Health Net 2005 Annual Report Download - page 47

How We Report Our Results
We currently operate within two reportable segments, Health Plan Services and Government Contracts, each
of which is described below.
Our Health Plan Services reportable segment includes the operations of our health plans, which offer
commercial, Medicare and Medicaid products in Arizona, California, Connecticut, New Jersey, New York and
Oregon, the operations of our health and life insurance companies and our behavioral health and pharmaceutical
services subsidiaries. We have approximately 3.3 million at-risk and 0.1 million administrative services only
(ASO) members in our Health Plan Services segment.
Our Government Contracts segment includes our government-sponsored managed care federal contract with
the U.S. Department of Defense (the Department of Defense) under the TRICARE program in the North Region
and other health care related government contracts that we administer for the Department of Defense. Under the
TRICARE contract for the North Region, we provide health care services to approximately 3.0 million Military
Health System (MHS) eligible beneficiaries (active duty personnel and TRICARE/Medicare dual eligible
beneficiaries), including 1.8 million TRICARE eligibles for whom we provide health care and administrative
services and 1.2 million other MHS-eligible beneficiaries for whom we provide ASO.
How We Measure Our Profitability
Our profitability depends in large part on our ability to effectively price our health care products; manage
health care costs, including pharmacy costs; contract with health care providers; attract and retain members; and
manage our G&A and selling expenses. In addition, factors such as regulation, competition and general economic
conditions affect our operations and profitability. The potential effect of escalating health care costs, as well as
any changes in our ability to negotiate competitive rates with our providers, may impose further risks to our
ability to profitably underwrite our business, and may have a material impact on our business, financial condition
or results of operations.
We measure our Health Plan Services segment profitability based on medical care ratio and pretax income.
The medical care ratio is calculated as Health plan services expense divided by Health plan services premiums.
The pretax income is calculated as Health plan services premium less Health plan services expense and G&A and
other net expenses. See “—Results of Operations—Table of Summary Financial Information” for a calculation of
our medical care ratio (MCR) and “—Results of Operations—Health Plan Services Segment Results” for a
calculation of our pretax income.
Health plan services premiums include HMO, POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which
premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide
care to Medicaid recipients, and revenue under Medicare risk contracts to provide care to enrolled Medicare
recipients. The amount of premiums we earn in a given year is driven by the rates we charge and the enrollment
levels. Health Plan services expense includes medical and related costs for health services provided to our
members, including physician services, hospital and related professional services, outpatient care, and pharmacy
benefit costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care
cost per visit, and the utilization rates represent the volume of health care consumption by our members.
General and administrative expenses include those costs related to employees and benefits, consulting and
professional fees, marketing, premium taxes and assessments and occupancy costs. Such costs are driven by
membership levels, introduction of new products, system consolidations and compliance requirements for
changing regulations. These expenses also included expenses associated with corporate shared services and other
costs to reflect the fact that such expenses are incurred primarily to support Health Plan Services segment.
Selling expenses consist of external broker commission expenses and generally vary with premium volume.
45