On March 29, 2007 we sold our 68-acre commercial campus in Shelton, Connecticut (the “Shelton Property”) to The Dacourt Group, Inc. (“Dacourt”), dba HN Property Owner, LLC, and leased it back from the buyer under an operating lease agreement for an initial term of ten years with an option to extend for two additional terms of ten years each. Under the Shelton Property lease agreement and other lease agreements, we lease an aggregate of approximately 492,673 square feet of office space in Shelton, Connecticut primarily used for the provision of administrative services to United and certain of its affiliates as part of our Northeast Operations. These leases expire at various dates ranging from 2016 to 2017.
The following selected financial and operating data as of and for the years ended December 31, 2010, 2009, and 2008 are derived from our audited consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K. The selected financial and operating data as of and for the years ended December 31, 2007 and 2006 are derived from our audited consolidated financial statements which are not included herein. The selected financial and operating data should be read in conjunction with “
We are a publicly traded managed care organization that delivers managed health care services through health plans and government sponsored managed care plans. Our mission is to help people be healthy, secure and comfortable. We provide health benefits to approximately 6.0 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, Department of Defense, including TRICARE, and Veterans Affairs programs. Our behavioral health services subsidiary, Managed Health Network (“MHN”), provides behavioral health, substance abuse and employee assistance programs to approximately 5.4 million individuals, including our own health plan members. Our subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.
For periods prior to the Northeast Sale, our Northeast Operations reportable segment included the operations conducted in Connecticut, New Jersey and New York for our commercial, Medicare and Medicaid health plans. For periods following the Northeast Sale, our Northeast Operations reportable segment includes the operations of our businesses that are providing administrative services to United and its affiliates pursuant to the United Administrative Services Agreements and the operations of Health Net Life in Connecticut and New Jersey prior to the renewal dates of the Transitioning HNL Members.
Government Contracts revenue is made up of two major components: health care and administrative services. The health care component includes revenue recorded for health care costs for the provision of services to our members, including paid claims and estimated incurred but not reported claims (“IBNR”) expenses for which we are at risk, and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care. The administrative services component encompasses fees received for all other services provided to both the government customer and to beneficiaries, including services such as medical management,
Various aspects of the health care reform legislation could have an adverse impact on our revenues and the cost of operating our business. For example, the new legislation will lower the rates of Medicare payments we receive, may make it more difficult for us to attract and retain members, increase the amount of certain taxes and fees we pay, impose a sales tax on medical device manufacturers and increase the amount of fees pharmaceutical manufacturers pay (both of which in turn could increase our medical costs), require rebates related to minimum medical loss ratios and require premium rate review. We could also face additional competition as competitors seize on opportunities to expand their business as a result of the new legislation, though there remains considerable uncertainty about the impact of these changes on the health insurance market as a whole and what actions our competitors could take. Because of the magnitude, scope and complexity of the new legislation, we also will need to dedicate substantial resources and incur material expenses to implement the new legislation, including implementing the current and future regulations that will provide guidance and clarification on important parts of the legislation. Any delay or failure by us to execute our operational and strategic initiatives with respect to health care reform or otherwise appropriately react to the new legislation and implementing regulations could result in operational disruptions, disputes with our providers or members, regulatory issues, damage to our existing or potential member relationships or other adverse consequences.
In addition to new federal regulations, various health insurance reform proposals are also emerging at the state level. Many of the states in which we operate are expected to seek to implement parts of the federal health care reform and even to add new requirements, such as prior approval of rates. Even in cases where state action is limited to implementing federal reforms, new or amended state laws will be required in many cases. States also may disagree in their interpretations of the federal statute and regulations, and state “guidance” that is issued could be unclear or untimely. The interaction of new federal regulations and the implementation efforts of the various states in which we do business will create substantial uncertainty for us and other health insurance companies about the requirements under which we must operate. Adding to the uncertainty, there also have been Congressional and legal challenges to federal health care reform that, if ultimately successful, could result in changes to the existing legislation or the repeal of ACA in its entirety. Additionally, in California, the ongoing state budget deficits continue to threaten funding for the current Medicaid program and Children’s Health Insurance Program, and the future expansion of these programs authorized by federal health care reform is uncertain.
Due to the unsettled nature of these reforms and the numerous steps required to implement them, we cannot predict how future regulations and laws, including state laws, implementing the new legislation will impact our business. As a result, although we continue to evaluate the impacts of the new legislation, it could have a material adverse effect on our business, financial condition and results of operations.
For additional information on federal and state health care reform and other potential new laws and regulations, as well as discussion of the related risks that we face, see “Item 1. Business-Government Regulation-Federal Legislation and Regulation-Health Care Reform Legislation” and “Item 1A. Risk Factors-“Federal health care reform legislation, as well as potential additional changes in federal or state legislation and regulations, could have an adverse impact on our revenues and the costs of operating our business and could materially adversely affect our business, cash flows, financial condition and results of operations.”
Western Region Operations segment pretax income decreased to $244.5 million in 2010 compared to $270.3 million in 2009;
Government Contracts segment pretax income was $178.7 million and $168.6 million for the years ended December 31, 2010 and 2009, respectively;
Northeast Operations segment pretax loss was $(68.7) million in 2010 compared to $(165.6) million in 2009; and
Net cash provided by operating activities totaled $271.4 million for the year ended December 31, 2010 compared to $247.5 million for the same period in 2009.
The table below and the discussion that follows summarize our results of operations for the years ended December 31, 2010, 2009 and 2008.
In the year ended December 31, 2010, we reported net income of $204.2 million or $2.06 per diluted share as compared to a net loss of $(49.0) million or $(0.47) per share for the same period in 2009. Pretax margin was 2.4 percent for 2010 compared to (0.2) percent for 2009. Our consolidated results of operations for the years ended December 31, 2010 and 2009 were impacted by the Northeast Sale. See Notes 1 and 3 to our consolidated financial statements for more information on the Northeast Sale. The Northeast Operations had a combined pretax loss of $68.7 million for the year ended December 31, 2010 compared to a pretax loss of $165.6 million for the year ended December 31, 2009, reflecting the ongoing run-out and wind-down of the Northeast Operations.
Our 2008 operating results were impacted by pretax charges of $175.1 million primarily for costs related to our operations strategy, legal and regulatory fees primarily associated with our rescission practices, estimated costs related to the settlement agreement for class action lawsuits referred to in this Form 10-K as the McCoy, Wachtel and Scharfman class action lawsuits, and other-than-temporary impairments of investments.
Our income tax expense and the effective income tax rate for the years ended December 31, 2010, 2009 and 2008 are as follows:
The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended December 31, 2010 due primarily to state and local taxes.
The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended December 31, 2009 due primarily to nondeductible goodwill impairment and the tax benefit associated with the Northeast Sale. The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended December 31, 2008 due primarily to state income taxes, tax-exempt investment income, and a favorable outcome related to prior year nondeductible class action lawsuit expenses.
The effective income tax rate in 2009 is an inverse ratio to the pretax loss. In 2009, we reported a tax expense associated with a pretax loss because a significant portion of the loss on sale of our Northeast health plan subsidiaries and the associated goodwill impairment is nondeductible for tax reporting purposes. The impact of these nondeductible items is also the primary cause of the large change in tax rates between 2010 and 2009 and between 2009 and 2008.
Total Western Region Operations enrollment at December 31, 2010 was approximately 2.9 million members, a decrease of 1.9 percent compared with enrollment at December 31, 2009. Total enrollment in our California health plan remained the same at approximately 2.2 million members from December 31, 2009 to December 31, 2010.
In November 2010, CMS imposed sanctions against us suspending the marketing to and enrollment of new members into all of our Medicare Advantage, MAPD and PDP products. These sanctions relate to our compliance with certain Medicare rules and regulations. While we cannot enroll new members into these products until CMS lifts the sanctions, the enrollment status of our current members, including PDP and MAPD members, is not impacted by this action. We continue to provide benefits to and serve our current PDP and MAPD members, and are actively working with CMS to resolve their concerns. Prior to the sanctions imposed by CMS, our Medicare Part D plans were offered in 49 states and the District of Columbia in 2010, and were offered in all 50 states and the District of Columbia in the year ended December 31, 2009. See “Item 1A. Risk Factors-Medicare programs represent a significant portion of our business and are subject to risk.”
We participate in the state Medicaid program in California, where the program is known as Medi-Cal. Medi-Cal enrollment as of December 31, 2010, increased by 44,000 members or 5.1 percent, from December 31, 2009 to 901,000 members. We attribute the increase in Medicaid enrollment to an increase in the Medicaid-eligible population due to continuing high unemployment and downturn in economic conditions.
Enrollment in our Medicare Advantage plans in our Western Region Operations at December 31, 2009 was 227,000 members, an increase of 2.3 percent compared with December 31, 2008. Membership in our Medicare PDP plans was 460,000 at the end of 2009, a 15.6 percent decrease compared with the end of 2008. This decline in Medicare PDP membership was primarily driven by our pricing discipline strategy at that time.
Medicaid enrollment in California on December 31, 2009, increased by 92,000 members or 12.0 percent, from December 31, 2008 to 857,000 members as a result of higher enrollment in the Fresno, Los Angeles and Sacramento counties and in the Healthy Families program.
(e) MCR is calculated as commercial, Medicare Advantage, Medicare Part D, or Medicaid health care cost divided by commercial, Medicare Advantage, Medicare Part D, or Medicaid premium, as applicable.
In the Western Region Operations, commercial premium yields PMPM increased by 7.9 percent to approximately $341 for the year ended December 31, 2010 compared with approximately $316 in the same period of 2009. This increase is due to continued pricing discipline.
The Medicare Advantage MCR in the Western Region Operations was 88.8 percent for the year ended December 31, 2010 compared with 88.1 percent for the year ended December 31, 2009. This increase in the Medicare Advantage MCR is due to a higher than expected health care cost trend.
The Medicare Part D MCR was 77.2 percent for the year ended December 31, 2010 compared with 78.4 percent for the same period in 2009. The 120 basis point improvement is consistent with our 2010 bid strategy.
G&A expense in the Western Region Operations was $881.8 million for the year ended December 31, 2010 compared with $833.5 million for the year ended December 31, 2009. The G&A expense ratio increased 50 basis points from 8.4 percent for the year ended December 31, 2009 to 8.9 percent for the year ended December 31,
2010, and is primarily due to increases in claims and enrollment processing fees and other outsourcing costs and higher investments in information technology as we prepare for health care reform.
Selling expense in our Western Region Operations was $235.6 million for the year ended December 31, 2010 compared with $233.3 million for the year ended December 31, 2009. The selling costs ratio was flat at 2.4 percent for each of the years ended December 31, 2010 and 2009.
Total revenues in the Western Region Operations increased 2.6 percent to $10.0 billion for the year ended December 31, 2009 compared to the same period in 2008. Health plan services premiums revenues in the Western Region Operations increased 2.7 percent to $9.9 billion for the year ended December 31, 2009 compared to the same period in 2008 primarily due to Medicare premium rate increases and an increase in Medicaid membership, partially offset by lower commercial membership.
Investment income in the Western Region Operations decreased to $67.6 million for the year ended December 31, 2009 from $75.9 million for the same period in 2008 due to lower interest rates.
In the Western Region Operations, commercial premium yields PMPM increased by 9.4 percent to approximately $316 for the year ended December 31, 2009 compared with approximately $288 in the same period of 2008.
The Western Region Operations commercial MCR was 86.8 percent for the year ended December 31, 2009, compared with 86.7 percent for the year ended December 31, 2008. This increase was primarily due to higher utilization related to the H1N1 flu and COBRA.
The Medicare Advantage MCR in the Western Region Operations was 88.1 percent for the year ended December 31, 2009 compared with 90.6 percent for the year ended December 31, 2008. The Medicare Part D
Medicaid MCR was 86.6 percent for the year ended December 31, 2009 compared with 84.0 percent for the year ended December 31, 2008. This increase was primarily driven by physician and hospital costs.
Under our current TRICARE contract for the North Region, we provided health care services to approximately 3.1 million eligible beneficiaries in the MHS as of December 31, 2010 and December 31, 2009. Included in the 3.1 million eligibles as of December 31, 2010 were 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.3 million other MHS-eligible beneficiaries for whom we provide administrative services only. As of December 31, 2010 and 2009, there were approximately 1.5 million TRICARE eligibles enrolled in TRICARE Prime under our North Region contract.
Government contracts cost ratio is calculated as government contracts costs divided by government contracts revenues.
Government contracts revenues increased by $239.8 million, or 7.7 percent, for the year ended December 31, 2010 as compared to the same period in 2009. Government contracts costs increased by $229.7 million or 7.8 percent for the year ended December 31, 2010 as compared to the same period in 2009. The increases were primarily due to an increase in health care services provided under a new option year in the TRICARE contract and growth in the family counseling business with the DoD. The Government contracts cost ratio was 94.7 percent and 94.6 percent for the years ended December 31, 2010 and 2009, respectively.
Our current TRICARE contract for the North Region includes a target cost and underwriting fee for reimbursed health care costs, which is negotiated annually during the term of the contract with underruns and overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting with the federal government, we recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable, and the collectibility is reasonably assured. As a result of changes in the estimate during the year ended December 31, 2010, we recognized a decrease in revenue of $51 million and a decrease in cost of $64 million. As a result of changes in the estimate during the year ended December 31, 2009, we recognized an increase in revenue of $40 million and an increase in cost of $49 million. As a result of changes in the estimate during the year ended December 31, 2008, we recognized an increase in revenue of $17 million and an increase in cost of $22 million. The administrative price is paid on a monthly basis, one month in arrears and certain components of the administrative price are subject to volume-based adjustments.
The Government contracts ratio decreased from 95.3 percent in 2008 to 94.6 percent in 2009 primarily due to growth in the family counseling business with the DoD and lower health care cost trends in the fourth quarter of 2009.
The Northeast Operations had approximately $258.3 million and $2,651.5 million in total revenues in the years ended December 31, 2010 and 2009, respectively, which represent 2 percent and 17 percent of our total revenues for the years ended December 31, 2010 and 2009, respectively. The Northeast Operations had a pretax loss of $68.7 million for the year ended December 31, 2010 compared to a pretax loss of $165.6 million for the year ended December 31, 2009. Our operating results for the year ended December 31, 2010 were impacted by a $6.0 million goodwill impairment, reduced by a $42.0 million adjustment to loss on sale of our Northeast health plan subsidiaries. See Note 2 to our consolidated financial statements for additional information regarding the goodwill impairment and the adjustment to loss on sale of our Northeast health plan subsidiaries. Our operating results for the year ended December 31, 2009 were impacted by a $105.9 million loss on the sale of our Northeast health plan subsidiaries.
The Northeast Operations had $71.2 million of health plan services premiums and $64.5 million of health plan services costs for the year ended December 31, 2010. We will continue to serve the members of the Acquired Companies under the United Administrative Services Agreements until they are either transitioned to a legacy United entity or non-renewed. We expect the United Administrative Services Agreements to remain in effect through the second quarter of 2011. The revenues and expenses associated with providing services under the United Administrative Services Agreements were $186.2 million and $279.4 million for the year ended December 31, 2010, respectively, and they are shown separately in the accompanying consolidated statements of operations.
The Northeast Operations had approximately $2,651.5 million and $2,847.2 million in total revenues in the years ended December 31, 2009 and 2008, respectively, which represent 17 percent and 19 percent of our total revenues for the years ended December 31, 2009 and 2008, respectively. The Northeast Operations had a pretax loss of $165.6 million for the year ended December 31, 2009 and pretax income of $10.4 million for the year ended December 31, 2008. Our operating results for the year ended December 31, 2009 were impacted by a $105.9 million loss on the sale of our Northeast health plan subsidiaries.
The Northeast Operations health plan services premium revenues decreased $211.9 million, or 8 percent, for the year ended December 31, 2009 as compared to the same period in 2008. The Northeast health plan services costs decreased by $146.3 million, or 6 percent for the year ended December 31, 2009 as compared to the same period in 2008. These decreases are primarily attributable to the Northeast Sale on December 11, 2009.
Our Corporate/Other segment is not a business operating segment. It is added to our reportable segments to reconcile to our consolidated results. The Corporate/Other segment includes costs that are excluded from the calculation of segment pretax income because they are not managed within the reportable segments. See Note 14-Segment Information to our consolidated financial statements for discussion on changes to our reportable segments and segment profit/(loss) measurement.
Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by investing in a diversified mix of high-quality, investment grade securities while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining an expected total return on invested funds.
and/or principal payments. We have the ability and current intent to hold to recovery all securities with an unrealized loss position. Our investment portfolio includes $648.2 million, or 39% of our portfolio holdings, of mortgage-backed and asset-backed securities. The majority of our mortgage-backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our entire asset-backed securities is AA+/Aa1. However, any failure by Fannie Mae or Freddie Mac to honor the obligations under the securities they have issued or guaranteed could cause a significant decline in the value or cash flow of our mortgage-backed securities. Our investment portfolio also includes $535.9 million, or 32% of our portfolio holdings of obligations of state and other political subdivisions. Such amount consists of current and non-current obligations of $527.1 million or 98%, and $8.8 million or 2% of the total obligations of state and other political subdivisions, respectively. Our investment portfolio also includes $9.9 million, or less than 1% of our portfolio holdings, of auction rate securities (ARS). These ARS have long-term nominal maturities for which the interest rates are reset through a dutch auction process every 7, 28 or 35 days. At December 31, 2010, these ARS had at one point or are continuing to experience “failed” auctions. These securities are entirely municipal issues and rates are set at the maximum allowable rate as stipulated in the applicable bond indentures. We continue to receive income on all ARS. If all or any portion of the ARS continue to experience failed auctions, it could take an extended amount of time for us to realize our investments’ recorded value.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from state and federal governments and agencies. Our receivable from CMS related to our Medicare business was $121.0 million as of December 31, 2010 and $102.7 million as of December 31, 2009. The receivable from DHS related to our California Medicaid business was $112.3 million as of December 31, 2010 and $82.2 million as of December 31, 2009. Our receivable from the DoD for the TRICARE contract for the North Region were $266.5 million and $270.8 million as of December 31, 2010 and December 31, 2009, respectively. The timing of collection of such receivables is impacted by government audit and negotiation, as well as the budget process, and can extend for periods beyond a year.
The majority of these charges, including the litigation reserve true-ups which was a non-cash charge, was settled in cash and was funded by cash flow from operating activities. For additional information regarding these charges, see “-Summary of Operating Results” above.
Net cash used in investing activities increased by $65.4 million compared to the year ended December 31, 2009. This increase is primarily due to $302 million increase in net purchases of investments in available-for-sale securities, partially offset by a $250 million increase in cash related to the sale of the Northeast operations (comprised of $80 million received from United for additional sale consideration and approximately $170 million net cash used in the sale of the Northeast operations in 2009).
Net cash used in financing activities increased by $305.7 million primarily due to a $222.7 million increase in stock repurchases, an $81.8 million increase in amounts paid under our amortizing financing facility due to the termination and payoff of that facility, and a $50.0 million increase in net repayments under our revolving credit facility, partially offset by an increase in checks outstanding, net of deposits of $45.9 million.
The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and
As of December 31, 2010, we were in compliance with all covenants under our revolving credit facility.
We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of December 31, 2010, we had outstanding an aggregate of $249.1 million in letters of credit. There were no amounts outstanding under the revolving credit facility as of December 31, 2010. As a result, the maximum amount available for borrowing under the revolving credit facility was $650.9 million as of December 31, 2010, and no amount had been drawn on the letters of credit. As of the filing date of this report, we had no outstanding borrowings under the revolving credit facility.
On June 30, 2010, we terminated the interest rate swap agreement that we entered into on March 12, 2009 (“2009 Swap”). The 2009 Swap was designed to reduce variability in our net income due to changes in variable interest rates. We recognized a pretax loss of $0.2 million in the three months ended June 30, 2010 in connection with the termination and settlement of the 2009 Swap, which is included in our administrative services fees and other income for the year ended December 31, 2010.
As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations. During the year ended December 31, 2010, we made no such capital contributions. In addition, we made no capital contributions to any of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations thereafter through the filing date of this report.
Our significant contractual obligations as of December 31, 2010 are summarized below for the years ending December 31:
Under the Stock Purchase Agreement, we retain financial responsibility for the profits or losses, subject to specified adjustments, of the Acquired Companies for the period beginning on the closing date and ending on the earlier of (i) the second anniversary of the closing date and (ii) the date that all of the United Administrative Services Agreements are terminated. We expect the United Administrative Services Agreements to be in effect through the second quarter of 2011, and anticipate that these profits or losses and the other expenses we incur in performing the administrative services could be significant. See “Item 1. Business-Segment Information-Northeast Operations Segment” for additional information.
We have excluded from the table above amounts already recorded in our current liabilities on our consolidated balance sheet as of December 31, 2010. We have also excluded from the table above various contracts we have entered into with our health care providers, health care facilities, the federal government and other contracts that we have entered into for the purpose of providing health care services. We have excluded those contracts that allow for cancellation without significant penalty, obligations that are contingent upon achieving certain goals and contracts for goods and services that are fulfilled by vendors within a short time horizon and within the normal course of business.
In order to secure judgment pending our appeal in the AmCareco litigation, we obtained surety bonds totaling $114.7 million, which are further secured by letters of credit issued in December 2005 in the amounts of $88.1 million. No amounts had been drawn on the bonds or the letters of credit as of December 31, 2010. See Notes 6 and 13 to the consolidated financial statements for additional information.
As of December 31, 2010, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto. See Note 6 - Financing Arrangements to the consolidated financial statements for a discussion on our letters of credit.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal areas requiring the use of estimates include revenue recognition, health care costs, reserves for contingent liabilities, amounts receivable or payable under government contracts, goodwill and recoverability of long-lived assets and investments and income taxes. Accordingly, we consider accounting policies on these areas to be critical in preparing our consolidated financial statements. A significant change in any one of these amounts may have a significant impact on our consolidated results of operations and financial condition. A more detailed description of the significant accounting policies that we use in preparing our financial statements is included in the notes to our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K.
Reserves for claims and other settlements include reserves for claims (incurred but not reported claims (“IBNR”) and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Western Region Operations reporting segment. As of December 31, 2010, 77% of reserves for claims and other settlements were attributed to claims reserves. See Note 16 to our consolidated financial statements for a reconciliation of changes in the reserve for claims.
We assess the profitability of contracts for providing health care services when operating results or forecasts indicate probable future losses. Significant factors that can lead 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 a manner consistent with the method of determining premium rates. Losses are determined by comparing anticipated premiums to estimates for the total of health care related costs less reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are recognized in the period the losses are determined and are classified as Health Plan Services. We held a premium deficiency reserve of $0.4 million as of December 31, 2010.
As part of our TRICARE contract for the North Region, we have a risk-sharing arrangement with the federal government whereby variances in actual claim experience from the targeted medical claim amount negotiated in our annual bid are shared. Due to this risk-sharing arrangement provided for in the TRICARE contract for the
North Region, the changes in the estimate of the IBNR reserves are not expected to have a material effect on the favorable or adverse development of our liability under the TRICARE contract.
Other government contracts revenues are recognized in the month in which the eligible beneficiaries are entitled to health care services or in the month in which the administrative services are performed or the period that coverage for services is provided. Under our TRICARE contract for the North Region we recognize amounts receivable and payable under the government contracts related to estimated health care IBNR expenses which are reported separately on the accompanying consolidated balance sheet as of December 31, 2010. These amounts are the same since all of the estimated health care IBNR expenses incurred are offset by an equal amount of revenues earned.
In the course of our operations, we are involved on a routine basis in various disputes with members, health care providers, and other entities, as well as audits by government agencies that relate to our services and/or business practices that expose us to potential losses.
We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events or changes in circumstances indicate that we might not recover the carrying value of these assets for each of our reporting units. We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2010 for our Western Region Operations and Northeast Operations reporting units. As a result, we recorded an impairment of $6 million related to the goodwill for our Northeast Operations in the three months ended June 30, 2010. We performed a two-step impairment test to determine the existence of impairment and the amount of the impairment. In the first step, we compared the fair values to the related carrying values and concluded that the carrying value of the Northeast Operations was impaired and that the carrying value of the Western Region Operations was not impaired. The ratio of the carrying value of our Western Region Operations to its fair value was approximately 80%. In the second step, we measured the amount by comparing the
In connection with the then pending Northeast Sale, we previously assessed the recoverability of goodwill and our long-lived assets, including other intangible assets, property and equipment and other long-term assets related to our Northeast Operations reporting unit. We also classified the Acquired Companies’ assets and liabilities as held for sale; therefore, we were required to measure these assets and liabilities at the lower of carrying value or fair value less cost to sell. As a result, in the year ended December 31, 2009, we recorded goodwill impairment of $137.0 million, impairments of other intangible assets of $6.3 million and impairments of property and equipment of $31.6 million.
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 the positions as filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities upon examination, in accordance with the Income Taxes Topic of the FASB
Accounting Standards Codification. The interpretation requires us to 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. The interpretation also requires that any differences between the amounts of tax benefits reported on tax returns and tax benefits reported in the financial statements be 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.