Health Net 2007 Annual Report Download - page 66

increase in health care services provided under a new option year in the TRICARE contract, Option Period 4,
which began April 1, 2007 and growing family counseling business with the Department of Defense. In addition,
2007 includes $36.5 million favorable settlement with the Federal Government regarding prior Option Period 1
health care cost targets.
Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care
costs, which is negotiated annually during the term of the contract with underruns and overruns of our target cost
borne 80% by the government and 20% by us. In the normal course of contracting with the federal government,
we recognize changes in our estimate for the target cost underruns and overruns when the amounts become
determinable, supportable, and the collectibility is reasonably assured. During the year ended December 31, 2007
and 2006, we recognized a decrease in the revenue estimate of $58 million and $104 million, respectively, and a
decrease in the cost estimate of $75 million and $128 million, respectively.
The Government contracts ratio decreased by 180 basis points for the year ended December 31, 2007 as
compared to the same period in 2006 primarily due to the favorable settlement with the Government regarding
prior Option 1 healthcare cost targets and ongoing expansion of our behavioral health services provided to our
military men and women and their families.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Government contracts revenues increased by $68.5 million, or 3%, for the year ended December 31, 2006 as
compared to the same period in 2005. The increase was primarily due to an increase in health care services
provided under a new option year in the TRICARE contract, Option 3, which began April 1, 2006 and a new
behavioral health contract with the Department of Defense for counseling services to active military personnel on
an ASO basis.
Government contracts costs increased by $23.3 million or 1% for the year ended December 31, 2006 as
compared to the same period in 2005, primarily due to higher costs from providing services under our Option 3
TRICARE contract.
The Government contracts ratio decreased by 180 basis points for the year ended December 31, 2006 as
compared to the same period in 2005 primarily due to improved health care performance in each successive
option period of the TRICARE contract for the North Region, particularly the Option 3 period which began on
April 1, 2006 and moderating health care cost trends.
Debt Refinancing
On June 23, 2006, we began a series of transactions for the purpose of refinancing our 8.375% Senior Notes
due 2011 (Senior Notes). In connection with the refinancing, we incurred $70.1 million in costs, including a
$51.0 million redemption premium with respect to our Senior Notes and $11.1 million for the settlement of four
interest rate swap contracts (Swap Contracts). We also paid $3.0 million for professional fees and incurred $5.0
million of other non-cash expenses related to such refinancing. The Senior Notes were redeemed on August 14,
2006. See “—Liquidity and Capital Resources” and Note 6 to our consolidated financial statements for additional
information on our refinancing activities.
Litigation, Severance and Related Benefit Costs
2007 Charges
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
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