Health Net 2006 Annual Report Download - page 76

An extensive degree of actuarial judgment is used in this estimation process, considerable variability is
inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and
payment patterns and medical cost trends. As such, the completion factors and the claims per member per month
trend factor are the most significant factors used in estimating our reserves for claims. Since a large portion of the
reserves for claims is attributed in the most recent months, the estimated reserves for claims is highly sensitive to
these factors. The following table illustrates the sensitivity of these factors and the estimated potential impact on
our operating results caused by these factors:
Completion Factor (a)
Percentage-point Increase (Decrease)
in Factor
Health Plan Services
Increase (Decrease) in
Reserves for Claims
2% .................................................. $(47.5) million
1% .................................................. $(24.2) million
(1)% ................................................. $ 25.1 million
(2)% ................................................. $ 51.1 million
Medical Cost Trend (b)
Percentage-point Increase (Decrease)
in Factor
Health Plan Services
Increase (Decrease) in
Reserves for Claims
2% .................................................. $ 24.6 million
1% .................................................. $ 12.3 million
(1)% ................................................. $(12.3) million
(2)% ................................................. $(24.6) million
(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate
how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore,
an increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.
(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for
the most recent three months.
Other relevant factors include exceptional situations that might require judgmental adjustments in setting the
reserves for claims, such as system conversions, processing interruptions or changes, environmental changes or
other factors. 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 described 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 1,225,000 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 joint venture agreement with The Guardian. We have approximately
191,000 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. On February 27,
2007, we announced that we were purchasing the Guardian’s interest in our joint venture. See Item 1. Business—
Recent and Other Developments and Other Company Information.
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