Health Net 2004 Annual Report Download - page 49

Net Investment and Other Income
The decreases in net investment and other income for the year ended December 31, 2004 compared to the same period in 2003
and for the year ended December 31, 2003 compared to the same period in 2002 are as follows:
2004 Compared to 2003
Change
2004 over 2003
Change
2003 over 2002
2004
2003 Dollars % 2002 Dollars %
(Dollars in millions)
Net investment income $58.1 $59.3 $(1.2) (2.0)% $65.2 $(5.9) (9.0)%
Other income
$6.1 $46.4 $(40.3) (86.8)% $49.2 $ (2.8) (5.7)%
Net investment income generally remained consistent from 2003 to 2004 with only a slight decrease of $1.2 million for the year
ended December 31, 2004 as a result of lower average cash balances.
Other income decreased by $40.3 million for the year ended December 31, 2004 as compared to the same period in 2003 due to
the sale of our employer services group division effective October 31, 2003. We deferred approximately $15.9 million of the gains on
the October 2003 sales of our employer services group division and dental and vision plans related to non-compete and network
access agreements. The deferred amounts are recognized as other income over the terms of the agreements. We recognized other
income of $2.8 million during 2004 related to the amortization of these agreements.
2003 Compared to 2002
Net investment income decreased by $5.9 million for the year ended December 31, 2003 as compared to the same period in
2002, primarily as a result of declines in interest rates applicable to our cash and cash equivalent balances as the Federal Reserve
lowered the Fed Funds target by 25 basis points. This impacted our investment income in 2003 because the Fed Funds target rates
track closely with cash yields, and a significant portion of our total balances available for investment is cash and cash equivalents.
The decline was partially offset by higher average cash and investment balances.
Other income decreased by $2.8 million for the year ended December 31, 2003 compared to the same period for 2002, primarily
due to the sale of our employer services group subsidiary effective October 31, 2003.
Health Plan Services Costs
2004 Compared to 2003
Health Plan Services costs increased by $896.8 million or 12.0% to $8,413.6 million for the year ended December 31, 2004
from $7,516.8 million for the same period in 2003 due to the following:
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• Commercial health care costs increased by $828.3 million, or 15.7%, for the year ended December 31, 2004 compared to
the same period in 2003. Commercial health care costs increased primarily due to our decision to accelerate claim
payments in early 2004 and provider settlements of $143.5 million relating to claims processing and payment issues that
had been or were being resolved in the fourth quarter of 2004. These higher levels of paid claims persisted through the
balance of 2004 and contributed to the increase in overall commercial health care costs. See “Item 3. Legal Proceedings—
Provider Disputes” for additional information on the provider settlements. In addition, physician costs on PMPM basis
increased by 7.2% in 2004, consistent with our expectations, and pharmaceutical costs on a PMPM basis for our health
plans rose by 5.2% in 2004.