Health Net 2014 Annual Report Download - page 98

96
Medical Cost Trend (b)
Percentage-point
Increase (Decrease)
in Factor
Western Region Operations
Health Plan Services
Increase (Decrease) in
Reserves for Claims
2% $ 30.9 million
1% $ 15.4 million
(1)% $ (15.4) million
(2)% $ (30.9) million
__________
(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how
complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an
increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.
(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the
most recent three months.
Our IBNR best estimate also includes a provision for adverse deviation, which is an estimate for known
environmental factors that are reasonably likely to affect the required level of IBNR reserves. This provision for adverse
deviation is intended to capture the potential adverse development from known environmental factors such as our entry
into new geographical markets, changes in our geographic or product mix, the introduction of new customer
populations, variation in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in
medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment
patterns, changes in technology that provide faster access to claims data or change the speed of adjudication and
settlement of claims, variability in claim inventory levels, non-standard claim development, and/or exceptional
situations that require judgmental adjustments in setting the reserves for claims.
We consistently apply our IBNR estimation methodology from period to period. Our IBNR best estimate is made
on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are
included in the current period. As additional information becomes known to us, we adjust our assumptions accordingly
to change our estimate of IBNR. Therefore, if moderately adverse conditions do not occur, evidenced by more complete
claims information in the following period, then our prior period estimates will be revised downward, resulting in
favorable development. However, any favorable prior period reserve development would increase current period net
income only to the extent that the current period provision for adverse deviation is less than the benefit recognized from
the prior period favorable development. If moderately adverse conditions occur and are more acute than we estimated,
then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease
current period net income.
For the year ended December 31, 2014, we had $14.6 million in net favorable reserve developments related to
prior years. This reserve development for the year ended December 31, 2014 consisted of $36.6 million in unfavorable
prior year development primarily due to the existence of moderately adverse conditions and a release of $51.2 million
of the provision for adverse deviation held at December 31, 2013. We believe that the $36.6 million unfavorable
development for the year ended December 31, 2014 was primarily due to unanticipated benefit utilization in our
commercial business arising from dates of service in the fourth quarter of 2013 as a result of an uncertain environment
related to the ACA. For the year ended December 31, 2013, we had $56.2 million in favorable reserve developments
related to prior years. We believe this favorable development was primarily due to the absence of moderately adverse
conditions. As part of our best estimate for IBNR, the provision for adverse deviation recorded as of December 31,
2014 and December 31, 2013 was $77.7 million and $53.4 million, respectively. The increase in the provision for
adverse deviation from December 31, 2013 to December 31, 2014 was primarily driven by growth in our new products
offered or programs administered under the ACA. The reserve developments related to prior years for the years ended
December 31, 2014 and 2013, when considered together with the provision for adverse deviation recorded as of
December 31, 2014 and 2013, respectively, did not have a material impact on our operating results or financial
condition.
We assess the profitability of contracts for providing health care services when operating results or forecasts
indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include
premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under a
capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers. Contracts
are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing