Health Net 2011 Annual Report Download - page 7

assignment of low income subsidy (“LIS”) eligible Medicare beneficiaries under CMS’ LIS auto-assignment
process. However, LIS members can make their own choice to enroll in our products during the annual
enrollment period, or in the month they become eligible for PDP coverage.
See “Item 1A. Risk Factors—Federal and state audits, reviews and investigations of us and our subsidiaries
could have a material adverse effect on our operations, financial condition and cash flows” for more information
about these CMS sanctions.
On January 6, 2012, HNL entered into an Asset Purchase Agreement with Pennsylvania Life Insurance
Company (“PDP Buyer”), an affiliate of CVS Caremark Corporation. Pursuant to the Asset Purchase Agreement
and subject to the satisfaction or waiver of the conditions set forth therein, HNL will sell to PDP Buyer (the
“PDP Asset Sale”) substantially all of the assets, properties and rights of HNL used primarily or exclusively in its
PDP business, subject to the assumption by PDP Buyer of certain related liabilities and obligations of HNL as set
forth in the Asset Purchase Agreement. Upon the closing of the PDP Asset Sale, HNL will receive a purchase
price in cash equal to $400 multiplied by the estimated number of individuals who will be enrolled as members
of a PDP plan of HNL as of the closing date (the “PDP Purchase Price”), which is estimated to amount to
approximately $160 million. The PDP Purchase Price will be subject to adjustment based on the actual number of
enrollees in the PDP plans as of the closing date. Additionally, if the pre-tax cash flow of the PDP business
between January 1, 2012 and the closing date reflects a loss of more than $20 million, the PDP Purchase Price
will be increased, and if such pretax cash flow reflects a loss of less than $20 million, the PDP Purchase Price
will be decreased. Moreover, the PDP Purchase Price will be subject to adjustment to take into account the value
as of the closing date of certain net assets related to the PDP business and will also be subject to increase based
on the amount of certain prepaid expenses related to the PDP business.
The PDP Asset Sale is subject to a number of closing conditions, including but not limited to the consent of
CMS. In addition, the Asset Purchase Agreement contains certain termination rights of HNL and PDP Buyer,
respectively, including that either party may terminate the Asset Purchase Agreement if the closing does not
occur prior to May 1, 2012. If the Asset Purchase Agreement is terminated for any reason, HNL will be obligated
to pay a termination fee of $20 million to PDP Buyer.
The PDP Asset Sale is expected to close in the second quarter of 2012, subject to the applicable closing
conditions. HNL and its affiliates will not be permitted to offer PDP plans for one year following the closing,
subject to certain exceptions. We will continue to provide prescription drug benefits as part of our Medicare
Advantage plan offerings.
For a discussion of the risks associated with the PDP Asset Sale, see “Item 1A. Risk Factors—Acquisitions,
divestitures and other significant transactions may adversely affect our business.”
Medicare Advantage Products
As of December 31, 2011, we were one of the nation’s largest Medicare Advantage contractors based on
membership of 204,912 members. We contract with CMS under the Medicare Advantage program to provide
Medicare Advantage products directly to Medicare beneficiaries and through employer and union groups. We
provide or arrange health care services normally covered by Medicare, plus a broad range of health care services
not covered by traditional Medicare, usually in exchange for a fixed monthly premium per member from CMS
that varies based on the geographic area in which the member resides, demographic factors of the member such
as age, gender and institutionalized status, and the health status of the member. Any additional benefits in our
plans are covered by a monthly premium charged to the enrollee or through portions of payments received from
CMS that may be allocated to these benefits, according to CMS regulations and guidance.
Our portfolio of Medicare Advantage plans focuses on simplicity so that members can use benefits with
minimal paperwork and receive coverage that starts immediately upon enrollment. We also provide Medicare
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