Health Net 2002 Annual Report Download - page 46

44 | HEALTH NET, INC.
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 adminis-
trative services are performed or the period that coverage
for services is provided. Government contracts also contain
cost and performance incentive provisions which adjust the
contract price based on actual performance. Revenue
under government contracts is subject to price adjustments
attributable to inflation and other factors. The effects of
these adjustments are recognized on a monthly basis,
although the final determination of these amounts could
extend significantly beyond the period during which the
services were provided.
From time to time, we make adjustments to our
revenues based on retroactivity. These retroactivity adjust-
ments reflect changes in the number of enrollees subse-
quent to when the revenue is billed. We estimate the
amount of future retroactivity each period and accordingly
adjust the billed revenue. The estimated adjustments are
based on historical trends, premiums billed, the volume of
contract renewal activity during the period and other
information. We refine our estimates and methodologies as
information on actual retroactivity becomes available.
On a monthly basis, we estimate the amount of uncol-
lectible receivables to reflect allowances for doubtful
accounts. The allowances for doubtful accounts are esti-
mated based on the creditworthiness of our customers, our
historical collection rates and the age of our unpaid
balances. During this process, we also assess the recover-
ability of the receivables, and an allowance is recorded
based upon their net realizable value. Those receivables
that are deemed to be uncollectible, such as receivables
from bankrupt employer groups, are fully written off
against their corresponding asset account, with a debit to
the allowance to the extent such an allowance was previ-
ously recorded.
HEALTH CARE SERVICES
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. We estimate the amount of the provision for service
costs incurred but not reported using standard actuarial
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. We consider
adjustments to prior period estimates to be a change in
estimate. Accordingly, we include such adjustments 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 esti-
mates, the actual liability could differ significantly from
the amounts provided. While the ultimate amount of
claims and losses paid are dependent on future develop-
ments, management is of the opinion that the recorded
reserves are adequate to cover such costs. These estimated
liabilities are reduced by estimated amounts recoverable
from third parties for subrogation.
As our estimates for health care costs are based on
actuarially developed estimates, incurred claims related to
prior years may differ from previously estimated amounts.
The table below summarizes our amounts incurred in prior
years for Health Plan Services and Government Contracts
health care costs which have been expensed in the current
year. Negative amounts result when claim payments
related to prior years are less than our previously
estimated amounts.
Our HMOs in California and Connecticut generally
contract with various medical groups to provide profes-
sional care to certain of its members on a capitated, or
fixed per member per month fee basis. Capitation
contracts generally include a provision for stop-loss and
non-capitated services for which we are liable. Professional
capitated contracts also generally contain provisions for
shared risk, whereby the Company and the medical groups
share in the variance between actual costs and predeter-
Year Ended December 31,
(Dollars in thousands) 2002 2001 2000
Prior year incurred
amounts expensed in
the current year:
Health Plan Services $11,654 $(5,238) $(22,310)
Government Contracts (7,456) (18,686) (5,807)
Total $4,198 $(23,924) $(28,117)
Prior year incurred
amounts expensed in
the current year as
a percent of current
year expenses:
Health Plan Services 0.2 % (0.1)% (0.4)%
Government Contracts (0.5)% (1.4)% (0.5)%
Total 0.1 % (0.3)% (0.4)%