Health Net 2007 Annual Report Download - page 68

and we intend to vigorously appeal this judgment. See Notes 12 and 14 to the consolidated financial statements
for additional information on this litigation.
Income Tax Provision
Our income tax expense and the effective income tax rate for the years ended December 31, 2007, 2006 and
2005 are as follows:
2007 2006 2005
(Dollars in millions)
Income tax expense ......................................... $165.2 $149.5 $146.5
Effective tax rate ........................................... 46.0% 31.2% 38.9%
The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended
December 31, 2007 due primarily to state income taxes, tax-exempt investment income, the establishment of a
valuation allowance against certain deferred tax assets, and nondeductible class action lawsuit expenses. The
effective income tax rate differs from the statutory tax rate of 35% for the year ended December 31, 2006 due
primarily to state income taxes, tax-exempt investment income, and business divestitures.
The effective income tax rate increased from 2006 to 2007 primarily due to the establishment of a valuation
allowance in 2007 against deferred tax assets for net operating loss carryforwards and tax credits of a particular
business unit potentially impacted by the McCoy class action lawsuit, and nondeductible class action lawsuit
expenses incurred in 2007. The effective income tax rate decreased from 2005 to 2006 primarily due to tax
benefits associated with the sale of a subsidiary that formerly held our Pennsylvania health plan and certain of its
affiliates. We recognized an approximate $32 million tax benefit related to this sale during 2006. Also during
2006 our state tax rate decreased primarily as a result of beneficial tax elections and an increased proportion of
income earned by subsidiaries that are assessed premium rather than income tax.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We believe that cash flow from operating activities, existing working capital, lines of credit and cash
reserves are adequate to allow us to fund existing obligations, introduce new products and services, and continue
to develop health care-related businesses. We regularly evaluate cash requirements for current operations and
commitments, and for capital acquisitions and other strategic transactions. We may elect to raise additional funds
for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as
appropriate.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our
amounts receivable from our TRICARE contract for the North Region. Health care receivables related to
TRICARE are best estimates of payments that are ultimately collectible or payable. The timing of collection of
such receivables is impacted by government audit and negotiation and can extend for periods beyond a year.
Amounts receivable under government contracts were $190.0 million and $199.6 million as of December 31,
2007 and 2006, respectively. Our cash flow from operating activities is also impacted by the timing of collections
on our amounts receivable from CMS. Our receivable from CMS decreased by $64 million from 2006 to 2007,
including $121 million decrease related to Medicare Part D. Our payable related to Medicare Part D was
approximately $57 million as of December 31, 2007.
During 2007, we recognized $306.8 million of pre-tax charges related to litigation and regulatory matters.
These charges will be settled in cash and will be funded by cash flow from operating and financing activities. For
additional information regarding these charges, see “—Summary of Operating Results ”above.
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