Health Net 2006 Annual Report Download - page 110

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Estimated annual pretax amortization expense for other intangible assets for each of the next five years
ending December 31 is as follows (dollars in millions):
Year Amount
2007 .............................................................. $4.4
2008 .............................................................. 4.4
2009 .............................................................. 4.4
2010 .............................................................. 4.4
2011 .............................................................. 4.0
Policy Acquisition Costs
Policy acquisition costs are those costs that vary directly with and related to the acquisition of new and
renewal health insurance business. Such costs include broker commissions, costs of policy issuance and
underwriting, and other costs we incur to acquire new business or renew existing business. Our health insurance
business typically has a one-year term and may be canceled upon a 30-day notice. We expense these costs as
incurred in accordance with the Health Care Organization Audit and Accounting Guide and report them as
selling expenses in our consolidated statements of operations.
Reserves for Contingent Liabilities
In the course of our operations, we are involved on a routine basis in various disputes with members, health
care providers, and other entities, as well as audits by government agencies that relate to our services and/or
business practices that expose us to potential losses.
We recognize an estimated loss, which may represent damages, settlement costs, future legal expenses or a
combination of the foregoing, as appropriate, from such loss contingencies when it is both probable that a loss
will be incurred and that the amount of the loss can be reasonably estimated. Our loss estimates are based in part
on an analysis of potential results, the stage of the proceedings, consultation with outside counsel and any other
relevant information available.
Insurance Programs
The Company is insured for various errors and omissions, property, casualty and other risks. The Company
maintains various self-insured retention amounts, or “deductibles,” on such insurance coverage. The Company
also maintains litigation reserves to cover those self-insured retention amounts for errors and omissions claims
based on historical claims filed, as well as estimates of claims incurred but not reported.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash
equivalents, investments and premiums receivable. All cash equivalents and investments are managed within
established guidelines which limit the amounts which may be invested with one issuer. Concentrations of credit
risk with respect to premiums receivable are limited due to the large number of payers comprising our customer
base. Our 10 largest employer group premiums receivable balances within each of our plans accounted for 45%
and 47% of our total premiums receivable as of December 31, 2006 and 2005, respectively. Our Medicare
receivable from CMS represented 42% of total receivables as of December 31, 2006, compared with 3% as of
December 31, 2005. Our 10 largest employer group premiums within each of our plans accounted for 20%, 21%
and 19% of our health plan services premiums for the years then ended December 31, 2006, 2005 and 2004,
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