Health Net 2014 Annual Report Download - page 69

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contingent fees and payments based on various incentives and penalties. We recognize revenue related to administrative
services on a straight-line basis over the option period, when the fees become fixed and determinable. The TRICARE
North Region 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 statements of operations. The T-3
contract also 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. See Note 2 to our consolidated financial statements under the heading
"Government Contracts" for additional information on our T-3 contract.
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. See Note 2 to our consolidated financial statements under the heading "Government Contracts" for
additional information on our other government contracts such as the MFLC contract and that PC3 Program.
Health Care Reform Legislation and Implementation
The ACA transformed the U.S. health care system through a series of complex initiatives. Due in part to the
magnitude, scope and complexity of these initiatives, as well as their ongoing implementation, the ultimate impact of
the ACA on us remains difficult to predict. The ACA has provided growth opportunities for health insurers, including
us, but also introduces new risks and uncertainties, and required changes in the way products are designed,
underwritten, priced, distributed and administered. While we have experienced significant growth in our revenues and
membership in certain products as a result of the ACA, the measures initiated by the ACA and the associated
preparation for and implementation of these measures have had, and will continue to have, an adverse impact on,
among other things, the costs of operating our business, and could materially adversely affect our business, cash flows,
financial condition and results of operations.
For a detailed description of the ACA’s provisions and related health care reform programs, initiatives, rules and
regulations, see "Item 1. Business-Government Regulation—Health Care Reform Legislation and Implementation." For
additional discussion of some of our risks and uncertainties related to the ACA, including certain legal, legislative and
regulatory developments, see "Item 1A. Risk Factors."
Medicaid Expansion
In connection with the ACA, the federal government extended funds to those states that opted to expand
Medicaid eligibility from a pool that included residents with incomes up to 100% of the federal poverty level ("FPL") to
an expanded pool of residents with incomes up to 133% of the FPL. Both Arizona and California are amongst the states
that have opted into this "Medicaid expansion." In 2014, our total Medicaid membership increased by 50% as a result of
Medicaid expansion. We anticipate continued Medicaid membership growth from the expansion, due in part to the
backlog of Medi-Cal applications in process at the county level at the end of 2014, as well as the expected movement of
some individuals from the exchanges population to Medicaid. For additional information on our Medicaid program, see
"Item 1. Business-Segment Information—Western Region Operations Segment—Medicaid and Related Products."
Public Health Insurance Exchanges
The ACA also required the establishment of state-run or federally facilitated "exchanges" where individuals and
small groups may purchase health coverage. We currently participate as Qualified Health Plans ("QHPs") in the
exchanges in California and Arizona. In California, we currently operate in 13 of 19 exchange rating regions in
California in the individual market and in all 19 exchange rating regions in the small business health options program
("SHOP").
We believe the exchanges represent a significant commercial business opportunity for us as our individual
commercial enrollment increased nearly 190 percent during 2014, driven in large part by enrollment in the exchanges
through the first open enrollment period. However, as we complete our second enrollment period, changing economic
conditions, the dynamic competitive environment on the exchanges, various legislative and legal developments and the
ongoing evolution of the regulatory framework for the exchanges, among other things, may alter the economics and
structure of our participation in the exchanges, which remain a new marketplace with which we have limited
experience. If we are not able to successfully adapt to any such changes in our markets, our financial condition, cash
flows and results of operations may be adversely affected. For more information on the exchanges, including the