Health Net 2009 Annual Report Download - page 11

Our TRICARE contract for the North Region is one of three regional contracts awarded by the Department
of Defense in August 2003 under the TRICARE Program. We commenced providing services under the North
Region contract in 2004. The North Region contract is a five-year contract and covers Connecticut, Delaware,
Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia, Wisconsin and the
District of Columbia. In addition, the contract covers a small portion of Tennessee, Missouri and Iowa.
Under the TRICARE contract for the North Region, we provide health care services to approximately
3.1 million Military Health System (“MHS”) eligible beneficiaries, including 1.8 million TRICARE eligibles for
whom we provide health care and administrative services and 1.3 million other MHS-eligible beneficiaries for
whom we provide administrative services only. Eligible beneficiaries in the TRICARE program are able to
choose from a variety of program options. They can choose to enroll in TRICARE Prime, which is similar to a
conventional HMO plan, or they can select, on a case-by-case basis, to utilize TRICARE Extra, which is similar
to a conventional PPO plan, or TRICARE Standard, which is similar to a conventional indemnity plan.
Under TRICARE Prime, enrollees pay an enrollment fee (which is zero for active duty participants and their
dependents) and select a primary care physician from a designated provider panel. The primary care physicians
are responsible for making referrals to specialists and hospitals. Except for active duty family members, who
have no co-payment charges, TRICARE Prime enrollees pay co-payments each time they receive medical
services from a civilian provider. TRICARE Prime enrollees may opt, on a case-by-case basis, for a
point-of-service option in which they are allowed to self-refer but incur a deductible and a co-payment.
Under TRICARE Extra, eligible beneficiaries may utilize a TRICARE network provider but incur a
deductible and co-payment which is greater than the TRICARE Prime co-payment. Under TRICARE Standard,
eligible beneficiaries may utilize a TRICARE authorized provider who is not a network provider but pay a higher
co-payment than under TRICARE Prime or TRICARE Extra. As of December 31, 2009, there were
approximately 1.5 million TRICARE eligibles enrolled in TRICARE Prime under our North Region contract.
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. As a result of changes in the estimate,
during the year ended December 31, 2009, we recognized an increase in revenue of $40 million and an increase
in cost of $49 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.
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 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.
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