indicator of future performance, and
investors should not use historical records to anticipate
results or future period trends.
The Company’s HMO and insurance subsidiaries
are required to maintain reserves to cover their estimated
ultimate liability for expenses with respect to reported and
unreported claims incurred.These reserves are estimates of
future payments based on various assumptions.
Establishment of appropriate reserves is an inherently
uncertain process, and there can be no certainty that cur-
rently established reserves will prove adequate in light
of subsequent actual experience, which in the past has
resulted, and in the future could result, in loss reserves
being too high or too low.The accuracy of these estimates
may be affected by external forces such as changes in the
rate of inflation, the regulatory environment, medical costs
and other factors. Future loss development or governmen-
tal regulators could require reserves for prior periods to be
increased, which would adversely impact earnings in
future periods. In light of present facts and current legal
interpretations, management believes that adequate provi-
sions have been made for claims and loss reserves.
The Company’s California HMO subsidiary con-
tracts with providers in California primarily through cap-
itation fee arrangements.The Company’s other HMO
subsidiaries contract with providers, to a lesser degree, in
other areas through capitation fee arrangements. Under a
capitation fee arrangement, the Company’s subsidiary
pays the provider a fixed amount per member on a regu-
lar basis and the provider accepts the risk of the fre-
quency and cost of member utilization of services.
The inability of providers to properly manage costs under
capitation arrangements can result in financial instability
of such providers. Any financial instability of capitated
providers could lead to claims for unpaid health care
against the Company’s HMO subsidiaries, even though
such subsidiaries have made their regular payments
to the capitated providers. Depending on state law, the
Company’s HMO subsidiaries may or may not be liable
for such claims. In California, the issue of whether
HMOs are liable for unpaid provider claims has not been