Health Net 2014 Annual Report Download - page 123

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-13
Government Contracts
On April 1, 2011, we began delivery of administrative services under our T-3 contract for the TRICARE North
Region. The T-3 contract was awarded to us on May 13, 2010, and included five one-year option periods. On March 15,
2014, the DoD exercised the last of these options, which extended the T-3 contract through March 31, 2015. On June
27, 2014, at the DoD's request, we submitted a proposal to add three additional one-year option periods to the T-3
contract. We currently expect negotiations relating to this proposal to conclude on or prior to March 31, 2015. If the
negotiations conclude as expected, we expect the DoD to exercise the first of the three one-year options by that date. If
all three one-year option periods are ultimately exercised, the T-3 contract would conclude on March 31, 2018.
We provide various types of administrative services under the T-3 contract, 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 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.
Therefore, we recognize revenue related to administrative services on a straight-line basis over the option period,
when the fees become fixed and determinable.
The T-3 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.
The transition-in process for the T-3 contract began in the second quarter of 2010. We had deferred transition-in
costs of $43.8 million and related deferred revenues of $52.5 million, both of which are amortized on a straight-line
basis over the customer relationship period. Fulfillment costs associated with the T-3 contract are expensed as incurred.
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.
The TRICARE 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. Health care costs for the T-3 contract that are paid and reimbursed or reimbursable amounted to $2.5 billion,
$2.5 billion and $2.6 billion for the years ended December 31, 2014, 2013 and 2012, respectively.
Other government contracts revenues are recognized in the month in which the eligible beneficiaries are entitled
to health care services or in the month in which the administrative services are performed or the period that coverage
for services is provided.
Amounts receivable under government contracts are comprised primarily of contractually defined billings,
accrued contract incentives under the terms of the contract and amounts related to change orders for services not
originally specified in the contract. Pursuant to our T-3 contract, the government has the right to unilaterally modify the
contract in certain respects by issuing change orders directing us to implement terms or services that were not originally
included in the contract. Following receipt of a change order, we have a contractual right to negotiate an equitable