Health Net 2015 Annual Report Download - page 188

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-27
The final reconciliation and settlement with HHS of the premium and cost sharing subsidies and the amounts
related to the 3Rs for the current year generally will be completed in the following year with HHS. The risk adjustment
and reinsurance amounts for the benefit year 2014 reflect the final reconciliation by HHS. Risk adjustment and
reinsurance amounts for 2014 were substantially settled during the year ended December 31, 2015. For further
information with respect to our risk corridor receivables, see the discussion above in this Note 2.
Section 1202 of ACA
Section 1202 of the ACA mandates increases in Medicaid payment rates for primary care in calendar years 2013
and 2014. The final rule has been in effect since January 1, 2013. The provisions of section 1202 impact our 1.8 million
Medi-Cal members in California and 65,000 Medicaid members in Arizona. DHCS, the agency that regulates the Medi-
Cal program, initially implemented a reimbursement methodology with no underwriting risk to the managed care plans
("MCPs") in 2013. Subsequently, DHCS changed the reimbursement methodology during the second quarter of 2014,
and this change transferred full underwriting risk to the MCPs.
For the periods prior to this reimbursement methodology change, i.e., the year ended December 31, 2013 and the
three months ended March 31, 2014, we accounted for the provisions of section 1202 on an administrative services only
basis since it transferred no underwriting risk to the MCPs, and recorded the receipts and payments on a net basis.
Following the change in reimbursement methodology, we have full underwriting risk for 2013, including both
utilization and unit cost risk. Accordingly, for the year ended December 31, 2014, with respect to our Medi-Cal
business, we:
• Reversed $7.9 million previously recorded as administrative services fees and other income in 2013
and for the three months ended March 31, 2014.
• Recorded payments on a grossed-up basis by recording Medi-Cal payments received as premium
revenue and estimated Medi-Cal claim payments as health care costs (incurred claims), each via
retroactive adjustments to premium revenues and health care costs.
• Recorded retrospective premium revenue adjustments based upon the state settlement agreement (see
Note 2 - "Health Plan Services Revenue Recognition" above).
The financial statement impact of the section 1202 reimbursement methodology change is summarized in the
table below.
Recorded In
Year Ended
December
31, 2013
Year Ended December 31, 2014
(Dollars in millions) No Risk No Risk Full Risk
Health plan services premiums........................................ $ 4.4 $ — $ 154.7
Health plan services expenses ......................................... — — 144.0
General and administrative expenses .............................. 4.4 — —
Administrative services fees and other income............... 6.5 1.4 (7.9)
Pretax income.................................................................. $ 6.5 $ 1.4 $ 2.8
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("ASU 2014-09") as modified by ASU No.
2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” ASU 2014-09 will