Health Net 2009 Annual Report Download - page 81

Off-Balance Sheet Arrangements
As of December 31, 2009, 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 and income taxes.
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 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 (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.
Approximately 39%, 37%, and 35% in 2009, 2008 and 2007, respectively, of our health plan services
premium revenues were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject
to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these
programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable
possibility that recorded estimates will change by a material amount.
Our Medicare contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums
paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment
model pays more for members whose medical history would indicate that they are expected to have higher
medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment
using diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. We and the
health care providers collect, compile and submit the necessary and available diagnosis data to CMS within
prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted and
expected to be submitted to CMS.
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
recoverability of the receivables, and an allowance is recorded based upon their net realizable value. Those
receivables that are deemed to be uncollectible, such as receivables from bankrupt employer groups, are fully
written off against their corresponding asset account, with a debit to the allowance to the extent such an
allowance was previously recorded.
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