Health Net 2007 Annual Report Download - page 76

The future contractual obligations in the contractual obligations table are estimated based on information
currently available. The timing of and the actual payment amounts may differ based on actual events.
Surety Bonds
In order to secure judgment pending our appeal in the AmCareco litigation, we obtained surety bonds
totaling $114.7 million, which are further secured by letters of credit issued in December 2005 in the amounts of
$90.1 million. See Notes 6 and 12 to the consolidated financial statements for additional information.
Off-Balance Sheet Arrangements
As of December 31, 2007, we had no off-balance sheet arrangements as defined under Regulation S-K
303(a)(4) and the instructions thereto.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America (GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Principal areas requiring the use of estimates include revenue
recognition, health care costs, reserves for contingent liabilities, amounts receivable or payable under
government contracts, goodwill and recoverability of long-lived assets and investments. Accordingly, we
consider accounting policies on these areas to be critical in preparing our consolidated financial statements. A
significant change in any one of these amounts may have a significant impact on our consolidated results of
operations and financial condition. A more detailed description of the significant accounting policies that we use
in preparing our financial statements is included in the notes to our consolidated financial statements which are
included elsewhere in this Annual Report on Form 10-K.
Health Plan Services
Health plan services premiums 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 (including Part D) to provide care and
services to enrolled Medicare recipients. Revenue is recognized in the month in which the related enrollees are
entitled to health care services. Premiums collected in advance of the month in which enrollees are entitled to
health care services are recorded as unearned premiums.
We have an arrangement with CMS for certain of our Medicare products whereby periodic changes in our
risk factor adjustment scores for certain diagnostic codes result in changes to our health plan services premium
revenues. We recognize such changes when the amounts become determinable, supportable and the collectibility
is reasonably assured. We also have risk sharing arrangements under our Medicare contracts where variances in
our actual claim experience from the targeted medical claim amount negotiated in our contracts are shared.
From time to time, we make adjustments to our revenues based on retroactivity. These retroactivity
adjustments reflect changes in the number of enrollees subsequent to when the revenue is billed. We estimate the
amount of future retroactivity each period and accordingly adjust the billed revenue. The estimated adjustments
are based on historical trends, premiums billed, the volume of contract renewal activity during the period and
other information. We refine our estimates and methodologies as information on actual retroactivity becomes
available.
On a monthly basis, we estimate the amount of uncollectible receivables to reflect allowances for doubtful
accounts. The allowances for doubtful accounts are estimated based on the creditworthiness of our customers, our
historical collection rates and the age of our unpaid balances. During this process, we also assess the
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