Health Net 2010 Annual Report Download - page 109

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Catastrophic Reinsurance Subsidy—CMS will reimburse Health Net for 80% of the drug costs after a member
reaches his or her out of pocket catastrophic threshold of $4,550, $4,350 and $4,050 for the years ended
December 31, 2010, 2009 and 2008, respectively. The CMS prospective payment (a flat PMPM cost reimbursement
estimate) is received monthly based on the original CMS bid. After the year is complete, a settlement is made based
on actual experience. The catastrophic reinsurance subsidy is accounted for as deposit accounting.
Low-Income Member Cost Sharing Subsidy—For qualifying low-income members, CMS will reimburse
Health Net, on the member’s behalf, some or all of a member’s cost sharing amounts (e.g. deductible, co-pay/
coinsurance). The amount paid for the member by CMS is dependent on the member’s income level in relation to
the Federal Poverty Level. Health Net receives prospective payments on a monthly basis, and they represent a
cost reimbursement that is finalized and settled after the end of the year. The low-income member cost sharing
subsidy is accounted for as deposit accounting.
CMS Risk Share—Premiums from CMS are subject to risk corridor provisions which compare costs targeted
in our annual bids to actual prescription drug costs, limited to actual costs that would have been incurred under
the standard coverage as defined by CMS. Variances of more than 5% above or below the original bid submitted
by us may result in CMS making additional payments to us or require us to refund to CMS a portion of the
premiums we received. We estimate and recognize an adjustment to premium revenues related to the risk
corridor payment settlement based upon pharmacy claims experience. The estimate of the settlement associated
with these risk corridor provisions requires us to consider factors that may not be certain including member
eligibility status differences with CMS. The risk-share adjustment, if any, is recorded as an adjustment to
premium revenues and premiums receivable.
Health care costs and general and administrative expenses associated with Part D are recognized as the costs
and expenses are incurred.
CMS Risk Factor Adjustments
We have an arrangement with CMS for certain of our Medicare products whereby periodic changes in our
risk factor adjustment scores for certain diagnostic codes result in changes to our health plan services premium
revenues. We recognize such changes when the amounts become determinable, supportable and the collectibility
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 revenue in the
years ended December 31, 2010, 2009 and 2008 was not significant.
TRICARE Contract Target Costs
Our 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. 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. 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.
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