Health Net 2002 Annual Report Download - page 47

HEALTH NET, INC. | 45
mined goals. Additionally, we contract with certain hospi-
tals to provide hospital care to enrolled members on a
capitation basis. Our 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.
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
margin 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 consis-
tent with the method of determining premium rates. Losses
are determined by comparing anticipated premiums to the
total of health care related costs less reinsurance recov-
eries, if any, and the cost of maintaining the contracts.
Losses, if any, are recognized in the period the loss is deter-
mined and are classified as Health Plan Services. We had
premium deficiency reserves of $0 and $1.7 million as of
December 31, 2002 and 2001, respectively.
We have risk-sharing arrangements with certain of our
providers related to approximately 1,471,000 members
primarily in the California commercial market. Shared-risk
arrangements provide for our providers and us to share in
the variance between actual costs and predetermined goals.
Our health plans in Connecticut, New Jersey and New
York market to small employer groups through a
marketing agreement with The Guardian Life Insurance
Company of America. We have approximately 270,000
members under this agreement. In general, we share
equally in the profits of the marketing agreement, subject
to certain terms of the marketing agreement related to
expenses, with The Guardian Life Insurance Company
of America.
RESERVES FOR CONTINGENT LIABILITIES
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 govern-
ment agencies that relate to our services and/or business
practices. We and several of our competitors were named
as defendants in a number of significant class action
lawsuits alleging violations of various federal statutes,
including the Employee Retirement Income Security
Act of 1974 and the Racketeer Influenced Corrupt
Organization Act.
We recognize an estimated loss from such loss contin-
gencies when we believe it is both probable that a loss will
be incurred and that the amount of the loss can be reason-
ably estimated. Our loss estimates are based in part on an
analysis of potential results, the stage of the proceedings,
our relevant insurance coverage, consultation with outside
counsel and any other relevant information available.
While the final outcome of these proceedings can not be
determined at this time, based on information presently
available we believe that the final outcome of such
proceedings will not have a material adverse effect upon
our results of operations or financial condition. However,
our belief regarding the likely outcome of such proceedings
could change in the future and an unfavorable outcome
could have a material adverse effect upon our results of
operations or financial condition. In addition, the ultimate
outcome of these loss contingencies cannot be predicted
with certainty and it is difficult to measure the actual loss,
if any, that might be incurred.
GOVERNMENT CONTRACTS
Amounts receivable 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 TRICARE health care costs rising faster than the
forecasted health care cost trends used in the original
contract bids, data revisions on formal contract adjust-
ments and routine contract changes for benefit
adjustments.
Amounts receivable or payable under government
contracts are based on three TRICARE contracts in five
regions which include both amounts billed and estimates
for amounts to be received under cost and performance
incentive provisions, price adjustments and change orders
for services not originally specified in the contracts.
These change orders arise because the government often
directs us to implement changes to our contracts before the
scope and/or value is defined or negotiated. We start to
incur costs immediately, before we have proposed a price to
the government. In these situations we make no attempt to
estimate and record revenue. Our policy is to collect and
defer the costs incurred. Once we have submitted a cost
proposal to the government, we will record the costs and
the appropriate value for revenue, using our best estimate of
what will ultimately be negotiated. Such estimates are deter-
mined based on information available as well as historical
performance and collection of which could extend for
periods beyond a year. Differences, which may be material,
between the amounts estimated and final amounts collected
are recorded in the period when determined.