Health Net 2009 Annual Report Download - page 103

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
recipients, and revenues from behavioral health services. Revenue is recognized in the month in which the related
enrollees are provided health care services. Premiums collected in advance are recorded as unearned premiums.
The TRICARE contract for the North Region is made up of two major revenue components, health care
services and administrative services. Health care services revenue includes health care costs, including paid
claims and estimated incurred but not reported (IBNR) expenses, for care provided for which we are at risk and
underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care.
Administrative services revenue encompasses all other services provided to both the government customer and to
beneficiaries, including services such as medical management, claims processing, enrollment, customer services
and other services unique to the managed care support contracts with the government. Revenue is recognized as
earned when the services are provided.
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.
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.
We provide administrative services only (ASO) products to large employer groups in California. Prior to the
Northeast Sale, we provided ASO services to our health plans in Connecticut, New Jersey and New York.
Subsequent to the sale, we provided ASO services to United and its affiliates from December 11, 2009 through
December 31, 2009 and recorded ASO revenue of $15.1 million. Under these arrangements, we provide claims
processing, customer services, medical management, provider network access and other administrative services.
Administrative services fees are recognized as revenue in the period services are provided.
Health Care Services and Government Contract Expenses
The cost of health care services is recognized in the period in which services are provided and includes an
estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to
primary care physicians, specialists, hospitals, outpatient care facilities and the costs associated with managing
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 (IBNR) 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.
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