Health Net 2010 Annual Report Download - page 105

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Acquired Companies) that had conducted businesses in our Northeast Operations segment (see Note 14) to
UnitedHealth Group Incorporated (United). The sale was made pursuant to a Stock Purchase Agreement (Stock
Purchase Agreement), dated as of July 20, 2009, by and among the Company, Health Net of the Northeast, Inc.,
Oxford Health Plans, LLC (Buyer) and, solely for the purposes of guaranteeing Buyer’s obligations thereunder,
United. At the closing of the Northeast Sale, affiliates of United also acquired membership renewal rights for
certain commercial health care business conducted by our subsidiary, Health Net Life Insurance Company
(Health Net Life) in the states of Connecticut and New Jersey (the Transitioning HNL Members). We will
continue to serve the members of the Acquired Companies under Administrative Services Agreements we
entered into with United and certain of its affiliates (the United Administrative Services Agreements) until all
members are either transitioned to legacy United products or non-renewed. See Note 3 for more information on
the Northeast Sale. As part of the Northeast Sale, we retained certain financial responsibilities for the profits and
losses of the Acquired Companies, subject to specified adjustments, for the period beginning on the closing date
and ending on the earlier of the second anniversary of the closing date and the date that the last United
Administrative Services Agreement is terminated. Accordingly, subsequent to the Northeast Sale, our Northeast
Operations segment includes the operations of the businesses that are providing administrative services pursuant
to the United Administrative Services Agreements, as well as the operations of Health Net Life in Connecticut
and New Jersey prior to the renewal dates of the Transitioning HNL Members.
Note 2—Summary of Significant Accounting Policies
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities through the date of the issuance of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. These estimates require the Company to apply complex assumptions and
judgments, and often the Company must make estimates about effects of matters that are inherently uncertain and
will likely change in subsequent periods. Actual results could differ from those estimates. Principal areas
requiring the use of estimates include the determination of Medicare risk factor adjustments, risk sharing
revenues, allowances for doubtful accounts, reserves for claims and other settlements, reserves for contingent
liabilities (including litigation reserve), amounts receivable and payable under government contracts, income
taxes and assumptions when determining net realizable values on long-lived assets.
Revenue Recognition
Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which
premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide
care to Medicaid recipients, and revenue under Medicare risk contracts to provide care to enrolled Medicare
recipients, and revenues from behavioral health services. Revenue is recognized in the month in which the related
enrollees are provided health care coverage. Premiums collected in advance are recorded as unearned premiums.
The current TRICARE contract for the North Region is made up of two major revenue components, health
care services and administrative services. Health care services revenue includes health care costs, including paid
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