Health Net 2013 Annual Report Download - page 77

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duals demonstration portion of the California Coordinated Care Initiative in Los Angeles and San Diego Counties may
prove to be unsuccessful for a number of reasons.”
State-Sponsored Health Plans Rate Settlement Agreement
On November 2, 2012, our wholly owned subsidiaries, Health Net of California, Inc. and Health Net Community
Solutions, Inc., entered into a settlement agreement (the "Agreement") with the DHCS to settle historical rate disputes
with respect to our participation in Medi-Cal for rate years prior to the 2011–2012 rate year. As part of the Agreement,
DHCS has agreed, among other things, to (1) an extension of all of our Medi-Cal managed care contracts existing on
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 CCI 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,
and will be settled in cash on December 31, 2019, except that under certain circumstances DHCS may extend the final
settlement for up to three additional one-year periods (as may be extended, the “Term”).
During the Term, 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) following DHCS' review of our adjustment
amount. Cash settlement of the Account will occur upon expiration of the Term as provided in the Agreement, subject to
certain provisions for interim partial settlement payments to us in the event that DHCS 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. The alternative minimum amount is calculated as follows: (i) $264
million, minus (ii) any partial settlement payments previously made to us by DHCS, minus (iii) 50% of the pretax
income on our state-sponsored health care programs business in excess of a 2.0% pretax margin for each calendar year
of the Term. Under the Agreement, DHCS will make an interim partial settlement payment to us based on a pro rata
portion of the alternative minimum amount if it terminates any of our state-sponsored health care programs contracts
early. We believe that the use of the Account will help promote greater financial stability and predictability in our state
health care programs business during the Term.
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 31, 2013, we had calculated and recorded a
deficit of $62.9 million, net of a valuation discount in the amount of $4.4 million, 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.