Health Net 2014 Annual Report Download - page 133

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-23
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and
liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in
which such differences are expected to reverse. We establish a valuation allowance in accordance with the provisions of
the Income Taxes Topic of the Financial Accounting Standards Board ("FASB") codification. We continually review the
adequacy of the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of
both positive and negative factors indicate that it is more likely than not that the benefits will be realized.
We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions is
subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we believe that it
is probable certain positions will be challenged by taxing authorities, and we may not prevail on all of the positions as
filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities
upon examination. We analyze the amount at which each tax position meets a “more likely than not” standard for
sustainability upon examination by taxing authorities. Only tax benefit amounts meeting or exceeding this standard will
be reflected in tax provision expense and deferred tax asset balances. Any difference between the amounts of tax
benefits reported on tax returns and tax benefits reported in the financial statements is recorded as a liability for
unrecognized tax benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and
liabilities and classified as current or noncurrent based upon the expected period of payment. See Note 11 for additional
disclosures.
Accounting for Certain Provisions of the ACA
Premium-based Fee on Health Insurers
The ACA mandated significant reforms to various aspects of the U.S. health insurance industry. Among other
things, the ACA imposes an annual premium-based fee on health insurers (the "health insurance industry fee") for each
calendar year beginning on or after January 1, 2014 which is not deductible for federal income tax purposes and in
many state jurisdictions. The health insurance industry fee is levied based on a ratio of an insurer's net health insurance
premiums written for the previous calendar year compared to the U.S. health insurance industry total. We are required
to estimate a liability for our portion of the health insurance industry fee and record it in full once qualifying insurance
coverage is provided in the applicable calendar year in which the fee is payable with a corresponding deferred cost that
is amortized ratably to expense over the calendar year that it is payable.
In September 2014, we paid the federal government $141.4 million for our portion of the health insurance
industry fee in accordance with the ACA. We had recorded a liability for this fee in other current liabilities with an
offsetting deferred cost in other current assets in our consolidated financial statements. Our general and administrative
expense for the year ended December 31, 2014 includes amortization of the deferred cost of $141.4 million. The
balance of the remaining deferred cost asset was $0 as of December 31, 2014.
Public Health Insurance Exchanges
The ACA requires the establishment of state-based, state and federal partnership or federally facilitated health
insurance exchanges ("exchanges") where individuals and small groups may purchase health insurance coverage under
regulations established by U.S. Department of Health and Human Services ("HHS"). We currently participate in
exchanges in Arizona and California. Effective January 1, 2014, the ACA includes permanent and temporary premium
stabilization provisions for transitional reinsurance, permanent risk adjustment, and temporary risk corridors
(collectively referred to as the "3Rs"), which are applicable to those insurers participating inside, and in some cases
outside, of the exchanges.
Member Related Components
Member Premium—We receive a monthly premium from members. The member premium, which is fixed for
the entire plan year, is recognized evenly over the contract period and reported as part of health plan services premium
revenue.