Health Net 2010 Annual Report Download - page 114

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Estimated annual pretax amortization expense for other intangible assets for each of the next five years
ending December 31 is as follows (dollars in millions):
Year Amount
2011 .............................................................. $3.5
2012 .............................................................. 3.4
2013 .............................................................. 3.4
2014 .............................................................. 2.8
2015 .............................................................. 2.6
Policy Acquisition Costs
Policy acquisition costs are those variable costs that relate to the acquisition of new and renewal commercial
health insurance business. Such costs include broker commissions, costs of policy issuance and underwriting, and
other costs we incur to acquire new commercial business or renew existing business. Our commercial health
insurance business typically has a one-year term and may be canceled upon a 30-day notice. We expense these
costs as incurred and report them as selling expenses in our consolidated statements of operations.
Reserves for Contingent Liabilities
In the course of our operations, we are involved on a routine basis in various disputes with members, health
care providers, and other entities, as well as audits or investigations by government agencies and elected officials
that relate to our services and/or business practices that expose us to potential losses.
We recognize an estimated loss, which may represent damages, assessment of regulatory fines or penalties,
settlement costs, future legal expenses or a combination of the foregoing, as appropriate, from such loss
contingencies when it is both probable that a loss will be incurred and that the amount of the loss can be
reasonably estimated. Our loss estimates are based in part on an analysis of potential results, the stage of the
proceedings, consultation with outside counsel and any other relevant information available.
In 2007, we entered into an agreement to settle three lawsuits styled as nationwide class actions. In
connection with this settlement agreement, we had established a reserve (prove-up fund) of $40 million as of
December 31, 2007 to compensate certain eligible class members who can prove that they paid out of pocket
costs for certain out of network claims or who have received balance bills for such services. Based on updated
information and developments during 2010, including the results of the completed prove-up fund administration,
we made an interim payment of approximately $1.0 million and reduced the prove-up fund reserve by $34.0
million as of December 31, 2010. This $34 million reserve adjustment was recorded as a decrease in our health
care cost in the Corporate/Other segment and had no impact on our reportable business segments (see Note 14).
Given the complexity and scope of the settlement, it is possible that the reserve amount may be further adjusted
in the future.
Insurance Programs
The Company is insured for various errors and omissions, property, casualty and other risks. The Company
maintains various self-insured retention amounts, or “deductibles,” on such insurance coverage. The Company
also maintains litigation reserves to cover those self-insured retention amounts for errors and omissions claims
based on historical claims filed.
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