Health Net 2011 Annual Report Download - page 79

Medical Care Ratios
The health plan services MCR in the Western Region Operations was 86.6 percent for the year ended
December 31, 2010 compared with 86.7 percent for the year ended December 31, 2009.
The Western Region Operations commercial MCR was 86.1 percent for the year ended December 31, 2010,
compared with 86.8 percent for the year ended December 31, 2009. The 70 basis point reduction for the year
ended December 31, 2010 was primarily due to our continuing pricing and underwriting discipline and more
moderate health care cost increases.
The Medicare Advantage MCR in the Western Region Operations was 88.8 percent for the year ended
December 31, 2010 compared with 88.1 percent for the year ended December 31, 2009. This increase in the
Medicare Advantage MCR was due to a higher than expected health care cost trend. The Medicare PDP (stand-
alone) MCR was 77.2 percent for the year ended December 31, 2010 compared with 78.4 percent for the same
period in 2009. The 120 basis point improvement was consistent with our 2010 bid strategy. Total Medicare
MCR in the Western Region Operations was 86.9 percent for the year ended December 31, 2010 compared to
86.6 percent for the same period in 2009.
Medicaid MCR was 87.7 percent for the year ended December 31, 2010 compared with 86.6 percent for the
year ended December 31, 2009. This increase was due to higher inpatient hospital and physician costs.
G&A, Selling and Interest Expenses
G&A expense in the Western Region Operations was $881.8 million for the year ended December 31, 2010
compared with $833.5 million for the year ended December 31, 2009. The G&A expense ratio increased 50 basis
points from 8.4 percent for the year ended December 31, 2009 to 8.9 percent for the year ended December 31,
2010, and was primarily due to increases in claims and enrollment processing fees and other outsourcing costs
and higher investments in information technology as we prepare for health care reform.
Selling expense in our Western Region Operations was $235.6 million for the year ended December 31,
2010 compared with $233.3 million for the year ended December 31, 2009. The selling costs ratio was flat at 2.4
percent for each of the years ended December 31, 2010 and 2009.
Interest expense was $34.9 million for the year ended December 31, 2010 compared with $41.0 million for
the year ended December 31, 2009. The decline was due to the decrease in our total outstanding debt, including
the retirement of our amortizing financing facility in May 2010. See “—Liquidity and Capital Resources—
Capital Structure—Termination of Amortizing Financing Facility” for additional information.
Government Contracts Reportable Segment
On April 1, 2011, we began delivery of administrative services under our T-3 contract for the TRICARE
North Region. The T-3 contract was awarded to us on May 13, 2010.
Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services
including: provider network management, referral management, medical management, disease management,
enrollment, customer service, clinical support service, and claims processing. We also provide assistance in the
transition into and out of the T-3 contract. These services are structured as cost reimbursement arrangements for
health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, and contingent fees
and payments based on various incentives and penalties. We recognize revenue related to administrative services
on a straight-line basis over the option period, when the fees become fixed and determinable. The T-3 members
are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care
costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the
terms of the T-3 contract, we are not the primary obligor for health care services and accordingly, we do not
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