Health Net 2010 Annual Report Download - page 10

TRICARE
Our wholly-owned subsidiary, Health Net Federal Services, LLC (“HNFS”), administers a large managed
care federal contract with the Department of Defense under the TRICARE program in the North Region. We
have been serving the Department of Defense since 1988 under the TRICARE program and its predecessor
programs. We believe we have established a solid history of operating performance under our contracts with the
Department of Defense. We believe there will be further opportunities to serve the Department of Defense and
other governmental organizations, such as the Department of Veterans Affairs, in the future.
Our current TRICARE contract for the North Region is one of three regional contracts awarded by the
Department of Defense in August 2003 under the TRICARE Program. We commenced providing services under
the TRICARE contract for the North Region in 2004. The current TRICARE contract for the North Region
covers Connecticut, Delaware, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New
Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West
Virginia, Wisconsin and the District of Columbia. In addition, the contract covers a small portion of each of
Tennessee, Missouri and Iowa.
Under the current TRICARE contract for the North Region, we provide health care services to
approximately 3.1 million Military Health System (“MHS”) eligible beneficiaries, including 1.8 million
TRICARE eligibles for whom we provide health care and administrative services and 1.3 million other
MHS-eligible beneficiaries for whom we provide administrative services only. Eligible beneficiaries in the
TRICARE program are able to choose from a variety of program options. They can choose to enroll in
TRICARE Prime, which is similar to a conventional HMO plan, or they can select, on a case-by-case basis, to
utilize TRICARE Extra, which is similar to a conventional PPO plan, or TRICARE Standard, which is similar to
a conventional indemnity plan.
Under TRICARE Prime, enrollees pay an enrollment fee (which is zero for active duty participants and their
dependents) and select a primary care physician from a designated provider panel. The primary care physicians
are responsible for making referrals to specialists and hospitals. Except for active duty family members, who
have no co-payment charges, TRICARE Prime enrollees pay co-payments each time they receive medical
services from a civilian provider. TRICARE Prime enrollees may opt, on a case-by-case basis, for a
point-of-service option in which they are allowed to self-refer but incur a deductible and a co-payment.
Under TRICARE Extra, eligible beneficiaries may utilize a TRICARE network provider but incur a
deductible and co-payment which is greater than the TRICARE Prime co-payment. Under TRICARE Standard,
eligible beneficiaries may utilize a TRICARE authorized provider who is not a network provider but pay a higher
co-payment than under TRICARE Prime or TRICARE Extra. As of December 31, 2010, there were
approximately 1.5 million TRICARE eligibles enrolled in TRICARE Prime under our North Region contract.
The current TRICARE contract for the North Region includes a target cost and underwriting fee 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, 2010, we recognized a decrease in revenue of $51
million and a decrease in cost of $64 million. 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. We are paid
within five business days for each health care claim run under the current TRICARE contract for the North
Region based on paid claims with an annual reconciliation of the risk sharing provision. We are not responsible
for providing most pharmaceutical benefits, claims processing for TRICARE and Medicare dual eligibles and
certain marketing and education services.
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