Health Net 2004 Annual Report Download - page 64

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based on per member per month claims trends developed from the experience in preceding months. This method is applied
consistently year over year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonality patterns,
product mix, benefit plan changes and changes in membership.
An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent in such
estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns and medical cost
trends. As such, the completion factors and the claims per member per month trend factor are the most significant factors used in
estimating our reserves for claims. Since a large portion of the reserves for claims is attributed in the most recent months, the
estimated reserves for claims is highly sensitive to these factors. The following table illustrates the sensitivity of these factors and the
estimated potential impact on our operating results caused by these factors:
Other relevant factors include exceptional situations that might require judgmental adjustments in setting the reserves for claims,
such as system conversions, processing interruptions or changes, environmental changes or other factors. In California, there were
significant improvements in the claims processing that had a material impact upon the reserve levels as of December 31, 2004. None
of the other factors had a material impact on the development of our claims payable estimates during any of the periods presented in
this Annual Report on Form 10-K. All of these factors are used in estimating reserves for claims and are important to our reserve
methodology in trending the claims per member per month for purposes of estimating the reserves for the most recent months. In
developing its best estimate of reserves for claims, we consistently apply the principles and methodology listed above from year to
year, while also giving due consideration to the potential variability of these factors. Because reserves for claims includes various
actuarially developed estimates, our actual health care services expense may be more or less than our previously developed estimates.
Claim processing expenses are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are
continually monitored and reviewed, with any adjustments reflected in current operations.
HN of California, our California HMO, generally contracts 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 generally include a provision for stop-
loss and non-capitated services for which we are liable. Professional capitated contracts also generally contain provisions for shared
risk. We have risk-sharing arrangements with certain of our providers related to approximately 1,140,000 members, primarily in the
California commercial market. Shared- risk arrangements provide for us to share with our providers the variance
61
Completion Factor (a)
Increase (Decrease)
in Factor
Health Plan Services
Increase (Decrease) in
Reserves for Claims
Government Contracts
Increase (Decrease) in
Reserves for Claims
2%
$(44.9) million
$(13.1) million
1%
$(22.9) million
$ (6.7) million
(1)%
$ 23.8 million
$ 6.9 million
(2)%
$ 48.6 million $ 14.1 million
Medical Cost Trend (b)
Increase (Decrease)
in Factor
Health Plan Services
Increase (Decrease) in
Reserves for Claims
Government Contracts
Increase (Decrease) in
Reserves for Claims
2%
$ 21.0 million
$ 9.2 million
1%
$ 10.5 million
$ 4.6 million
(1)%
$(10.5) million
$ (4.6) million
(2)%
$(21.0) million $ (9.2) million
(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how complete claims
paid to date are in relation to the estimate of total claims for a given period. Therefore, an increase in completion factor percent
results in a decrease in the remaining estimated reserves for claims.
(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the most recent three
months.