Health Net 2013 Annual Report Download - page 82

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Government Contracts Reportable Segment
On April 1, 2011, we began delivery of administrative services under our T-3 contract for the TRICARE North
Region. The T-3 contract was awarded to us on May 13, 2010 and became effective on April 1, 2011. We were the
managed care contractor for the DoD's previous TRICARE contract in the North Region, which ended on March 31,
2011. On March 28, 2013, the Department of Defense exercised option period 4, which commenced on April 1, 2013
and is scheduled to end on March 31, 2014. The Department of Defense has notified us of its intent to exercise option
period 5 which would extend our T-3 contract through March 31, 2015. If the remaining option period is exercised, the
T-3 contract for the North Region would conclude on March 31, 2015. The DoD has informed us that it intends to
request that we submit a proposal to add three additional one-year option periods to the T-3 contract. If we are
successful in negotiating a contract modification to the T-3 contract that adds three additional one-year option periods
and the DoD exercises all three option periods, the T-3 contract would conclude on March 31, 2018.
Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services
including: provider network management, referral management, medical management, disease management,
enrollment, customer service, clinical support service, and claims processing. We also provided assistance in the
transition activities related to the T-3 contract, and will provide assistance in any transition out of the T-3 contract.
These services are structured as cost reimbursement arrangements for health care costs plus administrative fees earned
in the form of fixed prices, fixed unit prices, and contingent fees and payments based on various incentives and
penalties. We recognize revenue related to administrative services on a straight-line basis over the option period, when
the fees become fixed and determinable. The T-3 members are served by our network and out-of-network providers in
accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later
reimbursed by the DoD for such payments. Under the terms of the T-3 contract, we are not the primary obligor for
health care services and accordingly, we do not include health care costs and related reimbursements in our consolidated
statement of operations. The contract also includes various performance-based incentives and penalties. For each of the
incentives or penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at each
interim date and are legally entitled to in the event of a contract termination. See Note 2 to our consolidated financial
statements under the heading “Government Contracts” for additional information on the T-3 contract.
In addition to the beneficiaries that we service under the T-3 contract, we administer contracts with the U.S.
Department of Veterans Affairs to manage community-based outpatient clinics in four states covering approximately
7,200 enrollees and provide behavioral health services to military families under the Department of Defense sponsored
MFLC program.
On August 15, 2012, our wholly owned subsidiary, MHN Government Services, Inc. entered into a new contract
to provide counseling services to military service members and their families under the MFLC program with a five-year
term that includes a 12-month base period and four 12-month option periods. MHN Government Services, Inc. was the
sole contractor under the previous MFLC contract, and is one of three contractors initially selected to participate in the
MFLC program under the current 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.
Government Contracts Segment Membership
2013 2012 2011
(Membership in thousands)
Membership under T-3 TRICARE contract......................................... 2,851 2,883 3,004
Under the T-3 contract for the TRICARE North Region, we provide administrative services to approximately 2.9
million, 2.9 million and 3.0 million MHS eligible beneficiaries as of December 31, 2013, 2012 and 2011, respectively.
As a result of the award of the T-3 contract for the TRICARE South Region, responsibility for the delivery of
services for the Fort Campbell area of Kentucky and Tennessee was realigned from the TRICARE North Region to the
TRICARE South Region. This realignment was expected, and as a result, effective April 1, 2012 we were no longer
responsible for servicing the approximately 116,000 eligible beneficiaries in the Fort Campbell area under our T-3
contract. This realignment had no material impact to our consolidated results of operations.