Health Net 2014 Annual Report Download - page 134

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-24
Premium Subsidy—For qualifying low-income members, HHS will reimburse us, on the member’s behalf, some
or all of the monthly member premium depending on the member’s income level in relation to the Federal Poverty
Level. We recognize the premium subsidy evenly over the contract period and report it as part of health plan services
premium revenue.
Cost Sharing Subsidy—For qualifying low-income members, HHS will reimburse us, on the member’s behalf,
some or all of a member’s cost sharing amounts (e.g., deductible, co-pay/coinsurance). The amount paid for the member
by HHS is dependent on the member’s income level in relation to the Federal Poverty Level. The Cost Sharing Subsidy
offsets health care costs when incurred. We record a liability if the Cost Sharing Subsidy is paid in advance or a
receivable if incurred health care costs exceed the Cost Sharing Subsidy received to date.
3Rs: Reinsurance, Risk Adjustment and Risk Corridor
Our accounting estimates are impacted as a result of the provisions of the ACA, including the 3Rs. The
substantial influx of previously uninsured individuals into the new health insurance exchanges under the ACA could
make it more difficult for health insurers, including us, to establish pricing accurately, at least during the early years of
the exchanges. The 3Rs are intended to mitigate some of the risks around pricing and lack of information surrounding
the previously uninsured. We will experience premium adjustments to our health plan services premium revenues and
health plan services expenses based on changes to our estimated amounts related to the 3Rs. Such estimated amounts
may differ materially from actual amounts ultimately received or paid under the provisions, which may have a material
impact on our consolidated results of operations and financial condition.
Reinsurance—The transitional reinsurance program requires us to make reinsurance contributions for calendar
years 2014 through 2016 to a state or HHS established reinsurance entity based on a national contribution rate per
covered member as determined by HHS. While all commercial medical plans, including self-funded plans, are required
to fund the reinsurance entity, only fully-insured non-grandfathered plans in the individual commercial market will be
eligible for recoveries if individual claims exceed a specified threshold. Accordingly, we account for transitional
reinsurance contributions associated with all commercial medical health plans other than non-grandfathered individual
plans as an assessment in general and administrative expenses in our consolidated statement of income. We account for
contributions made by individual commercial plans which are subject to recoveries as contra-health plan services
premium revenue, and we account for any recoveries as contra-health plan services expense in our consolidated
statements of income with a corresponding current or long-term receivable or payable. We recorded $234.0 million of
reinsurance recovery as contra-health plan services expense for the year ended December 31, 2014, and the balance
included in other receivables as of December 31, 2014 was $234.0 million.
Risk Adjustment—The risk adjustment provision applies to individual and small group business both within and
outside the exchange and requires measurement of the relative health status risk of each insurer’s pool of insured
enrollees in a given market. The risk adjustment provision then operates to transfer funds from insurers whose pools of
insured enrollees have lower-than-average risk scores to those insurers whose pools have greater-than-average risk
scores. Our estimate for the risk adjustment incorporates our risk scores by state and market relative to the market
average using data provided by the participating insurers and available information about the HHS model. This
information is consistent with our knowledge and understanding of market conditions.
As part of our ongoing estimation process, we consider information as it becomes available at interim dates along
with our actuarially determined expectations, and we update our estimates incorporating such information as
appropriate.
We estimate and recognize adjustments to our health plan services premium revenue for the risk adjustment
provision by projecting our ultimate premium for the calendar year. Such estimated calendar year amounts are
recognized ratably during the year and are revised each period to reflect current experience. We record receivables and/
or payables and classify the amounts as current or long-term in the consolidated balance sheets based on the timing of
expected settlement. Our risk adjustment estimate was $72.4 million net payable for the year ended December 31, 2014,
and was recorded as a reduction to health plan services premiums. The risk adjustment receivable balance included in
other receivables as of December 31, 2014 was $81.0 million and the risk adjustment payable balance included in
accounts payable and other liabilities as of December 31, 2014 was $153.4 million.