Health Net 2011 Annual Report Download - page 66

Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services
including: provider network management, referral management, medical management, disease management,
enrollment, customer service, clinical support service, and claims processing. We also provide assistance in the
transition into and out of the T-3 contract. These services are structured as cost reimbursement arrangements for
health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, and contingent fees
and payments based on various incentives and penalties. We recognize revenue related to administrative services
on a straight-line basis over the option period, when the fees become fixed and determinable. The TRICARE
North Region 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. The T-3 contract also includes various performance-based incentives and penalties. For each of the
incentives or penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at
each interim date and are legally entitled to in the event of a contract termination. See Note 2 to our consolidated
financial statements under the heading “T-3 TRICARE Contract” for additional information on our T-3 contract.
Under our previous TRICARE contract for the North Region, 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
incurred but not reported claims (“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.
We measure our Northeast Operations segment profitability based on pretax income. The pretax income is
calculated as Northeast Operations segment total revenues, including Northeast administrative services fees, less
Northeast segment total expenses, including Northeast administrative services expenses. Under the United
Administrative Services Agreements, which terminated on July 1, 2011, we provided claims processing,
customer services, medical management, provider network access and other administrative services to United
and certain of its affiliates. 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. For additional information on the United
Administrative Services Agreements and the Claims Servicing Agreements, see Note 2 to our consolidated
financial statements under the heading “Subsequent Accounting for the Northeast Sale.” See “—Results of
Operations—Northeast Operations Reportable Segment Results” for a calculation of our pretax income.
Health Care Reform Legislation
During the first quarter of 2010, the President signed into law both the Patient Protection and Affordable
Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), which is
causing and will continue to cause significant changes to the U.S. health care system and alter the dynamics of
the health care insurance industry. The provisions of the new legislation include, among others, imposing
significant new taxes and fees on health insurers that may not be deductible for income tax purposes, including a
health insurer fee on fully insured premiums and an excise tax on high premium insurance policies, stipulating a
minimum medical loss ratio (as adopted by the Secretary of the U.S. Department of Health and Human Services
(“HHS”)), limiting Medicare Advantage payment rates, increasing mandated benefits, eliminating medical
underwriting for medical insurance coverage decisions, or “guaranteed issue,” increasing restrictions on
rescinding coverage, or “rescissions,” prohibiting some annual and all lifetime limits on amounts paid on behalf
64