Health Net 2011 Annual Report Download - page 161

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
These financing receivables are considered past due if the required principal payments have not been
received as of the date such payments were due. We do not accrue interest on these financing receivables, and
interest income is recognized only to the extent any such cash payments are received. We had no past due
financing receivables as of December 31, 2011 and December 31, 2010. Financing receivables are considered
impaired when, based on current information and events, it is probable we will be unable to collect all amounts
due in accordance with the original contractual terms of the agreement, including scheduled principal payments.
Impairment is evaluated in total for smaller-balance receivables of a similar nature and on an individual
receivable basis for other larger receivables. If a receivable is impaired, a specific valuation allowance is
established. Impaired receivables, or portions thereof, are charged off when deemed uncollectible. We had no
impaired receivables as of December 31, 2011 and December 31, 2010.
As part of the on-going monitoring of the credit quality of our financing receivables, we track and monitor
certain credit quality indicators such as the counterparties’ credit rating and financial condition, including their
capital strength, amount of leverage, and stability of earnings and growth. The counterparty for the amounts due
for contingent membership renewals is investment grade and in strong financial condition. We believe that the
counterparties for the loans to health care providers are of strong financial condition.
The allowance for possible bad debt is a reserve established through a bad debt provision charged to general
and administrative expense, which represents our best estimate of probable losses that have been incurred within
the existing receivables. The allowance, in our judgment, is necessary to reserve for estimated bad debt and risks
inherent in the receivables. Our allowance for bad debt methodology is based on historical loss experience by
type of credit and internal risk assessment, with adjustments for current events and conditions. The allowance for
bad debt was not material as of December 31, 2011 and December 31, 2010.
Note 19—Subsequent Event
Sale of Medicare PDP Business
On January 9, 2012, we announced that our subsidiary, Health Net Life, has entered into a definitive
agreement to sell our Medicare PDP business to a subsidiary of CVS Caremark Corporation for approximately
$160 million in cash.
The transaction is subject to a number of closing conditions and applicable regulatory approvals, including
approval from CMS, and is expected to close in the second quarter of 2012. As of December 31, 2011, we had
approximately 400,000 Medicare PDP members in 49 states and the District of Columbia. Annualized revenue
for the Medicare PDP business is approximately $490 million. We will continue to provide prescription drug
benefits as part of our Medicare Advantage plan offerings.
CMS Risk Adjustment Data Validation Audit Methodology
On February 24, 2012, CMS published its final payment error calculation methodology for Medicare
Advantage risk adjustment data validation contract-level audits (RADV audits). On December 21, 2010, CMS
had invited public comment on the proposed methodology. CMS will begin applying the final methodology for
audits of the 2011 payment year. Among other things, the final methodology includes a fee-for-service adjuster,
which would limit our liability to an error rate in excess of CMS’ own fee-for-service error rate. We are
evaluating the impact this final methodology might have on our financial condition or results of operations.
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