Health Net 1998 Annual Report Download - page 25

F O U N D AT IO N H EALT H SYST EMS, I N C. 2 3
DI SCONTI NUED OPERAT I O N S
Workers’ Compensation I nsurance Business
In December 1997,the Company adopted a formal
plan to sell its workers’ compensation segment.In
December 1997,the Company estimated the loss on
the disposal of the workers’ compensation segment
would approximate $99.0 million (net of an income
tax benefit of $21.0 million) which included the
anticipated results of operations during the phase-
out period from December 1997 through the date
of disposal.On December 10,1998,the Company
completed the sale of the workers’ compensation
segment.The assets sold consisted primarily of
investments,premiums and reinsurance receivables.
The selling price was $257 million in cash.
Physic ian Pra ctice Management Business
On June 28,1996 the Company executed a Stock
and Note Purchase Agreement with FPA for the
purchase by FPA of the Company’s medical prac-
tices (the “Medical Practices”).The transaction was
consummated in Nove m b e r 1996 and the Company
re c ognized a net of tax gain on sale of $20.3 m i l l i o n ,
net of $17.6 million of taxes,in 1996. In 1997,the
Company recognized an additional $10.1 million
gain on the sale, net of $2.8 million of taxes,as a
result of the final settlement of certain contractual
provisions.The income and loss on discontinued
operations,net of taxes,for the Medical Practices
was $2.9 million during 1996.The results were
primarily due to insufficient patient volume being
served by the Medical Practices.The 1996 loss was
reduced by a gain of $10.8 million related to the
sale of various independent practice associations.
I mpact of Inflation and Other Element s
The managed health care industry is labor intensive
and its profit margin is low;hence, it is especially
sensitive to inflation.Increases in medical expenses
or contracted medical rates without corresponding
increases in premiums could have a material adverse
effect on the Company.
Various federal and state legislative initiatives
regarding the health care industry have been pro-
posed during recent legislative sessions,and health
care reform and similar issues continue to be in the
forefront of social and political discussion.If health
care reform or similar legislation is enacted, such
legislation could impact the Company. Management
cannot at this time predict whether any such initia-
tive will be enacted and,if enacted,the impact on
the financial condition or results of operations of
the Company.
The Company ’s ability to expand its business is
dependent, in part,on competitive premium pricing
and its ability to secure cost-effective contracts with
providers.Achieving these objectives is becoming
i n c reasingly difficult due to the competitive env i ro n-
ment.In addition,the Company’s profitability is
d e p e n d e n t , in part , on its ability to maintain effective
control over health care costs while providing mem-
bers with quality care. Factors such as health care
reform,integration of acquired companies, regula-
tory changes,utilization,new technologies,hospital
costs,major epidemics and numerous other external
influences may affect the Company ’s operating re s u l t s .
Accordingly, past financial performance is not neces-
sarily a reliable indicator of future performance, and
investors should not use historical records to antici-
pate results or future period trends.
The Company’s HMO and insurance subsid-
iaries are required to maintain reserves to cover their
estimated ultimate liability for expenses with respect
to reported and unreported claims incurred.These
reserves are estimates of future payments based on
various assumptions.Establishment of appropriate
reserves is an inherently uncertain process,and there
can be no certainty that currently established re s e rve s
will prove adequate in light of subsequent actual
experience, which in the past has resulted and in the
future could result in loss reserves being too high
or too low.The accuracy of these estimates may be
affected by external forces such as changes in the rate
of inflation,the regulatory environment, the judicial
administration of claims,medical costs and other
factors. Future loss development or governmental
regulators could require reserves for prior periods to
be increased,which would adversely impact earnings
in future peri o d s . In light of present facts and curre n t
legal interpretations,management believes that
adequate provisions have been made for claims and
loss reserves.