Health Net 1998 Annual Report Download - page 39

F O U N D AT IO N H EALT H SYST EMS, I N C. 3 7
services as well as managed care products related
to bill review, administration and cost containment
for hospitals,health plans and other entities.
Discontinued Operations
The consolidated financial statements give re t ro a c t i ve
effect to the following (see Note 3):
Workers’ Compensation Insurance Segment – In
December 1997,the Company revised its strategy
of maintaining a presence in the workers’ compensa-
tion insurance business and adopted a formal plan to
discontinue and sell this segment through divestiture
of its wo r ke rs ’compensation insurance subsidiari e s .
The Company completed its sale of this segment
on December 10,1998.
Physician Practice Management Segment –
On June 28,1996 the Company executed a Stock
and Note Purchase Agreement with FPA Medical
Management,Inc.(“FPA”),a national health care
management services organization,for the purchase by
FPA of the Company’s physician practice manage-
ment subsidiary and affiliated phy s i c i a n - owned med-
ical practices (collectively, the “Medical Practices”).
The transaction was consummated in November 19 9 6 .
Note 2 – Summary of Significant Accounting Policies
Consolidation and Basis of Presentation
The consolidated financial statements include the
accounts of the Company and its wholly-owned and
m a j o ri t y - owned subsidiari e s .All significant interc o m-
p a ny transactions have been eliminated in consolida-
tion except for transactions between the Company’s
continuing operations subsidiaries and the discontin-
ued operations segments discussed in Note 3.The
accompanying consolidated financial statements have
been restated for the FHS Combination accounted
for as a pooling of interests and for the discontinued
operations as discussed in Note 1.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated
financial statements and notes have been reclassified
to conform to the 1998 presentation.
Revenue Recognition
Health plan services premium reve nues include
HMO and PPO premiums from employer groups and
i n d i viduals and from Medicare recipients who have
p u rchased supplemental benefit cove r a g e , which pre-
miums are based on a pre d e t e rmined prepaid fee,
Medicaid reve nues based on mu l t i - y ear contracts to
p r ovide care to Medicaid re c i p i e n t s ,and reve nue under
M e d i c a re risk contracts to provide care to enro l l e d
M e d i c a re re c i p i e n t s . R e v e nue is re c o gnized in the
month in which the related enrollees are entitled to
health care serv i c e s . P remiums collected in adva n c e
a r e re c o r ded as unearned pre m i u m s .
G ove rnment contracts reve nues are re c og n i z e d
in the month in which the eligible beneficia ries are
entitled to health care serv i c e s .G ove rnment c o n t r a c t s
also contain cost and performance incentive provi-
sions which adjust the contract price based on actual
performance, and revenue under contracts is subject
to price adjustments attri bu t a b le to inflation and other
fa c t o rs .The effects of these adjustments are re c og n i z e d
on a monthly basis,although the final determination
of these amounts could extend significantly beyond
the period during which the services were provided.
Amounts receivable under government contracts are
comprised primarily of estimated amounts re c e i va bl e
under these cost and perform a n c e incentive provi-
sions,price adjustments,and change orders for
services not originally specified in the contracts.
Specialty services revenues are recognized in
the month in which the administrative services are
performed or the period that coverage for services
is provided.
Health Care Expenses
The cost of health care services is recognized in the
period in which services are provided and includes
an estimate of the cost of services which have been
incurred but not yet reported.Such costs include
p ayments to pri m a ry care phy s i c i a n s , s p e c i a l i s t s ,
hospitals,outpatient care facilities and the costs asso-
ciated with managing the extent of such care. The
estimate for reserves for claims and other settlements
is based on actuarial projections of health care costs
using historical studies of claims paid.Estimates are
continually monitored and reviewed and,as settle-
ments are made or estimates adjusted, differences are
reflected in current operations.Such estimates are
subject to the impact of changes in the regulatory
environment and economic conditions. Given the
inherent variability of such estimates, the actual
liability could differ significantly from the amounts
provided.While the ultimate amount of claims and
losses paid are dependent on future developments,
management is of the opinion that the reserves for
claims and other settlements are adequate to cover
such claims and losses.These liabilities are reduced
by estimated amounts recoverable from third parties
for subrogation.
The Company generally contracts with
various medical groups to provide professional care
to certain of its members on a capitation, or fixed
per member per month fee basis.Capitation con-
tracts generally include a provision for stop-loss and
non-capitated services for which the Company is
liable. Professional capitated contracts also generally
contain provisions for shared risk,whereby the