Health Net 1998 Annual Report Download - page 24

2 2 F O U N DAT IO N H EALT H SYST EMS, I N C.
primarily due to higher medical costs in 1996 and
favorable loss reserve development in certain health
plan operations during 1997.
The Company’s commercial product lines are
profitable. Premium rate increases in the commercial
line of products contributed to revenue increases
for the year ended December 31,1998 as compared
to the same period in the prior year in all divisions
of the Company, but were partially offset by enroll-
ment decreases in commercial HMO markets in
California and the health plans in the western and
central states. Commercial health care costs on a per
member per month basis have increased 8.1% dur-
ing the year ended December 31,1998 as compared
to the year ended December 31,1997.
The Company ’s Medicare product lines in the
C a l i f o rnia market are pro f i t a bl e , but are experi e n c i n g
l ower margins than in the prior ye a r.The Medicare
p roducts in the Company ’s Northeast health plans
h a ve shown an underwriting loss of approx i m a t e l y
$32.9 million for the year ended December 31,
1 9 9 8 .M e d i c a re premium rates and enrollment have
i n c reased in the Northeast marke t s , but enro l l m e n t
rates are expected to slow. M e d i c a re health care costs
in the California and Northeast markets continue to
i n c rease faster than premium rates.
Medicaid enrollment in the California divi-
sion has increased significantly resulting in a 53.9%
increase in member months during the year ended
December 31,1998,compared to 1997. However,
Medicaid premium rates have decreased in all mar-
ke t s . Medicaid health care costs have remained steady
or decreased on a per member per month basis in all
of the Company’s markets except for several of its
We s t e rn health plans, which have experienced higher
costs due to several high cost claims.
G o v e rnment Cont racts/ Specialty Serv i c e s
G ov e rnment contracts reve nue increased by
$40.2 million or 4.2% during the year ended
December 31,1998 as compared to 1997 primarily
due to the full year effect of the retroactive pricing
adjustment in the third quarter of 1997 which re d u c e d
1997 contract prices,as well as from growth in 1998
due to actuarial adjustments in risk share revenue
and favorable equitable adjustments resulting from
governmental audits.Government contracts revenue
increased by $40.4 million or 4.4% for the year
ended December 31, 1997,compared to 1996 as a
result of the California/ Hawaii CHAMPUS
contract being active for only 9 months in 1996
compared to a full year in 1997.
Specialty services revenues increased by
$24.5 million or 7.2% during the year ended Decem-
ber 31,1998 as compared to 1997.These increases
are primarily the result of higher drug manufacturer
rebates,new business as a result of the FHS Combi-
nation,and continued growth in the Company’s
managed behavioral health network and bill review
cost containment businesses.Specialty services rev-
enues increased by $25.1 million or 7.9% for the
year ended December 31,1997 as compared to the
same period in 1996 primarily due to the impact of
a full year’s revenue from Managed Health Network,
Inc. which was acquired in Marc h 1 9 9 6 .The incre a s e
in reve nu e was offset somewhat by the sale of cer-
tain ancillary health care service operations in 1996
and reduced reve nue from va rious ASO operations.
The Company expects continued market pressure to
maintain modest increases in premiums for behav i o r a l
health,dental and vision products.
The government contracts/ specialty services
MCR increased to 78.5% for 1998 compared to
77.6% for 1997. Excluding the 1998 Charges, t h i s
r a t i o was 77.4%.This increase for 1998 is primarily
due to (i) the effect of the 1998 Charges (ii) incre a s e d
pharmacy costs and higher health care claim costs
on CHAMPUS contracts and (iii) the elimination of
the Medicaid contract administration business which
was sold in 1997 which contributed to revenues
with no offsetting health care costs.The government
contracts/ specialty services MCR decreased to
77.6% for 1997 compared to 81.2% in 1996.This
decrease for 1997 is primarily due to improved
health care and subcontractor performance on the
CHAMPUS contracts and due to adverse reserve
development recognized in the fourth quarter of
1996 which resulted in a higher than usual MCR
during 1996.