Health Net 2005 Annual Report Download - page 10

TRICARE
Our wholly-owned subsidiary, Health Net Federal Services, LLC (“HNFS”), administers a large managed
care federal contract with the Department of Defense under the TRICARE program in the North Region. We
have been serving the Department of Defense since 1988 under the TRICARE program and its predecessor
programs. We believe we have established a solid history of operating performance under our contracts with the
Department of Defense. We believe there will be further opportunities to serve the Department of Defense and
other governmental organizations in the future.
Our TRICARE contract for the North Region is one of three regional contracts awarded by the Department
of Defense in August 2003 under the TRICARE Program. The North Region contract is a five-year contract and
covers Connecticut, Delaware, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New
Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West
Virginia, Wisconsin and the District of Columbia. In addition, the contract covers a small portion of Tennessee,
Missouri and Iowa. Under the TRICARE contract for the North Region, we provide health care services to
approximately 3.0 million Military Health System (“MHS”) eligible beneficiaries (active duty personnel and
TRICARE/Medicare dual eligible beneficiaries), including 1.8 million TRICARE eligibles for whom we provide
health care and administrative services and 1.2 million other MHS-eligible beneficiaries for whom we provide
administrative services only.
Eligible beneficiaries in the TRICARE program are able to choose from a variety of program options. They
can choose to enroll in TRICARE Prime, which is similar to a conventional HMO plan, or they can select, on a
case-by-case basis, to utilize TRICARE Extra, which is similar to a conventional PPO plan, or TRICARE
Standard, which is similar to a conventional indemnity plan.
Under TRICARE Prime, enrollees pay an enrollment fee (which is zero for active duty participants and their
dependents) and select a primary care physician from a designated provider panel. The primary care physicians
are responsible for making referrals to specialists and hospitals. Except for active duty family members, who
have no co-payment charges, TRICARE Prime enrollees pay co-payments each time they receive medical
services from a civilian provider. TRICARE Prime enrollees may opt, on a case-by-case basis, for a
point-of-service option in which they are allowed to self-refer but incur a deductible and a co-payment.
Under TRICARE Extra, eligible beneficiaries may utilize a TRICARE network provider but incur a
deductible and co-payment which is greater than the TRICARE Prime co-payment. Under TRICARE Standard,
eligible beneficiaries may utilize a TRICARE authorized provider who is not a network provider but pay a higher
co-payment than under TRICARE Prime or TRICARE Extra.
As of December 31, 2005, there were approximately 1.4 million TRICARE eligibles enrolled in TRICARE
Prime under our North Region contract. The total estimated number of eligible beneficiaries for the North Region
contract as of December 31, 2005, based on data provided by the Department of Defense, was 3.0 million.
The TRICARE contract for the North Region includes a target price for the cost reimbursed health care
costs which is negotiated annually during the term of the contract, with underruns and overruns of our target
price provision borne 80% by the government and 20% by us. The administrative price is paid on a monthly
basis, one month in arrears and certain components of the administrative price are subject to volume-based
adjustments.
We are paid within five days for each claims run under the North Region contract based on paid claims with
an annual reconciliation of the risk sharing provision. We are not responsible for providing pharmaceutical
benefits, claims processing for TRICARE and Medicare dual eligibles and certain marketing and education
services. For additional information regarding our TRICARE contract for the North Region, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
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