Health Net 2006 Annual Report Download - page 51

Health plan services premiums include HMO, POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have purchased supplemental benefit coverage (which premiums
are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care to
Medicaid recipients, and revenue under Medicare risk contracts, including Medicare Part D, to provide care to
enrolled Medicare recipients. Medicare revenue can also include amounts for risk factor adjustments. The
amount of premiums we earn in a given year is driven by the rates we charge and enrollment levels.
Administrative services fees and other income primarily includes revenue for administrative services such as
claims processing, customer service, medical management, provider network access and other administrative
services. Health plan services expense includes medical and related costs for health services provided to our
members, including physician services, hospital and related professional services, outpatient care, and pharmacy
benefit costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care
cost per visit, and the utilization rates represent the volume of health care consumption by our members.
General and administrative expenses include those costs related to employees and benefits, consulting and
professional fees, marketing, premium taxes and assessments and occupancy costs. Such costs are driven by
membership levels, introduction of new products, system consolidations and compliance requirements for
changing regulations. These expenses also include expenses associated with corporate shared services and other
costs to reflect the fact that such expenses are incurred primarily to support the Health Plan Services segment.
Selling expenses consist of external broker commission expenses and generally vary with premium volume.
We measure our Government Contracts segment profitability based on government contracts cost ratio and
pretax income. The government contracts cost ratio is calculated as government contracts cost divided by
government contracts revenue. The pretax income is calculated as government contracts revenue less government
contracts cost. See “—Results of Operations—Table of Summary Financial Information” for a calculation of our
government contracts cost ratio and “—Results of Operations—Government Contracts Segment Results” for a
calculation of our pretax income.
Government contracts revenue is made up of two major components: health care and administrative
services. The health care component includes revenue recorded for health care costs for the provision of services
to our members, including paid claims and estimated incurred but not reported claims (IBNR) expenses for
which we are at risk, and underwriting fees earned for providing the health care and assuming underwriting risk
in the delivery of care. The administrative services component encompasses fees received for all other services
provided to both the government customer and to beneficiaries, including services such as medical management,
claims processing, enrollment, customer services and other services unique to the managed care support contract
with the government.
2006 Financial Performance Highlights
Health Net’s financial performance in 2006 was strong. The Company’s diversified businesses all achieved
improved profitability compared with 2005. This broad-based performance drove key measures higher as:
• Net income rose by approximately 43% to $329.3 million;
• Earnings per diluted share increased approximately 40%;
• Total revenues rose 8.1%;
• Health plan enrollment (excluding Medicare Part D members) increased by 15,000 members in 2006
versus 2005 following three years of year-over-year declines; and
• Pretax margin rose 50 basis points to 3.7%.
Health Net completed the Universal Care Acquisition on March 31, 2006. The information above includes
the contribution from the businesses acquired from Universal Care.
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