Health Net 2002 Annual Report Download - page 60

58 | HEALTH NET, INC.
We assess the profitability of contracts for providing
health care services when operating results or forecasts
indicate probable future losses. Contracts are grouped in a
manner consistent with the method of determining premium
rates. Losses are determined by comparing anticipated
premiums to estimates for the total of health care related costs
less reinsurance recoveries, if any, and the cost of maintaining
the contracts. Losses, if any, are recognized in the period the
loss is determined and are classified as Health Plan Services.
We had premium deficiency reserves of $0 and $1.7
million as of December 31, 2002 and 2001, respectively.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with
a maturity of three months or less when purchased.
We and our consolidated subsidiaries are required to
set aside certain funds for restricted purposes pursuant to
regulatory requirements. As of December 31, 2002 and
2001, the restricted cash and cash equivalents balances
totaled $4.3 million and $4.4 million, respectively, and are
included in other noncurrent assets.
Investments
Investments classified as available for sale are reported at
fair value based on quoted market prices, with unrealized
gains and losses excluded from earnings and reported as
other comprehensive income, net of income tax effects.
The cost of investments sold is determined in accordance
with the specific identification method and realized gains
and losses are included in investment income.
Certain long-term debt investments are held by
trustees or agencies pursuant to state regulatory require-
ments. These investments totaled $1.3 million and $1.4
million as of December 31, 2002 and 2001, respectively,
and are included in other noncurrent assets. Short-term
investments held by trustees or agencies pursuant to state
regulatory requirements were $109.1 million and $86.1
million as of December 31, 2002 and 2001, respectively,
and are included in investments available for sale (see Note
11). Market values approximate carrying value as of
December 31, 2002 and 2001.
During 2002, we recorded an impairment charge of
$3.6 million related to an other-than-temporary decline in
the fair value of certain investments available for sale
(see Note 14).
Government Contracts
Amounts receivable or payable under government
contracts are based on three TRICARE contracts in five
regions which include both amounts billed ($7.2 million
and $17.4 million of net receivables at December 31, 2002
and 2001, respectively) and estimates for amounts to be
received under cost and performance incentive provisions,
price adjustments and change orders for services not origi-
nally specified in the contracts. Such estimates are deter-
mined based on information available as well as historical
performance and collection of which could extend for
periods beyond a year. Differences, which may be material,
between the amounts estimated and final amounts
collected are recorded in the period when determined.
In December 2000, our subsidiary, Health Net Federal
Services, Inc., and the DoD agreed to a settlement of
approximately $389 million for outstanding receivables
related to our three TRICARE contracts and for the
completed contract for the CHAMPUS Reform Initiative.
Approximately $60 million of the settlement amount was
received in December 2000. The remaining settlement
amount was received on January 5, 2001.
Additionally, health care and other costs payable
under government contracts include approximately $193.1
million and $224.0 million for health care services already
provided under these contracts as of December 31, 2002
and 2001, respectively.
Property and Equipment
Property and equipment are stated at historical cost less
accumulated depreciation. Depreciation is computed using
the straight-line method over the lesser of estimated useful
lives of the various classes of assets or the lease term. The
useful life for buildings and improvements is estimated at
35 to 40 years, and the useful lives for furniture, equipment
and software range from two to eight years (see Note 5).
Effective January 1, 1999, we adopted Statement of
Position 98-1 “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use” and
changed our method of accounting for the costs of inter-
nally developed computer software. The change involved
capitalizing certain consulting costs, payroll and payroll-
related costs for employees related to computer software
developed for internal use and subsequently amortizing
such costs over a three to five-year period. The Company
had previously expensed such costs.
Expenditures for maintenance and repairs are expensed
as incurred. Major improvements which increase the esti-
mated useful life of an asset are capitalized. Upon the sale
or retirement of assets, the recorded cost and the related
accumulated depreciation are removed from the accounts,
and any gain or loss on disposal is reflected in operations.
During 2002 and 2001, we recorded impairment
charges of $35.8 million and $27.9 million, respectively, for
certain information technology-related assets (see Note 14).