Health Net 2011 Annual Report Download - page 65

New Jersey prior to the renewal dates of the Transitioning HNL Members. Beginning July 1, 2011, our Northeast
Operations reportable 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. For additional information on the Transitioning HNL Members, the United Administrative Services
Agreements and the Claims Servicing Agreements, see Note 2 to our consolidated financial statements under the
heading “Subsequent Accounting for the Northeast Sale.”
How We Measure Our Profitability
Our profitability depends in large part on our ability to, among other things, effectively price our health care
products; manage health care costs, and pharmacy costs; contract with health care providers; attract and retain
members; and manage our general and administrative (“G&A”) and selling expenses. In addition, factors such as
state and federal health care reform legislation and regulation, competition and general economic conditions
affect our operations and profitability. The effect of escalating health care costs, as well as any changes in our
ability to negotiate competitive rates with our providers, may impose further risks to our ability to profitably
underwrite our business, and may have a material impact on our business, financial condition or results of
operations.
We measure our Western Region Operations reportable segment profitability based on medical care ratio
(“MCR”) and pretax income. The MCR is calculated as health plan services expense divided by health plan
services premiums. The pretax income is calculated as health plan services premiums and administrative services
fees and other income less health plan services expense and G&A and other net expenses. See “—Results of
Operations—Western Region Operations Reportable Segment—Western Region Operations Segment Results”
for a calculation of the MCR and pretax income.
Health plan services premiums include health maintenance organization (“HMO”), point of service (“POS”)
and preferred provider organization (“PPO”) premiums from employer groups and individuals and from
Medicare recipients who have purchased supplemental benefit coverage (which premiums are based on a
predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care to Medicaid
recipients, and revenue under Medicare risk contracts, including Medicare Part D, to provide care to enrolled
Medicare recipients. Medicare revenue can also include amounts for risk factor adjustments and additional
premiums that we charge in some places to members who purchase our Medicare risk plans. The amount of
premiums we earn in a given period is driven by the rates we charge and enrollment levels. Administrative
services fees and other income primarily include revenue for administrative services such as claims processing,
customer service, medical management, provider network access and other administrative services. Health plan
services expense includes medical and related costs for health services provided to our members, including
physician services, hospital and related professional services, outpatient care, and pharmacy benefit costs. These
expenses are impacted by unit costs and utilization rates. Unit costs represent the health care cost per visit, and
the utilization rates represent the volume of health care consumption by our members.
G&A expenses include those costs related to employees and benefits, consulting and professional fees,
marketing, business expansion initiatives, premium taxes and assessments, occupancy costs and litigation and
regulatory-related costs. Such costs are driven by membership levels, introduction of new products, system
consolidations, outsourcing activities and compliance requirements for changing regulations, among other things.
These expenses also include expenses associated with corporate shared services and other costs to reflect the fact
that such expenses are incurred primarily to support health plan services. Selling expenses consist of external
broker commission expenses and generally vary with premium volume.
We measure our Government Contracts segment profitability based on pretax income, which is calculated as
government contracts revenue less government contracts cost. See “—Results of Operations—Government
Contracts Reportable Segment—Government Contracts Segment Results” for a calculation of the government
contracts pretax income.
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