Health Net 2005 Annual Report Download - page 137

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(d) Our liabilities are estimated within a confidence level required under actuarial standards of practice. As
such, a change in “incurred claims related to prior years” will be offset by maintaining a consistent level of
confidence within the estimate of “incurred claims related to current years.” Therefore, a change, which is
offset in this manner, would not indicate that health care services were lower than previously estimated.
(e) Includes $35 million and $142 million as of December 31, 2005 and 2004, respectively, for reserves related
to provider settlements associated with claims processing and payment issues initially recognized during the
fourth quarter of 2004.
(f) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.
The table below provides a reconciliation of changes in reserve for claims for the years ended December 31,
2005, 2004 and 2003 for our legacy government contracts:
Government Contracts
Year Ended December 31,
2005 2004 2003
(Dollars in millions)
Reserve for claims (a), beginning of period .................... $64.2 $ 216.0 $ 193.0
Incurred claims related to:
Current year .................................... — 1,014.6 1,468.7
Prior years (b) ................................... (16.7) 19.1 35.4
Total incurred ....................................... (16.7) 1,033.7 1,504.1
Paid claims related to:
Current year .................................... — 981.5 1,294.3
Prior years ...................................... 47.5 204.0 186.8
Total paid .......................................... 47.5 1,185.5 1,481.1
Reserve for claims (a), end of period ......................... — 64.2 216.0
Add:
Other costs payable under government contracts ................ 62.5 55.0 40.0
Health care and other costs payable under government contract .... $62.5 $ 119.2 $ 256.0
(a) Consists of incurred but not reported claims and reported but unprocessed claims.
(b) For incurred claims related to prior years, the pretax income impact is 30% of the amounts shown, due to
the risk sharing features of the contracts. Additionally, healthcare change orders and/or bid price
adjustments to revenue of $7.6 million in 2005, $65.6 million in 2004, and $12.5 million in 2003 had
favorable impacts to pretax income, before risk sharing.
The following table shows the Company’s health plan services capitated and non-capitated expenses for the
years ended December 31:
Health Plan Services
2005 2004 2003
(Dollars in millions)
Total incurred claims .................................... $5,015.9 $5,057.0 $4,453.9
Capitated expenses and shared risk ......................... 2,270.7 2,429.5 2,404.0
Pharmacy and other ..................................... 726.4 927.1 658.9
Health plan services .................................... $8,013.0 $8,413.6 $7,516.8
For the years ended December 31, 2005, 2004 and 2003, the Company’s capitated, shared risk, pharmacy
and other expenses represented 37%, 40% and 41%, respectively, of the Company’s total health plan services.
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