Health Net 2013 Annual Report Download - page 71

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Our total revenues decreased 1.1 percent in the year ended December 31, 2012 to $11.3 billion from $11.4 billion
in the same period in 2011. This decrease was primarily driven by the decline in our government contracts revenue due
to the impact of the T-3 contract for the TRICARE North Region that commenced on April 1, 2011. Our government
contracts revenues decreased by 51.4 percent in 2012 to $0.7 billion from $1.4 billion in 2011. Our government
contracts costs decreased by 51.1 percent in 2012 to $0.6 billion from $1.2 billion in 2011. The declines in our
government contracts revenues and costs are primarily due to the change from our prior contract for the TRICARE
North Region, which was a risk-based contract, to the new T-3 contract, which is a cost reimbursement plus fixed fee
contract. For additional information on our T-3 contract, see “—Government Contracts Reportable Segment” and Note
2 to our consolidated financial statements.
Health plan services premiums revenues increased by 5.9 percent to $10.5 billion in the year ended December 31,
2012, compared with $9.9 billion in the year ended December 31, 2011. Health plan services expenses increased by 9.1
percent from $8.5 billion in the year ended December 31, 2011 to $9.3 billion in the year ended December 31, 2012.
Investment income increased to $82.4 million in the year ended December 31, 2012 compared with $74.2 million in the
year ended December 31, 2011.
For the year ended December 31, 2012, health care costs were impacted by approximately $34.5 million of
adverse development related to prior years. We believe this unfavorable reserve development for the year ended
December 31, 2012 was primarily due to significant delays in claims submissions for the fourth quarter of 2011 arising
from issues related to a new billing format required by the Health Insurance Portability and Accountability Act of 1996
("HIPAA") coupled with an unanticipated flattening of commercial trends and higher commercial large group claims
trend. For the year ended December 31, 2011, health care cost was impacted by approximately $96.5 million of
favorable reserve development related to prior years. This favorable development was primarily due to adjustments to
our reserves that related to variables and uncertainties associated with our assumptions. These unfavorable and
favorable prior period reserve developments were recorded as part of health care costs. Our operating results for the
year ended December 31, 2012 were impacted by pretax costs of $35.6 million related to our G&A cost reduction
efforts, $5.0 million related to the early termination of a medical management contract and $1.3 million in litigation-
related expenses net of an insurance reimbursement. Our operating results for the year ended December 31, 2011 were
impacted by a $181 million pretax expense incurred in connection with a judgment rendered in the AmCareco litigation.
For additional information regarding the AmCareco litigation, see Note 13 to our consolidated financial statements
under the heading "AmCareco Judgment." This expense was recorded as part of our G&A expenses. Our operating
results for the year ended December 30, 2011 were also impacted by a $40.8 million favorable adjustment to loss on
sale of Northeast health plan subsidiaries and a $6.8 million benefit from litigation reserve adjustments, partially offset
by pretax costs of $25.2 million related to our G&A cost reduction efforts.
Days Claims Payable
Days claims payable ("DCP") for the year ended December 31, 2013 was 40.4 days compared with 40.8 days for
the year ended December 31, 2012. Adjusted DCP, which we calculate in accordance with the paragraph below, for the
year ended December 31, 2013 was 58.7 days compared with 57.6 days for the year ended December 31, 2012.
Set forth below is a reconciliation of adjusted DCP, a non-GAAP financial measure, to the comparable GAAP
financial measure, DCP. DCP is calculated by dividing the amount of reserve for claims and other settlements ("Claims
Reserve") by health plan services cost ("Health Plan Costs") during the year and multiplying that amount by the number
of days in the year. In this Annual Report on Form 10-K, the following table presents an adjusted DCP metric that
subtracts capitation, provider and other claim settlements and Medicare Advantage Prescription Drug ("MAPD")
payables/costs from the Claims Reserve and Health Plan Costs. Management believes that adjusted DCP provides
useful information to investors because the adjusted DCP calculation excludes from both Claims Reserve and Health
Plan Costs amounts related to health care costs for which no or minimal reserves are maintained. Therefore,
management believes that adjusted DCP may present a more accurate reflection of DCP than does GAAP DCP, which
includes such amounts. This non-GAAP financial information should be considered in addition to, not as a substitute
for, financial information prepared in accordance with GAAP. You are encouraged to evaluate these adjustments and the
reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be
aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current
presentation and we may incur them again in the future. Our presentation of the adjusted amounts should not be
construed as an inference that our future results will be unaffected by unusual or nonrecurring items.