Health Net 2004 Annual Report Download - page 94

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition
Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and individuals and from
Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based on a predetermined prepaid
fee, Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk
contracts to provide care to enrolled Medicare recipients, and revenues from behavioral, dental and vision services. Revenue 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.
The company’s TRICARE contract for the North Region is made up of two major revenue components, health care and
administrative services. Health care services revenue includes health care costs, including paid claims and estimated incurred but not
reported (IBNR) expenses, for care provided for which we are at risk and underwriting fees earned for providing the health care and
assuming underwriting risk in the delivery of care. Administrative services revenue encompasses all other services provided to both
the government customer and to beneficiaries, including services such as medical management, claims processing, enrollment,
customer services and other services unique to the managed care support contracts with the government. Revenues associated with the
transition to the North Region contract are recognized over the entire term of the contract.
Health care costs and associated revenues are recognized as the costs are incurred and the associated revenue is earned. Revenue
related to administrative services is recognized as the services are provided and earned.
Other 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 administrative services are performed or the period that coverage for services is provided.
Revenue under the expired former Region 11, Region 6 and Regions 9, 10 and 12 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 government contracts are comprised primarily of price adjustments and change orders for services not
originally specified in the contracts. 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.
Health Care Services and Government Contract 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. 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
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