Health Net 2013 Annual Report Download - page 93

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Approximately 50%, 45%, and 40% in 2013, 2012 and 2011, respectively, of our health plan services premium
revenues were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject to audit and
retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these programs,
including CMS' proposed methodology with respect to risk adjustment data validation (“RADV”) audits, are extremely
complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will
change by a material amount.
Our Medicare Advantage contracts are with CMS. CMS deploys a risk adjustment model which apportions
premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk
adjustment model pays more for members whose medical history would indicate that they are expected to have higher
medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using
diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. We and the health care
providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines.
We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS.
On a monthly basis, we estimate the amount of uncollectible receivables to reflect allowances for doubtful
accounts. The allowances for doubtful accounts are estimated based on the creditworthiness of our customers, our
historical collection rates and the age of our unpaid balances. During this process, we also assess the recoverability of
the receivables, and an allowance is recorded based upon their net realizable value. Those receivables that are deemed
to be uncollectible, such as receivables from bankrupt employer groups, are fully written off against their corresponding
asset account, with a debit to the allowance to the extent such an allowance was previously recorded.
Reserves for claims and other settlements include reserves for claims (IBNR claims and received but unprocessed
claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives
and other reserves for our Western Region Operations reporting segment. Because reserves for claims include various
actuarially developed estimates, our actual health care services expenses may be more or less than our previously
developed estimates. As of December 31, 2013, 82% of reserves for claims and other settlements were attributed to
claims reserves. See Note 15 to our consolidated financial statements for a reconciliation of changes in the reserve for
claims and material prior period reserve development.
We calculate our best estimate of the amount of our IBNR reserves in accordance with GAAP and using standard
actuarial developmental methodologies. This method is also known as the chain-ladder or completion factor method.
The developmental method estimates reserves for claims based upon the historical lag between the month when
services are rendered and the month claims are paid while taking into consideration, among other things, expected
medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key
component of the developmental method is the completion factor, which is a measure of how complete the claims paid
to date are relative to the estimate of the claims for services rendered for a given period. While the completion factors
are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods since a
large portion of health care claims are not submitted to us until several months after services have been rendered.
Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member
per month claims trends developed from the experience in preceding months. This method is applied consistently year
over year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product
mix, benefit plan changes and changes in membership, among other things.