Health Net 2006 Annual Report Download - page 77

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
premium yield and health care cost trend 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 no premium deficiency
reserves as of December 31, 2006.
Government Contracts
The TRICARE North Region contract is made up of two major revenue components, health care and
administrative services. Health care services revenue includes health care costs, including paid claims and
estimated IBNR expenses, for care provided for which we are at risk and underwriting fees earned for providing
the health care and assuming underwriting risk in the delivery of care. Administrative services revenue
encompasses all other services provided to both the government customer and to beneficiaries, including services
such as medical management, claims processing, enrollment, customer services and other services unique to the
managed care support contracts with the government. Health care costs and associated revenues are recognized
as the costs are incurred and the associated revenue is earned. Revenue related to administrative services is
recognized as the services are provided and earned. Revenues associated with the transition to the TRICARE
contract for the North Region are recognized over the entire term of the contract.
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.
Other government contracts revenues are recognized in the month in which the eligible beneficiaries are
entitled to health care services or in the month in which the administrative services are performed or the period
that coverage for services is provided. Revenue under the expired former Region 11, Region 6 and Regions 9, 10
and 12 contracts was subject to price adjustments attributable to inflation and other factors. The effects of these
adjustments were recognized on a monthly basis, with the final determination of these amounts occurring in
2005.
Under our TRICARE contract for the North Region we recognize amounts receivable and payable under the
government contracts related to estimated health care IBNR expenses which are reported separately on the
accompanying consolidated balance sheet as of December 31, 2006. These amounts are the same since all of the
estimated health care IBNR expenses incurred are offset by an equal amount of revenues earned.
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