Health Net 2009 Annual Report Download - page 105

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The revenue recognition of the revenue and cost reimbursement components under Part D is described
below:
CMS Premium Direct Subsidy—Health Net receives a monthly premium from CMS based on an original bid
amount. This payment for each individual is a fixed amount per member for the entire plan year and is based
upon that individual’s risk score status. The CMS premium is recognized evenly over the contract period and
reported as part of health plan services premium revenue.
Member Premium—Health Net receives a monthly premium from members based on the original bid
submitted to CMS. The member premium, which is fixed for the entire plan year is recognized evenly over the
contract period and reported as part of health plan services premium revenue.
Low-Income Premium Subsidy—For qualifying low-income members, CMS will reimburse Health Net, on
the member’s behalf, some or all of the monthly member premium depending on the member’s income level in
relation to the Federal Poverty Level. The low-income premium subsidy is recognized evenly over the contract
period and reported as part of health plan services premium revenue.
Catastrophic Reinsurance Subsidy—CMS will reimburse Health Net for 80% of the drug costs after a
member reaches his or her out of pocket catastrophic threshold of $4,350, $4,050 and $3,850 for the years ended
December 31, 2009, 2008 and 2007, respectively. The CMS prospective payment (a flat PMPM cost
reimbursement estimate) is received monthly based on the original CMS bid. After the year is complete, a
settlement is made based on actual experience. The catastrophic reinsurance subsidy is accounted for as deposit
accounting.
Low-Income Member Cost Sharing Subsidy—For qualifying low-income members, CMS will reimburse
Health Net, on the member’s behalf, some or all of a member’s cost sharing amounts (e.g. deductible, co-pay/
coinsurance). The amount paid for the member by CMS is dependent on the member’s income level in relation to
the Federal Poverty Level. Health Net receives prospective payments on a monthly basis, and they represent a
cost reimbursement that is finalized and settled after the end of the year. The low-income member cost sharing
subsidy is accounted for as deposit accounting.
CMS Risk Share—Premiums from CMS are subject to risk corridor provisions which compare costs targeted
in our annual bids to actual prescription drug costs, limited to actual costs that would have been incurred under
the standard coverage as defined by CMS. Variances of more than 5% above or below the original bid submitted
by us may result in CMS making additional payments to us or require us to refund to CMS a portion of the
premiums we received. We estimate and recognize an adjustment to premium revenues related to the risk
corridor payment settlement based upon pharmacy claims experience. The estimate of the settlement associated
with these risk corridor provisions requires us to consider factors that may not be certain including member
eligibility status differences with CMS. The risk-share adjustment, if any, is recorded as an adjustment to
premium revenues and premiums receivable.
Health care costs and general and administrative expenses associated with Part D are recognized as the costs
and expenses are incurred.
CMS Risk Factor Adjustments
We have an arrangement with CMS for certain of our Medicare products whereby periodic changes in our
risk factor adjustment scores for certain diagnostic codes result in changes to our health plan services premium
revenues. We recognize such changes when the amounts become determinable, supportable and the collectibility
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