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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 2015
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from to
Commission File Number: 1-12718
HEALTH NET, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4288333
(State or Other Jurisdiction
of Incorporation or Organization) (I.R.S. Employer
Identification No.)
21650 Oxnard Street, Woodland Hills, CA 91367
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (818) 676-6000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.001 par value The New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred Stock The New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes No
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2015 was $4,858,629,585
(which represents 75,774,011 shares of Common Stock held by such non-affiliates multiplied by $64.12, the closing sales price of such
stock on the New York Stock Exchange on June 30, 2015).
The number of shares of the registrant’s Common Stock outstanding as of February 23, 2016 was 77,633,701 (excluding 76,700,096
shares held as treasury stock).

Table of contents

  • Page 1
    ... File Number: 1-12718 HEALTH NET, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 95-4288333 (I.R.S. Employer Identification No.) 21650 Oxnard Street, Woodland Hills, CA (Address of Principal Executive Offices...

  • Page 2
    HEALTH NET, INC. INDEX TO FORM 10-K Page PART I. Item 1-Business...General...Segment Information ...Provider Relationships ...Additional Information Concerning Our Business ...Government Regulation ...Intellectual Property...Employees...Dependence Upon Customers...Shareholder Rights Plan......

  • Page 3
    ... Committee of our Board of Directors also are available on our Internet website. We will provide electronic or paper copies free of charge upon request. Please direct your written request to Investor Relations, Health Net, Inc., 21650 Oxnard Street, Woodland Hills, California 91367, or contact...

  • Page 4
    ... benefit designs and varying levels of copayments at different premium rates. These plans are offered generally through contracts with participating network physicians, hospitals and other providers. When an individual enrolls in one of our HMO plans, he or she selects a primary care physician...

  • Page 5
    ... benefits from managed care health plans. For additional information on the CCI, see "-Dual Eligibles and the California Coordinated Care Initiative." In addition, we believe that economic pressures have caused customers (both individuals and employer groups) increasingly to make health insurance...

  • Page 6
    ... health plan operations are conducted by our subsidiaries, Health Net of Arizona, Inc., Health Net Access, Inc. and Health Net Life Insurance Company ("HNL"). Our commercial membership in Arizona was 126,048 including 30,367 tailored network members, as of December 31, 2015. Our Medicare Advantage...

  • Page 7
    ... To enroll in our Medi-Cal products, an individual must be eligible for Medicaid benefits in accordance with California's regulatory requirements. The State of California's Department of Health Care Services ("DHCS") pays us a monthly fee for the coverage of our Medi-Cal members. The monthly fee is...

  • Page 8
    ... 31, 2015, we had Medicare Advantage membership of 268,914 members as a contractor in California, Arizona, Oregon and Washington. We contract with CMS under the Medicare Advantage program to provide Medicare Advantage products directly to Medicare beneficiaries as well as through employer and union...

  • Page 9
    ...Medi-Cal, and require a complex range of services from multiple providers. We provide services to this population through multiple health plan categories, including our managed Medi-Cal plan and certain Medicare Advantage plans, as well as our managed long-term services and supports ("LTSS") program...

  • Page 10
    ... individuals and small groups may purchase health coverage. California and Oregon received approval by the U.S. Department of Health and Human Services ("HHS") and began operating state-run exchanges in 2014. HHS operates the exchange in Arizona. We currently participate as Qualified Health Plans...

  • Page 11
    ... insurance products are provided throughout most of our service areas. Other Specialty Services and Products We offer pharmacy benefits, behavioral health, dental and vision products and services (mostly through strategic relationships with third parties), as well as managed care products related...

  • Page 12
    ... these government programs, it could have a material adverse effect on our business, financial condition or results of operations." TRICARE Our wholly owned subsidiary, Health Net Federal Services, LLC ("HNFS"), is a Managed Care Support Contractor in the North Region for the DoD TRICARE program. We...

  • Page 13
    ... effect on our business, financial condition or results of operations." Patient Centered Community Care Program In September 2013, VA awarded HNFS a contract under its new Patient Centered Community Care ("PC3") program. The PC3 program provides eligible veterans coordinated, timely access to care...

  • Page 14
    ... health services. The primary care physicians and PPGs are responsible for making referrals (approved by the HMO's or PPG's medical director as required under the terms of our various plans and PPG contracts) to specialists and hospitals. Additionally, our tailored network products utilize a network...

  • Page 15
    ... four plans and Health Net account for approximately 83% of the insured commercial and Medicare market in California. Based on the number of 2015 enrollees, Kaiser is the largest managed health care company in California and Anthem Blue Cross of California is the largest PPO provider in California...

  • Page 16
    ... monthly premiums, including changes in benefit design to address employer group needs and anticipated health care utilization rates as forecast by us based on the demographic composition of, and our prior experience in, our service areas. Premiums are also affected by applicable state and federal...

  • Page 17
    ... and fees assessed to health plans. Also, for policy years beginning January 1, 2014 and beyond, the ACA does not allow rating based on claims experience for small group and individual business. See "Item 1A. Risk Factors -We face competitive and regulatory pressure to contain premium prices. If...

  • Page 18
    ... Secretary of HHS); limiting Medicare Advantage payment rates; increasing mandated "essential health benefits" in some lines of business; specifying certain actuarial value and cost-sharing requirements; eliminating medical underwriting for medical insurance coverage decisions, including "guaranteed...

  • Page 19
    ...underlying risk in the individual and small group markets; increasing restrictions on rescinding coverage; prohibiting some annual and all lifetime limits on amounts paid on behalf of or to our members; limiting the tax-deductible amount of compensation paid to health insurance executives; requiring...

  • Page 20
    ..., including, but not limited to HIPAA" for additional information about the risks related to privacy and security breaches. The Gramm-Leach-Bliley Act generally requires insurers to provide customers with notice regarding how their personal health and financial information is used and, in...

  • Page 21
    ...Company Regulatory Agency Health Net of Arizona, Inc. Health Net Access, Inc. Health Net of California, Inc. Health Net Community Solutions, Inc. Health Net Health Plan of Oregon, Inc. Health Net Life Insurance Company Managed Health Network Arizona Department of Insurance Arizona Health Care Cost...

  • Page 22
    ... of administrative services for employers, providers and members; negotiation of agreements with physician groups, hospitals, pharmacies and other health care providers; handling of claims for payment of hospital and other services; and provision of data processing services. Our employees are not...

  • Page 23
    ... and our contracts with California state agencies for the federally-subsidized Medicaid program and the dual eligibles demonstration under the CCI. Medicare premiums accounted for 20%, 23% and 27% of our Western Region Operations segment health plan services premium revenues in 2015, 2014 and 2013...

  • Page 24
    ... "ACA") as well as any related fees, assessments and taxes; our ability to successfully participate in the federal and state health insurance exchanges under the ACA, which involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of our premium rates...

  • Page 25
    ... of Health Care Services, the Arizona Health Care Cost Containment System, the Centers for Medicare & Medicaid Services, the Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance; operational issues; changes in political, economic or market...

  • Page 26
    ...Master Services Agreement with Cognizant, there is no assurance that we will be able to do so in a manner that will generate savings comparable to those anticipated prior to the suspension; and we will be required to pay our costs relating to the Merger, such as legal, accounting, financial advisory...

  • Page 27
    ... the Company, Centene, Merger Sub I, Merger Sub II and the members of the Company's Board, which could result in substantial costs to us. In connection with the Merger, two purported Company stockholders filed two putative stockholder class action lawsuits against the Company, Centene, Merger Sub...

  • Page 28
    ... business, cash flows, financial condition and results of operations. In addition, we and other health insurance companies continue to face uncertainty and execution risk due to the multiple, complex ACA implementations that were and continue to be required in abbreviated time frames in new markets...

  • Page 29
    ..., including the health insurer fee to be payable in 2017. Other recent legislation has included the Protecting Affordable Coverage for Employees ("PACE") Act, signed into law on October 7, 2015, which scaled back some of ACA's required changes with respect to the definition of small groups. Certain...

  • Page 30
    ... relating to these premium stabilization programs, as well as related to advanced payments of premium tax credits for exchange plans, such as reporting data to HHS and the calculation of payments and charges, were not fully operationalized until 2015, including with respect to the small group market...

  • Page 31
    ... the ACA's health insurance exchanges will continue to be a success. The ACA required the establishment of state-run or federally facilitated "exchanges" where individuals and small groups may purchase health coverage. We currently participate as QHPs in the exchanges in California and Arizona. Our...

  • Page 32
    ... adverse effect on our business, financial condition or results of operations." In addition, state exchange boards in California have the ability to limit the number of plans and negotiate the price of coverage sold on these exchanges and to limit the service areas in which Qualified Health Plans...

  • Page 33
    ... care costs is the cost of hospital-based products and services. Factors underlying the increase in hospital costs include, but are not limited to, the underfunding of public programs, such as Medicaid and Medicare and the constant pressure that places on rates from commercial health plans, new...

  • Page 34
    ... third-party review. For example, the California Department of Insurance ("CDI") and the California Department of Managed Health Care ("DMHC") require a third-party actuarial review of health insurance carriers' and health plans' proposed premium rate increases to confirm compliance with applicable...

  • Page 35
    ...by limitations on our ability to increase or maintain our premium levels. The ACA and other federal and state legislation and regulations require a reconciliation of premiums based on a final assessment of the relative medical risk a health plan incurs in the individual and small group market. Since...

  • Page 36
    ...and class action lawsuits have raised concerns regarding provider network size, network capacity and the adequacy of communication between health insurers and their consumers with respect to network composition for exchange products. Such regulatory action and lawsuits may require us to make changes...

  • Page 37
    ... current period net income, profitability per enrolled member and, subsequently, our earnings per share in any particular quarter or annual period. Our stock price could also be negatively impacted. If our actual claims liability is lower than estimated, it could mean that we set premium prices too...

  • Page 38
    ...material adverse effect on our business, financial condition or results of operations. Approximately 65.6% of our total revenues in the year ended December 31, 2015 relate to federal, state and local government health care coverage or counseling programs, such as Medicare, Medicaid, TRICARE, PC3 and...

  • Page 39
    ... from federal and state governments relating to our governmentfunded health care coverage programs may be subject to change. For example, CMS announces benchmark payment rates on an annual basis that impact the payments that we receive in connection with our participation in Medicare Advantage and...

  • Page 40
    ... premium revenue in our Western Region Operations reportable segment in 2015 and an expected 17.0% in 2016. The ACA includes, among other things, provisions that significantly reduce the government's Medicare payment rates. For more information on the risks associated with the ACA, see the ACA Risk...

  • Page 41
    ... performance of Medicare Advantage plans nationally. For the 2016 Star rating (calculated in 2015 for the 2017 payment year), our Oregon HMO contract received 4.5 out of 5 Stars. The California HMO and Oregon PPO contracts were measured at 4.0 Stars while our Arizona HMO and California PPO contracts...

  • Page 42
    ... a new managed care tax, and (2) increase participation in the program. If these are not achieved by January 2017, the state has indicated that CCI would end as of January 2018. See "-Medicare programs represent a significant portion of our business and are subject to risk", "-Government programs...

  • Page 43
    ... adverse effect on our results of operations. We utilize claims submissions, medical records and other medical data as provided by health care providers as the basis for payment requests that we submit to CMS under the risk adjustment model for our Medicare Advantage contracts. CMS and the Office of...

  • Page 44
    ... as claims by members alleging failure to pay for or provide health care, poor outcomes for care delivered or arranged, improper rescission, termination or non-renewal of coverage, insufficient payments for outof-network services, claims related to the payment of taxes, including but not limited to...

  • Page 45
    ..., including, but not limited to HHS, the Federal Trade Commission ("FTC"), state attorneys general, and other state regulators. In addition, as our individual exchange business grows, we are increasingly impacted by requirements under the Payment Card Industry ("PCI") Data Security Standard, which...

  • Page 46
    ... to them, we may have limited control over the actions and practices of our business associates. This risk increases as we contract with third parties for the performance of additional services on our behalf. Compliance with HIPAA and state and federal privacy and security laws and regulations...

  • Page 47
    ... employees. In the event that we are unable to manage our membership growth effectively, this could have a material adverse effect on our business, financial condition, cash flows, or results of operations. See "-We cannot assure you that our participation in the ACA's health insurance exchanges...

  • Page 48
    ... with applicable federal and state laws and regulations and contractual requirements. Any violations of, or noncompliance with, laws and/or regulations governing our business, or the terms of our contracts, by third party vendors or service providers could increase our enterprise risk exposure...

  • Page 49
    ...the use of tailored network products could create an increased risk of out of network claims issues, which could result in higher medical costs to us. The provider groups that we contract with are also required to achieve and maintain compliance with applicable federal and state laws and regulations...

  • Page 50
    ... or taxes for our commercial programs, such as surcharges on select fee-for-service and capitated medical claims or premium taxes on insurance companies and HMOs, and could adversely affect our results of operations. If we fail to effectively maintain our information management systems, it could...

  • Page 51
    ... the ACA's premium stabilization provisions, state-based and federally facilitated exchanges and the assessment and collection of the health insurer fee. Among other things, we have been required to define and implement new billing and payment capabilities and support new requests from third parties...

  • Page 52
    ... the competitive position of insurance companies and managed care companies. We believe our claims paying ability and financial strength ratings also are important factors in marketing our products to certain of our customers. In addition, our debt ratings impact both the cost and availability of...

  • Page 53
    value including assumptions and estimates related to future earnings and membership levels based on current and future plans and initiatives, long-term strategies and our annual planning and forecasting processes, as well as the expected weighted average cost of capital used in the discount process....

  • Page 54
    ... other companies in our industry raise premium rates by more than has been done in recent years to price for the expanded benefits required by, and the fees, taxes and assessments imposed by, the ACA or to respond to any increase in medical cost trends. In addition, health care, health care reform...

  • Page 55
    ... with federal and state health care reform, challenging economic conditions and our potential participation in new government programs or the provision of new services and/or benefits to new populations, among other things, may make it particularly difficult to forecast our future performance. As...

  • Page 56
    ... discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay for shares of our common stock. The Merger Agreement also contains certain provisions...

  • Page 57
    ... United States District Court for the Northern District of California (the "Northern District of California") relating to the independent contractor classification of counselors ("MFLCs") who contracted with our subsidiary, MHN Government Services, Inc., to provide short-term, non-medical counseling...

  • Page 58
    ... litigation regarding, the health care industry's business practices, including, without limitation, information privacy, premium rate increases, utilization management, appeal and grievance processing, rescission of insurance coverage and claims payment practices. In addition, in the ordinary...

  • Page 59
    ...time, including those described above in this Item 3, could be substantial and, in certain cases, could result in a significant earnings charge or impact on our cash flow in any particular quarter in which we enter into a settlement agreement and could have a material adverse effect on our financial...

  • Page 60
    ...which are subject to regulatory net worth requirements and additional state regulations which may restrict the declaration of dividends by HMOs, insurance companies and licensed managed health care plans. The payment of any dividend is at the discretion of our Board of Directors and depends upon our...

  • Page 61
    ... financial statements. Under our various stock option and long-term incentive plans, in certain circumstances, employees and nonemployee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and/or exercise price obligations...

  • Page 62
    ...Peer Group Index ...$ All historical performance data reflects the performance of each company's own stocks only and does not include the historical performance data of acquired companies. The preceding graph and related information are being furnished solely to accompany this Annual Report on Form...

  • Page 63
    ... financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2015 REVENUES: Health plan services premiums ...Government contracts ...Net investment income ...Administrative services fees and other income ...Divested operations and services...

  • Page 64
    ... 31, 2012 were impacted by pretax costs of $35.6 million related to our G&A cost reduction efforts, a $5.0 million expense related to the early termination of a medical management contract and $1.3 million in litigation-related expenses net of an insurance reimbursement. (2) No cash dividends were...

  • Page 65
    ... care related government contracts, including the Patient Centered Community Care program ("PC3 Program") contract we have with VA. Our PC3 Program contract has been expanded further to provide additional services for the VA in support of the Veterans Access, Choice and Accountability Act of 2014...

  • Page 66
    ...related to employees and benefits, consulting and professional fees, marketing, business expansion and cost reduction initiatives, premium taxes and assessments, Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the "ACA") related fees...

  • Page 67
    ... Contracts Reportable Segment" for additional information on our other government contracts such as the MFLC contract and the PC3 Program, including the VACAA. Centene Transaction On July 2, 2015, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Centene Corporation...

  • Page 68
    ... Related Products." Public Health Insurance Exchanges The ACA also required the establishment of state-run or federally facilitated "exchanges" where individuals and small groups may purchase health coverage. We currently participate as Qualified Health Plans ("QHPs") in the exchanges in California...

  • Page 69
    ... financial statements, "-Critical Accounting Estimates-Accounting for Certain Provisions of the ACA" and "Item 1A. Risk Factors" for additional information on these premium stabilization programs or "3Rs". MLRs Under the ACA, commercial health plans with medical loss ratios ("MLR") on fully insured...

  • Page 70
    premiums annually. Certain of the states in which we operate include similar rebate provisions. For example, a medical loss ratio corridor for the California Department of Health Care Services ("DHCS") adult Medicaid expansion members under the Medicaid program in California ("Medi-Cal") requires ...

  • Page 71
    $118.2 million in pretax expenses primarily related to the Cognizant Transaction. This amount includes $12.2 million in costs related to our pending Merger with Centene. See "Overview- Cognizant Transaction" for additional information regarding the Cognizant Transaction. 69

  • Page 72
    ... 31, 2015, 2014 and 2013. Year Ended December 31, 2015 2014 2013 (Dollars in thousands, except per share data) Revenues Health plan services premiums ...Government contracts ...Net investment income...Administrative services fees and other income...Total revenues...Expenses Health plan services...

  • Page 73
    ... in 2013. The increases in our government contracts revenues and costs were primarily due to services provided for the PC3 Program. Our general and administrative (G&A) expenses increased by $468.7 million, or 43 percent, in the year ended December 31, 2014, primarily due to ACA related fees of $97...

  • Page 74
    ... ended December 31, 2015 and 2014, our effective tax rates were adversely impacted by the ACA health insurer fee, which is not deductible for federal income tax purposes and in many state jurisdictions. Accordingly, the nondeductible health insurer fee increased our effective tax rate for the years...

  • Page 75
    ...31, 2015 2014 2013 2015 v 2014 Increase/ (Decrease) % Change 2014 v 2013 Increase/ (Decrease) % Change (Membership in thousands) California Large Group ...Small Group ...Individual ...Commercial ...Medicare Advantage...Medi-Cal/Medicaid ...Dual Eligibles ...Total California ...Arizona Large Group...

  • Page 76
    ... our Arizona and Northwest individual lines of businesses. Enrollment in our large group accounts decreased by 6.8 percent or 37,000 members to 510,000 members, from December 31, 2014 to December 31, 2015, primarily due to competitive pricing in California. Enrollment in our small group business in...

  • Page 77
    ...of new individual members from the ACA exchanges in California and Arizona. As of December 31, 2014, tailored network products accounted for 49.8 percent of our Western Region Operations commercial enrollment compared with 37.5 percent at December 31, 2013. Enrollment in our Medicare Advantage plans...

  • Page 78
    ... health care that is new to beneficiaries, providers, regulatory authorities and health plans in the state of California, and involves risks generally associated with government programs. For example, larger than expected numbers of dual eligibles have opted out of, and continue to dis-enroll...

  • Page 79
    ... 31, 2015 2014 2013 (Dollars in thousands, except PMPM data) Commercial premiums ...$ 5,530,545 Medicare premiums...3,076,302 Medicaid premiums...6,429,571 Dual Eligibles premiums...516,930 Health plan services premiums ...15,553,348 Net investment income ...55,494 Administrative services fees and...

  • Page 80
    ... 31, 2015 compared to an increase of 8.5 percent to $325 for the same period in 2014. The change in the premium yields and health care cost trends reflect the ongoing product mix change associated with our membership growth. Medical Care Ratios The Western Region Operations health plan services MCR...

  • Page 81
    ...commercial health plan services costs for the year ended December 31, 2014, as discussed in Note 2 to our consolidated financial statements under the heading "Accounting for Certain Provisions of the ACA." Premium Yield and Health Care Cost Trends Our Western Region Operations premium PMPM increased...

  • Page 82
    ... of this and certain other risks related to our participation in TRICARE and other government programs. Under the T-3 contract for the TRICARE North Region, we provided administrative services to approximately 2.8 million MHS eligible beneficiaries as of December 31, 2015. For a description of the...

  • Page 83
    ... in 2014. The decrease in government contract segment income for the year ended December 31, 2015 was primarily due to the increased costs from ramp-up services during VA's expedited implementation of the VACAA modification of the PC3 Program combined with extension option year pricing and costs on...

  • Page 84
    ..., 2015 2014 2013 (Dollars in thousands) Costs included in health plan services costs ...$ Costs included in government contract costs...Costs included in G&A...Costs included in depreciation and amortization ...Asset impairment ...Loss from operations before income taxes ...Income tax benefit...Net...

  • Page 85
    ... addition, our cash flow has been and will continue to be impacted, among other things, by the timing of payments related to the ACA. For example, the largest of the ACA taxes and fees is the health insurer fee. Our allocable share of the health insurer fee payable in 2015, based upon 2014 premiums...

  • Page 86
    ... payments from user fees under both the risk corridors program and other programs. Our net payable balance for the risk adjustment program related to the premium stabilization provisions of the ACA was $44.0 million and $72.4 million as of December 31, 2015 and December 31, 2014, respectively. Risk...

  • Page 87
    ...-through items and items accounted for under deposit accounting and are comprised of health care cost payments and reimbursements for the T-3 contract, catastrophic reinsurance subsidy, low-income member cost sharing subsidy and the coverage gap discount under the Medicare Part D program, and pass85

  • Page 88
    ... at any time, and we have suspended our stock repurchase program until further notice in connection with our pending Merger with Centene. For additional information on our stock repurchase program, see Note 9 to our consolidated financial statements. Revolving Credit Facility In October 2011, we...

  • Page 89
    ... twelve 30-day months) at the applicable treasury rate plus 30 basis points plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date. Each of the following will be an Event of Default under the indenture governing the Senior Notes: • failure to...

  • Page 90
    ... amend the defined term "Change of Control" in the Senior Notes to provide that the pending Merger with Centene will not constitute a "Change of Control." The required consents were received by August 12, 2015, and we executed a supplement to the indenture governing the Senior Notes effectuating the...

  • Page 91
    ...We have entered into long-term agreements to receive services related to disease management, case management, wellness, pharmacy benefit management, pharmacy claims processing services and health quality/risk scoring enhancement services with external third-party service providers. As of December 31...

  • Page 92
    ... elsewhere in this Annual Report on Form 10-K. Health Plan Services Health plan services premium revenues generally include HMO, PPO, EPO and POS premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based...

  • Page 93
    ... in the ACA. In addition to the rebates for the commercial health plans under the ACA, there is also a medical loss ratio corridor for the DHCS adult Medicaid expansion members under the state Medicaid program in California. If our MLR for this population is below 85%, then we would have to pay DHCS...

  • Page 94
    ... to a change in our profitability estimates include premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under a capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers. Contracts are grouped in...

  • Page 95
    ... individuals and small groups may purchase health insurance coverage under regulations established by U.S. Department of Health and Human Services ("HHS"). We currently participate in exchanges in Arizona and California. Effective January 1, 2014, the ACA includes permanent and temporary premium...

  • Page 96
    ...plan services expense in our consolidated statements of income. Reinsurance assessments and recoveries are classified as current or long-term receivable or payable based on the timing of expected settlement. Risk Adjustment-The risk adjustment provision applies to individual and small group business...

  • Page 97
    ... T-3 contract, see "-Government Contracts Reportable Segment." Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services, including: provider network management, referral management, medical management, disease management, enrollment, customer service...

  • Page 98
    ... a business's fair value and the relative size of recorded goodwill, changes in assumptions may have a material effect on the results of our impairment test. The discounted cash flows and market participant valuations (and the resulting fair value estimates of the Western Region Operations reporting...

  • Page 99
    ...Cognizant to suspend efforts toward, and defer the occurrence of, the BPaaS Services Commencement Date to provide time for Health Net and Centene to work towards closing the Merger, and accordingly entered into the Cognizant Amendment on July 1, 2015. The decision to suspend efforts toward the BPaaS...

  • Page 100
    ... of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The following table presents the expected cash outflows relating to market risk sensitive debt obligations as of December 31, 2015. These cash...

  • Page 101
    ... reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial...

  • Page 102
    ... executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements...

  • Page 103
    Item 9B. Other Information. None. 101

  • Page 104
    ... investment and advisory firm. Prior thereto, Ms. Citrino served as a Senior Managing Director in the Corporate Advisory Services group at Blackstone from 2004 through 2014. Ms. Citrino has served as a director of Dollar Tree, Inc., a NASDAQ Stock Market (NASDAQ)-listed company, since 2005, and is...

  • Page 105
    ... of New York from 1980 to 1984 and at Security Pacific National Bank from 1973 to 1980. Mr. Craver brings to our Board of Directors extensive senior executive management and financial experience at public companies. Mr. Craver gained his finance and accounting expertise as Chief Financial Officer of...

  • Page 106
    ... our President and Chief Executive Officer since August 1998. Mr. Gellert has been a director of Ventas, Inc., a NYSE-listed company, since August 2001. Mr. Gellert also is currently a member of the Board of Directors of America's Health Insurance Plans, a national association representing over one...

  • Page 107
    ... for managing Time Warner's relationships with commercial and investment banks and debt-rating agencies. Prior thereto, Mr. Yeager had a 27-year career with Ford Motor Company where he held executive and management positions in the Finance Staff, the Treasurer's Office, the Product Development Group...

  • Page 108
    ...and Chief Executive Officer Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer Chief Administration Officer President, Government Programs President, Western Region Health Plan Health Care Services Officer Senior Vice President, Organization Effectiveness and Chief...

  • Page 109
    ... Development from 2002 through 2008. Prior to rejoining Health Net, Mr. Ortiz served as Chief Human Resources Officer at Western Dental Services/Brident from July 2014 to June 2015 and as Senior Vice President, Organization Effectiveness for Warner Bros. Entertainment Group from March 2008 to July...

  • Page 110
    ... the case of Mr. Miller) under the Health Net, Inc. Deferred Compensation Plan for Directors. One hundred percent of the amount shown was deferred under the Health Net, Inc. Non-Employee Director Restricted Stock Unit Deferral Program. Mr. Foley retired from the Health Net Board immediately prior to...

  • Page 111
    ... of the first three anniversaries of the date of grant, provided that, RSUs granted prior to May 7, 2015 will become immediately vested in the event of a "change in control" of Health Net, as defined in the Company's 2006 Long-Term Incentive Plan, as amended (the "2006 Plan"), and RSUs granted on or...

  • Page 112
    ... non-employee director is eligible to participate in the Health Net, Inc. Deferred Compensation Plan for Directors (the "Director DC Plan"). Participants may elect to defer all or a portion of their cash retainers, meeting fees and certain other cash remuneration earned for services performed during...

  • Page 113
    ...delivers managed health care services through health plans and government-sponsored managed care plans. Our business requires a talented, motivated and capable leadership team, particularly given the amount and rate of change in the Company and the industry. To that end, executive compensation plays...

  • Page 114
    ...officers. Target total direct compensation is the sum of (i) annual base salary at December 31, 2015, as shown in the "2015 Target Total Cash Compensation" table, (ii) target 2015 incentive cash award, as shown in the "2015 Target Total Cash Compensation" table ("Target Bonus") and (iii) target long...

  • Page 115
    ... additional detail, see the information under "What are the elements of named executive officer compensation and why do we provide each element?-Long-Term Equity Incentive Compensation-Determinations Regarding Form and Mix of 2015 Equity Awards" and "-Analysis of Compensation During Fiscal 2015-Long...

  • Page 116
    ...shares that remain after payment of (i) the exercise price of stock options or purchase price of other awards, (ii) all applicable withholding taxes, and (iii) any applicable transaction costs. Double-Trigger Change in Control Equity Accelerations for Employee Grants. In early 2014, the Compensation...

  • Page 117
    ... Governance." What are the objectives of our executive officer compensation programs? Managed care is a complex industry that faces regulatory and marketplace challenges, especially in light of the sweeping changes enacted and proposed under federal health care reform legislation and other state...

  • Page 118
    ... Retain executives through long-term vesting Performance awards subject to multiple performance measures that pay out if preestablished performance targets are attained Target market median, while managing burn rate Annual PerformanceBased Incentive Cash Opportunity Cash Long-Term Equity...

  • Page 119
    ... Other Benefits Employment Agreements, Equity Award Agreements, Severance Plans Financial Counseling Allowance, Relocation Benefits, Limited Housing Benefits, Group Life Insurance, Limited Car Allowances • • Our use of each of these compensation elements varies among our executive officers...

  • Page 120
    ... use in 2016 of the equity grant guidelines established for 2015, adjusting only for changes in the trading price of the Company's common stock without changing the value of the applicable ranges of shares available for grant, consistent with the terms of the Merger Agreement. 2015 Equity Grant...

  • Page 121
    ...measures in 2015: (i) execute the Cognizant Services Agreement, (ii) implement a viable succession plan, (iii) maintain regulatory compliance, (iv) achieve margin improvements in our Medicare and commercial businesses and (v) grow profitable state health programs membership in California and Arizona...

  • Page 122
    ... program, which provides a very limited number of our executives with supplemental retirement income beyond the IRS contribution limits for qualified plans, affording participants a measure of financial stability and security and building the participants' long-term commitment to Health Net...

  • Page 123
    ...our named executive officers, pursuant to which they generally are eligible for severance and change in control benefits from Health Net. The severance and change in control payments and benefits provided under the employment agreements are independent of other elements of compensation. In 2014, the...

  • Page 124
    ... We provide Company-paid group term life insurance pursuant to a broad-based plan to all of our eligible employees, including our named executive officers, in an amount equal to one times base salary. All of our eligible employees, including our named executive officers, may purchase additional life...

  • Page 125
    ... provided services to the Compensation Committee primarily related to executive compensation and compensation risk analysis and services to the Governance Committee related to director compensation. Semler did not provide any other services to Health Net in 2015. The Compensation Committee utilized...

  • Page 126
    ...'s fees and other retention terms that relate to such work. During 2015, Semler provided the following services to the Governance Committee with regards to non-employee director compensation market survey analysis; peer group competitive review; review of market trends in director compensation...

  • Page 127
    ... 2015-Annual Performance-Based Incentive Cash Awards." Our Chief Executive Officer then provides the Compensation Committee with his assessment of the Company's performance during the performance year and our Chief Executive Officer and Chief Financial and Operating Officer, as applicable, provide...

  • Page 128
    ... and Chief Executive Officer James E. Woys Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer Juanell Hefner Chief Administration Officer Steven D. Tough President, Government Programs Steven J. Sell President, Western Region Health Plan (1) (2) (3) (4) (5) 1,230...

  • Page 129
    ... 2014 and assume a Company Performance Score of 100% and Individual Performance Scores (as described below) for each named executive officer equal to 100%. Describes 2015 target annual incentive cash award as a percentage of 50th percentile of market based on the competitive market data provided...

  • Page 130
    ... its own observations and assessments of our named executive officers and Health Net's performance in 2015, taking into account, among other things, the impact of the announcement of the proposed Merger and the operation of the business in light thereof. The Compensation Committee approved Messrs...

  • Page 131
    ... State Health and Government Programs businesses and responding to the Department of Defense's request for proposal for the next generation of the TRICARE contract; and (v) Mr. Sell's significant contributions in increasing the Company's Western Region and California health plan enrollment in 2015...

  • Page 132
    ... Market Jay M. Gellert President and Chief Executive Officer James E. Woys Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer Juanell Hefner Chief Administration Officer Steven D. Tough President, Government Programs Steven J. Sell President, Western Region Health...

  • Page 133
    ... President and Chief Executive Officer James E. Woys Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer Juanell Hefner(4) Chief Administration Officer Steven D. Tough President, Government Programs Steven J. Sell President, Western Region Health Plan $ 1,230,000...

  • Page 134
    ...named executive officer compensation and why do we provide each element?- Annual Performance-Based Incentive Cash Awards" for information regarding how the actual 2015 incentive cash awards were calculated for each of our named executive officers. (2) The amounts shown represent the grant date fair...

  • Page 135
    ... Woys Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer Juanell Hefner Chief Administration Officer Steven D. Tough President, Government Programs Steven J. Sell President, Western Region Health Plan (1) Based on base salary in effect as of December 31, 2015. 5x...

  • Page 136
    ... for all of our employees and other service providers, including our named executive officers, so that they are either exempt from, or satisfy the requirements of, Section 409A of the Code. Accounting Standards. FASB ASC Topic 718, Compensation-Stock Compensation, requires us to recognize...

  • Page 137
    ...risk taking, each of which is more fully described in the "Executive Compensation-Compensation Discussion and Analysis" section of this Annual Report on Form 10-K We believe that our compensation programs appropriately balance short- and long-term incentives. Long-term incentives provide a balanced...

  • Page 138
    ... Chief Executive Officer James E. Woys Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer Juanell Hefner Chief Administration Officer Steven D. Tough President, Government Programs Steven Sell(6) President, Western Region Health Plan Year 2015 2014 2013 2015 2014...

  • Page 139
    ... insurance. Mr. Tough's employment agreement provides him with "grandfathered" lifetime medical, dental and vision health benefits for himself and his dependents as a result of the Company's acquisition of FHC in 1997. His health benefits represented an average monthly benefit of $2,719 for 2015...

  • Page 140
    ...and Chief Executive Officer James E. Woys Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer Juanell Hefner Chief Administration Officer Steven D. Tough President, Government Programs Steven Sell President, Western Region Health Plan Grant Date 2/20/2015 2/20/2015...

  • Page 141
    ..., in the case of the Chief Executive Officer and the second most highly compensated executive, the independent members of the Board of Directors, and may be restricted by the terms of the Merger Agreement. The named executive officers' employment agreements also provide for certain severance payment...

  • Page 142
    ... equal to 80% of his annual base salary. The Tough Agreement provides Mr. Tough with "grandfathered" lifetime medical, dental and vision health benefits for himself and his dependents as a result of the Company's acquisition of FHC in 1997. In February 2015, Health Net, Inc. and Mr. Tough entered...

  • Page 143
    ...Executive Vice President, Chief Financial and Operating Officer and Interim Treasurer 50,000 133,200 90,000 - - - - - Juanell Hefner Chief Administration Officer - - - - - - Steven D. Tough President, Government Programs 32,400 36,000 - - - - - Steven Sell President, Western Region Health Plan...

  • Page 144
    ...2015 Number of years of credited service (#)(1) Present value of accumulated benefit ($)(2) Payments during last fiscal year ($) Name and Principal Position Plan Name Jay M. Gellert President and Chief Executive Officer James E. Woys Executive Vice President, Chief Financial and Operating Officer...

  • Page 145
    ... program covers Messrs. Gellert and Woys, and seventeen (17) former employees. Benefits under the SERP are not funded; they remain subject to the claims of our creditors. The SERP is a defined benefit plan designed to provide a Health Net-paid retirement annuity of 50% of the executive's average pay...

  • Page 146
    ... to a lump sum payment equal to 12 months of his then current annual base salary. In addition, the Tough Agreement provides Mr. Tough with "grandfathered" lifetime medical, dental and vision health benefits for himself and his dependents as a result of the Company's acquisition of FHC in 1997...

  • Page 147
    ...he will be entitled to receive: • • a one-time lump sum payment equivalent to 24 months of his or her then-current annual base salary; and grandfathered lifetime medical, dental, and vision health benefits for himself and his dependents. In February 2015, Health Net, Inc. and each of Ms. Hefner...

  • Page 148
    entry into a management agreement that grants a third party authority to hire or fire the executive. The Merger will constitute a "change in control" under each employment agreement. With respect to Mr. Woys, Ms. Hefner, Mr. Tough and Mr. Sell, "Good Reason" generally means (i) a substantial ...

  • Page 149
    ... an employment agreement that provides for severance, the individual will only receive payments and benefits under the Change in Control Severance Plan if they are better than those provided under the applicable employment agreement. All executive officers currently employed by the Company will only...

  • Page 150
    ... terms of our severance and change in control arrangements can be found elsewhere in this Annual Report on Form 10-K under "Severance and Change in Control Arrangements." Excluded are benefits provided to all employees, such as accrued vacation and benefits payable under our life and other insurance...

  • Page 151
    ...Position Jay M. Gellert President and Chief Executive Officer Compensation Components Severance Intrinsic Value of Accelerated Equity:(3) Stock Options RSUs PSUs Health Benefits(4) Excise Tax Gross-Up Payment(5) Total Value Occurrence of Change in Control ($) 0 Retirement ($) 0 Death& Disability...

  • Page 152
    ...associated with health benefits are calculated using 2016 enrollment rates and severance agreement terms, if applicable. The continuation of named executive officers' health benefits is discussed in detail in the "Severance and Change In Control Arrangements" section of this Annual Report on Form 10...

  • Page 153
    ... in the Company's proxy statement related to its annual meeting or Annual Report on Form 10-K; and performing such duties and responsibilities as may be assigned to the Board of Directors or the Compensation Committee under the terms of any compensation or other employee benefit plan, including any...

  • Page 154
    ... 31, 2015 (see footnote 2 above for information regarding additional issuances of equity awards under the Amended and Restated 2006 Plan since such date). Includes shares available for issuance under the Amended and Restated 2006 Plan that were subject to awards under the Company's 2005 Long-Term...

  • Page 155
    ... 16, 2016 by each non-employee director of Health Net currently serving on the Board of Directors, by each named executive officer of the Company and by all current directors and executive officers as a group, and the percentage that these shares bear to the total number of shares of Common Stock...

  • Page 156
    ...Chair, as applicable, when reviewing such related party transaction shall include, but are not limited to, the following: (i) the benefits to Health Net of the transaction; (ii) the impact on a director's independence in the event the related party is a member of the Board of Directors, an immediate...

  • Page 157
    ... Craver and Mr. Craver's employer paid ordinary course arm's length health insurance premium payments to Health Net. Our Board of Directors determined that Mr. Craver is independent based on (i) the fact that Mr. Craver's immediate family members were not executive officers of the entities that made...

  • Page 158
    .... In addition, in 2015, Health Net received ordinary course arm's length health insurance premium payments from an entity that employed an immediate family member of Mr. Willison. Our Board of Directors determined that Mr. Willison is independent based on (i) the fact that Health Net did not provide...

  • Page 159
    ... related services and (iv) accounting and financial reporting standards consultation; and (2) certain other miscellaneous non-audit services permitted under Section 10A of the Exchange Act, including without limitation, tax compliance and other tax services. From and after the effective date...

  • Page 160
    ... reference and filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedule The financial statement schedule listed on the accompanying Index to Consolidated Financial Statements set forth on page F-1 and covered by the Report of Independent Registered Public Accounting Firm are...

  • Page 161
    ... authorized. HEALTH NET, INC. By: /S / JAMES E. WOYS James E. Woys Chief Financial and Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates...

  • Page 162
    ... statements and financial statement schedule are filed as part of this Annual Report on Form 10-K: Consolidated Financial Statements Report of Independent Registered Public Accounting Firm...Consolidated Statements of Operations for each of the three years in the period ended December 31, 2015...

  • Page 163
    ... ACCOUNTING FIRM To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We have audited the accompanying consolidated balance sheets of Health Net, Inc. and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements...

  • Page 164
    HEALTH NET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) 2015 Year Ended December 31, 2014 2013 Revenues Health plan services premiums...$ Government contracts...Net investment income ...Administrative services fees and other income ...Total revenues ......

  • Page 165
    ... Amortization of prior service cost and net loss included in net periodic pension cost...Defined benefit pension plans, net ...Other comprehensive (loss) income, before tax...Income tax (benefit) expense related to components of other comprehensive income ...Other comprehensive (loss) income, net of...

  • Page 166
    ... BALANCE SHEETS (Amounts in thousands, except per share data) December 31, 2015 2014 ASSETS Current Assets: Cash and cash equivalents...$ 996,854 2,218,367 Investments-available-for-sale (amortized cost: 2015-$2,209,670, 2014-$1,777,404) Premiums receivable, net of allowance for doubtful accounts...

  • Page 167
    ...of January 1, 2014 ...Net income...Other comprehensive income ...Exercise of stock options and vesting of restricted stock units ...Share-based compensation expense...Tax benefit related to equity compensation plans...Repurchases of common stock ...Balance as of January 1, 2015 ...Net income...Other...

  • Page 168
    ...of acquisitions and dispositions: Premiums receivable and unearned premiums...Other current assets, receivables and noncurrent assets...Amounts receivable/payable under government contracts ...Reserves for claims and other settlements ...Accounts payable and other liabilities ...Net cash provided by...

  • Page 169
    ... below. Our health plan services are provided under our Western Region Operations reportable segment, which includes the operations primarily conducted in California, Arizona, Oregon and Washington for our commercial, Medicare and Medicaid health plans, our health and life insurance companies, our...

  • Page 170
    ... Recognition Health plan services premium revenues generally include HMO, PPO, EPO and POS premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based on a predetermined prepaid fee, Medicaid revenues...

  • Page 171
    ...2015. In addition to the rebates for the commercial health plans under the ACA, there is also a medical loss ratio corridor for the California Department of Health Care Services ("DHCS") adult Medicaid expansion members under Medi-Cal covering an 18-month period from January 1, 2014 to June 30, 2015...

  • Page 172
    ...Initiative that began in April 2014 and Medicaid expansion under federal health care reform that began in January 2014, are subject to retrospective premium adjustments based on certain risk sharing provisions included in our state-sponsored health plans rate settlement agreement described below. We...

  • Page 173
    ... FINANCIAL STATEMENTS-(Continued) The following table presents information regarding the impact to health plan services premium revenues related to the change in prior years Medicare risk adjustment revenues, retroactive premium adjustments for our Medi-Cal and other state-sponsored health programs...

  • Page 174
    ... are classified as Health Plan Services cost. As of December 31, 2015 and 2014, respectively, we held no premium deficiency reserves. Government Contracts On April 1, 2011, we began delivery of administrative services under our T-3 contract for the TRICARE North Region. The T-3 contract was awarded...

  • Page 175
    ... TRICARE members are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the terms of the T-3 contract, we are not the primary obligor...

  • Page 176
    ...-line basis over the customer relationship period. Fulfillment costs associated with the PC3 contract and the related modification are expensed as incurred. Share-Based Compensation Expense As of December 31, 2015, we had various long-term incentive plans that permit the grant of stock options...

  • Page 177
    ... with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The carrying value of premiums and other receivables, long-term notes receivable and nonmarketable securities approximates...

  • Page 178
    ... of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets primarily consist of the value of provider networks and customer relationships, which are all subject to amortization. We perform our annual impairment...

  • Page 179
    ...-line method over their estimated lives are as follows: Gross Carrying Amount Weighted Average Life (in years) Accumulated Amortization (Dollars in millions) Net Balance As of December 31, 2015: Provider networks...$ Customer relationships and other ...$ As of December 31, 2014: Provider networks...

  • Page 180
    ... employer group premiums within each of our plans accounted for 9%, 11% and 16% of our health plan services premium revenues for the years ended December 31, 2015, 2014 and 2013, respectively. The federal government is the primary customer of our Government Contracts reportable segment representing...

  • Page 181
    ...anti-dilutive and were not included in the computation of diluted earnings per share. Stock options expire at various times through February 2019 (see Note 8). In May 2011, our Board of Directors authorized a stock repurchase program for the repurchase of up to $300 million of our outstanding common...

  • Page 182
    ...(depreciation) after tax on investments available-for-sale and prior service cost and net loss related to our defined benefit pension plan (see Note 10). Our accumulated other comprehensive income (loss) for the years ended December 31, 2015, 2014 and 2013 is as follows: Unrealized Gains (Losses) on...

  • Page 183
    ... computation of net periodic pension cost. Taxes Based on Premiums We provide services in certain states which require premium taxes to be paid by us based on membership or billed premiums. These taxes are paid in lieu of or in addition to state income taxes and totaled $266.5 million in 2015, $191...

  • Page 184
    ... individuals and small groups may purchase health insurance coverage under regulations established by U.S. Department of Health and Human Services ("HHS"). We currently participate in exchanges in Arizona and California. Effective January 1, 2014, the ACA includes permanent and temporary premium...

  • Page 185
    ...plan services expense in our consolidated statements of income. Reinsurance assessments and recoveries are classified as current or long-term receivable or payable based on the timing of expected settlement. Risk Adjustment-The risk adjustment provision applies to individual and small group business...

  • Page 186
    ..., and sharing the risk for allowable costs with the federal government. Variances from the target exceeding certain thresholds may result in HHS making additional payments to us or require us to make payments to HHS. We estimate and recognize adjustments to our health plan services premium revenue...

  • Page 187
    ... 31, 2015 and 2014: Net Receivable/ (Payable) Balance as of December 31, 2014 and 2013 Change in Estimates Related to Prior Year Current Estimates Payments Made (Received) Net Receivable/ (Payable) Balance as of December 31, 2015 and 2014 (Dollars in millions) 2015 Risk adjustment...$ Risk...

  • Page 188
    ...31, 2015. For further information with respect to our risk corridor receivables, see the discussion above in this Note 2. Section 1202 of ACA Section 1202 of the ACA mandates increases in Medicaid payment rates for primary care in calendar years 2013 and 2014. The final rule has been in effect since...

  • Page 189
    ... in the following areas: claims management, membership and benefits configuration, customer contact center services, information technology, quality assurance, appeals and grievance services and non-clinical medical management support. In addition, in connection with the Master Services Agreement we...

  • Page 190
    ...Cognizant to suspend efforts toward, and defer the occurrence of, the BPaaS Services Commencement Date to provide time for Health Net and Centene to work towards closing the Merger, and accordingly entered into the Cognizant Amendment on July 1, 2015. The decision to suspend efforts toward the BPaaS...

  • Page 191
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) We recognized an impairment related to certain investments in the energy and oil sector in the amount of $2.0 million during the year ended December 31, 2015. The amount represents the difference between the present value of the...

  • Page 192
    ... 31, 2015: Less than 12 Months Fair Value Unrealized Losses 12 Months or More Fair Value Unrealized Losses Fair Value Total Unrealized Losses (Dollars in millions) Asset-backed securities ...U.S. government and agencies ...Obligations of states and other political subdivisions...Corporate debt...

  • Page 193
    ... shows the number of our individual securities-current that have been in a continuous loss position at December 31, 2015: Less than 12 Months 12 Months or More Total Asset-backed securities...U.S. government and agencies...Obligations of states and other political subdivisions ...Corporate debt...

  • Page 194
    .... As of December 31, 2014, we had classified software systems assets with a total net book value of $130.2 million as assets held for sale. During the third quarter of 2015, due to the deferral of the Asset Sale in connection with the pending Merger with Centene, the Company determined that the sale...

  • Page 195
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (ii) Bank of America, N.A.'s "prime rate" and (iii) the Eurodollar Rate (as such term is defined in the credit facility) for a one-month interest period plus one percent) plus an applicable margin ranging from 45 to 105 basis ...

  • Page 196
    ... amend the defined term "Change of Control" in the Senior Notes to provide that the pending Merger with Centene will not constitute a "Change of Control." The required consents were received by August 12, 2015, and we executed a supplement to the indenture governing the Senior Notes effectuating the...

  • Page 197
    ...that market participants would use, including assumptions for risk. Level 3 includes an embedded contractual derivative asset and/or liability held by the Company estimated at fair value. Significant inputs used in the derivative valuation model include the estimated growth in Health Net health care...

  • Page 198
    ... 1 and 2 of financial assets or liabilities that are fair valued on a recurring basis during the years ended December 31, 2015 and 2014. In determining when transfers between levels are recognized, our accounting policy is to recognize the transfers based on the actual date of the event or change in...

  • Page 199
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The changes in the balances of Level 3 financial assets for the years ended December 31, 2015 and 2014 were as follows (dollars in millions): Year Ended December 31, 2015 StateSponsored Health Plans Settlement Account Deficit ...

  • Page 200
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The changes in the balance of the Level 3 financial liability for the year ended December 31, 2015 and 2014 were as follows (dollars in millions): Year Ended December 31, 2015 2014 Embedded Contractual Derivative Opening ...

  • Page 201
    ... liability $ 11.5 Monte Carlo Simulation Approach National Health Care Expenditures Goodwill - Western Region reporting unit $ 558.9 Income Approach Discount Rate 7.5% - 7.5% (7.5%) Fair Value as of December 31, 2014 Valuation Technique(s) Unobservable Input Health Net Health Care...

  • Page 202
    ... 9.0 million shares of our common stock for issuance under the Plans. The fair value of each option award is estimated on the date of grant using a closed-form option valuation model ("Black-Scholes") based on assumptions, including the risk-free interest rate, expected option term or life, expected...

  • Page 203
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) based on the U.S. Treasury Strip yields in effect at the time of grant with maturity dates approximately equal to the expected life of the option at the grant date. During the years ended December 31, 2015, 2014 and 2013, we ...

  • Page 204
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents the number of stock options, RSUs and PSUs granted during the years ended December 31: 2015 2014 2013 Options granted...RSUs and PSUs granted ... - 701,069 - 881,338 - 1,143,881 A summary of RSU ...

  • Page 205
    ... FINANCIAL STATEMENTS-(Continued) Under the Plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and/or exercise price obligations, as applicable, arising from the exercise of stock options...

  • Page 206
    ... in part, for shares of Common Stock, or shares of preferred stock of the Company having essentially the same value or economic rights as such shares. In connection with our execution of the Merger Agreement with Centene, we amended the Rights Agreement on July 2, 2015 to provide, among other things...

  • Page 207
    ...postretirement defined benefit health care and life insurance plans that provide postretirement medical and life insurance benefits to directors, key executives, employees and dependents who meet certain eligibility requirements. The Health Net of California Retiree Medical and Life Benefits Plan is...

  • Page 208
    ... 31 consist of: Pension Benefits 2015 2014 Other Benefits 2015 2014 (Dollars in millions) Prior service cost...$ Net loss (gain) ...$ - 4.5 4.5 $ $ - 5.3 5.3 $ $ (0.2) $ 1.7 1.5 $ 0.1 6.1 6.2 The following table sets forth our plans with an accumulated benefit obligation in excess of...

  • Page 209
    .... Additional Information Pension Benefits 2015 2014 Other Benefits 2015 2014 Assumptions Weighted average assumptions used to determine benefit obligations at December 31: Discount rate ...Rate of compensation increase ... 4.0% 6.0% 3.7% 6.0% 4.2% 3.5% 3.9% 3.5% Pension Benefits 2015 2014 2013...

  • Page 210
    ... CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2015...

  • Page 211
    ... and in many state jurisdictions. See Note 2, under the heading "Accounting for Certain Provisions of the ACA- Premium-based Fee on Health Insurers" for additional information regarding the health insurer fee. During the year ended December 31, 2014, we recorded a $73.7 million tax benefit, net of...

  • Page 212
    ... at various dates through 2035. Limitations on utilization may apply to all of the federal and state net operating loss carryforwards. Accordingly, valuation allowances have been provided to account for the potential limitations on utilization of these tax benefits. No portion of the 2015 valuation...

  • Page 213
    ...-Keene Health Care Service Plan Act of 1975, as amended, our California health plans are regulated by the California Department of Managed Health Care ("DMHC") and must comply with certain minimum capital or tangible net equity requirements. Our non-California health plans as well as our insurance...

  • Page 214
    ..., 2015 and 2014, respectively. Statutory-basis net (loss) income of our health plan subsidiaries was approximately $(75.3) million, $(130.5) million and $(158,000) for the years ended December 31, 2015, 2014 and 2013, respectively. Our subsidiaries that are regulated by DMHC report their accounts in...

  • Page 215
    ... review by regulatory authorities of, and increased litigation regarding, the health care industry's business practices, including, without limitation, information privacy, premium rate increases, utilization management, appeal and grievance processing, rescission of insurance coverage and claims...

  • Page 216
    ... to the payment of taxes, including but not limited to claims that may have retroactive application. In addition, from time to time we are subject to claims relating to information security incidents and breaches, reinsurance agreements, rescission of coverage and other types of insurance coverage...

  • Page 217
    ...We have entered into long-term agreements to receive services related to disease management, case management, wellness, pharmacy benefit management, pharmacy claims processing services and health quality/risk scoring enhancement services with external third-party service providers. As of December 31...

  • Page 218
    ... health subsidiaries. These operations are conducted primarily in California, Arizona, Oregon and Washington. Our Government Contracts reportable segment includes government-sponsored managed care and administrative services contracts through the TRICARE program, the Department of Defense Military...

  • Page 219
    ... segment data for the three years ended December 31, 2015, 2014 and 2013. 2015 Western Region Operations Government Contracts Corporate/Other/ Eliminations Total (Dollars in millions) Revenues from external sources...$ Intersegment revenues ...Net investment income ...Administrative services fees...

  • Page 220
    ....6 29.9 270.0 170.1 Our health plan services premium revenue by line of business is as follows: Year Ended December 31, 2015 2014 2013 (Dollars in millions) Commercial premium revenue ...$ 5,530.5 Medicare premium revenue...Medicaid premium revenue...Dual Eligibles premium revenue ...3,076.3 6,429...

  • Page 221
    ... claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our health plan services. The table below provides a reconciliation of changes in reserve for claims for the years ended December 31, 2015, 2014...

  • Page 222
    ... new products offered or programs administered under the ACA. The following table shows the Company's health plan services expenses for the years ended December 31: Health Plan Services 2014 (Dollars in millions) 2015 2013 Total incurred fee for service claims...Capitated expenses and shared risk...

  • Page 223
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2014 March 31 June 30 September 30 December 31 (Dollars in millions, except per share data) Total revenues ...$ 3,038.9 2,402.3 Health plan services costs ...132.0 Government contracts costs ...Income from operations before 62...

  • Page 224
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands) Year Ended December 31, 2015 2014 2013 REVENUES: Net investment (loss) income ...$ Other income ...Administrative service fees ......

  • Page 225
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) Year Ended December 31, 2015 2014 2013 Net income ...Other comprehensive (loss) income before tax: Unrealized (losses) ...

  • Page 226
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED BALANCE SHEETS (Amounts in thousands) December 31, 2015 December 31, 2014 ASSETS Current Assets: Cash and cash equivalents ...$ Other assets...Deferred taxes...Assets held for sale...

  • Page 227
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2015 2014 2013 NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ...$ CASH FLOWS FROM INVESTING ACTIVITIES: ...

  • Page 228
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. NOTE TO CONDENSED FINANCIAL STATEMENTS Note 1-Basis of Presentation Health Net, Inc.'s ("HNT") investment in subsidiaries is stated at cost plus equity in undistributed earnings (losses) of ...

  • Page 229
    ... Life Insurance Company, (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (File No. 1-12718) and incorporated herein by reference). Agreement and Plan of Merger, dated as of July 2, 2015, by and among Centene Corporation, Health Net...

  • Page 230
    ... June 30, 2015 (File No. 1-12718) and incorporated herein by reference). *10.12 Form of Nonqualified Stock Option Agreement utilized for eligible employees of Health Net, Inc. under the 2006 Long-Term Incentive Plan, as amended (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for...

  • Page 231
    ...herein by reference). Form of Performance Share Award Agreement utilized for eligible employees of Health Net, Inc. under the Amended and Restated 2006 Long-Term Incentive Plan (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 1-12718...

  • Page 232
    ... 2006 Long-Term Incentive Plan (filed as Appendix A to the Company's Definitive Proxy Statement filed with the SEC on March 26, 2015 (File No. 1-12718) and incorporated herein by reference). Health Net, Inc. Management Incentive Plan (filed as Exhibit 10.40 to the Company's Annual Report on Form 10...

  • Page 233
    ... No. 4 to the Master Services Agreement, dated January 1, 2014, by and between Health Net, Inc. and International Business Machines Corporation (filed as Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2014 (File No. 1-12718) and incorporated herein...

  • Page 234
    ... Number Description ^10.68 Amendment No. 5 to the Master Services Agreement, dated as of November 2, 2014, by and between Health Net, Inc. and Cognizant Technology Solutions US Corporation (filed as Exhibit 10.78 to the Company's Annual Report on Form 10-K for the year ended December 31, 2014...

  • Page 235
    ... financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b) Date: February 29, 2016 JAY M. GELLERT Jay M. Gellert President and Chief Executive Officer...

  • Page 236
    ... 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, James E. Woys, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Health Net, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material...

  • Page 237
    ...the Annual Report of Health Net, Inc. (the "Company") on Form 10-K for the year ending December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Jay M. Gellert, as Chief Executive Officer of the Company, and James E. Woys, as Chief Financial Officer of...