Health Net 1998 Annual Report Download - page 22

2 0 F O U N D ATIO N H EALTH SYST EMS, I N C.
certain intangible assets becoming fully amortized
by the end of 1996, fixed assets becoming fully
depreciated in early 1997 and fixed asset write-offs
primarily associated with the Company’s restructur-
ing plans discussed below.
I n t e rest Expense
Interest expense increased by $28.6 million due to
increased borrowings under the revolving credit
facility coupled with a higher borrowing rate in 1998
as compared to 1997. Interest expense increased by
$18.2 million in 1997 as compared to 1996 due to
higher debt levels associated with the Company ’s
revolving lines of credit partially offset by lower
interest rates.
Asset I mpair me nt, Merg e r , Restructur ing and Other Charg e s
On July 19,1998, FPA Medical Management,Inc.
(“FPA”) filed for bankruptcy protection under
Chapter 11 of the Federal Bankruptcy Code. FPA,
through its affiliated medical groups,provided ser-
vices to approximately 190,000 of the Company’s
affiliated members in Arizona and California.FPA
has discontinued its medical group operations in
these markets.As a result,the Company is seeking
new tenants for, or will sell,the 13 healthcare facili-
ties it leased to FPA in these markets and has made
other arrangements for provider services to the
Company’s affiliated members.To date, the Com-
pany has sold three of these healthcare facilities.
Management’s analysis of this situation indi-
cated that the likely replacement lease terms from
these properties will be inadequate to enable the
C o m p a ny to sell the facilities and re c o ver their carry-
ing value.Based on management’s best estimate of
recovery for the real estate and the impairment
of notes receivable and other Company assets due to
the FPA bankruptcy filing,the Company recorded
a charge of $50.0 million during the second quarter
ended June 30,1998.The Company recorded an
additional $28.1 million during the third quarter
ended September 30,1998 which was primarily
related to additional impairment of the value of real
estate assets leased to FPA and an additional $6.0 mil-
lion during the fourth quarter ended December 31,
1998 which was related to the FPA bankruptcy.
Elements of the second,third and fourth quarter
charges included approximately $63.0 million for re a l
estate asset impairm e n t s ,a p p r oximately $10.0 m i l l i o n
for a note receivable impairment and $11.1 million
for other items related to FPA.
D u ring the third quarter ended September 30,
1998,excluding the charges totaling $28.1 million
related to the FPA bankru p t c y, the Company re c o rd e d
$146.9 million of restructuring and other charges.
These charges included (i) $87.0 million re l a t e d
primarily to premium deficiency reserves for the
Company’s Medicare operations in the Northeast
division, payment disputes with various provider
groups,and costs associated with contract termina-
tions and exiting rural markets which were recorded
as health care costs;(ii) $21.2 million related to
severance and benefits related to staff reductions in
selected health plans and the centralization and con-
solidation of Corporate functions;(iii) $18.6 million
related to the bankruptcy of a large hospital system;
and (iv) $20.1 million of other costs primarily
related to premium deficiency reserves established
for certain of the Company’s non-core health plan
operations.As of December 31,1998,$40.9 million
of the total $175.0 million of the third quarter
charges described above has resulted in cash outlay s
and $27.5 million is expected to require future
outlays of cash.
D u ring the fourth quarter ended December 31,
19 9 8 , the Company initiated a formal plan to dispose
of certain Central Division health plans included in
the Company ’s Health Plan Services segment. It is
anticipated that the dive s t i t u re of these plans will be
completed during the first half of 1999.The Company
evaluated the carrying values of the assets of these
health plans and determined that the carrying va l u e
exceeded estimated fair value by $112.4 million.As a
re s u l t , the Company re c o rded an impairment charge
which is attri bu t a ble to the following assets: G o o d-
will totaling $30.0 million,furniture and equipment
t o t a l i n g $40.3 million, building improvements total-
i n g $20.9 million and other impairments totaling
$21.2 million. In addition, the Company re c o rd e d
$48.9 million pri m a rily as health care costs.T h e s e
costs we re pri m a rily related to anticipated bad debts
totaling $17.4 million, p remium deficiency re s e rve s
of $22.1 million for certain health plans whose
health care costs exceed contractual premium reve-
nues and additional claims reserves and other costs
totaling $9.4 million.The Company also re c o rd e d
an additional $18.6 million of other charges. As
of December 31,1998,$6.0 million of the total
$185.9 million of the fourth quarter charges re s u l t e d
in cash outlays and $50.1 million is expected to
require future outlays of cash.