Health Net 2010 Annual Report Download - page 87

(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate
how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore,
an increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.
(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for
the most recent three months.
Other relevant factors include exceptional situations that might require judgmental adjustments in setting the
reserves for claims, such as system conversions, processing interruptions or changes, environmental changes or
other factors. All of these factors are used in estimating reserves for claims and are important to our reserve
methodology in trending the claims per member per month for purposes of estimating the reserves for the most
recent months. In developing our best estimate of reserves for claims, we consistently apply the principles and
methodology described above from year to year, while also giving due consideration to the potential variability
of these factors. Because reserves for claims include various actuarially developed estimates, our actual health
care services expense may be more or less than our previously developed estimates. Claims processing expenses
are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are
continually monitored and reviewed, with any adjustments reflected in current operations.
We assess the profitability of contracts for providing health care services when operating results or forecasts
indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include
premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under
a capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers.
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 losses are determined and are classified as Health Plan Services. We held a premium deficiency
reserve of $0.4 million as of December 31, 2010.
Government Contracts
The TRICARE North Region contract is made up of two major revenue components, health care and
administrative services. Health care services revenue includes health care costs, including paid claims and
estimated IBNR expenses, for care provided for which we are at risk and underwriting fees earned for providing
the health care and assuming underwriting risk in the delivery of care. Administrative services revenue
encompasses all other services provided to both the government customer and to beneficiaries, including services
such as medical management, claims processing, enrollment, customer services and other services unique to the
managed care support contracts with the government. Health care costs and associated revenues are recognized
as the costs are incurred and the associated revenue is earned. Revenue related to administrative services is
recognized as the services are provided and earned. Revenues associated with the transition to the TRICARE
contract for the North Region are recognized over the entire term of the contract.
There are different variables that impact the estimate of the IBNR reserves for our TRICARE business than
those that impact our managed care businesses. These variables consist of changes in the level of our nation’s
military activity, including the call-up of reservists in support of heightened military activity, continual changes
in the number of eligible beneficiaries, changes in the health care facilities in which the eligible beneficiaries
seek treatment, and revisions to the provisions of the contract in the form of change orders. Each of these factors
is subject to significant judgment, and we have incorporated our best estimate of these factors in estimating the
reserve for IBNR claims.
As part of our TRICARE contract for the North Region, we have a risk-sharing arrangement with the federal
government whereby variances in actual claim experience from the targeted medical claim amount negotiated in
our annual bid are shared. Due to this risk-sharing arrangement provided for in the TRICARE contract for the
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