Health Net 2007 Annual Report Download - page 57

Summary of Operating Results
Year Ended December 31, 2007 compared to Year Ended December 31, 2006
Net income for 2007 decreased to $193.7 million from $329.3 million in 2006. Earnings per share fell to
$1.74 per basic share and $1.70 per diluted share for 2007 compared with $2.86 per basic share and $2.78 per
diluted share for 2006. Pretax margin was 2.5% for 2007 compared to 3.7% for 2006. The primary drivers of
these declines are charges incurred related to litigation and regulatory matters and debt refinancing activities.
In 2007, we recorded $306.8 million pre-tax, or $222.4 million after-tax, charges incurred as a result of us
reaching an agreement in principle to settle three class action lawsuits known as the McCoy, Wachtel and
Scharfman lawsuits; the proposed resolution of regulatory issues with the New Jersey Department of Banking
and Insurance; arbitration settlement; and other immaterial litigation matters. See “Item 3. Legal Proceedings”
for additional information regarding these matters. The charge amount is comprised of the following:
• $201.5 million recorded as part of health plan services expenses during the year ended December 31,
2007 for claim-related matters, class disbursements and remediations; and
• $105.3 million recorded as part of G&A expenses during the year ended December 31, 2007 for
attorney’s fees, regulatory fines, arbitration settlement and estimated liability for litigation unrelated to
the class action lawsuits.
Included in the $105.3 million charge amount is $10 million related to an arbitration award. In recent years,
there has been growing public attention in California to the practices of health plans and health insurers involving
the rescission of members’ policies for misrepresenting their health status on applications for coverage. We are
party to arbitrations and litigation in which rescinded members allege that we unlawfully rescinded their
coverage. The lawsuits generally seek not only the cost of medical services that were not paid for as a result of
the rescission, but in some cases they also seek damages for emotional distress, attorney fees and punitive
damages. On February 21, 2008, we received an arbitration decision in a case involving the rescission of an
individual insurance policy. The arbitration decision ordered us to pay approximately $9.4 million in medical
service costs, emotional distress and punitive damages, plus the claimant’s attorneys’ fees, which amount has not
yet been finally determined. To provide for this judgment, we have accrued $10.0 million, including estimated
attorney fees, in our financial statements for the year ended December 31, 2007. The payment of this judgment
will be funded by operating cash flow. This disclosure updates the earnings release that we issued on February 5,
2008 announcing financial results for the quarter and year ended December 31, 2007. See “Item 3. Legal
Proceedings—Litigation Relating to Rescission of Policies” for additional information regarding this arbitration
award.
Results in 2006 reflect the impact of a $37.1 million litigation charge related to estimated legal defense costs
for the McCoy/Wachtel litigation and $70.1 million of expenses related to the refinancing of our senior notes.
See “Item 3. Legal Proceedings” for additional information on these litigation matters. See “Liquidity and
Capital Resources—Capital Structure” for additional information on the refinancing of our senior notes.
Total health plan enrollment, including Medicare Part D, increased to 3,754,000 members at December 31,
2007 from 3,699,000 members at December 31, 2006, primarily due to a 73,000-member increase in our
commercial small group/individual membership and a 116,000-member increase in our Medicare membership,
partially offset by 140,000-member decrease in our commercial large group and ASO membership. Our
continuing strategy of targeting the small group and individual market has resulted in changing the mix of our
membership: approximately 35% of our commercial risk enrollment is in the small group and individual market
at the end of 2007, up from 31% at the end of 2006. We continue to expand our Medicare membership, which
increased by 116,000 members. On January 1, 2007, we began offering Medicare Advantage Private-Fee-For
Service plans, and we began marketing our Medicare Part D plans in all 50 states and the District of Columbia.
We also increased the number of Part D plan choices that we offer seniors from two in 2006 to three in 2007, one
of which provides beneficiaries with coverage of generic drug expenses through the coverage gap, or “donut
hole.” Our TRICARE membership is stable at 2.9 million beneficiaries, and we have expanded our relationship
with the Department of Defense by providing behavioral health counseling services starting in 2006. In addition,
our behavioral health care business unit was awarded a five-year contract in 2007 to develop, administer and
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