Health Net 2007 Annual Report Download - page 12

The TRICARE contract for the North Region includes a target cost and price for reimbursed health care
costs which is negotiated annually during the term of the contract, with underruns and overruns of our target cost
borne 80% by the government and 20% by us. In the normal course of contracting with the federal government,
we recognize changes in our estimate for the target cost underruns and overruns when the amounts become
determinable, supportable and the collectibility is reasonably assured. During the year ended December 31, 2007,
we recognized a decrease in the revenue estimate of $58 million and a decrease in the cost estimate of $75
million. During the year ended December 31, 2006, we recognized a decrease in the revenue estimate of $104
million, and a decrease in the cost estimate of $128 million. The administrative price is paid on a monthly basis,
one month in arrears and certain components of the administrative price are subject to volume-based adjustments.
We are paid within five business days for each health care claim run under the North Region contract based
on paid claims with an annual reconciliation of the risk sharing provision. We are not responsible for providing
most pharmaceutical benefits, claims processing for TRICARE and Medicare dual eligibles and certain
marketing and education services. For additional information regarding our TRICARE contract for the North
Region, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Health care operations under our TRICARE contract for the North Region are scheduled to conclude on
March 31, 2009, unless extended by the Department of Defense. We anticipate that the government will issue a
TRICARE Request for Proposals in the first half of 2008 and proposals would be due approximately six months
after a formal Request for Proposals was issued. The Department of Defense has the authority to negotiate with
Health Net for an extension of the TRICARE North contract for up to two additional one-year option periods. If
the Department of Defense elects to extend for two additional one-year option periods and both option periods
are exercised, the TRICARE North contract would conclude on March 31, 2011.
Other Department of Defense Contracts
In February 2007, MHN was awarded a five-year prime contract, the Military Family & Life Consultant
Program (“MFLC”), to develop, administer and monitor the non-medical counseling program for Service
members. This contract was the successor to the prior Military Family Counseling Services (“MFCS”)
subcontract that MHN managed from 2004 to March 2007. Services under the new contract began on April 1,
2007. The program is designed to deliver short-term situational problem solving counseling, primarily with
regard to stress factors inherent in the military lifestyle.
The services provided under these subcontracts are not TRICARE benefits and are provided independently
from the services provided under our TRICARE contract for the North Region. Revenues for these subcontracts
for the year ended December 31, 2007 were $11.4 million and $37.5 million for the MFCS and MFLC contracts,
respectively.
Veterans Affairs
During 2007, HNFS administered 13 contracts with the U.S. Department of Veterans Affairs to manage
community-based outpatient clinics in 9 states. HNFS also managed 23 other contracts with the U.S. Department
of Veterans Affairs supporting 152 Veterans Affairs medical centers for claims repricing and audit services and
one contract with the U.S. Marshals Service for claims re-pricing services. Total revenues for our Veterans
Affairs business were approximately $32.0 million for the year ended December 31, 2007, representing a 19%
increase over 2006. These revenues are derived from service fees received and have no insurance risk associated
with them. MHN is a subcontractor in a program under the U.S. Department of Veterans Affairs, requiring MHN
to make proactive outbound calls to returning veterans, perform assessments and make referrals to Veterans
Affairs facilities.
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