Health Net 2002 Annual Report Download - page 59

HEALTH NET, INC. | 57
Revenue Recognition
Health plan services premium revenues include HMO,
POS and PPO premiums from employer groups and indi-
viduals and from Medicare recipients who have purchased
supplemental benefit coverage, which premiums are based
on a predetermined prepaid fee, Medicaid revenues based
on multi-year contracts to provide care to Medicaid recipi-
ents, revenue under Medicare risk contracts to provide
care to enrolled Medicare recipients, and revenues from
behavioral, dental and vision services. Revenue is recog-
nized in the month in which the related enrollees are enti-
tled 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 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, and 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. Amounts receivable under govern-
ment 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.
These change orders arise because the government often
directs us to implement changes to our contracts before the
scope and/or value is defined or negotiated. We start to
incur costs immediately, before we have proposed a price to
the government. In these situations, we make no attempt to
estimate and record revenue. Our policy is to collect and
defer the costs incurred. Once we have submitted a cost
proposal to the government, we will record the costs and
the appropriate value for revenue, using our best estimate of
what will ultimately be negotiated. These receivables
develop as a result of TRICARE health care costs rising
faster than the forecasted health care cost trends used in
the original contract bids, data revisions on formal contract
adjustments and routine contract changes for benefit
adjustments.
In December 1999, the Securities and Exchange
Commission issued, then subsequently amended, Staff
Accounting Bulletin No. 101 (SAB 101), “Revenue
Recognition in Financial Statements.” SAB 101, as
amended, provides guidance on applying accounting prin-
ciples generally accepted in the United States of America to
revenue recognition issues in financial statements. We
adopted SAB 101 effective October 1, 2000. The adoption
of SAB 101 did not have a material effect on our consoli-
dated financial position or results of operations.
Health Plan 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. Any adjust-
ments 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 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.
Our HMOs, primarily in California and Connecticut,
generally contract with various medical groups to provide
professional 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-
mined goals. Additionally, we contract with certain hospi-
tals to provide hospital care to enrolled members on a
capitation basis. Our HMOs also contract with hospitals,
physicians and other providers of health care, pursuant to
discounted fee-for-service arrangements, hospital per
diems, and case rates under which providers bill the
HMOs for each individual service provided to enrollees.