Health Net 2004 Annual Report Download - page 65

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. We have approximately 260,000 members under this agreement. In
general, we share equally with The Guardian in the profits of the marketing agreement, subject to certain terms of the marketing
agreement related to expenses.
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. Additionally, we contract with certain hospitals to provide hospital care to enrolled members on a capitation
basis.
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 consistent with the method of determining premium rates. Losses are
determined by comparing anticipated premiums to estimates for 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 losses are determined and are classified
as Health Plan Services. We held a premium deficiency reserve of $0.1 million as of December 31, 2004.
Government Contracts
The TRICARE North Region contract is made up of two major revenue components, health care and administrative services.
Health care services revenue includes health care costs, including paid claims and estimated IBNR expenses, for care provided for
which we are at risk and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care.
Administrative services revenue encompasses all other services provided to both the government customer and to beneficiaries,
including services such as medical management, claims processing, enrollment, customer services and other services unique to the
managed care support contracts with the government. Revenues associated with the transition to the new TRICARE contract for the
North Region are recognized over the entire term of the contract.
Under our new TRICARE contract for the North Region we recognize amounts receivable and payable under the government
contracts related to estimated health care IBNR expenses which are reported separately on the accompanying consolidated balance
sheet as of December 31, 2004. These amounts are the same since all of the estimated health care IBNR expenses incurred are offset
by an equal amount of revenues earned.
Health care costs and associated revenues are recognized as the costs are incurred and the associated revenue is earned. Revenue
related to administrative services is recognized as the services are provided and earned.
Other government contracts revenues are recognized in the month in which the eligible beneficiaries are entitled to health care
services or in the month in which the administrative services are performed or the period that coverage for services is provided.
Revenue under the expired former Region 11, Region 6 and Regions 9, 10 and 12 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 receivable under government contracts are comprised primarily of price adjustments and change orders for services not
originally specified in the contracts. 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.
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