Health Net 2005 Annual Report Download - page 52

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 pretax 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 pretax 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—Litigation,
Severance and Related Benefit Costs and Asset Impairments.”
Consolidated Segment Results
The following table summarizes the operating results of our reportable segments for the last three fiscal
years.
Year Ended December 31,
2005 2004 2003
(Dollars in millions)
Pretax income:
Health plan services segment ......................................... $363.4 $ 4.9 $438.2
Government contracts segment ........................................ 96.2 94.3 76.3
Total segment pretax income ............................................. $459.6 $ 99.2 $514.5
Litigation, severance and related benefits and asset impairments ................. (83.3) (32.9) (16.4)
Net gain on sale of businesses and properties ................................. — 1.1 18.9
Income from continuing operations before income taxes as reported .............. $376.3 $ 67.4 $517.0
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