Health Net 2010 Annual Report Download - page 107

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the Company and the medical groups share in the variance between actual costs and predetermined goals.
Additionally, we contract with certain hospitals to provide hospital care to enrolled members on a capitation
basis. Our HMOs also contract with hospitals, physicians and other providers of health care, pursuant to
discounted fee-for-service arrangements, hospital per diems, and case rates under which providers bill the HMOs
for each individual service provided to enrollees.
Approximately 43%, 39%, and 37% in 2010, 2009, and 2008, respectively, of our health plan services
premium revenues were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject
to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these
programs, including the Centers for Medicare and Medicaid Services (CMS) recently proposed methodology
with respect to risk adjustment data validation (RADV) audits and the recently enacted Patient Protection and
Affordable Care Act, are extremely complex and subject to interpretation. As a result, there is at least a
reasonable possibility that recorded estimates will change by a material amount.
We assess the profitability of contracts for providing health care services when operating results or forecasts
indicate probable future losses. Contracts are grouped in a manner consistent with the method of determining
premium rates. Losses are determined by comparing anticipated premiums to estimates for the total of health care
related costs less reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are
recognized in the period the loss is determined and are classified as Health Plan Services cost. We held a
premium deficiency reserve of $0.4 million and $0 as of December 31, 2010 and 2009, respectively.
Under the current TRICARE contract for the North Region, we record amounts receivable and payable for
estimated health care IBNR expenses and report such amounts separately on the accompanying consolidated
balance sheet. These amounts are equal since the estimated health care IBNR expenses incurred are offset by an
equal amount of revenues earned.
Subsequent Accounting for the Northeast Sale
Subsequent accounting for the Northeast Sale is reported as part of our Northeast Operations reportable
segment (see Note 14). We are required to continue to serve the members of the Acquired Companies under the
United Administrative Services Agreements until all members are either transitioned to a legacy United entity or
non-renewed. We expect the United Administrative Services Agreements to be in effect through the second
quarter of 2011. Under the United Administrative Services Agreements, we provide claims processing, customer
services, medical management, provider network access and other administrative services to United and certain
of its affiliates. We recognize the revenue that we earn from providing these administrative services in the period
these services are provided, and we report such revenue in the line item, Northeast administrative services fees,
in our consolidated statements of operations. Also included in the Northeast administrative services fees is the
amortization of the value of services to be provided under the United Administrative Services Agreements. In
connection with the Northeast Sale, the United Administrative Services Agreements were fair valued at $48
million and recorded as deferred revenue. The deferred revenue is being amortized and recorded as Northeast
administrative services fees using a level of effort approach. During the year ended December 31, 2010, $45.3
million was amortized from deferred revenue and recorded as Northeast administrative services fees.
In addition, we are entitled to 50% of the profits or losses associated with the Acquired Companies’
Medicare business for the year ending December 31, 2010 (subject to a cap of $10 million of profit or loss). As
of December 31, 2010, we have accrued $7.1 million in connection with 50% of the profits associated with the
Acquired Companies’ Medicare business. As part of the Northeast Sale, we also retained certain financial
responsibilities for the Acquired Companies for the period beginning on the closing date of the transaction and
ending on the earlier of the second anniversary of the closing date and the date that the last United
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