Health Net 2010 Annual Report Download - page 74

Government Contracts Segment Results
The following table summarizes the operating results for the Government Contracts segment for the last
three fiscal years:
Year Ended December 31,
2010 2009 2008
(Dollars in thousands, except per share data)
Government contracts revenues ..................... 3,344,483 3,104,700 2,835,261
Government contracts costs ........................ 3,165,747 2,936,090 2,702,573
Income from operations before income taxes ........... 178,736 168,610 132,688
Income tax provision .............................. 73,197 69,102 54,437
Net income ..................................... $ 105,539 $ 99,508 $ 78,251
Government contracts cost ratio ..................... 94.7% 94.6% 95.3%
Government contracts cost ratio is calculated as government contracts costs divided by government
contracts revenues.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Government contracts revenues increased by $239.8 million, or 7.7 percent, for the year ended
December 31, 2010 as compared to the same period in 2009. Government contracts costs increased by $229.7
million or 7.8 percent for the year ended December 31, 2010 as compared to the same period in 2009. The
increases were primarily due to an increase in health care services provided under a new option year in the
TRICARE contract and growth in the family counseling business with the DoD. The Government contracts cost
ratio was 94.7 percent and 94.6 percent for the years ended December 31, 2010 and 2009, respectively.
Our current TRICARE contract for the North Region includes a target cost and underwriting fee for
reimbursed health care costs, which is negotiated annually during the term of the contract with underruns and
overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting
with the federal government, we recognize changes in our estimate for the target cost underruns and overruns
when the amounts become determinable, supportable, and the collectibility is reasonably assured. As a result of
changes in the estimate during the year ended December 31, 2010, we recognized a decrease in revenue of $51
million and a decrease in cost of $64 million. As a result of changes in the estimate during the year ended
December 31, 2009, we recognized an increase in revenue of $40 million and an increase in cost of $49 million.
As a result of changes in the estimate during the year ended December 31, 2008, we recognized an increase in
revenue of $17 million and an increase in cost of $22 million. The administrative price is paid on a monthly
basis, one month in arrears and certain components of the administrative price are subject to volume-based
adjustments.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Government contracts revenues increased by $269.4 million, or 9.5 percent, for the year ended
December 31, 2009 as compared to the same period in 2008. Government contracts costs increased by $233.5
million, or 8.6 percent for the year ended December 31, 2009 as compared to the same period in 2008. The
increases were primarily due to an increase in health care services provided under a new option year in the
TRICARE contract, Option Period 6, and growth in the family counseling business with the DoD.
The Government contracts ratio decreased from 95.3 percent in 2008 to 94.6 percent in 2009 primarily due
to growth in the family counseling business with the DoD and lower health care cost trends in the fourth quarter
of 2009.
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