Health Net 2011 Annual Report Download - page 116

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amounts receivable under government contracts are comprised primarily of contractually defined billings,
accrued contract incentives 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, and we will
record the costs and the appropriate value for revenue, using our best estimate of what will ultimately be negotiated.
In addition to the beneficiaries that we service under the T-3 contract, we provide behavioral health services
to military families under the Department of Defense Military and Family Life Consultant (MFLC) Program
contract. Services under the MFLC contract began on April 1, 2007 and are contracted through July 25, 2012. On
December 13, 2010, the Department of Defense issued a Request for Proposals for the follow-on MFLC contract.
We anticipate that the Department of Defense will request that final proposal revisions be submitted in March
2012 with a contract award by the second quarter of 2012. Revenues from the MFLC contract were $259 million
for the year ended December 31, 2011.
Subsequent Accounting for the Northeast Sale
Subsequent accounting for the Northeast Sale is reported as part of our Northeast Operations reportable
segment (see Note 14). Under the United Administrative Services Agreements, we provided claims processing,
customer services, medical management, provider network access and other administrative services to United
and certain of its affiliates. We recognized the revenue that we earned from providing these administrative
services in the period these services were provided, and we reported such revenue in the line item, Northeast
administrative services fees and other income, in our consolidated statements of operations. Also included in
Northeast administrative services fees and other income was the amortization of the value of services provided
under the United Administrative Services Agreements. In connection with the Northeast Sale, the United
Administrative Services Agreements were fair valued at $48 million and recorded as deferred revenue. The
deferred revenue was amortized and recorded as Northeast administrative services fees and other income using a
level of effort approach. During the years ended December 31, 2011 and 2010, $2.7 million and $45.3 million,
respectively, were amortized from deferred revenue and recorded as Northeast administrative services fees and
other income.
In addition, we were entitled to 50% of the profits or losses associated with the Acquired Companies’
Medicare business for the year ended December 31, 2010 (subject to a cap of $10.0 million of profit or loss). In
the first quarter of 2011, we received $7.4 million related to our share of the profit associated with the Acquired
Companies’ Medicare business. The Medicare business was transferred to a United affiliate on January 1, 2011.
As part of the Northeast Sale, we also retained certain financial responsibilities for the Acquired Companies,
subject to specified adjustments for the period beginning on December 11, 2009 and ending on July 1, 2011.
Accordingly, the Northeast administrative services fees and other income included a quarterly net payment
(QNP) paid to United in accordance with the terms of the Stock Purchase Agreement. The QNP is a defined term
in the Stock Purchase Agreement and represented the net profit or loss from the wind-down of the Acquired
Companies, as adjusted in accordance with the Stock Purchase Agreement. We reported expenses we incurred in
providing these administrative services as a separate line item, Northeast administrative and claims services
expenses, in our consolidated statements of operations.
Under the Stock Purchase Agreement, United was required to pay us additional consideration for the value of the
Transitioning HNL Members and the members of the Acquired Companies that transitioned to other United products
based upon a formula set forth in the Stock Purchase Agreement to the extent such amounts exceed the initial
minimum payment of $60 million that United made to us at closing (referred to as contingent membership renewals).
This membership transition was completed on July 1, 2011. In connection with contingent membership renewals, we
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