Health Net 2011 Annual Report Download - page 123

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
other costs we incur to acquire new commercial business or renew existing business. Our commercial health
insurance business typically has a one-year term and may be canceled upon a 30-day notice. We expense these
costs as incurred and report them as selling expenses in our consolidated statements of operations.
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 or investigations by government agencies and elected officials
that relate to our services and/or business practices that expose us to potential losses.
We recognize an estimated loss, which may represent damages, assessment of regulatory fines or penalties,
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.
In 2007, we entered into an agreement to settle three lawsuits styled as nationwide class actions. In
connection with this settlement agreement, we had established a reserve (prove-up fund) of $40 million as of
December 31, 2007 to compensate certain eligible class members who can prove that they paid out of pocket
costs for certain out of network claims or who have received balance bills for such services. Based on updated
information and developments during 2010, including the results of the completed prove-up fund administration,
we made an interim payment of approximately $1 million and reduced the prove-up fund reserve by $34 million
as of December 31, 2010. This $34 million reserve adjustment was recorded as a decrease in our health care cost
in the Corporate/Other segment and had no impact on our reportable business segments (see Note 14). We made
no adjustments to the prove-up fund during 2011, and the reserve balance remained at $5 million as of
December 31, 2011. In January 2012, we reached an agreement in principle to resolve all outstanding issues
relating to the prove-up fund, including responsibility for its future administration. The difference between the
settlement amount and the reserve balance as of December 31, 2011 was not material.
Insurance Programs
The Company is insured for various errors and omissions, property, casualty and other risks. The Company
maintains various self-insured retention amounts, or “deductibles,” on such insurance coverage.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash
equivalents, investments and premiums receivable. All cash equivalents and investments are managed within
established guidelines, which provide us diversity among issuers. Concentrations of credit risk with respect to
premiums receivable are limited due to the large number of payers comprising our customer base. Our 10 largest
employer group premiums receivable balances within each of our plans accounted for 27% and 17% of our total
premiums receivable as of December 31, 2011 and 2010, respectively. Our Medicare receivable from CMS
represented 41% of total receivables as of December 31, 2011 compared with 28% as of December 31, 2010. Our
10 largest employer group premiums within each of our plans accounted for 17%, 17% and 17% of our health
plan services premium revenues for the years ended December 31, 2011, 2010 and 2009, respectively. The
federal government is the primary customer of our Government Contracts segment representing approximately
99% of our Government Contracts revenue. In addition, the federal government is a significant customer of the
Company’s Western Region Operations segment as a result of its contract with CMS for coverage of Medicare-
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