Health Net 2010 Annual Report Download - page 117

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Award of New TRICARE Contract
We are currently the managed care contractor for the Department of Defense’s TRICARE program in the
North Region. On May 13, 2010, we were awarded the new T-3 Managed Care Support Contract for the
TRICARE North Region, and health care delivery under the new contract is scheduled to commence on April 1,
2011. We believe that the T-3 contract will be accounted for as an administrative services only contract and are
currently evaluating the T-3 contract’s expected impact on our consolidated results of operations and financial
condition in 2011 and the related accounting and reporting requirements.
Recently Issued Accounting Pronouncements
In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
No. 2010-26, Financial Services-Insurance (Topic 944), Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts. The amendments in this update affect insurance entities that are within the scope
of Topic 944, which includes but is not limited to stock life insurance entities, mutual life insurance entities, and
property and liability insurance entities. The amendments in this update modify the definition of the types of
costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The
amendments in this update specify that that the costs must be based on successful efforts. The amendments in
this update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2011. We are currently evaluating the impact of this update on our consolidated financial
statements; however, we do not expect this standard to have a material impact on our financial condition or
results of operations.
Note 3— Sale of Northeast Health Plan Subsidiaries
On December 11, 2009, we completed the Northeast Sale. See Notes 1 and 2 for additional information on
the Northeast Sale.
At the closing, United paid to us $350 million, consisting of (i) a $60 million initial 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. This payment was subject to certain post-closing adjustments. On December 10, 2010,
United paid to us $80 million, representing one-half of the remaining amount of the closing adjusted tangible net
equity pursuant to the Stock Purchase Agreement. We are also entitled to a second $80 million payment in
December 2011, subject to certain adjustments.
After closing, United is required to pay us additional consideration as our Northeast commercial members,
Medicare and/or Medicaid businesses transition to other United products to the extent the value of such
transitioned members, based upon the formula set forth in the Stock Purchase Agreement, exceeds the initial
minimum payment of $60 million (referred to as contingent membership renewal). We will continue to serve the
members of the Acquired Companies under the United Administrative Services Agreements, until all members
are either transitioned to a legacy United entity or non-renewed. We expect the United Administrative Services
Agreements to be in effect through the second quarter of 2011.
We recognized a pretax loss of $106 million related to the sale of the Acquired Companies, which is
reported as a separate line item on our consolidated statement of operations for the year ended December 31,
2009. Prior to the consummation of the sale of the Acquired Companies, we classified the Acquired Companies’
assets and liabilities as available-for-sale. Upon the classification of the Northeast business to available-for-sale,
we were required to assess the Northeast business’ goodwill and intangibles for impairment and then adjust the
carrying value of the Northeast business to equal the lower of its carrying value or its fair value less cost to sell.
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