Health Net 1999 Annual Report Download - page 35

FOUNDATION HEALTH SYSTEMS, IN C. 33
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 majority-
owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation except for transac-
tions between the Company’s continuing operations sub-
sidiaries and the discontinued operations segments discussed
in Note 3.The accompanying consolidated financial state-
ments have been restated for the FHS Combination
accounted for as a pooling of interests and for the discon-
tinued operations as discussed in Note 1.
Reclassifications
Certain amounts in the 1998 and 1997 consolidated finan-
cial statements and notes have been reclassified to conform
to the 1999 presentation.
Revenue Recognition
Health plan services premium revenues include HMO and
PPO premiums from employer groups and individuals and
from Medicare recipients who have purchased supplemental
benefit coverage, which premiums are based on a predeter-
mined prepaid fee, Medicaid revenues based on multi-year
contracts to provide care to Medicaid recipients, and reve-
nue under Medicare risk contracts to provide care to
enrolled Medicare recipients. R evenue is recognized in the
month in which the related enrollees are entitled to health
care services. Premiums collected in advance are recorded as
unearned premiums.
Government contracts revenues are recognized in the
month in which the eligible beneficiaries are entitled to
health care services. Government contracts also contain cost
and performance incentive provisions which adjust the
contract price based on actual performance, and revenue
under contracts is subject to price adjustments attributable
to inflation and other factors.The effects of these adjust-
ments are recognized on a monthly basis, although the final
determination of these amounts could extend significantly
beyond the period during which the services were pro-
vided. Amounts receivable under government contracts are
comprised primarily of estimated amounts receivable under
these cost and performance incentive provisions, 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 payments to primary care
physicians, specialists, hospitals, outpatient care facilities and
the costs associated with managing the extent of such care.
The Company estimates the amount of the provision for
service costs incurred but not reported using standard actu-
arial methodologies based upon historical data including
the period between the date services are rendered and the
date claims are received and paid, denied claim activity,
expected medical cost inflation, seasonality patterns and
changes in membership.The estimates for service costs
incurred but not reported are made on an accrual basis and
adjusted in future periods as required. Any adjustments to
the prior period estimates are included in the current
period. 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 pro-
vided.While the ultimate amount of claims and losses paid
are dependent on future developments, management is of
the opinion that the recorded reserves are adequate to cover
such costs.These liabilities are reduced by estimated
amounts recoverable from third parties for subrogation.
The Company generally contracts with various med-
ical groups to provide professional care to certain of its
members on a capitation, or fixed per member per month
fee basis. Capitation contracts generally include a provision
for stop-loss and non-capitated services for which the
Company is liable. Professional capitated contracts also gen-
erally contain provisions for shared risk, whereby the Com-
pany and the medical groups share in the variance between
actual costs and predetermined goals. Additionally, the
Company contracts with certain hospitals to provide hospi-
tal care to enrolled members on a capitation basis.The
HMOs also contract with hospitals, physicians and other
providers of health care, pursuant to discounted fee-for-ser-
vice arrangements, hospital per diems, and case rates under
which providers bill the HMOs for each individual service
provided to enrollees.
The Company assesses the profitability of contracts for
providing health care services when operating results or
forecasts indicate probable future losses. Contracts are
grouped in a manner consistent with the method of deter-
mining premium rates. Losses are determined by comparing
anticipated premiums to the total of health care related
costs less reinsurance recoveries, if any, and the cost of
maintaining the contracts. Losses, if any, are recognized in
the period the loss is determined and are classified as
Health Plan Services.
During 1998, premium deficiency reserves were specif-
ically determined in accordance with this policy for the
Louisiana, Oklahoma, and Texas plans, which the Company
sold in 1999. See Note 3 - Acquisitions and Dispositions.
These future losses were probable as a result of increasing
health care costs, on a per member per month basis, driven
by a declining membership base.