Health Net 2005 Annual Report Download - page 72

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, 2005. 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 was subject to price adjustments attributable to inflation and other factors. The effects of these
adjustments were recognized on a monthly basis, with the final determination of these amounts occurring in
2005.
Some of the 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.
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 government 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. See “Item 3.—Legal Proceedings”
for additional information regarding these class actions.
We recognize an estimated loss from such loss contingencies when we believe it is both probable that a loss
will be incurred and that the amount of the loss can be reasonably 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
cannot 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 financial condition, results of operations or
liquidity. 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 financial condition, results of operations or
liquidity. 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.
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