Health Net 2005 Annual Report Download - page 57

Medicare Risk health care costs increased by $126.3 million, or 10.2%, for the year ended December 31,
2004 compared to the same period in 2003. Medicare risk health care costs increased primarily as a result of
higher hospital costs from higher bed day utilization, higher pharmacy cost trend for HMO products and provider
settlements of $14.6 million relating to claims processing and payment issues that had been or were being
resolved in the fourth quarter of 2004. The increase in the Medicare Risk health care cost PMPM was 11.5% for
the year ended December 31, 2004 over the same period in 2003.
Medicaid health care costs decreased by $57.8 million, or 6.0%, for the year ended December 31, 2004
compared to the same period in 2003 primarily as a result of lower physician costs combined with membership
losses. The decrease in the Medicaid health care cost PMPM was 1.3% for the year ended December 31, 2004
over the same period in 2003.
Health Plan Services MCR increased to 88.0% for the year ended December 31, 2004 as compared to 82.7%
for the same period in 2003 primarily due to higher commercial health care costs that outpaced the premium
revenue growth.
Net Investment and Other Income
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net investment income increased by $14.7 million, or 25.3%, for the year ended December 31, 2005 as
compared to the same period in 2004, primarily due to an increase in interest rates and an increase in the average
balance of investments, partially offset by lower net realized gains. Included in net investment income was $(0.6)
million and $4.2 million of net realized (loss) gain on sale of investments for 2005 and 2004, respectively.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net investment income decreased slightly by $1.2 million for the year ended December 31, 2004 due to a
decline in net realized gains and lower average cash balances, partially offset by the impact of higher interest
rates. Included in net investment income was $4.2 million and $12.0 million of net realized gain on sale of
investments for 2004 and 2003, respectively.
Other income decreased by $40.3 million for the year ended December 31, 2004 as a result of the sale of our
employer services group division effective October 31, 2003. Revenues from our employer services group
division were $45.6 million for the year ended December 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.
General, Administrative and Other Costs
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
G&A costs increased by $68.3 million, or 7.7%, for the year ended December 31, 2005 as compared to the
same period in 2004. Our administrative ratio (G&A and depreciation expenses as a percentage of Health Plan
Services premiums and other income) also increased to 10.3% for the year ended December 31, 2005 from 9.7%
for the same period in 2004. The increase is primarily due to our increased spending in preparation for our
Medicare Advantage and Part D expansion plans and an increase in health plan marketing activities, partially
offset by $10.6 million in legal costs associated with the provider settlements that was recognized in 2004.
The selling costs ratio (selling costs as a percentage of Health Plan Services premiums) decreased to 2.3%
for the year ended December 31, 2005 from 2.5% for the same period in 2004. The decrease is primarily due to a
decline in our small group and individual membership which have lower commission cost structures.
55