Health Net 2004 Annual Report Download - page 105

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
million of income before income taxes for the years ended December 31, 2004, 2003 and 2002, respectively. As of the date of sale,
these subsidiaries had a combined total of approximately $2.3 million in net equity which we fully recovered through the sales
proceeds.
Hospital Subsidiaries
In 1999, we sold our two hospital subsidiaries to Health Plus, Inc. As part of the sale, we received cash and a note for $12
million due on August 31, 2003 including any unpaid interest. Prior to August 31, 2003, we had established an $8.2 million allowance
on the note. On August 31, 2003, Health Plus defaulted on the note. As a result, we increased the allowance on the note by $3.4
million and recorded it in G&A expenses in our consolidated statements of operations for the three months ended September 30,
2003. The note was fully reserved as of September 30, 2003. On June 16, 2004, we and Health Plus restructured and settled all
outstanding issues relating to the note default for $4 million in cash. We have recorded the $4 million settlement as a reduction in
G&A expense in our consolidated statements of operations for the year ended December 31, 2004.
Pennsylvania Health Plan
Effective September 30, 2003, we withdrew our commercial health plan from the commercial market in the Commonwealth of
Pennsylvania. Coverage for our members enrolled in the Federal Employee Health Benefit Plan was discontinued on January 11,
2004, however, we have maintained our network of providers in Pennsylvania to service our New Jersey members. As of December
31, 2004, we had no members enrolled in our commercial health plan in Pennsylvania. Our Pennsylvania health plan is reported as
part of our Health Plan Services reportable segment.
Our Pennsylvania health plan had $0.7 million, $56.6 million and $133.6 million of total revenues and (losses) from operations
before income taxes of $(3.0) million, $(8.4) million and $(7.6) million for the years ended December 31, 2004, 2003 and 2002,
respectively. As of December 31, 2004 and 2003, our Pennsylvania health plan had net equity of $3.9 million and $10.6 million,
respectively. The net equity is comprised of cash, cash equivalents and investments available for sale and is required by the
Pennsylvania Department of Insurance to meet minimum capital requirements until all claims have been paid or discharged.
Employer Services Group Subsidiary
On October 31, 2003, we consummated the sale of our workers’ compensation services subsidiary, Health Net Employer
Services, Inc. (Health Net Employer Services), along with its subsidiaries Health Net Plus Managed Care Services, Inc. and Health
Net CompAmerica, Inc., collectively known as our employer services group division, to First Health Group Corp. (First Health). Our
agreement with First Health provides Health Net Employer Services customers with continued access to Health Net’s workers’
compensation provider network, and provides us with access to First Health’s preferred provider organization network. We also
entered into a non-compete agreement with First Health. In connection with this sale, we received $79.5 million in cash and
recognized a pre-tax gain of $12.3 million. We deferred approximately $15.9 million of the gain on the sale of our employer services
division related to non-compete and network access agreements. The deferred revenue is earned over the terms of the agreements
(four to seven years). Employer services group subsidiary revenue through the date of the sale was reported as part of other income on
the consolidated statements of operations.
Our employer services group subsidiary had $45.6 million and $47.1 million of total revenues and income from operations
before income taxes of $1.2 million and $1.2 million for the years ended December 31, 2003 and 2002, respectively. As of the date of
sale, our employer services group subsidiary had net equity of $42.3 million.
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