Health Net 2011 Annual Report Download - page 13

Connecticut, New Jersey, New York and Bermuda (“Acquired Companies”) that had previously conducted
businesses in our Northeast Operations segment. 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. The sale was made pursuant to a
Stock Purchase Agreement (as amended, the “Stock Purchase Agreement”), dated as of July 20, 2009, by and
among the Company, Health Net of the Northeast, Inc., Oxford Health Plans, LLC (“Buyer”) and, solely for the
purposes of guaranteeing Buyer’s obligations thereunder, United. At the closing of the Northeast Sale, affiliates
of United also acquired membership renewal rights for certain commercial health care business conducted by our
subsidiary, HNL, in the states of Connecticut and New Jersey (the “Transitioning HNL Members”). We were
required to 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 were either transitioned to a legacy United entity or did not renew. On
July 1, 2011, the United Administrative Services Agreements terminated following the completion of the
membership transition.
Upon the termination of the United Administrative Services Agreements, we entered into Claims Servicing
Agreements with United and certain of its affiliates pursuant to which we will continue to adjudicate run out
claims and perform limited other administrative services. The Claims Servicing Agreements will be in effect
until the last run out claim under the applicable Claims Servicing Agreement has been adjudicated.
As part of the Northeast Sale, we retained certain financial responsibilities for the profits and losses of the
Acquired Companies, subject to specified adjustments, for the period beginning on the closing date and ending
on the earlier of the second anniversary of the closing date and the date that the last United Administrative
Services Agreement was terminated. With the termination of the United Administrative Services Agreements on
July 1, 2011, we estimated and recorded QNP (as defined below) of $50.8 million for the six months ended
June 30, 2011. This amount was later revised during the fourth quarter of 2011 to $45.9 million. At this time, we
have completed the QNP process. The QNP is a defined term in the Stock Purchase Agreement and represented
the net profit or loss from the wind-down of the Acquired Companies, as adjusted in accordance with the Stock
Purchase Agreement. Under the Stock Purchase Agreement for the Northeast Sale, we are required to indemnify
the Buyer and its affiliates for all pre-closing liabilities of the acquired business and for a broad range of
excluded liabilities, including liabilities arising out of the acquired business incurred through the winding-up and
running-out period of the acquired business.
Subsequent to the Northeast Sale and prior to July 1, 2011, our Northeast Operations reportable segment
included the operations of the businesses that provided administrative services pursuant to the United
Administrative Services Agreements prior to their termination, as well as the operations of HNL in Connecticut
and New Jersey prior to the renewal dates of the Transitioning HNL Members. Beginning on July 1, 2011, our
Northeast Operations segment includes the operations of our businesses that are adjudicating run out claims and
providing limited other administrative services to United and its affiliates pursuant to the Claims Servicing
Agreements. Subsequent accounting for the Northeast Sale is reported as part of our Northeast Operations
reportable segment. We retained HNL’s stand-alone PDP business in Connecticut and New Jersey following the
Northeast Sale, and those results of operations are reported in our Western Region Operations reportable
segment.
At the closing of the Northeast Sale, 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.
Pursuant to the terms of the Stock Purchase Agreement, on December 10, 2010, we received $80 million, which
was one-half of the remaining amount of the closing adjusted tangible net equity of the Acquired Companies, and
on December 12, 2011, we received the remaining $80 million following the second anniversary of the closing.
United was required to pay us additional consideration as our Northeast commercial members, Medicare and/or
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