Shares of Woodland Hills based HealthNet Inc. dropped this morning on news of a 25 percent decline in 4th quarter profits due primarily to changes in its military contracts.

The company reported net income of $60.20 million, or 71 cents per diluted share, compared with $80.4 million, or 83 cents per diluted share for the year-ago period.

Shares fell $2.11 to $36.48.

The 4th quarter results include a $26.8 million pretax loss related to the company’s Northeast business, which it sold in 2009.

For the full year 2011, HealthNet reported net income of $72.1 million, of 80 cents per diluted share, down 65 percent from $204.24 million, or $2.06 per diluted share.

The standout was the company’s Western Region and Government Contracts business, which together produced net income of $278.4 million, or $3.09 per diluted share for the full year 2011, up 7 percent from $258.4 million, or $2.60 per diluted share for the full year 2010.

While premium revenues increased 4 percent in the quarter to $2.6 billion, the company’s government contracts business dropped 323 percent to $194.6 million.

The company explained that revenues in this segment, which insures active and retired members of the military, dropped precipitously because under a new contract, HealthNet is only reimbursed costs and paid a fixed fee. Unlike its last government contract, “Health Net now only records revenues and expenses associated with administrative services and related performance incentives and guarantees,” the company said. “These lower revenue and cost levels will continue over the term of the… contract.”

The company’s medical care ratio, the amount it spends on medical care for every dollar in premium, dropped to 84.8 percent, down from 85.5 percent a year ago.

In a prepared statement, HealthNet CEO Jay Gellert said he is “pleased with all we accomplished in 2011… Our commercial strategy resulted in continued enrollment growth in tailored network products. In 2011, we also successfully transitioned to the new TRICARE contract and Medicaid membership rose…Our fourth quarter performance concluded a successful year for the company and positions us well going into 2012.”