Health Net 2005 Annual Report Download - page 56

Our Health Plan Services MCRs by line of business are as follows:
Year Ended December 31,
2005 2004 2003
Commercial MCR (including ASO) .......................... 82.9% 88.1% 81.3%
Medicare Risk MCR ...................................... 89.4% 91.6% 89.3%
Medicaid MCR .......................................... 82.3% 82.2% 82.5%
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Commercial health care costs decreased by $485.1 million, or 7.9%, for the year ended December 31, 2005
as compared to the same period in 2004. The decrease in commercial health care costs is primarily attributable to
membership losses, primarily in California and New Jersey, and $143.5 million of costs recorded in 2004
associated with provider settlements relating to claims processing and payment issues that have been or are being
resolved. The increase in the commercial health care cost trend on a PMPM basis was 4.3% for the year ended
December 31, 2005 over the same period in 2004 due to an increase in our pharmacy and physician costs,
partially offset by moderating health care cost trends in our commercial market reflecting, in part, improvement
in our hospital cost experience due to lower inpatient utilization.
Medicare Risk health care costs increased by $48.0 million, or 3.5%, for the year ended December 31, 2005
as compared to the same period in 2004. The increase in the Medicare Risk health care cost PMPM was 2.8% for
the year ended December 31, 2005 compared to the same period in 2004. Medicare Risk health care costs
increased primarily as a result of higher physician and inpatient claim costs and increased capitation expense
related to Medicare rate adjustments for 2003 and 2004 totaling $9.7 million which were recognized in 2005. See
“—Health Plan Services Premiums” for detail regarding the increase in premium revenue related to the 2003 and
2004 Medicare rate adjustment. These increases were partially offset by provider settlements of $14.6 million
recorded in the fourth quarter of 2004.
Medicaid health care costs increased by $36.5 million, or 4.1%, for the year ended December 31, 2005 as
compared to the same periods in 2004. The increase in Medicaid health care costs was primarily driven by higher
hospital inpatient claims expense. The increase in the Medicaid Risk health care cost PMPM was 3.5% for the
year ended December 31, 2005 over the same period in 2004.
The comparison of health care costs above were substantially impacted by the $158 million of provider
dispute costs recorded in the fourth quarter of 2004.
Health Plan Services MCR decreased to 83.9% for the year ended December 31, 2005 as compared to
88.0% for the same period in 2004. The decrease was primarily seen in our commercial business due to provider
dispute settlements recorded in 2004. Excluding this, the favorable improvement in our MCR is primarily due to
continued pricing discipline and moderating health care cost trends in our commercial market reflecting, in part,
improvement in our hospital cost experience due to lower inpatient utilization resulting from enhanced medical
management activities.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
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.
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