Health Net 2010 Annual Report Download - page 67

We believe that adjusted days claims payable, a non-GAAP financial measure, provides useful information
to investors because the adjusted days claims payable calculation excludes amounts related to divested businesses
and health care expenses for which no or minimal reserves are maintained. Therefore adjusted days claims
payable may present a more accurate reflection of days claims payable calculated from claims-based reserves
than does days claims payable, which includes such costs. This non-GAAP financial information should be
considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. The
following table provides a reconciliation of the differences between adjusted days claims payable and days
claims payable, the most directly comparable financial measure calculated and presented in accordance with
GAAP. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for
supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses
that are the same as or similar to some of the adjustments in the current presentation and we may incur them
again in the future. Our presentation of the adjusted amounts should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items.
Reconciliation of Days Claims Payable:
Year ended December 31,
2010 2009
(Dollars in millions)
(1) Reserve for Claims and Other Settlements ................................. $ 942.0 $ 951.7
Less: Reserve for Claims and Other Settlements for Divested Businesses ........ — —
Less: Capitation Payable, Provider and Other Claim Settlements and
Medicare Part D .................................................... (108.7) (162.8)
(2) Reserve for Claims and Other Settlements—Adjusted ........................ $ 833.3 $ 788.9
(3) Health Plan Services Cost .............................................. $8,609.1 $10,732.0
Less: Health Plan Services Cost for Divested Businesses ..................... — (2,123.0)
Less: Capitation Payable, Provider and Other Claim Settlements and
Medicare Part D .................................................... (3,291.1) (3,296.0)
(4) Health Plan Services Cost—Adjusted ..................................... $5,318.0 $ 5,313.0
(5) Number of Days in Period .............................................. 365 365
=(1)/ (3) * (5) Days Claims Payable—(using end of period reserve amount) ........... 39.9 32.4
=(2)/ (4) * (5) Days Claims Payable—Adjusted (using end of period reserve amount) . . . 57.2 54.2
Income Tax Provision
Our income tax expense and the effective income tax rate for the years ended December 31, 2010, 2009 and
2008 are as follows:
2010 2009 2008
(Dollars in millions)
Income tax expense ........................................... $126.6 $23.8 $52.1
Effective tax rate ............................................. 38.3% 94.2% 35.4%
The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended
December 31, 2010 due primarily to state and local taxes.
The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended
December 31, 2009 due primarily to nondeductible goodwill impairment and the tax benefit associated with the
Northeast Sale. The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended
December 31, 2008 due primarily to state income taxes, tax-exempt investment income, and a favorable outcome
related to prior year nondeductible class action lawsuit expenses.
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