Health Net 2014 Annual Report Download - page 68

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Bermuda to United, and includes the acquisition by United of membership renewal rights for certain health care
business conducted by our subsidiary, Health Net Life Insurance Company, in the states of Connecticut and New Jersey.
As of December 31, 2012, we had substantially completed the transition and run-out of our divested businesses. See
Note 2 to our consolidated financial statements under the heading “Divested Operations and Services” and Notes 3 and
14 to our consolidated financial statements for additional information regarding the Northeast Sale, the sale of our
Medicare PDP business, and our reportable segments.
How We Measure Our Profitability
Our profitability depends in large part on our ability to, among other things, effectively price our health care
products; accurately predict and effectively manage health care and pharmacy costs; effectively 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. Each of these factors 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 pretax income, which 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, including selling expenses. See “—Results of Operations—Western Region
Operations Reportable Segment—Western Region Operations Segment Results” for a calculation of pretax income.
Health plan services premiums generally 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 (which includes
retroactive and retrospective premium adjustments), and revenue under Medicare risk contracts to provide care to
enrolled Medicare recipients. Medicare revenues also can include amounts for risk factor adjustments and additional
premiums that we charge in some places to members who purchase our Medicare risk plans. Health plan services
premiums also includes our revenues from the California Coordinated Care Initiative (the "CCI") program. For
additional information on the CCI, see "—Results of Operations—Western Region Operations Reportable Segment—
California Coordinated Care Initiative."
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 includes revenue for administrative services such as claims
processing, customer service, medical management, provider network access and other administrative services.
Health plan services expense generally 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, among other things, those costs related to employees and benefits, consulting and
professional fees, marketing, business expansion and cost reduction initiatives, premium taxes and assessments, Patient
Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the "ACA")
related fees, occupancy costs and litigation and regulatory-related costs. Such costs are driven by membership levels,
introduction of new products or provision of new services, 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.
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. 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