Health Net 2002 Annual Report Download - page 35

HEALTH NET, INC. | 33
■Increase in Medicaid health care costs of $147.9 million
or 19% for the year ended December 31, 2002 as
compared to the same period in 2001 is due to a 15%
increase in member months and a 4% increase in health
care costs on a PMPM basis as a result of increased
hospital and physician utilization.
Our Health Plan Services MCR decreased to 83.4%
for the year ended December 31, 2002 from 84.4% for the
same period in 2001. The improvement in our Health Plan
Services MCR is due to a continued focus on pricing disci-
pline combined with pricing increases above the health
care cost trend for our Medicare products. The increase in
our overall Health Plan Services premiums on a PMPM
basis of 6% as compared to the same period in 2001
outpaced the increase in our overall health care costs on a
PMPM basis of 5% as compared to the same period in 2001.
In addition to the pricing increases, we have been de-
emphasizing the large group market, which has had higher
MCRs, which also contributed to the decline in the MCRs.
2001 Compared to 2000
Health Plan Services MCR increased to 84.4% for the year
ended December 31, 2001 compared to 83.1% for the
same period in 2000. Total Health Plan Services costs on a
PMPM basis increased to $149.12 or 11% for the year
ended December 31, 2001 from $134.78 for the same
period in 2000 primarily due to a 10% increase in commer-
cial health care costs on a PMPM basis. This increase was
primarily due to increases in inpatient and outpatient
hospital costs of 9% for the year ended December 31, 2001
from the same period in 2000 reflecting significant shifts
from dual risk to shared risk and fee-for-service contracts
and a 10% increase in pharmacy costs on a PMPM basis
due to increased pricing and utilization.
GOVERNMENT CONTRACTS COSTS
2002 Compared to 2001
Government Contracts costs increased by $129.3 million
or 9.8% for the year ended December 31, 2002 compared
to the same period in 2001. This increase is primarily due
to increases in health care estimates and higher administra-
tive and health care change order costs. In addition,
heightened military activity during 2002 has contributed to
the increase in health care costs.
Government Contracts cost ratio decreased to 96.8%
for the year ended December 31, 2002 as compared to
98.7% for the same period in 2001. The 188 basis point
improvement is primarily due to risk sharing revenue
increases attributable to an increase in services provided to
TRICARE eligibles.
2001 Compared to 2000
The Government Contracts costs increased by $125.0
million or 10.4% for the year ended December 31, 2001
compared to the same period in 2000. The Government
Contracts cost ratio increased to 98.7% for the year ended
December 31, 2001 as compared to 94.6% for the same
period in 2000.
The increase is primarily due to a change in the copay
requirement for certain TRICARE contracts where the
copay requirement for dependents of a service person is
eliminated resulting in additional health care costs that
must be paid by us to the provider.
GENERAL AND ADMINISTRATIVE COSTS
2002 Compared to 2001
The administrative expense ratio decreased to 10.6% for
the year ended December 31, 2002 compared to 10.8%
for the same period in 2001. During the third quarter of
2001, we implemented a restructuring plan to consolidate
certain administrative, financial and technology functions
(the 2001 Plan). The 2001 Plan included the elimination of
approximately 1,500 positions. In 2002, we began to
realize operating and administrative expense reductions
attributed to the 2001 Plan. The decrease is partially offset
by higher information technology (IT) costs for our
systems consolidation project, including severance costs for
such project.
2001 Compared to 2000
The administrative expense ratio decreased to 10.8% for the
year ended December 31, 2001 from 13.1% for the same
period in 2000. This decrease was attributable to our ongoing
efforts to control our G&A costs including implementation of
a restructuring plan in the third quarter of 2001.
SELLING COSTS
2002 Compared to 2001
Selling costs consist of broker commissions paid to brokers
and agents and sales incentives paid to our sales associates.
We separated selling costs from G&A expenses to better
reflect the shift in our commercial health plan mix to small
group. The selling costs ratio (selling costs as a percentage
of Health Plan Services premiums) increased to 2.3% for
the year ended December 31, 2002 compared to 2.2% for
the same period in 2001. This increase is due to our
commercial health plan mix shifting to small group with
its higher selling costs.