Health Net 2003 Annual Report Download - page 57

Other Purchase Obligations
Other purchase obligations include payments due under agreements for goods or services that are enforceable and
legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of the transaction. We have included in the table set
forth under the heading “Contractual Obligations” obligations related to a ten-year pharmacy benefit services agreement
that we originally entered into in February 1999 and subsequently modified effective April 1, 2003 and a ten-year
agreement for a nurse advice line and other related services that we originally entered into in December 1998 and
subsequently modified effective April 1, 2003.
We have excluded from such table amounts already recorded in our current liabilities on our consolidated balance
sheet as of December 31, 2003. We have also excluded from such table various contracts we have entered into with our
health care providers, health care facilities, the federal government and other contracts that we have entered into for the
purpose of providing health care services. We have excluded those contracts that allow for cancellation without significant
penalty, obligations that are contingent upon achieving certain goals and contracts for goods and services that are fulfilled
by vendors within a short time horizon and within the normal course of business.
The future contractual obligations in the contractual obligations table are estimated based on information currently
available. The timing of and the actual payment amounts may differ based on actual events.
We entered into a binding letter agreement on March 1, 2004 to purchase certain assets related to provider network
and regional TRICARE Service Center operations from Sierra Military Health Services, Inc. We expect to sign the
definitive agreement on or about March 31, 2004. We expect the closing date to be the last date of health care delivery for
Region 1, currently expected to be August 31, 2004.
Off-Balance Sheet Arrangements
As of December 31, 2003, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4).
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principal areas requiring the use of estimates include revenue recognition, health care costs, reserves for contingent
liabilities, amounts receivable or payable under government contracts, goodwill and recoverability of long-lived assets
and investments. Accordingly, we consider accounting policies on these areas to be critical in preparing our consolidated
financial statements. A significant change in any one of these amounts may have a significant impact on our consolidated
results of operations and financial condition. A more detailed description of the significant accounting policies that we use
in preparing our financial statements is included in the notes to our consolidated financial statements which are included
elsewhere in this 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 revenues based on multi-year contracts to provide care to Medicaid recipients, and
revenue under Medicare risk contracts to provide care to enrolled Medicare recipients. Revenue is recognized in the
month in which the related enrollees are entitled to health care services. Premiums collected in advance of the month in
which enrollees are entitled to health care services are recorded as unearned premiums.
Government Contracts revenues are recognized in the month in which the eligible beneficiaries are entitled to health
care services or in the month in which the administrative services are performed or the period that coverage for services is
provided. Government contracts also contain cost and performance incentive provisions which adjust the contract price
based on actual performance. Revenue under government contracts is subject to price adjustments attributable to inflation
and other factors. The effects of these adjustments are recognized on a monthly basis, although the final determination of
these amounts could extend significantly beyond the period during which the services were provided.
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