Health Net 2011 Annual Report Download - page 94

(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate
how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore,
an increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.
(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for
the most recent three months.
Other relevant factors include exceptional situations that might require judgmental adjustments in setting the
reserves for claims, such as system conversions, processing interruptions or changes, environmental changes or
other factors. All of these factors are used in estimating reserves for claims and are important to our reserve
methodology in trending the claims per member per month for purposes of estimating the reserves for the most
recent months. In developing our best estimate of reserves for claims, we consistently apply the principles and
methodology described above from year to year, while also giving due consideration to the potential variability
of these factors. Because reserves for claims include various actuarially developed estimates, our actual health
care services expense may be more or less than our previously developed estimates. Claims processing expenses
are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are
continually monitored and reviewed, with any adjustments reflected in current operations.
We assess the profitability of contracts for providing health care services when operating results or forecasts
indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include
premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under
a capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers.
Contracts are grouped in a manner consistent with the method of determining premium rates. Losses are
determined by comparing anticipated premiums to estimates for the total of health care related costs less
reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are recognized in the
period the losses are determined and are classified as Health Plan Services. We held a premium deficiency
reserve of $0.9 million as of December 31, 2011.
Government Contracts
On April 1, 2011, we began delivering administrative services under the T-3 contract for the TRICARE
North Region. We were the managed care contractor for the DoD’s previous TRICARE contract in the North
Region, which ended on March 31, 2011.
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 plus fees received in the form of fixed prices, fixed unit prices, and contingent fees and payments
based on various incentives and penalties.
In accordance with GAAP, we evaluate, at the inception of the contract and as services are delivered, all
deliverables in the service arrangement to determine whether they represent separate units of accounting. The
delivered items are considered separate units of accounting if the delivered items have value to the customer on a
standalone basis (i.e., they are sold separately by any vendor) and no general right of return exists relative to the
delivered item. While we identified two separate units of accounting within the T-3 contract, no determination of
estimated selling price was performed because both units of accounting are performed ratably over the option
periods and, accordingly, the same methodology of revenue recognition applies to both units of accounting.
Therefore, we recognize revenue related to administrative services on a straight-line basis over the option
period, when the fees become fixed and determinable.
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