Health Net 2007 Annual Report Download - page 104

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
reserves for claims and other settlements, reserves for professional and general liabilities (including litigation and
workers’ compensation reserves), amounts receivable or payable under government contracts, income taxes and
assumptions when determining net realizable values on long-lived assets.
Revenue Recognition
Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and
individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which
premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide
care to Medicaid recipients, and revenue under Medicare risk contracts to provide care to enrolled Medicare
recipients, and revenues from behavioral health services. Revenue is recognized in the month in which the related
enrollees are entitled to health care services. Premiums collected in advance are recorded as unearned premiums.
The TRICARE contract for the North Region is made up of two major revenue components, health care
services and administrative services. Health care services revenue includes health care costs, including paid
claims and estimated incurred but not reported (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. Revenue is recognized as
earned when the services are provided.
Revenues associated with the transition from our old TRICARE contracts to the TRICARE contract for the
North Region are recognized over the entire term of the TRICARE contract for the North Region.
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.
Amounts receivable under government contracts are comprised primarily of contractually defined billings,
deferred underwriting fees under the terms of the contract and change orders for services not originally specified
in the contracts. Change orders arise because the government often directs us to implement changes to our
contracts before the scope and/or value is defined or negotiated. We start to incur costs immediately, before we
have proposed a price to the government. In these situations, we make no attempt to estimate and record revenue.
Our policy is to defer the costs as incurred until we have submitted a cost proposal to the government, at which
time we will record the costs and the appropriate value for revenue, using our best estimate of what will
ultimately be negotiated.
We provide ASO products to large employer groups in California, Connecticut, New Jersey and New York.
Under these arrangements, we provide claims processing, customer services, medical management, provider
network access and other administrative services. Administrative services fees are recognized as revenue in the
period services are provided.
Health Care Services and Government Contract Expenses
The cost of health care services is recognized in the period in which services are provided and includes an
estimate of the cost of services which have been incurred but not yet reported. Such costs include payments to
primary care physicians, specialists, hospitals, outpatient care facilities and the costs associated with managing
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