Health Net 2006 Annual Report Download - page 13

Under most of our California HMO and POS plans, members are required to select a PPG and a primary
care physician from within that group. In our other plans, including all of our plans outside of California,
members may be required to select a primary care physician from the broader HMO network panel of primary
care physicians. Some HMO “open access” plans and PPO plans do not require the member to select a primary
care physician. The primary care physicians and PPGs assume overall responsibility for the care of members.
Medical care provided directly by such physicians includes the treatment of illnesses not requiring referral, and
may include physical examinations, routine immunizations, maternity and childcare, and other preventive health
services. The primary care physicians and PPGs are responsible for making referrals (approved by the HMO’s or
PPG’s medical director as required under the terms of our various plans) to specialists and hospitals. Certain of
our HMOs offer enrollees “open panels” under which members may access any physician in the network, or
network physicians in certain specialties, without first consulting their primary care physician.
PPG and physician contracts are generally for a period of at least one year and are automatically renewable
unless terminated, with certain requirements for maintenance of good professional standing and compliance with
our quality, utilization and administrative procedures. In California, PPGs generally receive a monthly
“capitation” fee for every member assigned to it. Under a capitation fee arrangement, we pay a provider group a
fixed amount per member on a regular basis and the provider group accepts the risk of the frequency and cost of
member utilization of professional services. The capitation fee represents payment in full for all medical and
ancillary services specified in the provider agreements. In these capitation fee arrangements, in cases where the
capitated PPG cannot provide the health care services needed, such PPGs generally contract with specialists and
other ancillary service providers to furnish the requisite services under capitation agreements or negotiated fee
schedules with specialists. Outside of California, most of our HMOs reimburse physicians according to a
discounted fee-for-service schedule, although several have capitation arrangements with certain providers and
provider groups in their market areas. For services provided under our PPO products and the out-of-network
benefits of our POS products, we ordinarily reimburse physicians pursuant to discounted fee-for-service
arrangements. A provider group’s financial instability or failure to pay secondary providers for services rendered
could lead secondary providers to demand payment from us, even though we have made our regular capitated
payments to the provider group. Depending on state law, we could be liable for such claims.
Health Net of Connecticut, Inc., our Connecticut HMO (“HN of Connecticut”), has a contract with the
Connecticut State Medical Society IPA (“CSMS-IPA”). In 2005, we converted this contract from a capitated risk
arrangement coupled with a reinsurance agreement between CSMS-IPA and Health Net Services (Bermuda),
Ltd., a wholly-owned subsidiary of the Company, to a contractual arrangement between HN of Connecticut and
CSMS-IPA that includes an agreed upon compensation budget with negotiated reimbursement rates for
providers. This contractual arrangement has gain share and pay-for-performance features. We eliminated the
reinsurance arrangement. Referral authorization and claims administration are now performed by Health Net of
Connecticut.
HNFS maintains a network of qualified physicians, facilities, and ancillary providers in the prime service
areas of our TRICARE contract for the North Region. Services are provided on a fee-for-service basis. As of
December 31, 2006, HNFS had 89,689 physicians, 1,683 facilities, and 9,750 ancillary providers in its TRICARE
network.
Our behavioral health subsidiary, MHN, maintains a provider network comprised of approximately 42,000
psychiatrists, psychologists and other clinical categories of providers nationwide. Substantially all of these
providers are contracted with MHN on an individual or small practice group basis and are paid on a discounted
fee-for-service basis. Members who wish to access behavioral health services contact MHN and are referred to
contracted providers for evaluation or treatment services. Authorization for such services is for a limited number
of appointments and must be renewed by MHN based on medical necessity for continuing treatment. If a member
needs inpatient services, MHN maintains a network of approximately 1,400 facilities.
In addition to the physicians that are in our networks, we have also entered into agreements with various
third parties who have networks of physicians contracted to them (“Third Party Networks”). In general, under a
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