Health Net 2000 Annual Report Download - page 37

2000 Annual Report HEALTH NET 35
NOTE 2 - Summary of Significant
Accounting Policies
Consolidation and Basis of Presentation
The consolidated financial statements include the
accounts of the Company and its wholly-owned and
majority-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the 1999 and 1998 consolidated
financial statements and notes have been reclassified to
conform to the 2000 presentation.The reclassifications
have no effect on net earnings or losses or stockholders’
equity as previously reported.
Revenue Recognition
Health plan services premium revenues include HMO,
POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have pur-
chased supplemental benefit coverage, which premiums
are based on a predetermined prepaid fee, Medicaid rev-
enues based on multi-year contracts to provide care to
Medicaid recipients, and revenue under Medicare risk
contracts to provide care to enrolled Medicare recipients.
Revenue is recognized in the month in which the related
enrollees are entitled to health care services. Premiums
collected in advance are recorded as unearned premiums.
Government contracts revenues are recognized in the
month in which the eligible beneficiaries are entitled to
health care services. Government contracts also contain cost
and performance incentive provisions which adjust the
contract price based on actual performance, and
revenue under government contracts is subject to price
adjustments attributable to inflation and other factors.
The effects of these adjustments are recognized on a
monthly basis, although the final determination of these
amounts could extend significantly beyond the period
during which the services were provided.Amounts receiv-
able under government contracts are comprised primarily
of estimated amounts receivable under these cost and
performance incentive provisions, price adjustments, and
change orders for services not originally specified in the
contracts.These receivables develop as a result of TRI-
CARE health care costs rising faster than the forecasted
health care cost trends used in the original contract bids,
data revisions on formal contract adjustments and routine
contract changes for benefit adjustments. Specialty services
revenues are recognized in the month in which the admin-
istrative services are performed or the period that coverage
for services is provided.
In December 1999, the Securities and Exchange
Commission issued, then subsequently amended, Staff
Accounting Bulletin No. 101 (“SAB 101”),“Revenue
Recognition in Financial Statements.”SAB 101, as amended,
provides guidance on applying accounting principles gener-
ally accepted in the United States of America to revenue
recognition issues in financial statements.The Company
adopted SAB 101 effective October 1, 2000.The adoption of
SAB 101 did not have a material effect on the Company’s
consolidated financial position or results of operations.
Health Care Services
The cost of health care services is recognized in the
period in which services are provided and includes an
estimate of the cost of services which have been incurred
but not yet reported. Such costs include payments to pri-
mary care physicians, specialists, hospitals, outpatient care
facilities and the costs associated with managing the
extent of such care.The Company estimates the amount
of the provision for service costs incurred but not
reported using standard actuarial methodologies based
upon historical data including the period between the
date services are rendered and the date claims are received
and paid, denied claim activity, expected medical cost
inflation, seasonality patterns and changes in membership.
The estimates for service costs incurred but not reported
are made on an accrual basis and adjusted in future peri-
ods as required. Any adjustments to the prior period esti-
mates are included in the current period. Such estimates
are subject to the impact of changes in the regulatory
environment and economic conditions. Given the inher-
ent variability of such estimates, the actual liability could
differ significantly from the amounts provided.While the
ultimate amount of claims and losses paid are dependent
on future developments, management is of the opinion
that the recorded reserves are adequate to cover such
costs.These liabilities are reduced by estimated amounts
recoverable from third parties for subrogation.
The Company’s HMO in California generally con-
tracts with various medical groups to provide professional
care to certain of its members on a capitated, or fixed per
member per month fee basis. Capitation contracts gener-
ally include a provision for stop-loss and non-capitated
services for which the Company is liable. Professional
capitated contracts also generally contain provisions for
shared risk, whereby the Company and the medical
groups share in the variance between actual costs and
predetermined goals. Additionally, the Company contracts
with certain hospitals to provide hospital care to enrolled
members on a capitation basis.The Company’s HMOs in
other states also contract with hospitals, physicians and
other providers of health care, pursuant to discounted
fee-for-service arrangements, hospital per diems, and case
rates under which providers bill the HMOs for each
individual service provided to enrollees.
The Company assesses the profitability of contracts
for providing health care services when operating results
or forecasts indicate probable future losses. Contracts are
grouped in a manner consistent with the method of
determining premium rates. Losses are determined by
comparing anticipated premiums to 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 loss is determined and are
classified as Health Plan Services.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments
with a maturity of three months or less when purchased.