Health Net 2000 Annual Report Download - page 27

Management’s Discussion and Analysis of Financial Condition and Results of Operations HEALTH NET 25
definitively settled.The California agency that until July
1, 1999 acted as regulator of HMOs, had issued a written
statement to the effect that HMOs are not liable for such
claims. However, there is currently ongoing litigation on
the subject among providers and HMOs, including the
Company’s California HMO subsidiary.
liquidity and capital resources
Certain of the Company’s subsidiaries must comply with
minimum capital and surplus requirements under applica-
ble state laws and regulations, and must have adequate
reserves for claims. Certain subsidiaries must maintain
ratios of current assets to current liabilities pursuant to
certain government contracts.The Company believes
it is in compliance with these contractual and regulatory
requirements in all material respects.
The Company believes that cash from operations,
existing working capital, lines of credit, and funds from
planned divestitures of business are adequate to fund
existing obligations, introduce new products and services,
and continue to develop health care-related businesses.
The Company regularly evaluates cash requirements for
current operations and commitments, and for capital
acquisitions and other strategic transactions.The
Company may elect to raise additional funds for these
purposes, either through additional debt or equity, the
sale of investment securities or otherwise, as appropriate.
The Company’s investment objective is to maintain
safety and preservation of principal by investing in high-
quality, investment grade securities while maintaining liq-
uidity in each portfolio sufficient to meet the Company’s
cash flow requirements and attaining the highest total
return on invested funds.
Government health care receivables are best esti-
mates of payments that are ultimately collectible or
payable. Since these amounts are subject to government
audit, negotiation and appropriations, amounts ultimately
collected may vary significantly from current estimates.
Additionally, the timely collection of such receivables is
also impacted by government audit and negotiation and
could extend for periods beyond a year.
In December 2000, the Company’s subsidiary, Health
Net Federal Services, Inc., and the Department of
Defense agreed to a settlement of approximately $389
million for outstanding receivables related to the
Company’s three TRICARE contracts and for the com-
pleted contract for the CHAMPUS Reform Initiative.
Approximately $60 million of the settlement amount was
received in December 2000.The majority of the remain-
ing settlement that was received on January 5, 2001
reduced the amounts receivable under government con-
tracts on the Company’s balance sheets.The receivable
items settled by this payment include change orders, bid
price adjustments, equitable adjustments and claims.These
receivables developed as a result of TRICARE health
care costs rising faster than the forecasted health care cost
trends used in the original contract bids, data revisions on
formal contract adjustments, and routine contract changes
for benefits.The settlement amount, after paying vendors,
providers and amounts owed back to the government,
will be applied to the continuing operating needs of the
three TRICARE contracts and to reducing the outstand-
ing balance of the notes payable.
In 1997, the Company purchased convertible and
nonconvertible debentures of FOHP, Inc., a New Jersey
corporation (“FOHP”), in the aggregate principal
amounts of approximately $80.7 million and $24.0 mil-
lion, respectively. In 1997 and 1998, the Company con-
verted certain of the convertible debentures into shares of
Common Stock of FOHP, resulting in the Company
owning 99.6% of the outstanding common stock of
FOHP.The nonconvertible debentures mature on
December 31, 2002.
Effective January 1, 1999, Physicians Health Services
of New Jersey, Inc., a New Jersey HMO wholly-owned
by the Company, merged with and into First Option
Health Plan of New Jersey (“FOHP-NJ”), a New Jersey
HMO subsidiary of FOHP, and FOHP-NJ changed its
name to Physicians Health Services of New Jersey, Inc.
(“PHS-NJ”). Effective July 30, 1999, upon approval by the
stockholders of FOHP at a special meeting, a wholly-
owned subsidiary of the Company merged into FOHP
and FOHP became a wholly-owned subsidiary of the
Company. In connection with the merger, the former
minority shareholders of FOHP are entitled to receive
either $0.25 per share (the value per FOHP share as of
December 31, 1998 as determined by an outside
appraiser) or payment rights which entitle the holders to
receive as much as $15.00 per payment right on or about
July 1, 2001, provided certain hospital and other provider
participation conditions are met. Also in connection with
the merger, additional consideration of $2.25 per payment
right will be paid to certain holders of the payment rights
if PHS-NJ achieves certain annual returns on common
equity and the participation conditions are met. As of
December 31, 2000, the Company determined that it is
probable that these payment rights would be paid on or
about July 1, 2001. Accordingly, the Company recorded a
current liability and a purchase price adjustment to good-
will of $33.7 million as of December 31, 2000.
operating cash flows
Net cash provided by operating activities was $366.2 mil-
lion at December 31, 2000 compared to $297.1 million
at December 31, 1999.The increase in operating cash
flows was due primarily to:
• Higher net income,
• Liabilities associated with the 1998 and 1999 restructuring
plans eliminated by December 31, 2000, and
• Liabilities associated with plans sold in 1999 which
were eliminated.
investing activities
Net cash used in investing activities was $61.9 million for
December 31, 2000 compared to net cash provided by
investing activities of $163.4 million for December 31,
1999.This decrease was primarily due to proceeds from
the sale in 1999 of certain businesses and buildings of
$137.7 million.