Health Net 2002 Annual Report Download - page 39

HEALTH NET, INC. | 37
The Reinsurance Agreement is limited to $28 million
in aggregate payments and is subject to the following levels
of coinsurance:
■5% for the six-month period commencing on
August 1, 2001;
■10% for the six-month period commencing on
February 1, 2002;
■15% for the six-month period commencing on
August 1, 2002.
If the baseline medical loss ratio is less than 90% at
the end of the six-month period commencing on August 1,
2002, Health Net is entitled to recover medical and
hospital expenses below the 90% threshold up to an
amount to not exceed 1% of the total premiums for those
members still covered during the six-month period under
the Reinsurance Agreement.
The maximum liability under the Reinsurance
Agreement of $28 million was reported as part of loss on
assets held for sale as of June 30, 2001, since this was our
best estimate of our probable obligation under this
arrangement. As the reinsured claims are submitted to
FHAC, the liability is reduced by the amount of claims
paid. As of December 31, 2002, we have paid out $20.3
million under this agreement.
The SPA included an indemnification obligation for all
pending and threatened litigation as of the closing date
and certain specific provider contract interpretation or
settlement disputes. During the year ended December 31,
2002, we paid $5.7 million in settlements on certain
indemnified items. At this time, we believe that the esti-
mated liability related to the remaining indemnified obliga-
tions on any pending or threatened litigation and the
specific provider contract disputes will not have a material
impact to the financial condition of the Company.
The SPA provides for the following three true-up
adjustments that could result in an adjustment to the loss
on the sale of the Plan:
■A retrospective post-closing settlement of statutory
equity based on subsequent adjustments to the closing
balance sheet for the Plan.
■A settlement of unpaid provider claims as of the closing
date based on claim payments occurring during a one-
year period after the closing date.
■A settlement of the reinsured claims in excess of certain
baseline medical loss ratios. Final settlement is not sched-
uled to occur until the latter part of 2003. The develop-
ment of claims and claims related metrics and
information provided by Florida Health Plan Holdings
II, L.L.C. have not resulted in any revisions to the
maximum $28 million liability we originally estimated.
The true-up process has not been finalized and we do
not have sufficient information regarding the true-up
adjustments to assess probability or estimate any adjust-
ment to the recorded loss on the sale of the Plan as of
December 31, 2002.
The Florida health plan, excluding the $76.1 million
loss on net assets held for sale, had premium revenues of
$339.7 million and a net loss of $11.5 million and
premium revenues of $505.3 million and a net loss of
$33.4 million for the years ended December 31, 2001 and
2000, respectively. At the date of sale, the Florida health
plan had $41.5 million in net equity. The Florida health
plan was reported as part of our Health Plan Services
reportable segment.
2000 Dispositions
Net loss on sale of businesses and properties for the year
ended December 31, 2000 was comprised of a gain on sale
of a building in California of $1.1 million, and loss on sale
of HMO operations in Washington due to a purchase price
adjustment of $1.5 million.
INCOME TAX PROVISION
2002 Compared to 2001
The effective income tax rate was 33.4% for the year
ended December 31, 2002 compared with 37.0% for the
same period in 2001. The decrease of 3.6 percentage
points in the effective tax rates is primarily due to the
following:
■The adoption of SFAS No. 142 and the cessation of
goodwill amortization caused the tax rate to decrease by
2.1 percentage points. The majority of our goodwill
amortization has historically been treated as a permanent
difference that was not deductible for tax purposes and
which increased the effective tax rate,
■A decrease of 1.1 percentage points related to the tax
benefit arising from the sales of a claims processing
subsidiary and MedUnite, Inc.
The effective tax rate for the year ended December 31,
2002 differed from the statutory federal tax rate of 35.0%
due primarily to state income taxes, tax-exempt investment
income, business divestitures and tax return examination
settlements.
2001 Compared to 2000
The effective income tax rate was 37.0% for the year
ended December 31, 2001 compared with 37.7% for the
same period in 2000. The rate declined due to examination
settlements.