Health Net 2011 Annual Report Download - page 95

The contract 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.
Revenues and expenses associated with the T-3 contract are reported as part of Government Contracts
revenues and Government Contracts expenses in the consolidated statements of operations and included in the
Government Contracts reportable segment.
Some of the amounts receivable under government contracts are comprised primarily of contractually defined
billings, accrued contract incentives under the terms of the contract and change orders for services not originally
specified in the contracts. Change orders arise because the government often directs us to implement changes to our
contracts before the scope and/or value is defined or negotiated. We start to incur costs immediately, before we have
proposed a price to the government. In these situations, we make no attempt to estimate and record revenue, and we
will record the costs and the appropriate value for revenue, using our best estimate of what will ultimately be
negotiated. In the normal course of contracting with the federal government, we may make claims for contract and
price adjustments arising from cost overruns against the government. We recognize such claims when the amounts
become determinable, supportable and the collectability is reasonably assured.
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 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.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist
of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and
intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets primarily consist of
the value of employer group contracts, provider networks and customer relationships, which are all subject to
amortization.
We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events
or changes in circumstances indicate that we might not recover the carrying value of these assets for each of our
reporting units. We performed our annual impairment test on our goodwill and other intangible assets as of
June 30, 2011 for our Western Region Operations reporting unit, and no impairment was identified. We
performed a two-step impairment test to determine the existence of impairment and the amount of the
impairment. In the first step, we compared the fair values to the related carrying values and concluded that the
carrying value of the Western Region Operations was not impaired. As a result, the second step was not
performed. The ratio of the fair value of our Western Region Operations to its carrying value was approximately
180%. We also re-evaluated the useful lives of our other intangible assets and determined that the current
estimated useful lives were properly reflected.
During the three months ended June 30, 2010, we performed our annual impairment test and determined that
the implied value of the Northeast Operations reporting unit’s goodwill was zero. As a result, we recorded an
impairment charge of $6.0 million for the total carrying value of the Northeast Operations’ goodwill during the
three months ended June 30, 2010.
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