Health Net 2003 Annual Report Download - page 46

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.
Other Income
Other income is primarily composed of revenues from our employer services group subsidiary. Other income for
2003 was down compared to 2002 due to the sale of our employer services group subsidiary in the fourth quarter 2003. As
a result of this sale, we expect that other income in 2004 will be approximately $50 million lower than in 2003 and that it
will consist primarily of recognition of deferred revenue from divestitures.
2003 Compared to 2002
Other income decreased by $2.8 million or 5.7% for the year ended December 31, 2003 as compared to the same
period in 2002. This decrease is primarily due to the sale of our employer services group subsidiary effective October 31,
2003. We deferred approximately $15.9 million of the gains on the sales of our employer services subsidiary and dental
and vision plans related to non-compete and network access agreements. The deferred amounts are recognized as revenues
over the terms of the agreements. We expect to recognize approximately $2.8 million during 2004 related to these
deferred gains and will record these amounts in other income on our consolidated statement of operations.
2002 Compared to 2001
Other income decreased by $21.1 million or 30.0% 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 employer services claims
processing subsidiary effective July 1, 2002.
Health Plan Services Costs
2003 Compared to 2002
Health plan services costs increased by $355.3 million or 5.0% for the year ended December 31, 2003 as compared to
the same period in 2002. Total health plan services costs on a PMPM basis increased to $166.96 or 7.0% for the year
ended December 31, 2003 from $155.99 for the same period in 2002. These changes are primarily due to the following:
• Increase in commercial health care costs of $377.0 million or 7.6%, reflecting an increase of 10.8% in
commercial health care costs on a PMPM basis partially offset by a decrease of 2.9% in member months
primarily due to higher hospital and physician costs partially offset by moderating trends in pharmacy costs
attributable to benefit changes, increased generic usage and the conversion of two popular prescribed
pharmaceuticals to over-the-counter status, and
• Increase in Medicaid health care costs of $44.7 million or 4.9% primarily due to a 2.8% increase in member
months and an increase of 2.0% in health care costs on a PMPM basis as a result of limited Medicaid fee
schedule increases and a significant portion of providers in California being paid capitation on a percentage of
premium basis, partially offset by
• Decrease in Medicare risk health care costs of $66.2 million or 5.1% primarily due to a decrease of 8.1% in
member months, partially offset by an increase of 3.3% in Medicare health care costs on a PMPM basis. The
decrease in member months is the result of our planned exit from certain counties in California, Arizona and
Connecticut. The increases in health care costs on a PMPM basis are primarily in California and Connecticut,
which experienced higher physician capitation rates and increased inpatient and outpatient utilization. These
trends are also consistent with revenue increases and limited Medicare fee schedule increases.
Health Plan Services MCR decreased to 82.7% for the year ended December 31, 2003 as compared to 83.5% for the
same period in 2002. The decrease is primarily due to a continued focus on pricing discipline combined with pricing
increases 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 a PMPM basis of 8.1% for the year ended December
31, 2003 as compared to the same period in 2002 outpaced the increase in our overall health care costs on a PMPM basis
of 7.0% for the year ended December 31, 2003 as compared to the same period in 2002.
44