Reference is also made to the disclosures contained under the heading "Cautionary Factors" included elsewhere in this Annual Report on Form 10-K, which could cause the Company's actual results to differ from those projected in forward looking statements of the Company made by or on behalf of the Company. In addition, certain of these factors may have affected the Company- 's past results and may affect future results.
The cost of health care services is recognized in the period in which it is provided and includes an estimate of the cost of services which have been incurred but not yet reported. Such costs include payments to primary care physicians, specialists, hospitals, out-patient care facilities and the costs associated with managing the extent of such care. The estimate for accrued health care costs is based on actuarial projections of hospital and other costs using historical studies of claims paid. Estimates are continually monitored and reviewed and, as settlements are made or estimates adjusted, differences are reflected in current operations.
Goodwill and other intangible assets have resulted from the Conversion, as well as acquisitions which have been accounted for under the purchase method. Other intangible assets consist of the value of employer group contracts and provider networks. The Company routinely evaluates the recoverability of goodwill and other intangible assets based on estimated future cash flows.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of marketable securities as described in Note 2, cash equivalents and premiums receivable. All cash equivalents and investments are managed within established guidelines which limit the amounts which may be invested with one issuer. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising the Company's customer base. The Company's ten largest employer groups accounted for 37.4% and 23.9% of receivables and 21.4% and 24.8% of premium revenue as of December 31, 1996 and 1995, respectively, and for the years then ended. In addition, the Company has a receivable in the amount of $22.1 million from the State of Connecticut that represents claims paid by the Company and reimbursable by the State of Connecticut pursuant to a previous ASO arrangement. Such receivable is included in other assets.
The following summarizes acquisitions and strategic investments by HSI for the three years ended December 31, 1996:
Health Net was under audit by the IRS during 1995 and 1994. The principal issue during the course of the audit was whether Health Net qualified as a tax-exempt entity for certain periods prior to the Conversion. In March 1995, Health Net and the IRS entered into a settlement of all outstanding issues raised in the audit. The settlement paid was treated as a payment on the notes due to the Foundation, in accordance with the terms of such notes. A deferred tax liability account was previously established by the Company to cover potential liabilities relating to the audit. As a result of this settlement, the deferred tax liability and associated goodwill of approximately $33.0 million have been eliminated.
1989 Plan - In 1989, 2,210,000 shares of the Company's Class A Common Stock were authorized to be issued under future grants to officers, directors and certain employees of the Company pursuant to the 1989 Stock Option Plan.
In addition, the Company provided loss reserves totaling $8.5 million relating primarily to contracts with governmental employer groups in the Company's non-California markets. The Company expects to utilize these reserves over the remaining lives of these contracts, which expire at varying dates through 1999.