Health Net 2013 Annual Report Download - page 114

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-10
Our revenue from the Medi-Cal program, including seniors and persons with disabilities ("SPD") programs, and
other state-sponsored health programs are subject to certain retroactive rate adjustments based on expected and actual
health care cost. For the year ended December 31, 2013, we recognized $74.3 million of premium revenue as a result of
retroactive rate adjustments for our SPD and non-SPD members for periods prior to 2013. For the year ended December
31, 2012, we recognized $21.7 million of premium revenue as a result of retroactive rate adjustments for our SPD and
non-SPD members for periods prior to 2012. Retroactive rate adjustments for our SPD and non-SPD members were not
material for the year ended December 31, 2011.
In addition, our state-sponsored health care programs in California, including Medi-Cal, Healthy Families,
Seniors and Persons with Disabilities, the dual eligibles demonstration portion of the California Coordinated Care
Initiative that is expected to begin in 2014, and any potential future Medicaid expansion under federal health care
reform, are subject to retrospective premium adjustments based on certain risk sharing provisions included in our state-
sponsored health plans rate settlement agreement described below. We estimate and recognize the retrospective
adjustments to premium revenue based upon experience to date under our state-sponsored health care programs
contracts. The retrospective premium adjustment is recorded as an adjustment to premium revenue and other noncurrent
assets.
On November 2, 2012, we entered into a state-sponsored health plans rate settlement agreement (the
"Agreement") with DHCS to settle historical rate disputes with respect to our participation in the Medi-Cal program, for
rate years prior to the 2011–2012 rate year. As part of the Agreement, DHCS agreed, among other things, to (1) an
extension of all of our Medi-Cal managed care contracts existing as of the date of the Agreement for an additional five
years from their then existing expiration dates; (2) retrospective premium adjustments on all of our state-sponsored
health care programs, including Medi-Cal, Healthy Families, SPDs, our proposed participation in the dual eligibles
demonstration portion of the California Coordinated Care Initiative that is expected to begin in 2014 and any potential
future Medi-Cal expansion populations (our “state-sponsored health care programs”), which will be tracked in a
settlement account as discussed in more detail below; and (3) compensate us should DHCS terminate any of our state-
sponsored health care programs contracts early.
Effective January 1, 2013, the settlement account (the "Account") was established with an initial balance of zero.
The balance in the Account is adjusted annually to reflect retrospective premium adjustments for each calendar year
(referenced in the Agreement as a deficit or surplus). A deficit or surplus will result to the extent our actual pretax
margin (as defined in the Agreement) on our state-sponsored health care programs is below or above a predetermined
pretax margin target. The amount of any deficit or surplus is calculated as described in the Agreement. Cash settlement
of the Account will occur on December 31, 2019, except that under certain circumstances the DHCS may extend the
final settlement for up to three additional one-year periods (as may be extended, the "Term"). In addition, the DHCS
will make an interim partial settlement payment to us if it terminates any of our state-sponsored health care programs
contracts early. Upon expiration of the Term, if the Account is in a surplus position, then no monies are owed to either
party. If the Account is in a deficit position, then DHCS shall pay the amount of the deficit to us. In no event, however,
shall the amount paid by DHCS to us under the Agreement exceed $264 million or be less than an alternative minimum
amount as defined in the Agreement.
We estimate and recognize the retrospective adjustments to premium revenue based upon experience to date
under our state-sponsored health care programs contracts. As of December 13, 2013, we had calculated and recorded a
deficit of $62.9 million, net of a valuation discount in the amount of $4.4 million (see Note 7), reflecting our estimated
retrospective premium adjustment to the Account based on our actual pretax margin for the year ended December 31,
2013. The retrospective premium adjustment is recorded as an adjustment to premium revenue and other noncurrent
assets.
Health Plan Services Health Care Cost
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 and 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.