Health Net 2015 Annual Report Download - page 185

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-24
Member Related Components
Member Premium—We receive a monthly premium from members. The member premium, which is fixed for
the entire plan year, is recognized evenly over the contract period and reported as part of health plan services premium
revenue.
Premium Subsidy—For qualifying low-income members, HHS will reimburse us, on the member’s behalf, some
or all of the monthly member premium depending on the member’s income level in relation to the Federal Poverty
Level. We recognize the premium subsidy evenly over the contract period and report it as part of health plan services
premium revenue.
Cost Sharing Subsidy—For qualifying low-income members, HHS will reimburse us, on the member’s behalf,
some or all of a member’s cost sharing amounts (e.g., deductible, co-pay/coinsurance). The amount paid for the member
by HHS is dependent on the member’s income level in relation to the Federal Poverty Level. The Cost Sharing Subsidy
offsets health care costs when incurred. We record a liability if the Cost Sharing Subsidy is paid in advance or a
receivable if incurred health care costs exceed the Cost Sharing Subsidy received to date.
3Rs: Reinsurance, Risk Adjustment and Risk Corridor
Our accounting estimates are impacted as a result of the provisions of the ACA, including the 3Rs. The
substantial influx of previously uninsured individuals into the new health insurance exchanges under the ACA could
make it more difficult for health insurers, including us, to establish pricing accurately, at least during the early years of
the exchanges. The 3Rs are intended to mitigate some of the risks around pricing and lack of information surrounding
the previously uninsured. Estimating the amounts for the 3Rs involve complex calculations, assumptions and
judgments. Our estimation process relies in part on data provided by participating insurers, including us, and also
requires interpretation and application of existing laws, regulations and guidance, including, among others, those related
to the treatment of income taxes in calculating risk corridors as well as the timing and source of program funding. The
interpretation and application of certain laws, regulations and guidance may impact the estimation process, which
impact may be material. Accordingly, we will experience premium adjustments to our health plan services premium
revenues and health plan services expenses based on changes to our estimated amounts related to the 3Rs until we
receive the final reconciliation and settlement amount from HHS. Such estimated amounts may differ materially from
actual amounts ultimately received or paid under the provisions, which may have a material impact on our consolidated
results of operations and financial condition.
Reinsurance—The transitional reinsurance program requires us to make reinsurance contributions for calendar
years 2014 through 2016 to a state or HHS established reinsurance entity based on a national contribution rate per
covered member as determined by HHS. While all commercial medical plans, including self-funded plans, are required
to fund the reinsurance entity, only fully-insured non-grandfathered plans in the individual commercial market will be
eligible for recoveries if individual claims exceed a specified threshold. Accordingly, we account for transitional
reinsurance contributions associated with all commercial medical health plans other than non-grandfathered individual
plans as an assessment in general and administrative expenses in our consolidated statement of income and recorded
$36.0 million and $55.0 million for the years ended December 31, 2015 and 2014, respectively. We account for
contributions made by individual commercial plans which are subject to recoveries as contra-health plan services
premium revenue and recorded $14.3 million and $15.9 million for the years ended December 31, 2015 and 2014,
respectively. We account for any recoveries as contra-health plan services expense in our consolidated statements of
income. Reinsurance assessments and recoveries are classified as current or long-term receivable or payable based on
the timing of expected settlement.
Risk Adjustment—The risk adjustment provision applies to individual and small group business both within and
outside the exchange and requires measurement of the relative health status risk of each insurer’s pool of insured
enrollees in a given market. The risk adjustment provision then operates to transfer funds from insurers whose pools of
insured enrollees have lower-than-average risk scores to those insurers whose pools have greater-than-average risk
scores. Our estimate for the risk adjustment incorporates our risk scores by state and market relative to the market
average using data provided by the participating insurers and available information about the HHS model. This
information is consistent with our knowledge and understanding of market conditions.