Health Net 2013 Annual Report Download - page 117

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-13
operations. Health care costs for the T-3 contract that are paid and reimbursed or reimbursable amounted to $2.5 billion,
$2.6 billion and $1.7 billion for the years ended December 31, 2013, 2012 and 2011, respectively.
Under our previous TRICARE contract for the North Region, which concluded on March 31, 2011, government
contracts revenue was made up of two major components: health care and administrative services. The health care
component included revenue recorded for health care costs for the provision of services to our members, including paid
claims and estimated IBNR expenses for which we were at risk, and underwriting fees earned for providing the health
care and assuming underwriting risk in the delivery of care. The administrative services component encompassed fees
received for 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 contract with the government. Government contracts revenue and expenses included the impact from underruns
and overruns relative to our target cost under the applicable contracts.
Our previous TRICARE contract for the North Region included a target cost and underwriting fee for reimbursed
health care costs, which was 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 recognized changes in our estimate for the target cost underruns and overruns when the amounts
become determinable, supportable, and the collectability is reasonably assured. As a result of changes in the estimate
during the year ended December 31, 2011, we recognized a decrease in revenue of $42 million and a decrease in cost of
$52 million.
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,
accrued contract incentives under the terms of the contract and amounts related to change orders for services not
originally specified in the contract. Pursuant to our T-3 contract, the government has the right to unilaterally modify the
contract in certain respects by issuing change orders directing us to implement terms or services that were not originally
included in the contract. Following receipt of a change order, we have a contractual right to negotiate an equitable
adjustment to the contract terms to account for the impact of the change order. We start to perform under such change
orders and begin to incur associated costs after we receive the government's unilateral modification, but before we have
negotiated the final scope and/or value of the change order. In these situations, costs are expensed as incurred, and we
estimate and record revenue when we have met all applicable revenue recognition criteria. These criteria include the
requirements that change order amounts are determinable, that we have performed under the change orders, and that
collectability of amounts payable to us is reasonably assured.
In addition to the beneficiaries that we service under the T-3 contract, we provide behavioral health services to
military families under the DoD sponsored MFLC program. On August 15, 2012, we entered into a new MFLC contract
awarded by the DoD. The new contract has a five-year term that includes a 12-month base period and four 12-month
option periods. As a result of the government's decision to award the new MFLC contract to multiple contractors, we
expect that the revenues we receive from the new contract will be substantially reduced in comparison to the original
MFLC contract. Revenues from the MFLC contracts were $104.8 million, $221.3 million and $258.6 million for the
years ended December 31, 2013, 2012 and 2011, respectively.
Divested Operations and Services
Divested operations and services revenues and expenses include items related to the run-out of our Northeast
business that was sold in the Northeast Sale on December 11, 2009. Prior to the first quarter of 2012, these line items
had been called Northeast administrative services fees and other revenues and expenses. Due to the sale of our
Medicare PDP business on April 1, 2012, starting with the first quarter of 2012, Divested operations and services
revenues and expenses also include transition-related revenues and expenses related to the sale of our Medicare PDP
business. We provided Medicare PDP transition-related services to CVS Caremark in connection with the transaction.
As of December 31, 2012, we had substantially completed the administration and run-out of our divested businesses.