Health Net 2005 Annual Report Download - page 71

development of our claims payable estimates during any of the periods presented in this Annual Report on Form
10-K. All of these factors are used in estimating reserves for claims and are important to our reserve
methodology in trending the claims per member per month for purposes of estimating the reserves for the most
recent months. In developing its best estimate of reserves for claims, we consistently apply the principles and
methodology listed above from year to year, while also giving due consideration to the potential variability of
these factors. Because reserves for claims includes various actuarially developed estimates, our actual health care
services expense may be more or less than our previously developed estimates. Claims processing expenses are
also accrued based on an estimate of expenses necessary to process such claims. Such reserves are continually
monitored and reviewed, with any adjustments reflected in current operations.
HN of California, our California HMO, generally contracts 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. We have risk-sharing
arrangements with certain of our providers related to approximately 1,150,000 members, primarily in the
California commercial market. Shared-risk arrangements provide for us to share with our providers the variance
between actual costs and predetermined goals. Our health plans in Connecticut, New Jersey and New York
market to small employer groups through a marketing agreement with The Guardian. We have approximately
206,000 members under this agreement. In general, we share equally with The Guardian in the profits of the
marketing agreement, subject to certain terms of the marketing agreement related to expenses.
Our HMOs in other states 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. Additionally, we contract with certain hospitals
to provide hospital care to enrolled members on a capitation basis.
We assess the profitability of contracts for providing health care services when operating results or forecasts
indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include
margin assumptions, risk share terms and non-performance of a provider under a capitated agreement resulting in
membership reverting to fee-for-service arrangements with other providers. Contracts are grouped in a manner
consistent with the method of determining premium rates. Losses are determined by comparing anticipated
premiums to estimates for 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 losses are determined and are classified
as Health Plan Services. We held a premium deficiency reserve of $0.3 million as of December 31, 2005.
Government Contracts
During the second half of 2004, we transitioned from our old TRICARE contracts to our TRICARE contract
for the North Region. As a result, the development of claim payment patterns for this new contract is limited and
is not as mature when compared to that for our old TRICARE contracts and our managed care businesses. In
addition, there are different variables that impact the estimate of the IBNR reserves for our TRICARE business
than those that impact our managed care businesses. These variables consist of changes in the level of our
nation’s military activity, including the call-up of reservists in support of heightened military activity, continual
changes in the number of eligible beneficiaries, changes in the health care facilities in which the eligible
beneficiaries seek treatment, and revisions to the provisions of the contract in the form of change orders. Each of
these factors is subject to significant judgment, and we have incorporated our best estimate of these factors in
estimating the reserve for IBNR claims.
As part of our TRICARE contract for the North Region, we have a risk-sharing arrangement with the federal
government whereby variances in actual claim experience from the targeted medical claim amount negotiated in
our annual bid are shared. Due to this risk-sharing arrangement provided for in the TRICARE contract for the
North Region, the changes in the estimate of the IBNR reserves are not expected to have a material effect on the
favorable or adverse development of our liability under the TRICARE contract.
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