Health Net 2014 Annual Report Download - page 120

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-10
Under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of
2010 (collectively, the “ACA”), commercial health plans with medical loss ratios ("MLR") on fully insured products, as
calculated as set forth in the ACA, that fall below certain targets are required to rebate ratable portions of their
premiums annually. We classify the estimated rebates, if any, as a reduction to Health plan services premiums in our
consolidated statement of operations. Estimated rebates for our commercial health plans were $0 for the year ended
December 31, 2014. In addition to the rebates for the commercial health plans under the ACA, there is also a medical
loss ratio corridor for the California Department of Health Care Services ("DHCS") adult Medicaid expansion members
under the state Medicaid program in California ("Medi-Cal") beginning in 2014 and covering an 18-month period. If
our MLR for this population is below 85%, then we would have to pay DHCS a rebate. If the MLR is above 95%, then
DHCS would have to pay us additional premium. As of December 31, 2014, we have accrued $200.6 million for a
MLR rebate with respect to this population payable to DHCS. Accordingly, for the year ended December 31, 2014, we
reduced Medicaid premium revenue by $200.6 million. Our Medicaid contract with the state of Arizona contains profit-
sharing provisions. Because our Arizona Medicaid profits were in excess of the amount we are allowed to fully retain,
we reduced Medicaid premium revenue by $24.7 million for the year ended December 31, 2014. With respect to our
Arizona Medicaid contract, the profit corridor receivable balance included in other noncurrent assets as of December
31, 2014 was $2.3 million and the profit corridor payable balance included in accounts payable and other liabilities as
of December 31, 2014 was $27.0 million. In addition, certain provisions of the ACA became effective January 1, 2014,
including an annual insurance industry premium-based assessment and the establishment of federally facilitated, state
and federal partnership or state-based health insurance exchanges coupled with premium stabilization programs. See
below in this Note 2 under the heading "Accounting for Certain Provisions of the ACA" for additional information.
Approximately 59%, 50%, and 45% in 2014, 2013 and 2012, respectively, of our health plan services premiums
were generated under Medicare, Medicaid/Medi-Cal and dual eligibles contracts, as applicable. These revenues are
subject to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these
programs, including the Centers for Medicare and Medicaid Services ("CMS") 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 the Centers for Medicare & Medicaid Services ("CMS"). CMS
deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and
certain demographic factors. This risk adjustment model results in periodic changes in our risk factor adjustment scores
for certain diagnostic codes, which then result in changes to our health plan services premium revenues. Because the
recorded revenue is based on our best estimate at the time, the actual payment we receive from CMS for risk adjustment
reimbursement settlements may be materially different than the amounts we have initially recognized on our financial
statements. The change in our estimate for the risk adjustment revenue related to prior years in the years ended
December 31, 2014, 2013 and 2012 increased health plan services premium revenues by $13.1 million, decreased
health plan services premium revenues by $9.0 million, and increased health plan services premium revenues by $12.0
million, respectively.
Our revenue from the Medi-Cal program, including seniors and persons with disabilities ("SPD") programs, and
other state-sponsored health programs are subject to certain retroactive rate adjustments based on expected and actual
health care cost. For the year ended December 31, 2014, retroactive rate adjustments for our SPD and non-SPD
members for periods prior to 2014 were not significant. For the year ended December 31, 2013, we recognized $74.3
million of premium revenue as a result of retroactive rate adjustments for our SPD and non-SPD members for periods
prior to 2013. For the year ended December 31, 2012, we recognized $21.7 million of premium revenue as a result of
retroactive rate adjustments for our SPD and non-SPD members for periods prior to 2012.
In addition, our state-sponsored health care programs in California, including Medi-Cal, SPD programs, the dual
eligibles demonstration portion of the California Coordinated Care Initiative that began in April 2014 and Medicaid
expansion under federal health care reform that began in January 2014, are subject to retrospective premium
adjustments based on certain risk sharing provisions included in our state-sponsored health plans rate settlement
agreement described below. We estimate and recognize the retrospective adjustments to premium revenue based upon
experience to date under our state-sponsored health care programs contracts. The retrospective premium adjustment is
recorded as an adjustment to premium revenue and other noncurrent assets.