Health Net 2009 Annual Report Download - page 4

operations (the “Acquired Companies”). The sale was made pursuant to a Stock Purchase Agreement (the “Stock
Purchase Agreement”), dated as of July 20, 2009, by and among the Company, Health Net of the Northeast, Inc.
(“HNNE”), Oxford Health Plans, LLC (“Buyer”) and, solely for the purposes of guaranteeing Buyer’s
obligations thereunder, UnitedHealth Group Incorporated (“United”). At the closing of the Northeast Sale,
affiliates of United also acquired membership renewal rights for certain health care business conducted by our
subsidiary, Health Net Life Insurance Company (“HNL”), in the states of Connecticut and New Jersey. We will
continue to serve the members of the Acquired Companies under Administrative Services Agreements we
entered into with United and certain of its affiliates (the “United Administrative Services Agreements”), until all
members are either transitioned to legacy United products or non-renewed. Prior to the Northeast Sale, our
Northeast Operations reportable segment included our commercial, Medicare and Medicaid health plans, the
operations of our HMOs in Connecticut, New York and New Jersey and our New York insurance company.
Following the Northeast Sale, our Northeast Operations reportable segment includes the operations of our
businesses that are providing administrative services to United and its affiliates pursuant to the United
Administrative Services Agreements. We retained HNL’s stand-alone Part D business in Connecticut and
New Jersey following the Northeast Sale, and those results of operations are reported in our West Operations
reportable segment.
At the closing of the Northeast Sale, United paid to the Company $350 million, consisting of (i) a $60
million minimum payment for the commercial membership of the acquired business and the Medicare and
Medicaid businesses of the Acquired Companies, and (ii) $290 million, representing a portion of the adjusted
tangible net equity of the Acquired Companies at closing. Under the Stock Purchase Agreement, the Company
will receive one-half of the remaining amount of the closing adjusted tangible net equity of the Acquired
Companies on the first anniversary of closing and the other half on the second anniversary, estimated to be
$160 million subject to certain adjustments. After closing, United could pay us additional consideration as our
Northeast commercial members, Medicare and/or Medicaid businesses transition to other United products to the
extent such amounts exceed the initial minimum payment of $60 million.
Under the Stock Purchase Agreement, we retain financial responsibility for the profits or losses, subject to
specified adjustments, of the Acquired Companies for the period beginning on the closing date and ending on the
earlier of (i) the second anniversary of the closing date and (ii) the date that all of the United Administrative
Services Agreements are terminated. We expect the United Administrative Services Agreements to be in effect
for approximately two years following the closing of the transaction, and anticipate that these profits or losses
and the other expenses we incur in performing the administrative services could be significant. After termination
of the United Administrative Services Agreements, we have agreed to provide claims servicing to the Acquired
Companies for any claims remaining at that time.
Under the Stock Purchase Agreement, we also will be entitled to 50 percent of the profits or losses
associated with the Acquired Companies’ Medicare business for the year ended December 31, 2010 (subject to a
cap of $10 million of profit or loss). In the event that the Acquired Companies renew the Medicare contract for
the acquired business for the year ended December 31, 2011, United will be entitled to all of the after-tax profits
and losses relating to the business for that year (subject to certain limitations). We have agreed to administer the
Medicare business of the Acquired Companies for 2010 and for 2011 (only if the related Medicare contract is not
transferred to a non-Acquired Company affiliate of United as of January 1, 2011). We expect to administer the
Medicaid business of the Acquired Companies until no later than June 30, 2010, which is the termination date for
the related Medicaid contract.
See “Item 7. Management’s Discussion and Analysis and Results of Operations—Recent Developments,”
“Item 1A. Risk Factors—Under the United Administrative Services Agreements, we are obligated to provide
administrative services in connection with the wind-down and run-off of the acquired business, which exposes us
to operational and financial risks” and “Item 1A. Risk Factors—Under the agreements that govern the Northeast
Sale, we have retained responsibility for certain liabilities of the acquired business, which could be substantial”
for additional information regarding the Northeast Sale and our Northeast Operations segment.
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