Health Net 2011 Annual Report Download - page 115

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The transition-in process for the T-3 contract began in the second quarter of 2010. We had deferred
transition-in costs of $43.8 million, which began amortizing on April 1, 2011 on a straight-line basis, and we had
related deferred revenues of $52.5 million, which are being amortized over the customer relationship period.
Fulfillment costs associated with the T-3 contract are expensed as incurred.
Revenues and expenses associated with the T-3 contract are reported as part of Government Contracts
revenues and Government Contracts expenses in the consolidated statements of operations and included in the
Government Contracts reportable segment.
The TRICARE members are served by our network and out-of-network providers in accordance with the
T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the
DoD for such payments. Under the terms of the T-3 contract, we are not the primary obligor for health care
services and accordingly, we do not include health care costs and related reimbursements in our consolidated
statement of operations. Health care costs for the T-3 contract that are paid and reimbursable amounted to $1.7
billion for the year ended December 31, 2011.
Under our previous TRICARE contract for the North Region, which concluded on March 31, 2011,
Government Contracts revenue was made up of two major components: health care and administrative services.
The health care component included revenue recorded for health care costs for the provision of services to our
members, including paid claims and estimated IBNR expenses for which we were at risk, and underwriting fees
earned for providing the health care and assuming underwriting risk in the delivery of care. The administrative
services component encompassed fees received for 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 contract with the government. Government
Contracts revenue and expenses included the impact from underruns and overruns relative to our target cost
under the applicable contracts.
Our previous TRICARE contract for the North Region included a target cost and underwriting fee for
reimbursed health care costs, which was negotiated annually during the term of the contract with underruns and
overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting with
the federal government, we recognized changes in our estimate for the target cost underruns and overruns when
the amounts become determinable, supportable, and the collectibility is reasonably assured. As a result of changes
in the estimate during the year ended December 31, 2011, we recognized a decrease in revenue of $42 million and
a decrease in cost of $52 million. As a result of changes in the estimate during the year ended December 31, 2010,
we recognized a decrease in revenue of $51 million and a decrease in cost of $64 million. As a result of changes in
the estimate during the year ended December 31, 2009, we recognized an increase in revenue of $40 million and
an increase in cost of $49 million. During the year ended December 31, 2011, we recognized $32 million in
revenues related to transitioning out of the previous TRICARE contract for the North Region.
Under our previous TRICARE contract for the North Region, we recorded amounts receivable and payable
for estimated health care IBNR expenses and report such amounts separately on the accompanying consolidated
balance sheet. These amounts are equal since the estimated health care IBNR expenses incurred are offset by an
equal amount of revenues earned.
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.
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