Health Net 2003 Annual Report Download - page 18

through the sales proceeds. Prior to the sale, revenue from our employer services group subsidiaries was reported as part
of other income in our consolidated statements of operations and therefore had no impact on our reportable segments’
results of operations.
Sale of Dental and Vision Subsidiaries
On October 31, 2003, we consummated the sale of our dental and vision subsidiaries, Health Net Dental and Health
Net Vision to SafeGuard and, as a result, we no longer underwrite or administer stand-alone dental and vision products.
However, we continue to make available private label Health Net branded dental products via our new strategic
relationship with SafeGuard and continue to make available private label Health Net branded vision products via our new
strategic relationship with EyeMed. In connection with the sale of Health Net Dental and Health Net Vision, we received
approximately $14.8 million in cash. We also and paid $2.1 million in cash and transferred $2.1 million in liabilities to
SafeHealth Life under the assumption reinsurance agreement. See “Segment Information – Health Plan Services
Segment – Other Specialty Services and Products – Dental and Vision” for further information regarding the sale of
Health Net Dental and Health Net Vision.
Withdrawal of Pennsylvania Health Plan
Effective September 30, 2003, we withdrew our 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 members. As of December 31, 2003, we had approximately 3,800 members enrolled in our commercial health
plan in Pennsylvania.
Hospital Subsidiaries
In 1999, we sold our two hospital subsidiaries to Health Plus, Inc. As part of the sale, we received cash and a note for
$12 million due on August 31, 2003 including any unpaid interest. Prior to August 31, 2003, we had established an $8.2
million allowance on the note. On August 31, 2003, Health Plus defaulted on the note and we increased the allowance on
the note by $3.4 million. The note was fully reserved as of September 30, 2003. We are in the process of trying to
restructure the note and are making continued efforts to collect all outstanding principal and interest due on the note. We
have recorded the additional $3.4 million allowance in G&A expenses in our accompanying consolidated statements of
operations for the year ended December 31, 2003.
Nurse Advice Line and Other Related Services Agreement
On August 6, 2003, we entered into an amendment to modify an existing ten-year agreement for a nurse advice line
and other related services, which we entered into in December 1998 with an external third-party service provider. The
effective date of the amendment April 1, 2003. The amendment changes the pricing schedule of this services agreement to
a cost-per-call basis from the per member per month (“PMPM”) basis of the original agreement. The amendment also
provides for the modification of the exclusivity provision under the original agreement. Under the terms of the
amendment, exclusivity for the provision of nurse advice line and audio health information services is not granted to the
external third-party service provider.
Pharmacy Benefit Services Agreement
Effective April 1, 2003, we amended our existing ten-year pharmacy benefit services agreement that we had entered
into in 1999 with an external third-party service provider (the “Pharmacy Benefit Services Agreement”). The amendment
provides for (1) the termination of certain service and performance provisions and the modification of certain other
service and performance provisions of the Pharmacy Benefit Services Agreement, (2) our payment of approximately
$11.5 million in May 2003 (the “Amendment Payment”) to the external third-party service provider, (3) our ability to
terminate the Pharmacy Benefit Services Agreement on April 1, 2004, subject to certain termination provisions and (4)
one year of consulting services (ending March 31, 2004) on specialty pharmacy strategic planning, benefit design strategy
and e-prescribing services from the external third-party service provider for a fee of $5 million.
As part of the original 1999 transactions with this external third-party service provider, we sold our non-affiliate
health plan pharmacy benefit management operations and received a warrant to acquire 800,000 shares of common stock
(as adjusted for stock splits) of the external third-party service provider. In April 2003, we exercised the vested portion of
the warrants (640,000 shares) and, following a 30-day holding period, sold the underlying common stock for a gain of
approximately $11.5 million. We recorded the Amendment Payment as well as the gain realized on the sale of the
underlying common stock in G&A expenses in May 2003. The remaining 160,000 shares are scheduled to vest on April 1,
2004.
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