Health Net 2007 Annual Report Download - page 54

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, occupancy costs and litigation and regulatory-
related 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.
2007 Financial Performance Summary
Health Net’s financial performance in 2007 is summarized as follows:
• Net income for the year ended December 31, 2007 decreased to $193.7 million from $329.3 million for
the same period in 2006, and was impacted by after-tax expenses of $222.4 million and $31.6 million
related to litigation and regulatory matters and debt refinancing activities for the years ended
December 31, 2007 and 2006, respectively;
• Diluted earnings per share decreased to $1.70 for the year ended December 31, 2007 from $2.78 for the
same period in 2006, and was impacted by $1.96 and $0.27 related to litigation and regulatory matters
and debt refinancing activities for the years ended December 31, 2007 and 2006, respectively;
• Total revenues for the year ended December 31, 2007 increased by approximately 9% to $14.1 billion
from the same period in 2006;
• Total health plan enrollment increased by 55,000 members to 3,754,000 members at December 31,
2007 from 3,699,000 members at the same period in 2006; and
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