Health Net 2011 Annual Report Download - page 113

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Health Plan Services Revenue Recognition
Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which
premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide
care to Medicaid recipients, and revenue under Medicare risk contracts to provide care to enrolled Medicare
recipients, and revenues from behavioral health services. Revenue is recognized in the month in which the related
enrollees are provided health care coverage. Premiums collected in advance are recorded as unearned premiums.
Under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of
2010 (collectively, the “ACA”), commercial health plans with medical loss ratios on fully insured products, as
calculated as set forth in the ACA, that fall below certain targets are required to rebate ratable portions of their
premiums annually. We classify the estimated rebates, if any, as an offset to Health plan services premiums in
our Consolidated Statement of Operations.
Approximately 43%, 43%, and 39% in 2011, 2010, and 2009, respectively, of our health plan services
premiums were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject to audit
and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these programs,
including the Centers for Medicare and Medicaid Services (CMS) proposed methodology with respect to risk
adjustment data validation (RADV) audits and the ACA, are extremely complex and subject to interpretation. As a
result, there is at least a reasonable possibility that recorded estimates will change by a material amount.
Prior to the Northeast Sale, we provided ASO services to our health plans in Connecticut, New Jersey and
New York. Subsequent to the sale, we provided ASO services to United and its affiliates. Under these
arrangements, which terminated on July 1, 2011, we provided claims processing, customer services, medical
management, provider network access and other administrative services. Administrative services fees were
recognized as revenue in the period services were provided. Upon the termination of the United Administrative
Services Agreements, Claims Servicing Agreements became effective with United and certain of its affiliates
pursuant to which we continue to adjudicate run out claims and perform limited other administrative services.
See Subsequent Accounting for the Northeast Sale below for more information regarding ASO revenues related
to ASO services provided to United and its affiliates.
Health Plan Services Health Care Cost
The cost of health care services is recognized in the period in which services are provided and includes an
estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to
primary care physicians, specialists, hospitals, outpatient care facilities and the costs associated with managing
the extent of such care. Our health care cost can also include from time to time remediation of certain claims as a
result of periodic reviews by various regulatory agencies. We estimate the amount of the provision for service
costs incurred but not reported (IBNR) using standard actuarial methodologies based upon historical data
including the period between the date services are rendered and the date claims are received and paid, denied
claim activity, expected medical cost inflation, seasonality patterns and changes in membership. The estimates
for service costs incurred but not reported are made on an accrual basis and adjusted in future periods as required.
Any adjustments to the prior period estimates are included in the current period. Such estimates are subject to the
impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such
estimates, the actual liability could differ significantly from the amounts provided. While the ultimate amount of
claims and losses paid are dependent on future developments, management believes that the recorded reserves
are adequate to cover such costs.
Our HMOs, primarily in California, generally contract with various medical groups to provide professional
care to certain of their members on a capitated, or fixed per member per month fee basis. Capitation contracts
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