Health Net 2015 Annual Report Download - page 171

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-10
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.
Under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of
2010 (collectively, the “ACA”), commercial health plans with medical loss ratios ("MLR") 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 classify the estimated rebates, if any, as a reduction to health plan services premiums in our
consolidated statement of operations. Estimated rebates for our commercial health plans were $0 for the year ended
December 31, 2015 and $0 for the year ended December 31, 2014. We paid $0.4 million related to 2014 rebates during
the year ended December 31, 2015. In addition to the rebates for the commercial health plans under the ACA, there is
also a medical loss ratio corridor for the California Department of Health Care Services ("DHCS") adult Medicaid
expansion members under Medi-Cal covering an 18-month period from January 1, 2014 to June 30, 2015 and for
annual periods thereafter. If our MLR for this population is below 85%, then we would have to pay DHCS a rebate. If
the MLR is above 95%, then DHCS would have to pay us additional premium. As of December 31, 2015 and December
31, 2014, we have accrued $345.0 million and $200.6 million, respectively, in accounts payable and other liabilities,
and accrued $58.1 million and $0, respectively, in other noncurrent liabilities for MLR rebates with respect to this
population payable to DHCS. Our Medicaid contract with the state of Arizona contains profit-sharing provisions. If our
Arizona Medicaid profits are in excess of the amount we are allowed to fully retain, we record a payable and reduce
health plan services premiums. With respect to our Arizona Medicaid contract, the balance included in other noncurrent
assets as of December 31, 2015 and December 31, 2014 was $0 and $2.3 million, respectively, and the profit corridor
payable balance included in accounts payable and other liabilities as of December 31, 2015 and December 31, 2014 was
$49.7 million and $27.0 million, respectively. The profit corridor payable balance included in other noncurrent
liabilities as of December 31, 2015 was $2.4 million and $0 as of December 31, 2014. In the year ended December 31,
2015, the Arizona Health Care Cost Containment System ("AHCCCS") withheld $36.2 million in connection with the
profit corridor payable from our capitation payment. See below in this Note 2 under the heading "Accounting for
Certain Provisions of the ACA" for additional information.
The following table presents information regarding the impact to health plan services premium revenues related
to the Medi-Cal MLR rebates and our Arizona Medicaid contract profit-sharing provisions (amounts in millions):
Increase (Decrease) in Health Plan Services
Premium Revenue
Year Ended December 31, 2015
2015 2014
Medi-Cal MLR rebates ........................................................ $(202.5) $ (200.6)
AZ Medicaid contract profit-sharing provisions.................. (63.7)(24.7)
Approximately 64%, 59%, and 50% in 2015, 2014 and 2013, respectively, of our health plan services premiums
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 the Centers for Medicare & Medicaid Services ("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. This risk adjustment
model results in periodic changes in our risk factor adjustment scores for certain diagnostic codes, which then result in
changes to our health plan services premium revenues. Because the recorded revenue is based on our best estimate at
the time, the actual payment we receive from CMS for risk adjustment reimbursement settlements may be materially
different than the amounts we have initially recognized on our financial statements. We also have stand-alone Medicare
Advantage Plus Prescription Drug ("MAPD") plans that cover both prescription drugs (Part D) and medical care. The
Part D benefit consists of pharmacy benefits for Medicare beneficiaries. We provide prescription drug benefits as part