Health Net 2010 Annual Report Download - page 11

The current TRICARE contract for the North Region is subject to annual renewals on April 1 of each year at
the option of the Department of Defense. In 2007, Congress passed legislation allowing for up to two additional
years of extensions for all TRICARE regions, including the North Region contract, at the Department of
Defense’s option. Subsequent to the passage of this legislation, we negotiated the terms, including administrative
prices and health care target costs, of the North Region contract for the following three option periods with the
Department of Defense: option period 6 (April 1, 2009 – March 31, 2010), option period 7 (April 1, 2010 –
September 30, 2010), and option period 8 (October 1, 2010 – March 31, 2011). Our TRICARE contract for the
North Region was scheduled to end on March 31, 2009 and was extended by the Department of Defense
TRICARE Management Authority, or TMA, through March 31, 2010. In March 2010, we were notified that the
TMA exercised its options to extend the TRICARE contract for the North Region for option period 7 and option
period 8. The exercise of these option periods extends our current TRICARE contract for the North Region
through March 31, 2011.
On May 13, 2010, we were awarded the new Managed Care Support Contract (“T-3”) for the TRICARE
North Region. The transition-in-period for the T-3 contract contractually commenced on May 13, 2010, and
health care delivery under the new contract is scheduled to commence on April 1, 2011. The T-3 contract has five
one-year option periods, however, the Department of Defense has indicated that it intends to exercise option
period 2 (without exercising option period 1), due to a delay of approximately one year in the government’s
initial award of the T-3 North Region contract. Accordingly, option period 2 will commence on April 1, 2011,
and if all remaining option periods are exercised, the T-3 North Region contract would conclude on March 31,
2015.
The T-3 contract has an ASO structure with fixed fees and incentive payments. The T-3 North Region
contract 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. The Fort Campbell area of Kentucky and Tennessee was intended to be part of
the TRICARE South Region contract but has been added to our T-3 North Region contract. We currently serve
the Fort Campbell area under our TRICARE contract for the North Region, and expect to continue doing so
under the T-3 contract for the North Region, at least until health care delivery commences under the T-3 South
Region contract, which we estimate could be as early as April 1, 2012. We believe that the T-3 contract will be
accounted for as an ASO contract and are currently evaluating its expected impact on our consolidated results of
operations and financial condition in 2011, as well as the related accounting and reporting requirements.
For additional information regarding our current TRICARE contract for the North Region and the T-3 North
Region contract, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Item 1A. Risk Factors—A significant reduction in revenues from the government programs in
which we participate could have an adverse effect on our business, financial condition or results of operations.”
Other Department of Defense Contracts
In 2007, MHN was awarded a five-year contract by the Department of Defense, the Military Family & Life
Consultant Program (“MFLC”), to develop, administer and monitor the non-medical counseling program for
service members. The program is designed to deliver short-term situational problem solving counseling,
primarily with regard to stress factors inherent in the military lifestyle. Services under the MFLC contract began
on April 1, 2007 and will end in February 2012. On December 13, 2010, the Department of Defense issued a
Request for Proposals (“RFP”) for the follow-on MFLC contract, with services expected to commence in
February 2012. Pursuant to various amendments to the RFP, bids are due on March 22, 2011. The services
provided under the MFLC contract are not TRICARE benefits and are provided independently from the services
provided under our current TRICARE contract for the North Region.
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