Health Net 2004 Annual Report Download - page 57

share, as a result of our settlement agreement with SNTL Litigation Trust, to settle all outstanding claims under the Superior National
I
nsurance Group, Inc v. Foundation Health Corporation, et. al. litigation. See “Item 3. Legal Proceedings” and Note 12 to our
consolidated financial statements for additional information regarding the Superior settlement.
Cumulative Effect of a Change in Accounting Principle
A description of the cumulative effect of a change in accounting principle from adopting SFAS No. 142 is contained in Note 2
to our consolidated financial statements.
Liquidity and Capital Resources
We believe that cash flow from operating activities, existing working capital, lines of credit, and funds from any potential
divestitures of business are adequate to allow us to fund existing obligations, introduce new products and services, and continue to
develop health care-related businesses. We regularly evaluate cash requirements for current operations and commitments, and for
capital acquisitions and other strategic transactions. We may elect to raise additional funds for these purposes, either through issuance
of debt or equity, the sale of investment securities or otherwise, as appropriate.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable
from our TRICARE contract for the North Region. Health care receivables related to TRICARE are best estimates of payments that
are ultimately collectible or payable. The timing of collection of such receivables is impacted by government audit and negotiation
and can extend for periods beyond a year. Amounts receivable under government contracts were $129.5 million and $90.9 million as
of December 31, 2004 and 2003, respectively. Cash flows from operating activities for 2004 were impacted by the effects of the
transition to the new TRICARE contract. Under the old TRICARE contracts, we are required to set aside cash for the payment of run-
out claims, which is expected to continue through 2005. We have set aside $38.9 million in cash as of December 31, 2004 as required
under those TRICARE contracts to pay the run-out claims.
During the fourth quarter of 2004, we recorded $158.1 million of health care costs and $10.6 million of legal costs related to
provider settlements. Most of the settlements involve California hospitals, and the claims at issue date back to 2001. These provider
settlements will be funded by cash flow from operating activities. For additional information regarding the provider settlements, see
“Health Plan Services Costs—2004 Compared to 2003” and “Item 3. Legal Proceedings—Provider Disputes.”
Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale
investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by
investing in high-quality, investment grade securities while maintaining liquidity in each portfolio sufficient to meet our cash flow
requirements and attaining the highest total return on invested funds.
Operating Cash Flows
Decreases in our operating cash flows for the year ended December 31, 2004 compared to the same period in 2003 and for the
year ended December 31, 2003 compared to the same period in 2002 are as follows:
54
2004 2003
Change
2004 over
2003
2002
Change
2003 over
2002
(
Dollars in millions
)
Net cash (used in) provided by operating activities $(54.9) $379.8 $(434.7) $413.5 $(33.7)