Health Net 2014 Annual Report Download - page 71

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MLRs
Under the ACA, commercial health plans with medical loss ratios ("MLR") on fully insured products, as
calculated as set forth in the ACA, that fall below certain targets are required to rebate ratable portions of their
premiums annually. Certain of the states in which we operate include similar rebate provisions. For example, a medical
loss ratio corridor for the California Department of Health Care Services ("DHCS") adult Medicaid expansion members
under the Medicaid program in California ("Medi-Cal") requires rebate payments to or from DHCS depending on
MLRs for this population. In addition, our Medicaid contract with the state of Arizona contains profit sharing or profit
ceiling provisions under which we refund amounts to Arizona if our health plan generates profit above a certain
specified percentage. During the year ended December 31, 2014, we accrued $200.6 million for a MLR rebate with
respect to our adult Medicaid expansion population payable to DHCS and accrued $24.7 million, net of a $2.3 million
receivable, for excess profit sharing payable to the state of Arizona under our Medicaid contract. Accordingly, for the
year ended December 31, 2014, we reduced Medicaid premium revenue by $225.3 million. See Note 2 "Health Plan
Services Revenue Recognition" section for further discussion on these MLR provisions.
We and other health insurance companies continue to face uncertainty and execution risk due to the multiple,
complex ACA implementations that were and are required in abbreviated time frames in new markets. Additionally, in
many cases, our operational and strategic initiatives must be implemented in evolving regulatory environments and
without the benefit of established market data. In addition, the relative lack of operating experience in these new
marketplaces for insurers and, in certain cases, providers and consumers, has fostered a dynamic marketplace that may
require us to adjust our operating and strategic initiatives over time, and there is no assurance that insurers, including
us, will be able to do so successfully. Our execution risk encapsulates, among other things, our simultaneous
participation in the exchanges, Medicaid expansion and the CCI. These initiatives involved the incorporation of new
and expanded populations and, among other things, have required that we restructure our provider network in response,
and will require us to remain diligent in monitoring the market to, among other things, effectively and efficiently adapt
to our dynamic environment. Any delay or failure by us to successfully execute our operational and strategic initiatives
with respect to health care reform or otherwise appropriately react to the legislation, implementing regulations, actions
of our competitors and the changing marketplace could result in operational disruptions, disputes with our providers or
members, increased exposure to litigation, regulatory issues, damage to our existing or potential member relationships
or other adverse consequences that could have an adverse impact on our business, financial condition, cash flows and
results of operations.
Cognizant Transaction
On November 2, 2014, we entered into a Master Services Agreement (as subsequently amended and restated, the
"Master Services Agreement") with Cognizant. Under the terms of the Master Services Agreement, Cognizant will,
among other things, provide us with certain consulting, technology and administrative services in the following areas:
claims management, membership and benefits configuration, customer contact center services, information technology,
quality assurance, appeals and grievance services, and non-clinical medical management support (collectively, the "BP
and IT Services").
Concurrent with executing the Master Services Agreement, we entered into an asset purchase agreement with
Cognizant (the "Asset Purchase Agreement"), through which Cognizant will purchase certain software assets and
related intellectual property from us for $50 million. See Note 3 to our consolidated financial statements under the
heading “Assets Held for Sale” for additional information on the assets sold in this transaction.
The Cognizant Transaction is expected to close in the first half of 2015, subject to the receipt of required
regulatory approvals. We expect that certain of our employees will become employees of Cognizant or its
subcontractors, and that certain positions will be eliminated as part of the transaction.
The initial term of the Master Services Agreement is seven years, commencing on the later of (i) ten business
days following final regulatory approval of the transaction, and (ii) March 1, 2015 (the "Commencement Date"). We
have two options to extend the Master Services Agreement for one year each by giving notice to Cognizant no less than
three months prior to the end of the then existing term.
We will pay Cognizant for the BP and IT Services through a combination of fixed and variable fees, with the
variable fees fluctuating based on our actual need for such services. Based on the currently projected usage of BP and
IT Services over the initial term of the Master Services Agreement, we expect to pay Cognizant approximately $2.8
billion, subject to price adjustments described in the Master Services Agreement. The Master Services Agreement is
currently expected to generate approximately $150 million to $200 million in annual general and administrative and
depreciation expense savings for us by 2017.Our operating results in our Corporate/Other segment for the year ended
December 31, 2014 were impacted by an $88.5 million pretax asset impairment primarily related to our assets held for