Health Net 2014 Annual Report Download - page 96

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term of this contract was approximately two years, and the total estimated future commitments under the agreement
were approximately $25.4 million.
We have excluded from the table above amounts already recorded in our current liabilities on our consolidated
balance sheet as of December 31, 2014. We have also excluded from the table above various contracts we have entered
into with our health care providers, health care facilities, the federal government and other contracts that we have
entered into for the purpose of providing health care services. We have excluded those contracts that allow for
cancellation without significant penalty, obligations that are contingent upon achieving certain goals and contracts for
goods and services that are fulfilled by vendors within a short time horizon and within the normal course of business.
The future contractual obligations in the contractual obligations table are estimated based on information
currently available. The timing of and the actual payment amounts may differ based on actual events.
Off-Balance Sheet Arrangements
As of December 31, 2014, we had no off-balance sheet arrangements as defined under Regulation S-K Item 303
(a)(4) and the instructions thereto. See Note 6 to our consolidated financial statements for a discussion of our letters of
credit.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from those estimates. Principal areas requiring the use of estimates include
revenue recognition, health care costs, including IBNR amounts, reserves for contingent liabilities, amounts receivable
or payable under government contracts, goodwill and other intangible assets, recoverability of long-lived assets and
investments, and income taxes. Furthermore, starting in 2014, our critical accounting estimates have been and will
continue to be impacted as a result of the implementation of certain provisions of the ACA. Accordingly, we consider
accounting policies on these areas to be critical in preparing our consolidated financial statements. A material change in
any one of these amounts may have a material impact on our consolidated results of operations and financial condition.
A more detailed description of the significant accounting policies that we use in preparing our financial statements is
included in Note 2 to our consolidated financial statements, which are included elsewhere in this Annual Report on
Form 10-K.
Health Plan Services
Health plan services premium revenues generally include HMO, POS and PPO premiums from employer groups
and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums
are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide care to Medicaid
recipients, revenue under Medicare risk contracts to provide care to enrolled Medicare recipients, and revenue from the
dual eligible pilot program. Revenue is recognized in the month in which the related enrollees are entitled to health care
services. Premiums collected in advance of the month in which enrollees are entitled to health care services are
recorded as unearned premiums.
Approximately 59%, 50%, and 45% in 2014, 2013 and 2012, respectively, of our health plan services premium
revenues 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 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 CMS. CMS deploys a risk adjustment model which apportions
premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk
adjustment model pays more for members whose medical history would indicate that they are expected to have higher
medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using
diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. We and the health care
providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines.
We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS.
Under the ACA, commercial health plans with MLRs 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 estimate such