Health Net 2010 Annual Report Download - page 88

North Region, the changes in the estimate of the IBNR reserves are not expected to have a material effect on the
favorable or adverse development of our liability under the TRICARE contract.
Other government contracts revenues are recognized in the month in which the eligible beneficiaries are
entitled to health care services or in the month in which the administrative services are performed or the period
that coverage for services is provided. Under our TRICARE contract for the North Region we recognize amounts
receivable and payable under the government contracts related to estimated health care IBNR expenses which are
reported separately on the accompanying consolidated balance sheet as of December 31, 2010. These amounts
are the same since all of the estimated health care IBNR expenses incurred are offset by an equal amount of
revenues earned.
Some of the amounts receivable under government contracts are comprised primarily of contractually
defined billings, deferred underwriting fees under the terms of the contract and change orders for services not
originally specified in the contracts. Change orders arise because the government often directs us to implement
changes to our contracts before the scope and/or value is defined or negotiated. We start to incur costs
immediately, before we have proposed a price to the government. In these situations, we make no attempt to
estimate and record revenue. Our policy is to defer the costs as incurred until we have submitted a cost proposal
to the government, at which time we will record the costs and the appropriate value for revenue, using our best
estimate of what will ultimately be negotiated. In the normal course of contracting with the federal government,
we may make claims for contract and price adjustments arising from cost overruns against the government. We
recognize such claims when the amounts become determinable, supportable and the collectibility is reasonably
assured.
Reserves For Contingent Liabilities
In the course of our operations, we are involved on a routine basis in various disputes with members, health
care providers, and other entities, as well as audits by government agencies that relate to our services and/or
business practices that expose us to potential losses.
We recognize an estimated loss, which may represent damages, settlement costs, future legal expenses or a
combination of the foregoing, as appropriate, from such loss contingencies when it is both probable that a loss
will be incurred and that the amount of the loss can be reasonably estimated. Our loss estimates are based in part
on an analysis of potential results, the stage of the proceedings, consultation with outside counsel and any other
relevant information available.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist
of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and
intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets primarily consist of
the value of employer group contracts, provider networks and customer relationships, which are all subject to
amortization.
We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events
or changes in circumstances indicate that we might not recover the carrying value of these assets for each of our
reporting units. We performed our annual impairment test on our goodwill and other intangible assets as of
June 30, 2010 for our Western Region Operations and Northeast Operations reporting units. As a result, we
recorded an impairment of $6 million related to the goodwill for our Northeast Operations in the three months
ended June 30, 2010. We performed a two-step impairment test to determine the existence of impairment and the
amount of the impairment. In the first step, we compared the fair values to the related carrying values and
concluded that the carrying value of the Northeast Operations was impaired and that the carrying value of the
Western Region Operations was not impaired. The ratio of the carrying value of our Western Region Operations
to its fair value was approximately 80%. In the second step, we measured the amount by comparing the
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