Health Net 2015 Annual Report Download - page 173

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-12
The following table presents information regarding the impact to health plan services premium revenues related
to the change in prior years Medicare risk adjustment revenues, retroactive premium adjustments for our Medi-Cal and
other state-sponsored health programs and the change in deficit calculated under our state-sponsored health plans rate
settlement agreement (amounts in millions):
Increase (Decrease) in Health Plan Services Premium
Revenue
Year Ended December 31,
2015 2014 2013
Change in prior years risk adjustment revenue estimate............. $ 1.1 $ 13.1 $ (9.0)
Medi-Cal retroactive premium adjustments for prior years ........ 46.9 — 74.3
Change in deficit calculated under our state-sponsored health
plans rate settlement agreement............................................... —(62.9) 62.9
Health Plan Services Health Care Cost
The cost of health care services is recognized in the period in which services are provided and includes an
estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to primary
care physicians, specialists, hospitals and outpatient care facilities, and the costs associated with managing the extent of
such care. Our health care cost can also include from time to time remediation of certain claims as a result of periodic
reviews by various regulatory agencies.
Our HMOs, primarily in California, generally contract with various medical groups to provide professional care
to certain of their members on a capitated, or fixed per member per month fee basis. Capitation contracts generally
include a provision for stop-loss and non-capitated services for which we are liable. Professional capitated contracts
also generally contain provisions for shared risk and pay-for-performance bonuses, whereby the Company and the
medical groups share in the variance between actual costs and predetermined goals. Additionally, we contract with
certain hospitals to provide hospital care to enrolled members on a capitated basis. Our HMOs also contract with
hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital
per diems, and case rates under which providers bill the HMOs for each individual service provided to enrollees.
We estimate the amount of the provision for health care service costs IBNR in accordance with GAAP and using
standard actuarial developmental methodologies based upon historical data including the period between the date
services are rendered and the date claims are received and paid, denied claim activity, expected medical cost inflation,
seasonality patterns and changes in membership, among other things.
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. As part of our best estimate for IBNR,
the provision for adverse deviation recorded at December 31, 2015 and 2014 was approximately $74.3 million and
$77.7 million, respectively.
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