Health Net 2007 Annual Report Download - page 79

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. 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, 2007. These amounts
are the same since all of the estimated health care IBNR expenses incurred are offset by an equal amount of
revenues earned.
Some of the 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. In the normal course of contracting with the federal government,
we may make claims for contract and price adjustments arising from cost overruns against the government. We
recognize such claims when the amounts become determinable, supportable and the collectibility is reasonably
assured.
Reserves For Contingent Liabilities
In the course of our operations, we are involved on a routine basis in various disputes with members, health
care providers, and other entities, as well as audits by government agencies that relate to our services and/or
business practices that expose us to potential losses.
We recognize an estimated loss, which may represent damages, settlement costs, future legal expenses or a
combination of the foregoing, as appropriate, from such loss contingencies when it is both probable that a loss
will be incurred and that the amount of the loss can be reasonably estimated. Our loss estimates are based in part
on an analysis of potential results, the stage of the proceedings, consultation with outside counsel and any other
relevant information available.
Goodwill
Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist
of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and
intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets consist of the value of
employer group contracts, provider networks and customer relationships.
We perform our annual impairment test on our recorded goodwill and intangible assets not subject to
amortization as of June 30 or more frequently if events or changes in circumstances indicate that we might not
recover the carrying value of these assets for each of our reporting units. Health Plans Services is our only
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