Health Net 2011 Annual Report Download - page 92

The future contractual obligations in the contractual obligations table are estimated based on information
currently available. The timing of and the actual payment amounts may differ based on actual events.
Off-Balance Sheet Arrangements
As of December 31, 2011, we had no off-balance sheet arrangements as defined under Regulation S-K Item
303(a)(4) and the instructions thereto. See Note 6 to our consolidated financial statements for a discussion of our
letters of credit.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America (“GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Principal areas requiring the use of estimates include revenue
recognition, health care costs, including IBNR amounts, reserves for contingent liabilities, amounts receivable or
payable under government contracts, goodwill and other intangible assets, recoverability of long-lived assets and
investments, and income taxes. Accordingly, we consider accounting policies on these areas to be critical in
preparing our consolidated financial statements. A significant change in any one of these amounts may have a
significant impact on our consolidated results of operations and financial condition. A more detailed description
of the significant accounting policies that we use in preparing our financial statements is included in the notes to
our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K.
Health Plan Services
Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have purchased supplemental benefit coverage (for which
premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide
care to Medicaid recipients, and revenue under Medicare risk contracts (including Part D) to provide care and
services to enrolled Medicare recipients. Revenue is recognized in the month in which the related enrollees are
entitled to health care services. Premiums collected in advance of the month in which enrollees are entitled to
health care services are recorded as unearned premiums.
Approximately 43%, 43%, and 39% in 2011, 2010 and 2009, respectively, of our health plan services
premium revenues were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject
to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these
programs, including proposed Risk Adjustment Data Validation (“RADV”) Audit and enacted the Patient
Protection and Affordable Care Act, are extremely complex and subject to interpretation. As a result, there is at
least a reasonable possibility that recorded estimates will change by a material amount.
Our Medicare contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums
paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment
model pays more for members whose medical history would indicate that they are expected to have higher
medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment
using diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. We and the
health care providers collect, compile and submit the necessary and available diagnosis data to CMS within
prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted and
expected to be submitted to CMS.
On a monthly basis, we estimate the amount of uncollectible receivables to reflect allowances for doubtful
accounts. The allowances for doubtful accounts are estimated based on the creditworthiness of our customers, our
90