Health Net 2010 Annual Report Download - page 108

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Administrative Services Agreement is terminated. Accordingly, the Northeast administrative services fees
include a Quarterly Net Payment (QNP) to be paid to United in accordance with the terms of the Stock Purchase
Agreement. The QNP is a defined term in the Stock Purchase Agreement and represents the net profit or loss
from the wind-down of the Acquired Companies, as adjusted in accordance with the Stock Purchase Agreement.
We report expenses we incur in providing these administrative services as a separate line item, Northeast
administrative services expenses, in our consolidated statements of operations.
Under the Stock Purchase Agreement, United is required to pay us additional consideration for the value of
the members of the Acquired Companies that transition to other United products based upon a formula set forth
in the Stock Purchase Agreement to the extent such amounts exceed the initial minimum payment of $60 million
that United made to us at closing (referred to as contingent membership renewal). In connection with contingent
membership renewals, we recorded $42.0 million in the year ended December 31, 2010 as an adjustment to the
loss on sale of the Northeast health plan subsidiaries. As of December 31, 2010, $33.8 million was due from
United in connection with contingent membership renewals.
Medicare Part D
We provide the Medicare Part D benefit as a fully insured product to our existing Medicare members. The Part
D benefit consists of pharmacy benefits for Medicare beneficiaries. Part D renewal occurs annually, but it is not a
guaranteed renewable product. We report Part D as part of our Western Region Operations reportable segment.
Part D offers two types of plans: Prescription Drug Plan (PDP) and Medicare Advantage Plus Prescription
Drug (MAPD). PDP covers only prescription drugs and can be combined with traditional Medicare, certain
Medicare Advantage Plans or Medicare supplemental plans. MAPD covers both prescription drugs and medical
care. The majority of our Part D members in the PDP fall into the low-income category.
Health Net has two primary contracts under Part D, one with CMS and one with the Part D enrollees. The
CMS contract covers the portions of the revenue and expenses that will be paid for by CMS. The enrollee
contract covers the services to be performed by Health Net for the premiums paid by the enrollees. The insurance
contracts are directly underwritten with the enrollees, not CMS, and therefore there is a direct insurance
relationship with the enrollees. The premiums are received directly from the enrollees and from CMS for
low-income subsidy members.
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.
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