Health Net 2014 Annual Report Download - page 100

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covered member as determined by HHS. While all commercial medical plans, including self-funded plans, are required
to fund the reinsurance entity, only fully-insured non-grandfathered plans in the individual commercial market will be
eligible for recoveries if individual claims exceed a specified threshold. Accordingly, we account for transitional
reinsurance contributions associated with all commercial medical health plans other than non-grandfathered individual
plans as an assessment in general and administrative expenses in our consolidated statement of income. We account for
contributions made by individual commercial plans which are subject to recoveries as contra-health plan services
premium revenue, and we account for any recoveries as contra-health plan services expense in our consolidated
statements of income with a corresponding current or long-term receivable or payable.
Risk Adjustment-The risk adjustment provision applies to individual and small group business both within and
outside the exchange and requires measurement of the relative health status risk of each insurer’s pool of insured
enrollees in a given market. The risk adjustment provision then operates to transfer funds from insurers whose pools of
insured enrollees have a lower-than-average risk scores to those insurers whose pools have greater-than-average risk
scores. Our estimate for the risk adjustment incorporates our risk scores by state and market relative to the market
average using data provided by the participating insurers and available information about the HHS model. This
information is consistent with our knowledge and understanding of market conditions.
As part of our ongoing estimation process, we consider information as it becomes available at interim dates along
with our actuarially determined expectations, and we update our estimates incorporating such information as
appropriate.
We estimate and recognize adjustments to our health plan services premium revenue for the risk adjustment
provision by projecting our ultimate premium for the calendar year. Such estimated calendar year amounts are
recognized ratably during the year and are revised each period to reflect current experience. We record receivables and/
or payables and classify the amounts as current or long-term in the consolidated balance sheets based on the timing of
expected settlement.
Risk Corridor-The temporary risk corridor program will be in place for three years and applies to individual and
small group business operating both inside and outside of the exchanges. The risk corridor provisions limit health
insurers' gains and losses by comparing allowable medical costs to a target amount, each defined/prescribed by HHS,
and sharing the risk for allowable costs with the federal government. Variances from the target exceeding certain
thresholds may result in HHS making additional payments to us or require us to make payments to HHS.
We estimate and recognize adjustments to our health plan services premium revenue for the risk corridor
provision by projecting our ultimate premium for the calendar year. Such estimated calendar year amounts are
recognized ratably during the year and are revised each period to reflect current experience, including changes in risk
adjustment and reinsurance recoverables. We record receivables or payables and classify the amounts as current or long-
term in the consolidated balance sheets based on the timing of expected settlement.
The final reconciliation and settlement with HHS of the premium and cost sharing subsidies and the amounts
related to the 3Rs for the current year will be completed in the following year with HHS.
Government Contracts
On April 1, 2011, we began delivery of administrative services under our T-3 contract. For additional information
on our T-3 contract, see "—Government Contracts Reportable Segment."
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 provided assistance in the
transition into the T-3 contract, and will provide assistance in any transition 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.
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.