Health Net 2014 Annual Report Download - page 124

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-14
adjustment to the contract terms to account for the impact of the change order. We start to perform under such change
orders and begin to incur associated costs after we receive the government's unilateral modification, but before we have
negotiated the final scope and/or value of the change order. In these situations, costs are expensed as incurred, and we
estimate and record revenue when we have met all applicable revenue recognition criteria. These criteria include the
requirements that change order amounts are determinable, that we have performed under the change orders, and that
collectability of amounts payable to us is reasonably assured.
In addition to the beneficiaries that we service under the T-3 contract, we provide behavioral health services to
military families under the DoD sponsored MFLC program. On August 15, 2012, we entered into a new MFLC contract
awarded by the DoD. The new contract has a five-year term that includes a 12-month base period and four 12-month
option periods. As a result of the government's decision to award the new MFLC contract to multiple contractors, the
revenues we receive from the new contract are substantially reduced in comparison to the original MFLC contract.
Revenues from the MFLC contracts were $119.7 million, $104.8 million and $221.3 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
In September 2013, the U.S. Department of Veterans Affairs (“VA”) awarded us a contract under its new Patient
Centered Community Care program (“PC3 Program”). The PC3 Program provides eligible veterans coordinated, timely
access to care through a comprehensive network of non-VA providers who meet VA quality standards when a local VA
medical center cannot readily provide the care. We support VA in providing care to veterans in three of the six PC3
Program regions. These three regions, Regions 1, 2 and 4, encompass all or portions of 37 states, the District of
Columbia, Puerto Rico and the Virgin Islands. The PC3 Program contract term includes a base period of performance
through September 30, 2014 and four one-year option periods that may be exercised by VA. On September 23, 2014,
VA exercised option period 1 which commenced on October 1, 2014 and is scheduled to end on September 30, 2015. In
addition to the one-year option periods, VA has the ability to extend the PC3 Program contract an additional two years
and six months based on VA's need.
In August 2014, VA expanded our PC3 Program contract to include primary care services for veterans who are
unable to obtain primary care at a VA medical center in the three PC3 regions in which we operate. In addition, in
November 2014, we modified our PC3 Program contract to further expand our services with VA in support of the
Veterans Access, Choice and Accountability Act of 2014 ("VACAA"). The VACAA modification to our PC3 Program
contract (the "VACAA modification") expires no later than September 30, 2017. The VACAA modification includes,
among other things, the production and distribution of the new Veterans Choice Card, which allows veterans to elect to
receive care outside of the VA when they qualify. The transition-in process for the VACAA modification began in the
fourth quarter of 2014. We had deferred revenues associated with the contract modification of $68.2 million as of
December 31, 2014, which are amortized on a straight-line basis over the customer relationship period. Fulfillment
costs associated with the PC3 contract and the related modification are expensed as incurred. For the year ended
December 31, 2014, we had $24.7 million in revenues from the PC3 Program.
Divested Operations and Services
Divested operations and services revenues and expenses include items related to the run-out of our Northeast
business that was sold in the Northeast Sale on December 11, 2009 and the transition-related services provided in
connection with the sale of our Medicare PDP business on April 1, 2012. As of December 31, 2012, we had
substantially completed the administration and run-out of our divested businesses. See Note 3 for additional
information regarding the Northeast Sale and the sale of our Medicare PDP business, and see Note 14 for information
regarding our reportable segments.
Medicare Part D
We provide the Medicare Part D benefit as a fully insured product to our existing Medicare members. The Part D
benefit consists of pharmacy benefits for Medicare beneficiaries. Part D renewal occurs annually, but it is not a
guaranteed renewable product. We report Part D as part of our Western Region Operations reportable segment. On April
1, 2012, we completed the sale of our Medicare PDP business. In connection with the transaction, we were not
permitted to offer Medicare PDP plans for one year following closing, subject to certain exceptions. For more
information regarding the sale of our Medicare PDP business, see Note 3. We continue to provide prescription drug