Health Net 2013 Annual Report Download - page 119

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-15
collection of discount payments from pharmaceutical manufacturers and payments to Health Net based on prescription
drug event data.
CMS Risk Share—Premiums from CMS are subject to risk corridor provisions which compare costs targeted in
our annual bids to actual prescription drug costs, limited to actual costs that would have been incurred under the
standard coverage as defined by CMS. Variances of more than 5% above or below the original bid submitted by us may
result in CMS making additional payments to us or require us to refund to CMS a portion of the premiums we received.
We estimate and recognize an adjustment to premium revenues related to the risk corridor payment settlement based
upon pharmacy claims experience. The estimate of the settlement associated with these risk corridor provisions requires
us to consider factors that may not be certain, including member eligibility status differences with CMS. The risk-share
adjustment, if any, is recorded as an adjustment to premium revenues and premiums receivable.
Health care costs and general and administrative expenses associated with Part D are recognized as the costs and
expenses are incurred.
Medi-Cal Rate Reduction
In October 2011, CMS approved certain elements of California's 2011-2012 budget proposals to reduce Medi-
Cal provider reimbursement rates as authorized by California Assembly Bill 97 (AB 97). The elements approved by
CMS included a 10 percent reduction in reimbursement rates for a number of providers. DHCS had preliminarily
indicated that the Medi-Cal managed care rate reductions could be effective retroactive to July 1, 2011. However,
according to the 2014 Medi-Cal estimates made public on January 10, 2014, the AB 97 cuts applicable to Medi-Cal
managed care plans became effective on October 1, 2013. The AB 97 cuts are being applied to Medi-Cal managed care
plans only on a prospective basis, beginning October 1, 2013. The impact of the provisions of AB 97 did not have a
material impact to our Health plan services premium revenue for the years ended December 31, 2013.
Medicaid Premium Taxes
On June 27, 2013, the State of California reinstated premium taxes retroactive to July 1, 2012 for plans
participating in Medi-Cal. As a result of this reinstatement, for the year ended December 31, 2013, we recorded $92.8
million, including $20.2 million attributable to periods prior to 2013, as general and administrative expense. In addition,
the State of California increased Medicaid premium revenues in an amount equal to the increase in the premium taxes.
As a result, we recorded $92.8 million in health plan services premiums for the year ended December 31, 2013. These
Medicaid premium taxes are currently authorized by the State of California through July 1, 2016.
Share-Based Compensation Expense
As of December 31, 2013, we had various long-term incentive plans that permit the grant of stock options and
other equity awards to certain employees, officers and non-employee directors, which are described more fully in Note
8.
The compensation cost that has been charged against income under our various long-term incentive plans was
$29.9 million, $28.9 million and $27.6 million during the years ended December 31, 2013, 2012 and 2011, respectively.
The total income tax benefit recognized in the income statement for share-based compensation arrangements was $11.6
million, $11.2 million and $10.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Cash flows resulting from the tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) are classified as financing cash flows and such amounts are approximately $0.6 million, $6.1
million and $1.3 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Forfeiture rates for share based awards are estimated up front and true-up adjustments are recorded for the actual
forfeitures.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with maturity of three months or less when purchased. We
had checks outstanding, net of deposits of $0 and $23.8 million as of December 31, 2013 and 2012, respectively.