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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ÈANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
‘TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 1-12718
HEALTH NET, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4288333
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer Identification No.)
21650 Oxnard Street, Woodland Hills, CA 91367
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (818) 676-6000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock, $.001 par value New York Stock Exchange, Inc.
Rights to Purchase Series A Junior Participating Preferred
Stock
New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ÈNo ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2). Yes ÈNo ‘
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 27, 2003 was
$3,827,769,091 (which represents 115,957,864 shares of Class A Common Stock held by such non-affiliates multiplied
by $33.01, the closing sales price of such stock on the New York Stock Exchange on June 27, 2003).
The number of shares outstanding of the registrant’s Class A Common Stock as of March 10, 2004 was 112,743,445
(excluding 20,873,729 shares held as treasury stock).
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive proxy
statement for the 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the year ended December 31, 2003.

Table of contents

  • Page 1
    ...12718 HEALTH NET, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 95-4288333 (I.R.S. Employer Identification No.) 21650 Oxnard Street, Woodland Hills, CA (Address of Principal Executive Offices) 91367 (Zip Code...

  • Page 2
    HEALTH NET, INC. INDEX TO FORM 10-K Page PART I. Item 1-Business ...General ...Segment Information ...Provider Relationships and Responsibilities ...Additional Information Concerning Our Business ...Government Regulation ...Service Marks ...Employees ...Other Company Information and Recent and ...

  • Page 3
    ...Plan Services and Government Contracts. Our Health Plan Services reportable segment includes the operations of our health plans in Arizona, California, Connecticut, New Jersey, New York and Oregon, the operations of our health and life insurance companies and our behavioral health and pharmaceutical...

  • Page 4
    ...network physician of their choice; and a managed indemnity plan which is provided for employees who reside outside of their HMO service areas. For information regarding the marketing and sale of our health plans, see "Additional Information Concerning our Business - Marketing and Sales." The pricing...

  • Page 5
    ... of provider network. Our commercial membership in Arizona was 119,110 as of December 31, 2003, which represented an increase of approximately 0.5% during 2003. This increase was primarily due to increased sales of our PPO products in the small group and individual market. Our Medicare membership in...

  • Page 6
    ... in Connecticut and New Jersey. To enroll in our Medicaid products, an individual must be eligible for Medicaid benefits under the appropriate state regulatory requirements. Our HMO products include, in addition to standard Medicaid coverage, certain additional services including dental and vision...

  • Page 7
    ...health, dental and vision products and services (through strategic relationships with third parties) as well as managed care products related to cost containment for hospitals, health plans and other entities as part of our Health Plan Services segment. Pharmacy Benefit Management. Pharmacy benefits...

  • Page 8
    ... alone dental and vision product business of Health Net Life Insurance Company were reported as part of our Health Plan Services reportable segment. Government Contracts Segment Our Government Contracts reportable segment includes government-sponsored managed care plans through the TRICARE programs...

  • Page 9
    ... a TRICARE authorized provider who is not a network provider but pay a higher co-payment than under TRICARE Prime or TRICARE Extra. During 2003, enrollment of TRICARE beneficiaries in TRICARE Prime for the Region 11 contract increased by 4.4% to 150,004, while the total estimated number of eligible...

  • Page 10
    ... from the broader HMO network panel of primary care physicians. Some HMO "open access" plans and PPO plans do not require the member to select a primary care physician. The primary care physicians and PPGs assume overall responsibility for the care of members. Medical care provided directly by such...

  • Page 11
    ...capitation, per diem rates, case rates and discounted fee-for-service schedules. In certain cases, these provider services are included in contracts our health plan subsidiaries have with PPGs and hospitals. Cost Containment In most HMO plan designs, either the primary care physician or the treating...

  • Page 12
    ... is the largest PPO provider in California. All together, these four plans and Health Net account for a majority of the insured market in California. There are also a number of small, regional-based health plans that compete with Health Net primarily in the small business group market segment. The...

  • Page 13
    ... coverage and health benefit plan sponsors. The purposes of HIPAA are to: • • limit pre-existing condition exclusions applicable to individuals changing jobs or moving to individual coverage, guarantee the availability of health insurance for employees in the small group and individual market...

  • Page 14
    ... and sold. ERISA. Most employee benefit plans are regulated by the federal government under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Employment-based health coverage is such an employee benefit plan. ERISA is administered, in large part, by the U.S. Department of...

  • Page 15
    ... policy making bodies to assure that plan members have access to representation, procedures for resolving grievances, the interrelationship between HMOs and their health care providers, adequacy and accessibility of the network of health care providers, timely and accurate payment of provider claims...

  • Page 16
    ... precludes most individuals from suing health plans for causes of action based upon state law and would enable plan members to challenge coverage and benefits decisions in state and federal courts. Although both bills provided for independent review of decisions regarding medical care, the bills...

  • Page 17
    ...the sale, we no longer market workers' compensation managed care cost containment services directly to customers. Pursuant to a workers compensation network access agreement we entered into with First Health, we agreed to maintain our network of health care providers, including physicians, hospitals...

  • Page 18
    ...commercial health plan from the commercial market in the Commonwealth of Pennsylvania. Coverage for our members enrolled in the Federal Employee Health Benefit Plan was discontinued on January 11, 2004, however, we intend to maintain our network of providers in Pennsylvania to service our New Jersey...

  • Page 19
    ... our Board of Directors to repurchase up to an aggregate of up to $450 million (net of exercise proceeds and tax benefits from the exercise of employee stock options) of our Class A Common Stock. Florida Operations Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health...

  • Page 20
    ... in the Rights Agreement, in the event that we are acquired in a merger or other business combination in which the Class A Common Stock does not remain outstanding or is changed or 50% of the assets or earning power of the Company is sold or otherwise transferred to any other person, the Rights will...

  • Page 21
    .... Periodic renegotiations of hospital and other provider contracts, coupled with continued consolidation of physician, hospital and other provider groups, may result in increased health care costs or limit our ability to negotiate favorable rates. The managed health care industry is labor intensive...

  • Page 22
    ..., our HMOs face an even higher risk with hospital expenses that could have a material adverse effect. Factors underlying the increase in hospital costs include, but are not limited to, the underfunding of public programs, such as Medicaid and Medicare, growing rates of uninsured individuals, new...

  • Page 23
    ... the reimbursement or payment levels for services provided under government programs such as Medicare or Medicaid; enhance the providers' rights of timely payment and access to appeal processes; mandate certain benefits and services that could increase costs; and restrict a health plan's ability to...

  • Page 24
    ...Segment - TRICARE" for additional information regarding the new contract for the North Region. Shortly after we were awarded the contract, Sierra Military Health Services, Inc. ("Sierra") and Aetna Government Health Plans ("Aetna") filed protests with the United States General Accounting Office (the...

  • Page 25
    .... We contract with physicians, hospitals and other providers as a means to assure access to health care services for our members, to manage health care costs and utilization and to better monitor the quality of care being delivered. In any particular market, providers could refuse to contract with...

  • Page 26
    ..., such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors and/or result in higher health care costs. Health care providers may establish provider service organizations to offer competing managed care products. To the extent...

  • Page 27
    ... services, monitoring utilization and other cost factors, processing provider claims, billing our customers on a timely basis and identifying accounts for collection. Our customers and providers also depend upon our information systems for membership verification, claims status and other information...

  • Page 28
    ...taking actions similar to those taken in connection with the 2001 Plan. If we are unable to manage our general and administrative expenses, our business, financial condition and results of operations could be harmed. We depend, in part, on independent sales agents to market our products and services...

  • Page 29
    .... Combined rent for our Woodland Hills facilities was approximately $13.0 million in 2003. We also lease an aggregate of approximately 452,048 square feet of office space in Rancho Cordova, California for certain Health Plan Services and Government Contract operations. Our aggregate rent obligations...

  • Page 30
    ... 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, case number SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance Group...

  • Page 31
    ... been filed in federal and state courts seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of common stock, convertible subordinated debentures and options to purchase common stock of FPA Medical Management, Inc. ("FPA") at various times between...

  • Page 32
    ... (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on February 22, 2001 as an amendment to a case filed in the Northern District of California), Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court...

  • Page 33
    ... class action allegedly brought on behalf of individual physicians in California who provided health care services to members of the defendants' health plans. The complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and Professions Code and certain state...

  • Page 34
    ... 2002, the Medical Society of New Jersey filed a complaint in New Jersey state court against us and our subsidiaries, Health Net of the Northeast, Inc., First Option Health Plan of New Jersey, Inc., and Health Net of New Jersey, Inc. (the Health Net defendants). Plaintiff brought this action on its...

  • Page 35
    ... regulatory net worth requirements and additional state regulations which may restrict the declaration of dividends by HMOs, insurance companies and licensed managed health care plans. The payment of any dividend is at the discretion of our Board of Directors and depends upon our earnings, financial...

  • Page 36
    ... our Board of Directors to repurchase up to an aggregate of up to $450 million (net of exercise proceeds and tax benefits from the exercise of employee stock options) of our Class A Common Stock. Item 6. Selected Financial Data. 2003 STATEMENT OF OPERATIONS DATA (1): REVENUES Health plan services...

  • Page 37
    ... and government contracts subsidiaries provide health benefits through our HMOs, PPOs and POS plans to approximately 5.3 million individuals in 14 states. We also offer managed health care products related to behavioral health and prescription drugs. In addition, we own health and life insurance...

  • Page 38
    ...in our health care costs, especially hospital costs, by employing a range of medical management, pharmaceutical management and provider contracting strategies. In addition, we must successfully implement our new TRICARE contract for the North Region, complete our Health Net One systems consolidation...

  • Page 39
    ... managed care plans through the TRICARE programs and other government contracts. In August 2003, we were awarded a new five year contract for the TRICARE North Region that supports nearly 2.8 million Military Health System eligible participants. The new North Region contract covers Connecticut...

  • Page 40
    ...medical centers and community hospitals. We maintain contracts with large integrated physician groups, Independent Practice Associations and individual primary care specialty physicians. Overall, we believe that our provider relations are generally good. In recent years, we have implemented a number...

  • Page 41
    ... change in accounting principle ...Health plan services medical care ratio ...Government contracts cost ratio ...Administrative ratio (1) ...Selling costs ratio (2) ...Net margin (3) ...Return on equity (4) ...Health plan services premiums per member per month (PMPM) (5) ...Health plan services PMPM...

  • Page 42
    ... group market due to withdrawing our commercial health plan effective September 30, 2003 and withdrawing our coverage for the members enrolled in the Federal Employee Health Benefit Plan effective January 11, 2004, offset by Increase in New York of 23,000 members primarily in our large group market...

  • Page 43
    ... the State of California of the Healthy Families program, which provides health insurance to children from low-income families, and Increase in Connecticut and New Jersey of 16,000 members due to expansion of Medicaid eligible population. Government Contracts Membership Government contracts covered...

  • Page 44
    ...2003, we were awarded a new five year contract for the TRICARE North Region that supports nearly 2.8 million Military Health System ("MHS") eligible beneficiaries, including providing health care and administrative services for 1.7 million TRICARE eligibles and providing only administrative services...

  • Page 45
    ...from change order cost activities, Increase in revenues of $54.6 million due to favorable bid price adjustments, and Increase in revenues of $13.6 million from transition services related to the new TRICARE contract for the North Region. Transition payments for services connected to the North Region...

  • Page 46
    ... above the health care cost trend for our commercial and Medicare Risk products. In addition, health care cost increases in our commercial, Medicare and Medicaid lines have slowed with moderating growth in hospital and pharmacy costs. The increases in our overall Health Plan Services premiums on...

  • Page 47
    ...$93.5 million related to higher option period pricing, Increase of $42.8 million due to administrative and health care change order cost activities, and Increase in transition costs of $11.6 million from transition activities related to the new TRICARE contract for the North region, partially offset...

  • Page 48
    ... costs ratio (selling costs as a percentage of Health Plan Services premiums) increased to 2.6% for the year ended December 31, 2003 compared to 2.3% for the same period in 2002. This increase reflects the continued shift of our commercial health plan mix to small group with its higher selling costs...

  • Page 49
    ... an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. ("CSMS-IPA") for $15.0 million that we expected to recover through future connectivity service capabilities. CSMS-IPA is an association of medical doctors providing health care primarily in...

  • Page 50
    ... other costs, respectively. No payments remain to be paid related to the 2001 Plan. Net Gain (Loss) on Sale of Businesses and Properties and Assets Held for Sale The divestitures of our employer services group subsidiary, dental plan, vision plan, claims services subsidiaries and Florida health plan...

  • Page 51
    ... health plan from the commercial market in the Commonwealth of Pennsylvania. Coverage for our members enrolled in the Federal Employee Health Benefit Plan ended on January 11, 2004. We intend to maintain our network of providers in Pennsylvania to service our New Jersey members and TRICARE eligibles...

  • Page 52
    ... National Insurance Group, Inc v. Foundation Health Corporation, et. al. litigation. See Note 12 to the consolidated financial statements and "Part I - Item 3. Legal Proceedings" for additional information regarding the Superior Litigation. Cumulative Effect of a Change in Accounting Principle...

  • Page 53
    ... the increases in health care revenue and cost attributable to reservist activation to support increased military activity, Net increase in cash flows of $29.7 million from reserves for claims and other settlements, and Net increase in cash flows of $2.5 million from the tax benefits on stock option...

  • Page 54
    ..., our total authority under our stock repurchase program is estimated at $574 million based on the authorization we received from our Board of Directors to repurchase up to an aggregate of up to $450 million (net of exercise proceeds and tax benefits from the exercise of employee stock options) of...

  • Page 55
    ...entered into interest rate swap contracts to hedge against interest rate risk associated with our fixed rate senior notes payable. See "Quantitative and Qualitative Disclosures About Market Risk" for additional information regarding the interest rate swap. Our credit facilities, which provide for an...

  • Page 56
    ... the same period in 2001. The change was primarily due to the repurchase of 6,519,600 shares of our Class A common stock during 2002 for $159.7 million, offset by the increase of $39.1 million in proceeds received from the exercise of stock options and employee stock purchases. We also paid down our...

  • Page 57
    ... Annual Report on Form 10-K. Revenue Recognition Health plan services premiums include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based on a predetermined prepaid fee, Medicaid...

  • Page 58
    ...asset account, with a debit to the allowance to the extent such an allowance was previously recorded. Health Plan Services Reserves for claims and other settlements and health care and other costs payable under government contracts include reserves for claims (incurred but not reported claims ("IBNR...

  • Page 59
    ... in the California commercial market. Shared-risk arrangements provide for our providers and us to share in the variance between actual costs and predetermined goals. Our health plans in Connecticut, New Jersey and New York market to small employer groups through a marketing agreement with The...

  • Page 60
    ... for various other provisions of the new TRICARE North Region contract. Goodwill We test goodwill for impairment annually based on the estimated fair value of the reporting units which comprise our Health Plan Services and Government Contracts reportable segments. We test for impairment on...

  • Page 61
    ... to current liabilities pursuant to certain government contracts. Management believes that as of December 31, 2003, all of our health plans and insurance subsidiaries met their respective regulatory requirements. As necessary, we make contributions to and issue standby letters of credit on behalf...

  • Page 62
    ... insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to interest rate...

  • Page 63
    ... reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial...

  • Page 64
    ..., provide more detailed reviews of estimation procedures for worker's compensation liabilities and account properly for operating leases and termination benefits. We had also commenced the process of defining and implementing other changes to enhance our internal control over financial reporting and...

  • Page 65
    ...adopted a Code of Business Conduct and Ethics that applies to our employees, directors and officers, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is posted on our Internet web site, www.health.net. We...

  • Page 66
    .... Termination of Employment or Service. In the event of the termination of employment or service as a director of the holder of an award, other than in the event of a termination or removal for "Cause" (as defined under the 1998 Stock Option Plan), the Compensation Committee may provide for the...

  • Page 67
    ... Annual Report on Form 10-K or are incorporated herein by reference: 2.1 Agreement and Plan of Merger, dated October 1, 1996, by and among Health Systems International, Inc., FH Acquisition Corp. and Foundation Health Corporation (filed as Exhibit 2.5 to the Company's Registration Statement on Form...

  • Page 68
    ... herein by reference). Form of Nonqualified Stock Option Agreement utilized for Tier 2 officers of Health Net, Inc., a copy of which is filed herewith. Form of Restricted Stock Agreement utilized by Health Net, Inc. (filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the...

  • Page 69
    ... Net, Inc. Employee Stock Purchase Plan, as amended and restated as of January 1, 2002 (filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12718) and incorporated herein by reference. Foundation Health Systems, Inc. Executive Officer...

  • Page 70
    ... lenders party thereto and Bank of America, N.A. as Administrative Agent, a copy of which is filed herewith. First Amendment to Office Lease, dated May 14, 2001, between Health Net (a California corporation) and LNR Warner Center, LLC (filed as Exhibit 10.38 to the Company's Annual Report on Form 10...

  • Page 71
    ...to Stock Purchase Agreement dated as of October 31, 2003 by and between Health Net, Inc. and First Health Group Corp. (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-12718) and incorporated herein by reference). Statement relative...

  • Page 72
    * †Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c) of Form 10-K. A copy of the exhibit is being filed with this Annual Report on Form 10-K. (b) Reports on Form...

  • Page 73
    .... SIGNATURE TITLE DATE /s/ Jay M. Gellert Jay M. Gellert President and Chief Executive Officer and Director (Principal Executive Officer) Executive Vice President, Finance and Operations (Principal Accounting and Financial Officer) Director March 15, 2004 /s/ Marvin P. Rich Marvin P. Rich March...

  • Page 74
    ... to Consolidated Financial Statements The following consolidated financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K: Consolidated Financial Statements Report of Independent Auditors ...Consolidated Balance Sheets as of December 31, 2003 and...

  • Page 75
    ...Auditors To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We have audited the accompanying consolidated balance sheets of Health Net, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations...

  • Page 76
    ..., net ...Deferred taxes ...Other noncurrent assets ...Total Assets ...LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Reserves for claims and other settlements ...Health care and other costs payable under government contracts ...Unearned premiums ...Accounts payable and other liabilities...

  • Page 77
    HEALTH NET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) Year Ended December 31, 2003 2002 2001 Revenues Health plan services premiums ...Government contracts ...Net investment income ...Other income ...Total revenues ...Expenses Health plan services ......

  • Page 78
    ...Amount Shares Amount Total Balance at January 1, 2001 ...125,994 $126 Comprehensive income: Net income ...Change in unrealized depreciation on investments, net of tax of $2,865 ...Total comprehensive income ...Exercise of stock options including related tax benefit ...Employee stock purchase plan...

  • Page 79
    ... contracts ...Reserves for claims and other settlements ...Tax benefit on stock options and restricted stock ...Accounts payable and other liabilities ...Net cash provided by operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments ...Maturities of investments ...Purchases...

  • Page 80
    ... segments: Health Plan Services and Government Contracts. Our current Health Plan Services reportable segment includes the operations of our health plans in the states of Arizona, California, Connecticut, New Jersey, New York and Oregon, the operations of our health and life insurance companies and...

  • Page 81
    ... plan services premium revenues include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, which premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide...

  • Page 82
    ...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...

  • Page 83
    ... was purchased in a business combination and the purchase price was the fair value of the reporting unit. We identified the following six reporting units with goodwill within our businesses: Health Plans, Government Contracts, Behavioral Health, Dental & Vision, Subacute and Employer Services Group...

  • Page 84
    ... interests in publicly traded companies engaged in a line (or lines) of business similar to the Company. The public companies selected are defined as guideline companies. The acquisition methodology involved analyzing the transaction involving similar companies that have been bought and sold in the...

  • Page 85
    ...by reporting unit are as follows (amounts in millions): Health Plans Behavioral Health Dental/ Vision Employer Services Group Subacute Total Balance as of January 1, 2002 ...Impairment losses ...Reclassification from other intangible assets ...Goodwill written off related to sale of business unit...

  • Page 86
    ... of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value...

  • Page 87
    ... 31 (amounts in thousands, except per share data): 2003 2002 2001 Net income, as reported ...Add: Stock-based employee compensation expense included in reported net income, net of related tax effects ...Deduct: Total stock-based employee compensation expense determined under fair value based method...

  • Page 88
    ... Other Postretirement Benefit Plans disclosures. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 addresses the issuer's accounting for certain freestanding financial instruments...

  • Page 89
    ... the sales of our dental and vision plans and our employer services group subsidiary completed on October 31, 2003. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses financial accounting and reporting...

  • Page 90
    ... commercial market in the Commonwealth of Pennsylvania. Coverage for our members enrolled in the Federal Employee Health Benefit Plan was discontinued on January 11, 2004, however, we intend to maintain our network of providers in Pennsylvania to service our New Jersey members and TRICARE eligibles...

  • Page 91
    ... date of sale, our EOS claims services subsidiary had no net equity. Florida Health Plan Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc. (the Plan), to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received...

  • Page 92
    ... of our available-forsale investments were as follows: 2003 Gross Gross Unrealized Unrealized Holding Holding Gains Losses (Amounts in thousands) Amortized Cost Carrying Value Mortgage-backed securities ...Asset-backed securities ...U.S. government and agencies ...Obligations of states and other...

  • Page 93
    ... 12 months or more Total Mortgage-backed ...U.S. government and agency ...Obligation of state and ...other political subdivisions ...Corporate debt ... 66 23 3 10 102 1 - - - 1 67 23 3 10 103 As of December 31, 2003, we had 103 out of a total of 326 available-for-sale investment securities in an...

  • Page 94
    ... adverse events in connection with any employee pension benefit plan of ours; our failure to comply with the terms of other indebtedness with an aggregate amount exceeding $40 million such that the other indebtedness can be or is accelerated; or a change in control. As of December 31, 2003 and...

  • Page 95
    ... full-time employees are eligible to participate. The stockholders have approved these plans except for the 1998 Stock Option Plan which was adopted by our Board of Directors. During 2002, the stockholders approved the 2002 Stock Option Plan. During 2003 and 2002, we issued 190,000 and 80,000 shares...

  • Page 96
    ... price of $.01 per Right. We entered into Amendment No. 1 to the Rights Agreement to exempt the FHS Combination (the current operations of Health Net, Inc. are a result of the April 1, 1997 merger transaction involving Health Systems International, Inc. and Foundation Health Corporation) and related...

  • Page 97
    ...the authorization we received from our Board of Directors to repurchase up to an aggregate of up to $450 million (net of exercise proceeds and tax benefits from the exercise of employee stock options) of our Class A Common Stock. Note 9-Employee Benefit Plans Defined Contribution Retirement Plans We...

  • Page 98
    ... defined benefit health care and life insurance plans that provide postretirement medical and life insurance benefits to directors, key executives, employees and dependents who meet certain eligibility requirements. The Health Net health care plan is non-contributory for employees retired prior...

  • Page 99
    ... the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2003 (amounts in thousands): 1-percentage point increase 1-percentage point decrease Effect on total of service and...

  • Page 100
    ...to be contributed, in the form of cash, to the defined benefit pension and postretirement health and life plans during 2004 is expected to be paid out as benefits during the same year. Estimated Future Benefit Payments The following benefit payments, which reflect future service, as appropriate, are...

  • Page 101
    ... our health plans as well as our insurance subsidiaries are required to periodically file financial statements with regulatory agencies in accordance with statutory accounting and reporting practices. Under the Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must comply...

  • Page 102
    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, case number SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance Group, Inc. (BIG), a ...

  • Page 103
    ... have been filed in federal and state courts seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of common stock, convertible subordinated debentures and options to purchase common stock of FPA Medical Management, Inc. (FPA) at various times between...

  • Page 104
    ... (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on February 22, 2001 as an amendment to a case filed in the Northern District of California), Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court...

  • Page 105
    ... class action allegedly brought on behalf of individual physicians in California who provided health care services to members of the defendants' health plans. The complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and Professions Code and certain state...

  • Page 106
    ... 2002, the Medical Society of New Jersey filed a complaint in New Jersey state court against us and our subsidiaries, Health Net of the Northeast, Inc., First Option Health Plan of New Jersey, Inc., and Health Net of New Jersey, Inc. (the Health Net defendants). Plaintiff brought this action on its...

  • Page 107
    ... not provide for complete cancellation rights. The total future minimum lease commitments under the lease are approximately $86.3 million. On December 23, 2003, Health Net, Inc. entered into an operating lease agreement to renew its leased office space in Woodland Hills, California for its executive...

  • Page 108
    ...Other purchase obligation expenses totaled $26.9 million, $32.9 million and $19.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. Note 13-Related Parties One current executive officer of the Company is a director of an industry-related association, of which the Company is...

  • Page 109
    ... an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. (CSMS-IPA) for $15.0 million that we expected to recover through future connectivity service capabilities. CSMS-IPA is an association of medical doctors providing health care primarily in...

  • Page 110
    ...Jersey, New York, Oregon and Pennsylvania, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. Our Government Contracts reportable segment includes government-sponsored multi-year managed care plans through the TRICARE program...

  • Page 111
    ... data for the three years ended December 31 (amounts in thousands). 2003 Health Plan Services Government Contracts Corporate And Other(1) Total Revenues from external sources ...$9,093,219 $1,865,773 Intersegment revenues ...42,087 Net investment income ...66,338 116 Other income ...922 32 Interest...

  • Page 112
    ... items and are not managed within either of our reportable segments. Note 16-Health Care Services and Government and Contract Expenses Reserves for claims and other settlements and health care and other costs payable under government contracts include reserve for claims which consist of incurred...

  • Page 113
    ... 2001, the Company's capitated, shared risk, pharmacy and other expenses represented 41%, 45% and 47%, respectively, of the Company's total health plan services. 2003 Government Contracts 2002 2001 Total incurred claims ...Administrative and other costs ...Government contracts costs ... $1,504,073...

  • Page 114
    ... an interest in certain accounts receivables of the subsidiaries. These subsidiaries are reported as part of our Government Contracts reportable segment. These subsidiaries had $14.7 million, $11.5 million and $13.0 million of total revenues for the year ended December 31, 2003, 2002 and 2001...

  • Page 115
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED BALANCE SHEETS (Amounts in thousands) December 31, 2003 December 31, 2002 ASSETS Current Assets: Cash and cash equivalents ...Investments-available for sale ...Other assets ......

  • Page 116
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands) Year Ended December 31, 2003 2002 2001 REVENUES: Net investment income ...Other income ...Administrative service agreements ...Total...

  • Page 117
    ... SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2003 2001 2001 NET CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES ...CASH FLOWS FROM INVESTING ACTIVITIES: Sales...

  • Page 118
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. NOTE TO CONDENSED FINANCIAL STATEMENTS Note 1-BASIS OF PRESENTATION Health Net, Inc.'s ("HNT") investment in subsidiaries is stated at cost plus equity in undistributed earnings (losses) of ...

  • Page 119
    SUPPLEMENTAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES HEALTH NET, INC. (Amounts in thousands) Charged Balance at to costs Credited to Balance at beginning and other end of of period expenses accounts (1) Deductions (2) period 2003: Allowance for doubtful accounts: Premiums ...