Health Net 2013 Annual Report Download - page 94

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An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent
in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns
and medical cost trends. As such, the completion factors and the claims per member per month trend factor are the most
significant factors used in estimating our reserves for claims. Since a large portion of the reserves for claims is
attributed to the most recent months, the estimated reserves for claims are highly sensitive to these factors. The
following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results
caused by these factors:
Completion Factor (a)
Percentage-point
Increase (Decrease)
in Factor
Western Region Operations
Health Plan Services
(Decrease) Increase in
Reserves for Claims
2% $ (53.0) million
1% $ (27.1) million
(1)% $ 28.4 million
(2)% $ 58.1 million
Medical Cost Trend (b)
Percentage-point
Increase (Decrease)
in Factor
Western Region Operations
Health Plan Services
Increase (Decrease) in
Reserves for Claims
2% $ 23.9 million
1% $ 11.9 million
(1)% $ (11.9) million
(2)% $ (23.9) million
__________
(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how
complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an
increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.
(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the
most recent three months.
Our IBNR best estimate also includes a provision for adverse deviation, which is an estimate for known
environmental factors that are reasonably likely to affect the required level of IBNR reserves. This provision for adverse
deviation is intended to capture the potential adverse development from known environmental factors such as our entry
into new geographical markets, changes in our geographic or product mix, the introduction of new customer
populations, variation in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in
medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment
patterns, changes in technology that provide faster access to claims data or change the speed of adjudication and
settlement of claims, variability in claim inventory levels, non-standard claim development, and/or exceptional
situations that require judgmental adjustments in setting the reserves for claims.
We consistently apply our IBNR estimation methodology from period to period. Our IBNR best estimate is made
on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are
included in the current period. As additional information becomes known to us, we adjust our assumptions accordingly
to change our estimate of IBNR. Therefore, if moderately adverse conditions do not occur, evidenced by more complete
claims information in the following period, then our prior period estimates will be revised downward, resulting in
favorable development. However, any favorable prior period reserve development would increase current period net
income only to the extent that the current period provision for adverse deviation is less than the benefit recognized from
the prior period favorable development. If moderately adverse conditions occur and are more acute than we estimated,
then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease
current period net income.
For the year ended December 31, 2013, we had $56.2 million in favorable reserve developments related to prior
years. We believe this favorable development was primarily due to the absence of moderately adverse conditions. As
part of our best estimate for IBNR, the provision for adverse deviation recorded as of December 31, 2013 was $53.4