Health Net 2014 Annual Report Download - page 121

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-11
On November 2, 2012, we entered into a state-sponsored health plans rate settlement agreement (the
"Agreement") with DHCS to settle historical rate disputes with respect to our participation in the Medi-Cal program, for
rate years prior to the 2011–2012 rate year. As part of the Agreement, DHCS agreed, among other things, to (1) an
extension of all of our Medi-Cal managed care contracts existing as of 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, which includes SPDs, Healthy Families, the dual eligibles demonstration
portion of the CCI that began in 2014 and the Medi-Cal expansion populations that also began in 2014 (our “state-
sponsored health care programs”), which are 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.
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). A deficit or surplus will result to the extent our actual pretax
margin (as defined in the Agreement) on our state-sponsored health care programs is below or above a predetermined
pretax margin target. The amount of any deficit or surplus is calculated as described in the Agreement. Cash settlement
of the Account will occur on December 31, 2019, except that under certain circumstances the DHCS may extend the
final settlement for up to three additional one-year periods (as may be extended, the "Term"). In addition, the DHCS
will make an interim partial settlement payment to us if it 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 as defined in the Agreement.
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. As of December 31, 2014, we had calculated a surplus of
$53.4 million under the Agreement and reduced our receivable to zero, reflecting our cumulative estimated
retrospective premium adjustment to the Account based on our actual pretax margin for the period beginning on
January 1, 2013 and ending on December 31, 2014. As a surplus Account position results in no monies due to either
party upon expiration of the Term, we have no receivable and no payable recorded as of December 31, 2014 in
connection with the Agreement. As of December 13, 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. As a result of the change in the
Account balance calculated during the year ended December 31, 2014, our health plan services premium revenue was
reduced by $62.9 million for the year ended December 31, 2014. For the year ended December 31, 2013, we had
recorded an increase in our health plan services premium revenue of $62.9 million as a result of the deficit calculated
under the Agreement as of December 31, 2013.
Health Plan Services Health Care Cost
The cost of health care services is recognized in the period in which services are provided and includes an
estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to primary
care physicians, specialists, hospitals and outpatient care facilities, and the costs associated with managing the extent of
such care. Our health care cost can also include from time to time remediation of certain claims as a result of periodic
reviews by various regulatory agencies.
Our HMOs, primarily in California, generally contract with various medical groups to provide professional care
to certain of their members on a capitated, or fixed per member per month fee basis. Capitation contracts generally
include a provision for stop-loss and non-capitated services for which we are liable. Professional capitated contracts
also generally contain provisions for shared risk and pay-for-performance bonuses, whereby the Company and the
medical groups share in the variance between actual costs and predetermined goals. Additionally, we contract with
certain hospitals to provide hospital care to enrolled members on a capitated basis. Our HMOs also contract with
hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital
per diems, and case rates under which providers bill the HMOs for each individual service provided to enrollees.