Health Net 2002 Annual Report Download - page 34

32 | HEALTH NET, INC.
On August 1, 2002 the United States Department of
Defense (DoD) issued a Request For Proposals (RFP) for the
rebid of the TRICARE contracts. The RFP divides the United
States into three regions (North, South and West) and
provides for the award of one contract for each region. The
RFP also provides that each of the three new contracts will
be awarded to a different prime contractor. We submitted
proposals in response to the RFP for each of the three
regions in January 2003 and it is anticipated that the DoD
will award the three new TRICARE contracts on or before
June 1, 2003. Health care delivery under the new TRICARE
contracts will not commence until the expiration of health
care delivery under the current TRICARE contracts.
If all option periods are exercised by DoD under the
current TRICARE contracts with us and no further exten-
sions are made, health care delivery ends February 29,
2004 for the Region 11 contract, on March 31, 2004 for
the Regions 9, 10 and 12 contract and on October 31,
2004 for the Region 6 contract. As set forth above, we are
competing for the new TRICARE contracts in response to
the RFP.
2001 Compared to 2000
Government Contracts revenues increased $73.9 million or
5.8% for the year ended December 31, 2001 compared to
the same period in 2000. The increase is primarily due to a
$40.1 million increase in TRICARE revenue from increased
change order activity and a $30.2 million increase from
successful negotiation on new extension pricing.
NET INVESTMENT INCOME
2002 Compared to 2001
Investment income declined by $13.3 million or 16.9% for
the year ended December 31, 2002 as compared to the
same period in 2001. This decline is primarily a result of
continued declines in interest rates of an average of 97
basis points in the year ended December 31, 2002, as
compared to the same period in 2001 partially offset by
higher average cash and investment balances.
During the year ended December 31, 2002, we sold
$5.0 million, par value, of WorldCom (MCI) bonds and
recognized a pretax loss of $3.2 million, included in net
investment income.
2001 Compared to 2000
Investment income decreased by $11.2 million or 12.4%
for the year ended December 31, 2001 compared to the
same period in 2000. This decrease was due to declining
interest rates. The decrease in the average yield for 2001 is
reflective of the Federal Reserve’s continued lowering of
interest rates.
In the latter part of the fourth quarter of 2001, we
began to reposition certain of our investable assets within
our regulated health plans to increase investment income
by investing in investments with longer durations. This
resulted in an over 75% increase in investments available
for sale as of December 31, 2001 from December 31, 2000.
OTHER INCOME
2002 Compared to 2001
Other income is primarily comprised of revenues from our
employer services group subsidiary. Other income
decreased by $17.4 million or 24.8% for the year ended
December 31, 2002 compared to the same period in 2001.
This decrease is primarily due to a decline in business
volume and sale of our claims processing subsidiary effec-
tive July 1, 2002.
2001 Compared to 2000
Other income decreased by $41.4 million or 37.1% for the
year ended December 31, 2001 compared to the same period
in 2000. This decrease is primarily due to a decline in busi-
ness volume from certain customers that decided to perform
their claims processing and bill review functions in-house.
HEALTH PLAN SERVICES COSTS
2002 Compared to 2001
Total health plan services costs decreased by $79.7 million
or 1.1% for the year ended December 31, 2002 as
compared to the same period in 2001 primarily due to the
disposition of the Florida health plan effective August 1,
2001. Total Health Plan Services costs on a PMPM basis
increased to $155.99 or 5% for the year ended December
31, 2002 from $149.12 for the same period in 2001.
Excluding the Florida health plan, the health plan services
costs increased by $242.6 million or 3.5% for the year
ended December 31, 2002, primarily due to the following:
■Increase in commercial health care costs of $258.5
million or 6% for the year ended December 31, 2002 as
compared to the same period in 2001 is due to a 13%
increase in health care costs on a PMPM basis as a result
of higher hospital unit cost trends, partially offset by a
7% decrease in member months,
■Decrease in Medicare risk health care costs of $162.9
million or 11% for the year ended December 31, 2002 as
compared to the same period in 2001 is due to a 16%
decrease in member months, partially offset by a 5%
increase in health care costs on a PMPM basis as a result
of higher hospital unit cost trends, and