Health Net 2005 Annual Report Download - page 95

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description of Business
Health Net, Inc. (referred to herein as the Company, we, us, our or HNT) is an integrated managed care
organization that delivers managed health care services. We are among the nation’s largest publicly traded
managed health care companies. Our health plans and government contracts subsidiaries provide health benefits
through our health maintenance organizations (HMOs), insured preferred provider organizations (PPOs) and
point of service (POS) plans to approximately 6.3 million individuals in 27 states and the District of Columbia
through group, individual, Medicare, Medicaid and TRICARE programs. Our subsidiaries also offer managed
health care products related to behavioral health and prescription drugs. We also own health and life insurance
companies licensed to sell exclusive provider organization (EPO), PPO, POS and indemnity products, as well as
auxiliary non-health products such as life and accidental death and dismemberment, dental, vision, behavioral
health and disability insurance in 46 states and the District of Columbia.
We currently operate within two reportable segments: Health Plan Services and Government Contracts. Our
Health Plan Services reportable segment includes the operations of our health plans in the states of 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.
Our Government Contracts reportable segment includes government-sponsored managed care plans through
the TRICARE program and other health care-related government contracts. The Government Contracts
reportable segment administers a large managed care contract with the U.S. Department of Defense under the
TRICARE program in the North Region. The Company administers health care programs covering
approximately 3.0 million eligible individuals in the Military Health System and currently has one TRICARE
contract that covers Connecticut, Delaware, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts,
Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island,
Vermont, Virginia, West Virginia, Wisconsin and the District of Columbia. In addition, the contract covers a
small portion of Tennessee, Missouri and Iowa.
Note 2—Summary of Significant Accounting Policies
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Certain amounts in
the consolidated financial statements and notes thereto for the years ended December 31, 2004 and 2003 have
been reclassified to conform to the presentation for the year ended December 31, 2005.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America (GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Principal areas requiring the use of estimates include the determination
of allowances for doubtful accounts, reserves for claims and other settlements, reserves for professional and
general liabilities (including litigation and workers’ compensation reserves), amounts receivable or payable
under government contracts and assumptions when determining net realizable values on long-lived assets.
Revenue Recognition
Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which
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