Health Net 1998 Annual Report Download - page 23

F O U N D AT IO N H EALTH SYST EMS, I N C. 2 1
As set forth above, the total 1998 Charges
recorded by the Company were $410.9 million.
Restructuring,merger and other charges of
$395.9 million were recorded during the year ended
D e c e m b e r 31, 1997 related to the FHS Combination
and the restructuring of the Company’s Eastern
D i vision health plans.The principal elements of these
charges included (i) re s t ru c t u ring costs of $146.8 mil-
lion for a wo r k f o rce re d u c t i o n , the consolidation of
e m p l oye e benefit plans,the consolidation of facilities
in geographic locations where office space is dupli-
cated, the consolidation of overlapping provider net-
works,and the consolidation of information systems
to standardized systems;(ii) $69.6 million in merger
related costs primarily for investment banking,legal,
accounting and other costs;(iii) premium deficiency
reserves of $57.5 million related to the Company’s
Gem Insurance Company (“Gem”) and (iv) other
charges of $122.0 million primarily related to other
costs for certain of the Company’s non-core opera-
tions. As of December 31,1998, $86.9 million of
the net 1997 re s t ru c t u ring charge has resulted in cash
outlays and $13.8 million is expected to require
future outlays of cash.
D u ring 19 9 6 , the Company re c o rded
$44.1 million of restructuring and other charges.
These charges were primarily comprised of restruc-
turing costs of $27.4 million and $16.7 million of
other costs including loss contract accruals related to
governmental employer groups in the Company’s
non-California markets,consulting and other costs.
Income Tax Provision and Benefit
The effective tax benefit rate of 35.0% on losses
from continuing operations for the year e n d e d
December 31, 1998 increased compared to the effec-
tive tax benefit rate on continuing operations of
24.0% for the year ended 1997.The increased tax
benefit rate was due primarily to nondeductible
merger and restructuring costs during 1997. The
1996 effective tax provision rate on income of
26.7% differs from the statutory tax rate primarily
due to various items including tax exempt interest
income and a settlement of an Internal Revenue
Service examination.
SEGMENT REPORT I N G
Health Plan Serv i c e s
Health plan revenues increased by $1.6 billion or
27.6% primarily due to enrollment increases in the
commercial, Medicare and Medicaid lines of busi-
ness in the Northeast Division that was acquired in
the fourth quarter of 1997.These acquisitions con-
tributed approximately $977.8 million in revenues
during the year ended December 31,1998.In addi-
tion,Medicaid enrollment growth in the California
division and premium rate increases for all divisions
contributed to the overall increase in revenues for
the health plans.
Revenues generated by the Company’s health
plan operations increased $434.3 million or 8.1%
f o r the period ended December 31,1997 compared
to the same period in 1996.The increase in reve nu e s
for the year ended December 31,1997 as compared
to the same period in 1996 is primarily due to
enrollment increases in the Medicaid lines of busi-
ness and enrollment and premium increases in the
Medicare lines of business in California,commercial
enrollment increases in Connecticut and Arizona,
and the partial year impact of the acquisitions of
Advantage Health in Pennsylvania,FOHP in New
Jersey, and PACC in Oregon.
Health plan health care costs increased by
33.3% for the year ended December 31,1998 as
compared to 1997 primarily as a result of enroll-
ment increases in the Northeast Division, Medicaid
enrollment growth in the California Division,phar-
macy cost increases in all divisions and additional
health care costs from the 1998 Charges totaling
$104.3 million.The health plans MCR increased
from 84.3% in 1997 to 88.0% in 1998 due to higher
medical costs particularly in physician and hospital
fee for service costs,increase in pharmacy costs and
increased utilization.Excluding the 1998 Charges,
the health plans MCR was 86.6%.
Health plan health care costs increased by
6.8% for the year ended December 31, 1997 as
compared to 1996.In the California market,health
care costs increased as a result of higher pharmacy
costs for both the commercial and Medicare lines of
business, increased provider contracting arrange-
ments,increased hospital utilization in the Medicare
line of business,and increased enrollment in the
Medicaid line of business.While health care costs
increased during 1997,the health plans MCR
declined to 84.3% for the year ended December 31,
1997 from 85.2% for the comparable period in 1996