Health Net 2003 Annual Report Download - page 40

However, as part of our contract with the Department of Defense, we are reimbursed for costs related to this heightened
military activity. As noted above, we expect our Government contracts cost ratio to remain relatively stable in 2004
compared with 2003, even with the transition to our new TRICARE contract for the North Region.
A description of the differences in the economic structure between our existing TRICARE contracts and the new
contract for the North Region is contained in “Item 1. Business – Segment Information – Government Contracts Segment
– TRICARE.” We believe that the changes in the economic structure of the new contract, when compared to our expiring
contracts, should reduce our risk related to the ability to accurately project our profitability over the term of the new
contract.
Health Net One Systems Consolidation Project. We are in the process of converting a number of information systems
in our health plan business to a single information system. This system is currently in use in our Northeast and Arizona
health plans and project completion is scheduled for the third quarter of 2004. This project, known as Health Net One,
also includes consolidation initiatives for other functional areas, such as claims handling, customer service and product
development. We believe Health Net One will produce administrative cost savings and improved service capability over
the next several years. We believe that having our health plans operate off a single information technology platform will
permit us to develop and deploy new products more rapidly, thus producing a competitive advantage in our markets. We
completed the conversion of our Arizona health plan to the selected system in 2003. Although we did encounter some
operational issues, such as build-up in the claims backlog, these issues were eventually resolved. We have incorporated
the knowledge gained from these issues into the overall Health Net One project plan. For additional information regarding
our Health Net One systems consolidation project, see “Item 1. Business – Additional Information Concerning our
Business – Health Net One Systems Consolidation Project.”
Provider Network. We maintain a large network of providers to service our members in the six states in which we
have health plans. These networks include a broad range of hospitals, including academic 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 of techniques specifically aimed at the review of very high cost hospital claims, a problem
that has plagued the entire managed care industry and hospitals. Some of these techniques, including reviews of individual
claims, create differences of interpretation between us and hospitals. We have been able to resolve these differences
through negotiation or, in some cases, through arbitration. Given the high rate of growth in hospital costs, we believe we
must continue to be vigilant in our review of these costs. Our efforts to maintain good relations with our providers,
particularly hospitals, will have a significant impact on our ability to achieve our financial goals in 2004 and beyond. See
“Risk Factors – If we are unable to maintain good relations with the physicians, hospitals and other providers that we
contract with, our profitability could be adversely affected.”
Results of Operations
Our income from continuing operations before income taxes and cumulative effect of a change in accounting
principle for the year ended December 31, 2003 was $323.1 million or $2.79 per basic share and $2.73 per diluted share,
compared to income from continuing operations for the same period in 2002 of $234.5 million or $1.89 per basic share
and $1.86 per diluted share. Our income from operations for the year ended December 31, 2001 was $80.9 million, or
$0.66 per basic share and $0.65 per diluted share. Our results for the year ended December 31, 2003 include an $18.9
million net pretax gain on sale of businesses and a $16.4 million pretax asset impairment charge related to certain of our
buildings and a noncurrent asset. Also during the year ended December 31, 2003, we recognized an $89.1 million loss on
settlement from disposition of discontinued operations, net of tax of $47.9 million, or $0.77 per basic share and $0.75 per
diluted share, as a result of our settlement agreement with SNTL Litigation Trust, successor-in-interest to Superior
National Insurance Group, Inc. (“Superior”), to settle all outstanding claims under the Superior National Insurance Group,
Inc v. Foundation Health Corporation, et. al. litigation. See Notes 3, 12 and 14 to the consolidated financial statements for
further information regarding the net pretax gain on sale of businesses, asset impairment charge and settlement agreement
with the SNTL Litigation Trust.
Our income from operations before income taxes and cumulative effect of a change in accounting principle for the
year ended December 31, 2002 include a pretax loss of $60.3 million on asset impairments and restructuring charges and a
pretax loss of $5.0 million on loss on assets held for sale. We recognized a charge for a cumulative effect of a change in
accounting principle of $8.9 million, or $0.07 per basic and diluted share, as a result of adopting Statement of Financial
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