Health Net 2006 Annual Report Download - page 50

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
General
We are an integrated managed care organization that delivers managed health care services through health
plans and government sponsored managed care plans. We are among the nation’s largest publicly traded
managed health care companies. Our mission is to help people be healthy, secure and comfortable. We provide
health benefits to approximately 6.6 million individuals in 27 states and the District of Columbia through group,
individual, Medicare (including Part D), Medicaid, TRICARE and Veterans Affairs programs. Our behavioral
health services subsidiary, MHN, provides behavioral health, substance abuse and employee assistance programs
(EAPs) to approximately 7.3 million individuals, including our own health plan members. Our subsidiaries also
offer managed health care products related to prescription drugs, and offer managed health care product
coordination for multi-region employers and administrative services for medical groups and self-funded benefits
programs.
How We Report Our Results
We currently operate within two reportable segments, Health Plan Services and Government Contracts, each
of which is described below.
Our Health Plan Services reportable segment includes the operations of our commercial, Medicare
(including the Medicare prescription drug benefit commonly referred to as “Part D”) and Medicaid health plans,
the operations of our health and life insurance companies and our behavioral health and pharmaceutical services
subsidiaries. We have approximately 3.6 million members, including Medicare Part D members, and 109,000
administrative services only (ASO) members in our Health Plan Services segment.
Our Government Contracts segment includes our government-sponsored managed care federal contract with
the U.S. Department of Defense (the Department of Defense) under the TRICARE program in the North Region
and other health care related government contracts that we administer for the Department of Defense. Under the
TRICARE contract for the North Region, we provide health care services to approximately 2.9 million Military
Health System (MHS) eligible beneficiaries (active duty personnel and TRICARE/Medicare dual eligible
beneficiaries), including 1.8 million TRICARE eligibles for whom we provide health care and administrative
services and 1.1 million other MHS-eligible beneficiaries for whom we provide ASO.
How We Measure Our Profitability
Our profitability depends in large part on our ability to, among other things, effectively price our health care
products; manage health care costs, including pharmacy costs; contract with health care providers; attract and
retain members; and manage our general and administrative (G&A) and selling expenses. In addition, factors
such as regulation, competition and general economic conditions affect our operations and profitability. The
potential effect of escalating health care costs, as well as any changes in our ability to negotiate competitive rates
with our providers, may impose further risks to our ability to profitably underwrite our business, and may have a
material impact on our business, financial condition or results of operations.
We measure our Health Plan Services segment profitability based on medical care ratio (MCR) and pretax
income. The MCR is calculated as health plan services expense divided by health plan services premiums. The
pretax income is calculated as health plan services premiums and administrative services fees and other income
less health plan services expense and G&A and other net expenses. See “—Results of Operations—Table of
Summary Financial Information” for a calculation of our MCR and “—Results of Operations—Health Plan
Services Segment Results” for a calculation of our pretax income.
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