Health Net 2006 Annual Report Download - page 104

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Health Net has two primary contracts under Part D, one with the Centers for Medicare and Medicaid
Services (CMS) and one with the Part D enrollees. The CMS contract covers the portions of the revenue and
expenses that will be paid for by CMS. The enrollee contract covers the services to be performed by Health Net
for the premiums paid by the enrollees. The insurance contracts are directly underwritten with the enrollees, not
CMS, and therefore there is a direct insurance relationship with the enrollees. The premiums are generally
received directly from the enrollees.
Part D offers two types of plans: Prescription Drug Plan (PDP) and Medicare Advantage Plus Prescription
Drug (MAPD). PDP covers only prescription drugs and can be combined with traditional Medicare or Medicare
supplemental plans. MAPD covers both prescription drugs and medical care.
The revenue recognition of the revenue and cost reimbursement components under Part D is described
below:
CMS Premium Direct Subsidy—Health Net receives a monthly premium from CMS based on an original bid
amount. This payment for each individual is a fixed amount per member for the entire plan year and is based
upon that individual’s risk score status. The CMS premium is recognized evenly over the contract period and
reported as part of health plan services premium revenue.
Member Premium—Health Net receives a monthly premium from members based on the original bid
submitted to CMS. The member premium, which is fixed for the entire plan year is recognized evenly over the
contract period and reported as part of health plan services premium revenue. Premiums for our low-income Part
D members are paid by CMS.
Catastrophic Reinsurance Subsidy—CMS will reimburse Health Net for 80% of the drug costs after a
member reaches his or her $3,600 out of pocket catastrophic threshold. The CMS prospective payment (a flat
PMPM cost reimbursement estimate) is received monthly based on the original CMS bid. After the year is
complete, a settlement is made based on actual experience.
Low-Income Premium Subsidy—For qualifying low-income members, CMS will reimburse Health Net, on
the member’s behalf, some or all of the monthly member premium depending on the member’s income level in
relation to the Federal Poverty Level. The low-income premium subsidy is recognized evenly over the contract
period and reported as part of health plan services premium revenue.
Low-Income Member Cost Sharing Subsidy—For qualifying low-income members, CMS will reimburse
Health Net, on the member’s behalf, some or all of a member’s cost sharing amounts (e.g. deductible, co-pay/
coinsurance). The amount paid for the member by CMS is dependent on the member’s income level in relation to
the Federal Poverty Level. Health Net receives prospective payments on a monthly basis, and they represent a
cost reimbursement that is finalized and settled after the end of the year.
CMS Risk Share—Health Net will receive additional premium or return premium based on whether the
actual costs are higher or lower than the level estimated in the original bid submitted to CMS. The premium
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