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2000 Annual Report
HEALTH NET, INC. 2000 Annual Report
HEALTH NET, INC.
GROWTH
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Table of contents

  • Page 1
    H E A LT H N E T, I N C . H GROWTH n lh 2000 Annual H E A LT H N E T, I N C . Report 2000 Annual Report

  • Page 2
    TABLE OF CONTENTS Financial Highlights Letter to Stockholders Operations Review Financial Review 2 5 8 17

  • Page 3
    ... health care system by: Winning the ongoing trust of the public, our members, our customers, our provider partners and our associates by developing lasting, affirmative relationships Leading the markets we serve by offering consumer-responsive products Adding value by arranging health care services...

  • Page 4
    ... Health Net, Inc. (Amounts in thousands, except per share data) 2000 (2) Year ended December 31, 1999(3) 1998(3) 1997(3) 1996(3) Stateme nt of Ope rations Data : reve nue s Health plan services premiums Government contracts/Specialty services Investment and other income Total revenues...

  • Page 5
    ...LT H NET 3 Net Income (Loss) (in thousands) Selling, General and Administrative (including depreciation) Ratio 0 0 1997 1998 1999 $(187,084) $(165,158) $142,365 2000 $163,623 1997 18.0% 1998 17.5% 1999 16.0% 2000 15.2% Operating Cash Flow (in thousands) Debt-to-Total Capital Ratio 0 0 1997...

  • Page 6
    4 H E A LT H NET 2 0 0 0 A n n u a l R e p o r t GROWTH F R O M L E F T T O R I G H T: E X E C U T I V E M A N A G E M E N T C O M M I T T E E M E M B E R S GARY VELASQUEZ, CORA TELLEZ, STEVE ERWIN, JEFF BAIRSTOW AND J AY G E L L E R T, P R E S I D E N T A N D C H I E F E X E C U T I V E O F ...

  • Page 7
    ... completed the turnaround and began to grow again. To signal this new beginning, on November 3, 2000, we changed the company name to Health Net, Inc. from Foundation Health Systems, Inc. Long the name of our California health plan, Health Net is a name that evokes our future - a future when all of...

  • Page 8
    ... emphasis on customer service and our attractive product designs are drawing new members, especially in our key New York and California markets. As a measurement of our success, our plans in California and the Northeast were rated #1 in member satisfaction surveys conducted by a major national firm...

  • Page 9
    ... true credits to the best of what this industry offers. We thank you, the stockholders of Health Net, for your patience and support.We hope that our success in 2000 is a harbinger of continued success in the years ahead. Sincerely, J AY M . G E L L E R T PRESIDENT AND CHIEF EXECUTIVE OFFICER MARCH...

  • Page 10
    8 H E A LT H NET 2 0 0 0 A n n u a l R e p o r t RELIABLE LINDA STRECKFUSS, FORMER MEMBER, PHS HEALTH PLANS

  • Page 11
    ... to military retirees and low-income individuals, Health Net is working to create products and programs to fit the varying health care needs of its customers. In 2000, Health Net of California introduced an array of new health care products, offering consumers different pricing options and benefit...

  • Page 12
    10 H E A LT H NET 2 0 0 0 A n n u a l R e p o r t C O L L A B O R AT I V E ARNOLD DoROSARIO, MD I N T E R N I S T, P R I M E D M E D I C A L G R O U P

  • Page 13
    ... physicians. C AQ H In early 2000, Health Net joined the Coalition for Affordable Quality Healthcare (CAQH) - a coalition representing 24 of the nation's largest health plans. CAQH is committed to working with others in the medical community to address issues where collective action will make life...

  • Page 14
    12 H E A LT H NET 2 0 0 0 A n n u a l R e p o r t CANDID REBECCA BAUGHMAN, RN, BS, CCM H E A LT H N E T O F C A L I F O R N I A A S S O C I AT E

  • Page 15
    ... time to time, some doctors decide to stop working with managed health care plans. Regardless of why a doctor leaves the network, Health Net does everything it can to ensure continuity of care for its members.  That's where Rebecca Baughman comes in. A registered nurse for  years and a case...

  • Page 16
    14 H E A LT H NET 2 0 0 0 A n n u a l R e p o r t ENTERPRISING F R O M L E F T T O R I G H T: N E W V E N T U R E S G R O U P R E P R E S E N TAT I V E S K AT H L E E N R I C H A R D , S T E V E S E L L , PA U L G I L B E RT S O N

  • Page 17
    ... plans, co-payment information and out-of-pocket maximums online, anytime. Questium 2.0, which will be released in mid-2001, will let members refill mail-order prescriptions online and view individual medical histories from health plan records over a secure Internet site. In addition to providing...

  • Page 18
    ...to-date. Networking Associate s - During the latter part of 2000, the New Ventures Group began work on an enterprise-wide portal for its own 11,000 associates.The portal, which serves as the company's internal Web site, will, for the first time in Health Net's history, electronically connect all of...

  • Page 19
    ...2000 FINANCIAL REVIEW Market for Registrant's Common Equity and Related Stockholder Matters Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Report of the Audit Committee of the Board of Directors Report...

  • Page 20
    ...H E A LT H NET 2000 Annual Report Market for Registrant's Common Equity and Related Stockholder Matters The following table sets forth the high and low sales prices of the Company's Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), on the New York Stock Exchange, Inc...

  • Page 21
    ... three TRICARE contracts that cover Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon,Washington and parts of Arizona, Idaho, Louisiana and Texas.Through this segment, the Company also offers behavioral health, dental and vision services as well as managed care products related to bill review...

  • Page 22
    ... effect of a change in accounting principle, net of tax Net income (loss) Health plan services medical care ratio ("MCR") Government contracts/Specialty services MCR Administrative (SG&A + Depreciation) Ratio Health plan premiums per member per month Health plan services per member per month $7,351...

  • Page 23
    ... and retirees and their dependents are automatically eligible to receive benefits under the TRICARE program. Any changes in the enrollment reflect the timing of when the individuals become eligible. health plan se rvice s premiums Health Plan Services premiums increased $320.0 million or 5% for...

  • Page 24
    ... Company's behavioral health care subsidiary, increased benefit payments due to parity provisions instituted by certain states during the year ended December 31, 2000.These provisions require behavioral health service providers to offer the same level of services to all current health plan members...

  • Page 25
    ... $18.5 million for severance and benefit costs related to executives and operations employees at the Colorado regional processing center and operations employees at the Northwest health plans.The operations functions include premium accounting, claims, medical management, customer service, sales and...

  • Page 26
    ...part, on its ability to maintain effective control over health care costs while providing members with quality care. Factors such as health care reform, regulatory changes, increased cost of medical services, utilization, new technologies and drugs, hospital costs, major epidemics and numerous other...

  • Page 27
    ... cash from operations, existing working capital, lines of credit, and funds from planned divestitures of business are adequate to fund existing obligations, introduce new products and services, and continue to develop health care-related businesses. The Company regularly evaluates cash requirements...

  • Page 28
    ....The funded amounts are included in other noncurrent assets. During 2000, the Company secured an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. ("CSMSIPA") for $15.0 million. CSMS-IPA is an association of medical doctors providing health care...

  • Page 29
    ... related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer's credit rating or credit perception may affect the value of financial instruments. The Company has several bond portfolios to fund reserves. The Company attempts to manage the interest rate...

  • Page 30
    ...'s Internal Audit Department, thereby providing for full and free access to the Committee. Richard J. Stegemeier Audit Committee Chairman March 2, 2001 R e p o r t o f I n d e p e n d e n t Au d i t o r s To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We...

  • Page 31
    2000 Annual Report H E A LT H NET 29 Consolidated Balance Sheets Health Net, Inc. (Amounts in thousands) December 31, 2000 1999 assets Current Assets: Cash and cash equivalents Investments - available for sale Premiums receivable, net of allowance for doubtful accounts (2000 - $19,822; 1999 ...

  • Page 32
    ... s o f O p e ra t i o n s Health Net, Inc. (Amounts in thousands, except per share data) Year Ended December 31, 2000 1999 1998 reve nue s Health plan services premiums Government contracts/Specialty services Investment and other income Total revenues $7,351,098 1,623,158 102,299 9,076,555 6,242...

  • Page 33
    ... depreciation on investments, net of tax of $343 Total comprehensive income Exercise of stock options including related tax benefit Conversion of Class B to Class A Employee stock purchase plan Balance at December 31, 2000 See accompanying notes to consolidated financial statements. 114,449 $115...

  • Page 34
    ... depreciation on investments, net of tax of $343 Total comprehensive income Exercise of stock options including related tax benefit Conversion of Class B to Class A Employee stock purchase plan Balance at December 31, 2000 See accompanying notes to consolidated financial statements. (3,194) $(95...

  • Page 35
    2000 Annual Report H E A LT H NET 33 Consolidated Statements of Cash Flows Health Net, Inc. (Amounts in thousands) Year Ended December 31, 2000 1999 1998 cash f lows from ope rating activitie s: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating ...

  • Page 36
    ... Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon and Washington, and parts of Arizona, Idaho, Louisiana and Texas.This segment also offers behavioral health, dental, vision, and pharmaceutical products and services as well as managed care products related to bill review, administration and...

  • Page 37
    ... consolidated financial statements and notes have been reclassified to conform to the 2000 presentation.The reclassifications have no effect on net earnings or losses or stockholders' equity as previously reported. Revenue Recognition Health plan services premium revenues include HMO, POS and PPO...

  • Page 38
    ...the value of employer group contracts, provider networks, non-compete agreements and debt issuance costs. Goodwill and other intangible assets are amortized using the straightline method over the estimated lives of the related assets listed below. In accordance with Accounting Principles Board ("APB...

  • Page 39
    ...are limited due to the large number of payers comprising the Company's customer base.The Company's 10 largest employer groups accounted for 36% and 32% of premiums receivable and 16% and 15% of premium revenue as of December 31, 2000 and 1999, respectively, and for the years then ended. Earnings Per...

  • Page 40
    ...E A LT H NET 2000 Annual Report Fair Value of Financial Instruments Comprehensive Income The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and notes receivable and notes payable approximate their carrying amounts in the financial statements and...

  • Page 41
    ...The funded amounts are included in other noncurrent assets. During 2000, the Company secured an exclusive ebusiness connectivity services contract from the Connecticut State Medical Society IPA, Inc. ("CSMSIPA") for $15.0 million. CSMS - IPA is an association of medical doctors providing health care...

  • Page 42
    40 H E A LT H NET 2000 Annual Report NOTE 4 - Inve stme nts As of December 31, the amortized cost, gross unrealized holding gains and losses and fair value of the Company's available-for-sale investments were as follows (amounts in thousands): 2000 Gross Unrealized Holding Gains Gross Unrealized...

  • Page 43
    ... Company's Board of Directors. Under the 1989, 1990, 1991, 1992, 1993, 1997 and 1998 employee stock option plans and the non-employee director stock option plan, the Company grants options at prices at or above the fair market value of the stock on the date of grant.The options carry a maximum term...

  • Page 44
    ...LT H NET 2000 Annual Report Stock option activity and weighted average exercise prices for the years ended December 31 are presented below: 2000 Weighted Average Number of Exercise Options Price 1999 Weighted Average Number of Exercise Options Price 1998 Weighted Average Exercise Price Number of...

  • Page 45
    ... shares of Class B Common Stock sold automatically converted into shares of Class A Common Stock in the hands of such third parties. Shareholder Rights Plan NOTE 8 - Capital Stock The Company has two classes of Common Stock.The Company's Class B Common Stock has the same economic benefits as the...

  • Page 46
    ... executives, employees and dependents who meet certain eligibility requirements. Under these plans, the Company pays a percentage of the costs of medical, dental and vision benefits during retirement.The plans include certain cost-sharing features such as deductibles, co-insurance and maximum annual...

  • Page 47
    ...financial statements (amounts in thousands): Pension Benefits 2000 1999 Other Benefits 2000 1999 Change in benefit obligation: Benefit obligation, beginning of year Service cost Interest cost Benefits paid Actuarial loss (gain) Projected benefit obligation, end of year Change in fair value of plan...

  • Page 48
    ... point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2000 (amounts in thousands): 1-percentage point increase 1-percentage point decrease Performance-Based Annual Bonus Plan In 2000, the Company adopted a new Executive Officer...

  • Page 49
    ...v. Foundation Health Corporation, Foundation Health Systems, Inc. and Milliman & Robertson, Inc. ("M&R"), filed on April 28, 2000, in the United States Bankruptcy Court for the Central District of California.The lawsuit relates to the 1998 sale of Business Insurance Group, Inc., a holding company of...

  • Page 50
    ...in the consolidated federal class actions but has not formally responded to the other complaints.The Company intends to vigorously defend the actions. In September 1983, a lawsuit was filed in Los Angeles Superior Court by Baja Inc. ("Baja") against East Los Angeles Doctors Hospital Foundation, Inc...

  • Page 51
    ... General of Connecticut, Richard Blumenthal, filed another lawsuit against Physicians Health Services of Connecticut, Inc. ("PHS-CT").This new suit also names Foundation Health Systems, Inc., Anthem Blue Cross and Blue Shield of CT, Anthem Health Plans, Inc., CIGNA Healthcare of CT, Inc., and Oxford...

  • Page 52
    ...partner in a law firm which received legal fees totaling $0.3 million, $1.2 million, and $1.0 million, in 2000, 1999, and 1998, respectively. Such law firm is also an employer group of the Company from which the Company receives premium revenues at standard rates. One current director was an officer...

  • Page 53
    ... rate and each is payable upon demand by the Company in the event of a voluntary termination of employment of the respective officer or termination for cause. During 1999, three executive officers of the Company, in connection with their hire or relocation, received one-time loans from the Company...

  • Page 54
    ... for severance and benefit costs related to executives and operations employees at the Colorado regional processing center and operations employees at the Northwest health plans.The operations functions include premium accounting, claims, medical 1998 Charges management, customer service, sales...

  • Page 55
    ... 11 of the Federal Bankruptcy Code. FPA, through its affiliated medical groups, provided services to approximately 190,000 of the Company's affiliated members in Arizona and California and also leased health care facilities from the Company. FPA has discontinued its medical group operations in these...

  • Page 56
    ... allocate resources.The Company's reportable segments are business units that offer different products to different classes of customers.The Company has two reportable segments: Health Plan Services and Government Contracts/Specialty Services.The Health Plan Services segment provides a comprehensive...

  • Page 57
    ... 0.38 0.37 December 31 basic earnings pe r share (i) Net income dilute d earnings pe r share (i) Net income 1999: Total revenues Income from continuing operations before income taxes Income before cumulative effect of a change in accounting principle, net of tax Net income $2,158,344 78,779 47...

  • Page 58
    ... class action lawsuit was filed in Connecticut State Court against Physicians Health Services of Connecticut, Inc. by Kevin Lynch, M.D. and Karen Laugel, M.D. on behalf of physician members of the Connecticut State Medical Society who provide health care services to PHS-CT health plan members...

  • Page 59
    ... Health Net of California. Prior to that, Mary served in several executive positions for Blue Cross Blue Shield of Washington, DC; Lifeguard, Inc.; and Cigna Companies of Arizona. Mary began her health care career at Saint Luke's Hospital in Duluth, Minnesota where she served as a Registered Nurse...

  • Page 60
    ..., General Counsel and Secretary 21650 Oxnard Street Woodland Hills, California 91367 (800) 291-6911 (818) 676-6000 www.health.net INDEPENDENT AUDITORS Deloitte & Touche LLP Los Angeles, California STOCK TRANSFER AGENT AND REGISTRAR Computershare Investor Services Chicago, Illinois ANNUAL REPORT...

  • Page 61

  • Page 62
    H E A LT H N E T, I N C . 2000 Annual Report 21650 OXNARD STREET WOODLAND HILLS CALIFORNIA 91367