Health Net 2000 Annual Report Download - page 38

36 HEALTH NET 2000 Annual Report
The Company and its consolidated subsidiaries are
required to set aside certain funds for restricted purposes
pursuant to regulatory requirements. As of December 31,
1999, the cash and cash equivalents balance of $52.9 mil-
lion was restricted and included in other noncurrent
assets.There were no such restricted amounts as of
December 31, 2000.
Investments
Investments classified as available for sale are reported at
fair value based on quoted market prices, with unrealized
gains and losses excluded from earnings and reported as
other comprehensive income, net of income tax effects.
The cost of investments sold is determined in accordance
with the specific identification method and realized gains
and losses are included in investment income.
Certain debt investments are held by trustees or
agencies pursuant to state regulatory requirements.These
investments totaled $7.2 million and $31.8 million as of
December 31, 2000 and 1999, respectively, and are
included in other noncurrent assets (see Note 11). Market
values approximate carrying value at December 31, 2000
and 1999.
Government Contracts
Amounts receivable or payable under government con-
tracts are based on three TRICARE contracts in five
regions which include both amounts billed ($1.2 million
and $5.1 million of net receivables at December 31, 2000
and 1999, respectively) and estimates for amounts to be
received under cost and performance incentive provisions,
price adjustments and change orders for services not orig-
inally specified in the contracts. Such estimates are deter-
mined based on information available as well as historical
performance and collection of which could extend for
periods beyond a year. Differences, which may be mater-
ial, between the amounts estimated and final amounts col-
lected are recorded in the period when determined.
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 remaining settlement
amount was received on January 5, 2001.
Additionally, the reserves for claims and other settle-
ments include approximately $205.3 million and
$189.7 million relating to health care services provided
under these contracts as of December 31, 2000 and 1999,
respectively.
Property and Equipment
Property and equipment are stated at historical cost less
accumulated depreciation. Depreciation is computed using
the straight-line method over the lesser of estimated useful
lives of the various classes of assets or the lease term.The
useful life for buildings and improvements is estimated at
35 to 40 years, and the useful lives for furniture, equipment
and software range from three to eight years (see Note 5).
Effective January 1, 1999, the Company adopted
Statement of Position 98-1 “Accounting for the Costs of
Computer Software Developed or Obtained for Internal
Use”and changed its method of accounting for the costs
of internally developed computer software.The change
involved capitalizing certain consulting costs, payroll and
payroll related costs for employees related to computer
software developed for internal use and subsequently
amortizing such costs over a three to five year period.
The Company had previously expensed such costs.
Expenditures for maintenance and repairs are
expensed as incurred. Major improvements which increase
the estimated useful life of an asset are capitalized. Upon
the sale or retirement of assets, the recorded cost and the
related accumulated depreciation are removed from the
accounts, and any gain or loss on disposal is reflected
in operations.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a
result of various business acquisitions and consist of iden-
tifiable intangible assets acquired and the excess of the
cost of the acquisitions over the tangible and intangible
assets acquired and liabilities assumed (goodwill).
Identifiable intangible assets consist of the value of
employer group contracts, provider networks, non-com-
pete agreements and debt issuance costs. Goodwill and
other intangible assets are amortized using the straight-
line method over the estimated lives of the related assets
listed below. In accordance with Accounting Principles
Board (“APB”) Opinion No. 17, the Company periodi-
cally evaluates these estimated lives to determine if events
and circumstances warrant revised periods of amortiza-
tion.The Company further evaluates the carrying value
of its goodwill and other intangible assets based on esti-
mated fair value or undiscounted operating cash flows
whenever significant events or changes occur which
might impair recovery of recorded costs. Fully amortized
goodwill and other intangible assets and the related accu-
mulated amortization are removed from the accounts.
Impairment is measured in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 121 “Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of ”and is
based on whether the asset will be held and used or held
for disposal. An impairment loss on assets to be held and
used is measured as the amount by which the carrying
amount exceeds the fair value of the asset. Fair value of
assets held for disposal would additionally be reduced
by costs to sell the asset. For the purposes of analyzing
impairment, assets, including goodwill, are grouped at the
lowest level for which there are identifiable independent
cash flows, which is generally at the operating subsidiary
level. Estimates of fair value are determined using various
techniques depending on the event that indicated poten-
tial impairment (see Note 15). Impairment charges for
goodwill in 1999 and 1998 amounted to $4.7 million and
$30.0 million, respectively (see Note 15).