Health Net 2006 Annual Report Download - page 148

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally
accepted accounting principles. The majority of the reserve balance held at each quarter-end is associated
with the most recent months’ incurred services because these are the services for which the fewest claims
have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated
with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the
most recent months’ incurred services. Revised estimates for prior years are determined in each quarter
based on the most recent updates of paid claims for prior years. As of December 31, 2006, incurred claims
related to prior years were estimated to be $77.3 million lower than originally estimated at December 31,
2005. The majority of this amount was due to adjustments to our reserves that related to variables and
uncertainties associated with our assumptions. In 2006, as our reserve balance for older months of service
decreased, and estimates of our incurred costs for older dates of service became more certain and
predictable, our estimates of incurred claims related to prior periods were adjusted accordingly.
As of December 31, 2005, incurred claims related to prior years were estimated to be $114.5 million lower
than originally estimated as of December 31, 2004. This was primarily the result of claim processing
improvements in California, which shortened the period of time to settle claims. The improvements were
taken into consideration when setting reserves at December 31, 2004. During 2005 the actual claim pattern
that emerged showed that claim payments had come in even faster than originally estimated and resulted in
a more favorable impact to our reserve estimate.
(d) Includes $35 million and $142 million as of December 31, 2005 and 2004, respectively, for reserves related
to provider settlements associated with claims processing and payment issues initially recognized during the
fourth quarter of 2004.
(e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.
The following table shows the Company’s health plan services capitated and non-capitated expenses for the
years ended December 31:
Health Plan Services
2006 2005 2004
(Dollars in millions)
Total incurred claims ............................................... $5,144.7 $5,015.9 $5,057.0
Capitated expenses and shared risk .................................... 2,396.8 2,270.7 2,429.5
Pharmacy and other ................................................ 1,058.9 726.4 927.1
Health plan services ............................................... $8,600.4 $8,013.0 $8,413.6
For the years ended December 31, 2006, 2005 and 2004, the Company’s capitated, shared risk, pharmacy
and other expenses represented 40%, 37% and 40%, respectively, of the Company’s total health plan services.
F-54