Health Net 2013 Annual Report Download - page 127

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-23
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and
liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in
which such differences are expected to reverse. We establish a valuation allowance in accordance with the provisions of
the Income Taxes Topic of the Financial Accounting Standards Board ("FASB") codification. We continually review the
adequacy of the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of
both positive and negative factors indicate that it is more likely than not that the benefits will be realized.
We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions is
subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we believe that it
is probable certain positions will be challenged by taxing authorities, and we may not prevail on all of the positions as
filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities
upon examination. We analyze the amount at which each tax position meets a “more likely than not” standard for
sustainability upon examination by taxing authorities. Only tax benefit amounts meeting or exceeding this standard will
be reflected in tax provision expense and deferred tax asset balances. Any differences between the amounts of tax
benefits reported on tax returns and tax benefits reported in the financial statements is recorded in a liability for
unrecognized tax benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and
liabilities and classified as current or noncurrent based upon the expected period of payment. See Note 11 for additional
disclosures.
Note 3—Sale of Medicare PDP Business and Northeast Business
Sale of Medicare PDP Business
On April 1, 2012, our subsidiary Health Net Life Insurance Company ("HNL") sold substantially all of the assets,
properties and rights of HNL used primarily or exclusively in our Medicare PDP business to CVS Caremark for a total
purchase price of $248.2 million. In the year ended December 31, 2012, we recognized a $132.8 million pretax gain on
the sale of our Medicare PDP business, or $114.8 million net of tax, and this after tax gain was reported as gain on sale
of discontinued operation, net of tax.
In connection with the transaction, we were not permitted to offer Medicare PDP plans for one year following the
closing, subject to certain exceptions. We continue to provide prescription drug benefits as part of our Medicare
Advantage plan offerings.
In addition, we provided Medicare PDP transition-related services to CVS Caremark in connection with the
transaction prior to December 31, 2012, and certain transition-related services were provided in 2013. We recognized
the value of future transition-related services to be provided under the Asset Purchase Agreement of $12.0 million as
deferred revenue at fair value as of April 1, 2012. This deferred revenue was amortized on a straight-line basis over a
nine-month period. The fair value of such deferred revenue was estimated using the income approach based on
discounted cash flows. This fair value measurement is based on significant unobservable Level 3 inputs, which include
costs associated with providing the transition-related and other services and a discount rate of 1.2 percent. See Note 7
for additional information regarding the fair value measurement of this deferred revenue. Revenues and expenses from
these transition-related services are reported as part of divested operations and services revenue and expenses (see
Notes 2 and 14).
Our revenues related to our Medicare PDP business were $192.1 million and $485.6 million for the years ended
December 31, 2012 and 2011, respectively. These revenues were excluded from our continuing operating results and
included in income (loss) from discontinued operation. Our Medicare PDP business had a pretax (loss) income of
$(28.8) million and $17.2 million for the years ended December 31, 2012 and 2011, respectively. As of December 31,
2012 and 2013, we had no Medicare stand-alone prescription drug plan members. We had no revenues and no pretax
income related for the Medicare PDP business for the year ended December 31, 2013.