Health Net 2004 Annual Report Download - page 42

Beginning in the latter part of the first quarter ended March 31, 2004, we began to implement a plan designed to improve
financial performance (the “2004 Financial Performance Improvement Plan”). As part of the 2004 Financial Performance
Improvement Plan, we increased prices in our commercial health plans and commenced a series of initiatives designed to reduce the
growth rate of our commercial health care costs. Following implementation of the 2004 Financial Performance Improvement Plan, the
rate of increase in commercial per member per month (“PMPM”) premium yields climbed from a 6.9% increase in the first quarter
ended March 31, 2004 compared with the first quarter ended March 31, 2003, to a 10.7% increase in the fourth quarter ended
December 31, 2004 compared with the fourth quarter ended December 31, 2003. We expect that the rate of growth in PMPM
premium yields will continue to increase in the first quarter of 2005.
We believe that the implementation of higher premiums caused employer groups, many of which had high health care cost
trends, to leave our health plans and obtain coverage elsewhere, which resulted in an overall 8% decrease in commercial health plan
enrollment from December 31, 2003 to December 31, 2004. The losses were greatest in our California and Northeast health plans. We
expect these declines to extend into the first half of 2005.
In the fourth quarter ended December 31, 2004, we recorded a $252 million pre-tax earnings charge which was comprised of the
following:
• $169 million of expenses associated with provider settlements, including legal costs, relating to claims processing and
payment issues that have been or are being resolved;
• $65 million of expenses for adverse reserve developments, most of which relates to the second and third quarters of 2004;
and
Provider Settlement Expenses. Following a thorough review of outstanding provider disputes and management’s decision in the
fourth quarter ended December 31, 2004 to settle a large number of provider disputes, we recorded an amount for provider
settlements that reflects what we believe is a reasonable estimate to bring all of these matters to closure. These provider disputes were
primarily in our California health plan and related to claims issues extending as far back as 2001. For additional information
regarding our provider disputes, see “Item 3. Legal Proceedings—Provider Disputes” and “—Results of Operations—Health Plan
Services Costs.”
Reserve Developments. The fourth quarter 2004 pre-tax earnings charge also included amounts recorded for prior period adverse
reserve developments, most of which related to revisions to reserve estimates for the second and third quarters of 2004.
Approximately $56 million of the $65 million recorded for prior period adverse reserve developments relate to 2004. For information
regarding our reserve restatements for December 31, 2003 and prior, see Note 16 to our consolidated financial statements. The 2004
adverse reserve developments are directly related to management’s decision in 2004 to accelerate claims payment practices and
disengage from the claims review practices, both designed to improve relations with providers. As a result of deliberate actions to
accelerate claims payments, we experienced higher level of paid claims in the first quarter of 2004 compared with 2003. These higher
levels of paid claims persisted through the balance of 2004 and contributed to the increase in commercial health care costs. This had
the impact of masking the increasing trend in health care costs until the fourth quarter of 2004 when higher levels of paid claims than
were previously estimated emerged. The reserves established at December 31, 2004 assume a permanent increase in claims costs
because of these changes.
Severance, Asset Impairment and Restructuring Charges and other Miscellaneous Expenses. We recorded $18 million of
miscellaneous items as part of the fourth quarter 2004 pre-tax earnings charge, including severance and related benefit costs, lease
terminations, the write-off of certain investments and IT assets and other balance sheet items. For information regarding these balance
sheet items, see “—Results of Operations—Severance, Asset Impairments and Restructuring Costs.”
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• $18 million in severance, asset impairment and restructuring charges and other expenses.