Health Net 2007 Annual Report Download - page 58

monitor the non-medical counseling program for military service members known as Military Family and Life
Consultant Program (MFLC). The total contract is valued at approximately $250 million.
Health Net’s total revenues increased 9% in 2007 to $14.1 billion from $12.9 billion in 2006. Health plan
services premium revenues increased 10% to $11.4 billion in 2007 compared to $10.4 billion in 2006. Our
commercial revenue yield was 9.2% in 2007 compared to 7.6% in 2006. The health plan services medical care
ratio (MCR) was 85.4% in 2007 compared to 83.0% in 2006. The MCR for 2007 included the impact of the
$201.5 million, or 180 basis points, of health plan services expenses related to the litigation and regulatory-
related charge.
Our Government contracts revenues increased 5% in 2007 to $2.5 billion from $2.4 billion in 2006. The
Government contracts cost ratio improved to 92.2% in 2007 compared to 94.0% in 2006.
Our G&A expense ratio improved by 10 basis points to 11.1% in 2007 compared to 11.2% in 2006. The
G&A expense ratio for 2007 included the impact of $105.3 million, or 90 basis points, of G&A expenses related
to the litigation and regulatory-related charge. Our selling costs ratio increased by 50 basis points to 2.9% in
2007 compared to 2.4% in 2006.
Net cash provided by operating activities increased to $605.5 million in 2007 compared to $277.9 million
for 2006, reflecting TRICARE payment for Option 3 Period underwriting fee and the growth in our Medicare
Part D business.
Year Ended December 31, 2006 compared to Year Ended December 31, 2005
Net income improved to $329.3 million in 2006, or $2.78 per diluted share, from $229.8 million in 2005, or
$1.99 per diluted share. 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. Results in 2005 reflect the impact of $83.3 million in litigation and severance and related
benefit costs. 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. See Note 14 to our consolidated financial statements for additional information on the 2005 litigation and
severance and related benefit costs.
Our total health plan enrollment increased by 315,000 members in 2006 compared to 2005. Medicare Part D
business and the March 31, 2006 acquisition of certain health plan businesses of Universal Care, Inc. (Universal
Care Acquisition) were the primary drivers of the membership increase. We achieved our enrollment target for
Medicare Part D and membership reached over 300,000 members. We have successfully integrated the members
acquired in the Universal Care Acquisition with better than expected operating results and, as a result of the
Universal Care Acquisition, have added a total of approximately 83,000 members as of December 31, 2006. Our
commercial enrollment stabilized in 2006 and new commercial sales in 2006 were nearly double the amount of
new commercial sales in 2005. These increases were partially offset by decreases due to pricing competition.
During 2006, we maintained our diverse medical membership base by introducing Medicare Part D and
other products. Our strategy of targeting the small group and mid-market has resulted in changing the mix of our
membership: approximately 30% of our commercial enrollment, including ASO, was in the small group and
individual segments at the end of 2006, up from 28% at the end of 2005. Our TRICARE membership was stable
at 2.9 million beneficiaries. Our pretax profit margins improved to 3.7% for 2006, compared to 3.2% for 2005.
This is attributable to our Health Plan Services MCR improving to 83.0% for 2006, compared to 84.3% for 2005.
This improvement was primarily due to a focused Medicare re-contracting effort in late 2005 in California and
Arizona. Our continued focus on pricing discipline and moderating health care cost trends also contributed to the
improvement. The increase in commercial premium PMPM was 8% for the year ended December 31, 2006
compared to the same period in 2005. Our Government Contracts cost ratio also improved to 94.0% for 2006,
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