Health Net 2015 Annual Report Download - page 172

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-11
of our Medicare Advantage and dual eligibles offerings. Health care costs and general and administrative expenses
associated with Part D are recognized as the costs and expenses are incurred.
Our premiums from the Medi-Cal programs and other state-sponsored health programs are subject to certain
retroactive premium adjustments based on expected and actual health care costs.
In addition, our state-sponsored health care programs in California, including Medi-Cal, seniors and persons with
disabilities ("SPD") programs, the dual eligibles demonstration portion of the California Coordinated Care Initiative
that began in April 2014 and Medicaid expansion under federal health care reform that began in January 2014, are
subject to retrospective premium adjustments based on certain risk sharing provisions included in our state-sponsored
health plans rate settlement agreement described below. We estimate and recognize the retrospective adjustments to
premium revenue based upon experience to date under our state-sponsored health care programs contracts. The
retrospective premium adjustment is recorded as an adjustment to premium revenue and other noncurrent assets.
On November 2, 2012, we entered into a state-sponsored health plans rate settlement agreement (the
"Agreement") with DHCS to settle historical rate disputes with respect to our participation in the Medi-Cal program, for
rate years prior to the 2011–2012 rate year. As part of the Agreement, DHCS agreed, among other things, to (1) an
extension of all of our Medi-Cal managed care contracts existing as of the date of the Agreement for an additional five
years from their then existing expiration dates; (2) retrospective premium adjustments on all of our state-sponsored
health care programs, including Medi-Cal, which includes SPDs, Healthy Families, the dual eligibles demonstration
portion of the CCI that began in 2014 and the Medi-Cal expansion populations that also began in 2014 (our “state-
sponsored health care programs”), which are tracked in a settlement account as discussed in more detail below; and (3)
compensate us should DHCS terminate any of our state-sponsored health care programs contracts early.
Effective January 1, 2013, the settlement account (the "Account") was established with an initial balance of zero.
The balance in the Account is adjusted annually to reflect retrospective premium adjustments for each calendar year
(referenced in the Agreement as a deficit or surplus). A deficit or surplus will result to the extent our actual pretax
margin (as defined in the Agreement) on our state-sponsored health care programs is below or above a predetermined
pretax margin target. The amount of any deficit or surplus is calculated as described in the Agreement. Cash settlement
of the Account will occur on December 31, 2019, except that under certain circumstances the DHCS may extend the
final settlement for up to three additional one-year periods (as may be extended, the "Term"). In addition, the DHCS
will make an interim partial settlement payment to us if it terminates any of our state-sponsored health care programs
contracts early. Upon expiration of the Term, if the Account is in a surplus position, then no monies are owed to either
party. If the Account is in a deficit position, then DHCS shall pay the amount of the deficit to us. In no event, however,
shall the amount paid by DHCS to us under the Agreement exceed $264 million or be less than an alternative minimum
amount as defined in the Agreement.
We estimate and recognize the retrospective adjustments to premium revenue based upon experience to date
under our state-sponsored health care programs contracts. The retrospective premium adjustment is recorded as an
adjustment to premium revenue and other noncurrent assets. As of December 31, 2015, we had calculated a surplus of
$386.2 million. As a surplus Account position results in no monies due to either party upon expiration of the Term, we
have no receivable and no payable recorded as of December 31, 2015 in connection with the Agreement. As of
December 31, 2014, we had calculated a surplus of $53.4 million under the Agreement and reduced our receivable to
zero, reflecting our cumulative estimated retrospective premium adjustment to the Account based on our actual pretax
margin for the period beginning on January 1, 2013 and ending on December 31, 2014. As a surplus Account position
results in no monies due to either party upon expiration of the Term, we had no receivable and no payable recorded as
of December 31, 2014 in connection with the Agreement. As of December 31, 2013, we had calculated and recorded a
deficit of $62.9 million, net of a valuation discount in the amount of $4.4 million, reflecting our estimated retrospective
premium adjustment to the Account based on our actual pretax margin for the year ended December 31, 2013.