Health Net 2009 Annual Report Download - page 102

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Vermont, Virginia, West Virginia, Wisconsin and the District of Columbia and a small portion of Tennessee,
Missouri and Iowa. The Company administers health care programs covering approximately 3.0 million eligible
individuals in the Military Health System under the TRICARE contract.
The five-year North Region contract is subject to annual renewals on April 1 of each year at the option of
the Department of Defense. In 2007, Congress passed legislation allowing for up to two additional years worth of
extensions for all TRICARE regions, including the North Region contract, at the Department of Defense’s
option. Subsequent to the passage of this legislation, we negotiated the terms, including administrative prices and
health care target costs, of the North Region contract for the following three option periods with the Department
of Defense: option period 6 (April 1, 2009—March 31, 2010), option period 7 (April 1, 2010—September 30,
2010), and option period 8 (October 1, 2010—March 31, 2011). We are currently in the sixth option period of
health care operations which is scheduled to conclude on March 31, 2010 unless extended by the Department of
Defense. The Department of Defense has formally indicated its intent to exercise option periods 7 and 8 under
our current contract for the North Region.
Note 2—Summary of Significant Accounting Policies
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany transactions have been eliminated in consolidation.
In accordance with the Generally Accepted Accounting Principles Topic of the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (codification), we adopted the codification as of
July 1, 2009. The codification became the source of authoritative accounting principles generally accepted in the
United States of America (GAAP) recognized by the FASB and is effective for financial statements issued for
interim and annual reporting periods ending after September 15, 2009. The codification supersedes all then-
existing non-SEC accounting and reporting standards and the FASB will not issue any new standards in the form
of Statements, FASB Staff Positions (FSPs) and Emerging Issues Task Force (EITF) consensuses. Instead, it will
issue Accounting Standards Updates.
Use of Estimates
The preparation of financial statements in conformity with 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. These estimates require the Company to apply complex assumptions and judgments, and often
the Company must make estimates about effects of matters that are inherently uncertain and will likely change in
subsequent periods. Actual results could differ from those estimates. Principal areas requiring the use of
estimates include the determination of Medicare risk factor adjustments, risk sharing revenues, allowances for
doubtful accounts, reserves for claims and other settlements, reserves for contingent 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
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