Health Net 2009 Annual Report Download - page 106

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
is reasonably assured. Because the recorded revenue is based on our best estimate at the time, the actual payment
we receive from CMS for risk adjustment reimbursement settlements may be different than the amounts we have
initially recognized on our financial statements. The change in our estimate for the risk adjustment in the years
ended December 31, 2009 and 2008 was not significant. For the year ended December 31, 2007, the change in
estimate was $67.9 million.
TRICARE Contract Target Costs
Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care
costs, which is negotiated annually during the term of the contract with underruns and overruns of our target cost
borne 80% by the government and 20% by us. In the normal course of contracting with the federal government,
we recognize changes in our estimate for the target cost underruns and overruns when the amounts become
determinable, supportable, and the collectibility is reasonably assured. As a result of changes in the estimate
during the year ended December 31, 2009, we recognized an increase in revenue of $40 million and an increase
in cost of $49 million. As a result of changes in the estimate during the year ended December 31, 2008, we
recognized an increase in revenue of $17 million and an increase in cost of $22 million. As a result of changes in
the estimate during the year ended December 31, 2007, we recognized a decrease in revenue of $58 million, and
a decrease in cost of $75 million. In addition, 2007 included a $36.5 million favorable settlement with the
Federal Government regarding prior Option Period 1 health care cost targets. The administrative price is paid on
a monthly basis, one month in arrears and certain components of the administrative price are subject to volume-
based adjustments.
Share-Based Compensation Expense
As of December 31, 2009, we had various long-term incentive plans that permit the grant of stock options
and other equity awards to certain employees, officers and non-employee directors, which are described more
fully in Note 8.
The compensation cost that has been charged against income under our various long-term incentive plans
was $11.7 million, $24.1 million and $24.3 million during the years ended December 31, 2009, 2008 and 2007,
respectively. The total income tax benefit recognized in the income statement for share-based compensation
arrangements was $4.5 million, $9.3 million and $9.4 million for the years ended December 31, 2009, 2008 and
2007, respectively.
Cash flows resulting from the tax deductions in excess of the compensation cost recognized for those
options (excess tax benefits) are classified as financing cash flows and such amounts are approximately $23
thousand, $0.8 million and $18.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Forfeiture rates for share based awards are estimated up front and true-up adjustments are recorded for the
actual forfeitures.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with maturity of three months or less when
purchased.
Investments
Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair
value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net
of income tax effects. The cost of investments sold is determined in accordance with the specific identification
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