Health Net 2007 Annual Report Download - page 105

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the extent of such care. Our health care cost can also include from time to time remediation of certain claims as a
result of periodic reviews by various regulatory agencies. We estimate the amount of the provision for service
costs incurred but not reported using standard actuarial methodologies based upon historical data including the
period between the date services are rendered and the date claims are received and paid, denied claim activity,
expected medical cost inflation, seasonality patterns and changes in membership. The estimates for service costs
incurred but not reported are made on an accrual basis and adjusted in future periods as required. Any
adjustments to the prior period estimates are included in the current period. Such estimates are subject to the
impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such
estimates, the actual liability could differ significantly from the amounts provided. While the ultimate amount of
claims and losses paid are dependent on future developments, management is of the opinion that the recorded
reserves are adequate to cover such costs. These estimated liabilities are reduced by estimated amounts
recoverable from third parties for subrogation.
Our HMOs, primarily in California, generally contract with various medical groups to provide professional
care to certain of their 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, whereby the Company and the medical
groups share in the variance between actual costs and predetermined goals. Additionally, we contract with certain
hospitals to provide hospital care to enrolled members on a capitation basis. Our HMOs 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.
We assess the profitability of contracts for providing health care services when operating results or
forecasts indicate probable future losses. 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 loss is determined and are classified as Health Plan Services
cost. We had no premium deficiency reserves as of December 31, 2007 and 2006. Under the TRICARE
contract for the North Region, we record amounts receivable and payable for estimated health care IBNR
expenses and report such amounts separately on the accompanying consolidated balance sheet. These amounts
are equal since the estimated health care IBNR expenses incurred are offset by an equal amount of revenues
earned.
Medicare Part D
Effective January 1, 2006, Health Net began offering the Medicare Part D benefit as a fully insured
product to our existing and new members. The Part D benefit consists of pharmacy benefits for Medicare
beneficiaries. Part D renewal occurs annually, but it is not a guaranteed renewable product. We report Part D
as part of our health plan services reportable segment. The majority of our Part D members fall into the
low-income category.
Health Net has two primary contracts under Part D, one with the Centers for Medicare and Medicaid
Services (CMS) and one with the Part D enrollees. The CMS contract covers the portions of the revenue and
expenses that will be paid for by CMS. The enrollee contract covers the services to be performed by Health Net
for the premiums paid by the enrollees. The insurance contracts are directly underwritten with the enrollees, not
CMS, and therefore there is a direct insurance relationship with the enrollees. The premiums are generally
received directly from the enrollees.
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