Health Net 2005 Annual Report Download - page 97

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Our HMOs, primarily in California, generally contract with various medical groups to provide professional
care to certain of their members on a capitated, or fixed per member per month fee basis. Capitation contracts
generally include a provision for stop-loss and non-capitated services for which we are liable. Professional
capitated contracts also generally contain provisions for shared risk, whereby the Company and the medical
groups share in the variance between actual costs and predetermined goals. Additionally, we contract with certain
hospitals to provide hospital care to enrolled members on a capitation basis. Our HMOs also contract with
hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements,
hospital per diems, and case rates under which providers bill the HMOs for each individual service provided to
enrollees.
We assess the profitability of contracts for providing health care services when operating results or forecasts
indicate probable future losses. Contracts are grouped in a manner consistent with the method of determining
premium rates. Losses are determined by comparing anticipated premiums to estimates for the total of health care
related costs less reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are
recognized in the period the loss is determined and are classified as Health Plan Services cost. We held a
premium deficiency reserve of $0.3 million and $0.1 million as of December 31, 2005 and 2004, respectively.
Under the TRICARE contract for the North Region, we record amounts receivable and payable for
estimated health care IBNR expenses and report such amounts separately on the accompanying consolidated
balance sheet. These amounts are equal since the estimated health care IBNR expenses incurred are offset by an
equal amount of revenues earned.
Share-Based Compensation Expense
We have various stock option plans which cover certain employees, officers, and non-employee directors,
and we had an employee stock purchase plan under which substantially all of our full-time employees were
eligible to participate (see Note 7). As permitted by Statement of Financial Accounting Standards (SFAS)
No. 123, we accounted for share-based payments to employees using APB Opinion 25’s intrinsic value method
and, as such, recognized no compensation cost for employee stock options. Had compensation cost for our plans
been determined based on the fair value at the grant dates options and employee purchase rights consistent with
the method of SFAS No. 123, our net income and net income per share would have been reduced to the pro
forma amounts indicated below for the years ended December 31:
2005 2004 2003
(Dollars in millions, except per share data)
Net income, as reported ..................................... $229.8 $ 42.6 $234.0
Add: Share based compensation expense included in reported net
income, net of related tax effects ............................ 1.5 1.2 1.3
Deduct: Total share based compensation expense determined under
fair value based method for all awards subject to SFAS No. 123,
net of related tax effects ................................... (12.2) (13.7) (16.7)
Net income, pro forma ...................................... $219.1 $ 30.1 $218.6
Net income per share—basic:
As reported ........................................... $ 2.03 $ 0.38 $ 2.02
Pro forma ............................................ 1.94 0.27 1.88
Net income per share—diluted:
As reported ........................................... 1.99 0.38 1.98
Pro forma ............................................ 1.90 0.27 1.85
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