Health Net 2010 Annual Report Download - page 86

On a monthly basis, we estimate the amount of uncollectible receivables to reflect allowances for doubtful
accounts. The allowances for doubtful accounts are estimated based on the creditworthiness of our customers, our
historical collection rates and the age of our unpaid balances. During this process, we also assess the
recoverability of the receivables, and an allowance is recorded based upon their net realizable value. Those
receivables that are deemed to be uncollectible, such as receivables from bankrupt employer groups, are fully
written off against their corresponding asset account, with a debit to the allowance to the extent such an
allowance was previously recorded.
Reserves for claims and other settlements include reserves for claims (incurred but not reported claims
(“IBNR”) and received but unprocessed claims), and other liabilities including capitation payable, shared risk
settlements, provider disputes, provider incentives and other reserves for our Western Region Operations
reporting segment. As of December 31, 2010, 77% of reserves for claims and other settlements were attributed to
claims reserves. See Note 16 to our consolidated financial statements for a reconciliation of changes in the
reserve for claims.
We estimate the amount of our reserves for claims primarily by using standard actuarial developmental
methodologies. This method is also known as the chain-ladder or completion factor method. The developmental
method estimates reserves for claims based upon the historical lag between the month when services are rendered
and the month claims are paid while taking into consideration, among other things, expected medical cost
inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key component of
the developmental method is the completion factor which is a measure of how complete the claims paid to date
are relative to the estimate of the claims for services rendered for a given period. While the completion factors
are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods
since a large portion of health care claims are not submitted to us until several months after services have been
rendered. Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based
on per member per month claims trends developed from the experience in preceding months. This method is
applied consistently year over year while assumptions may be adjusted to reflect changes in medical cost
inflation, seasonal patterns, product mix, benefit plan changes and changes in membership.
An extensive degree of actuarial judgment is used in this estimation process, considerable variability is
inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and
payment patterns and medical cost trends. As such, the completion factors and the claims per member per month
trend factor are the most significant factors used in estimating our reserves for claims. Since a large portion of the
reserves for claims is attributed to the most recent months, the estimated reserves for claims are highly sensitive
to these factors. The following table illustrates the sensitivity of these factors and the estimated potential impact
on our operating results caused by these factors:
Completion Factor (a)
Percentage-point Increase (Decrease)
in Factor
Health Plan Services
(Decrease) Increase in
Reserves for Claims
2%.................................................. $(46.2) million
1%.................................................. $(23.5) million
(1)% ................................................ $ 24.4 million
(2)% ................................................ $ 49.9 million
Medical Cost Trend (b)
Percentage-point Increase (Decrease)
in Factor
Health Plan Services
Increase (Decrease) in
Reserves for Claims
2%.................................................. $ 23.8 million
1%.................................................. $ 11.9 million
(1)% ................................................ $(11.9) million
(2)% ................................................ $(23.8) million
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