Health Net 2013 Annual Report Download - page 113

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-9
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.
On April 1, 2012, we completed the sale of the business operations of our Medicare PDP business to CVS
Caremark. As a result of the sale, the operating results of our Medicare PDP business have been classified as
discontinued operations in our consolidated statements of operations for the years ended December 31, 2012 and 2011.
See Note 3 for more information on the sale of our Medicare PDP business.
Use of Estimates
The preparation of financial statements in conformity with United States Generally Accepted Accounting
Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities through the date of the issuance 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 materially
from those estimates. Principal areas requiring the use of estimates include revenue recognition, health care costs,
including incurred but not yet reported ("IBNR") amounts, reserves for contingent liabilities, amounts receivable or
payable under government contracts, goodwill and other intangible assets, recoverability of long-lived assets and
investments, and income taxes.
Health Plan Services Revenue Recognition
Health plan services premium revenues generally 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 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. Under
the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010
(collectively, the “ACA”), commercial health plans with medical loss ratios on fully insured products, as calculated as
set forth in the ACA, that fall below certain targets are required to rebate ratable portions of their premiums annually.
We classify the estimated rebates, if any, as a reduction to Health plan services premiums in our consolidated statement
of operations.
Approximately 50%, 45%, and 40% in 2013, 2012 and 2011, respectively, of our health plan services premiums
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, including the
Centers for Medicare and Medicaid Services ("CMS") proposed methodology with respect to risk adjustment data
validation ("RADV") audits, 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 Advantage 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. Such risk adjustment
model results in periodic changes in our risk factor adjustment scores for certain diagnostic codes, which result in
changes to our health plan services premium revenues. Because the recorded revenue is based on our best estimate at
the time, the actual payment we receive from CMS for risk adjustment reimbursement settlements may be materially
different than the amounts we have initially recognized on our financial statements. The change in our estimate for the
risk adjustment revenue in the years ended December 31, 2013, 2012 and 2011 was not significant.