Health Net 2015 Annual Report Download - page 66

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We measure our Western Region Operations reportable segment profitability based on pretax income and net
income. Pretax income is calculated as health plan services premiums and administrative services fees and other income
less health plan services expense and G&A and other net expenses, including selling expenses. Net income is calculated
as pretax income less income tax provision. See “—Results of Operations—Western Region Operations Reportable
Segment—Western Region Operations Segment Results” for a calculation of pretax income and net income.
Health plan services premiums generally include health maintenance organization (“HMO”), point of service
(“POS”) and preferred provider organization (“PPO”) premiums from employer groups and individuals, and from
Medicare recipients who have purchased supplemental benefit coverage (which premiums are based on a predetermined
prepaid fee), Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients (which includes
retroactive and retrospective premium adjustments), and revenue under Medicare risk contracts to provide care to
enrolled Medicare recipients. Health plan services premiums also can include amounts for risk factor adjustments and
additional premiums that we charge in some places to members who purchase our Medicare risk plans. Health plan
services premiums are also impacted by the provisions of ACA, including the premium stabilization provisions and
rebates associated with medical loss ratio targets. In addition to the medical loss ratio rebates, health plan services
premiums are also impacted by medical loss ratio corridors and profit sharing provisions. See Note 2 to the consolidated
financial statements for further information on these and other items that may impact health plan services premiums.
Health plan services premiums also includes our revenues from the California Coordinated Care Initiative (the "CCI")
program. For additional information on the CCI, see "—Results of Operations—Western Region Operations Reportable
Segment—California Coordinated Care Initiative."
The amount of premiums we earn in a given period is driven by the rates we charge and enrollment levels.
Administrative services fees and other income primarily includes revenue for administrative services such as claims
processing, customer service, medical management, provider network access and other administrative services.
Health plan services expense generally includes medical and related costs for health services provided to our
members, including physician services, hospital and related professional services, outpatient care, and pharmacy benefit
costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care cost per visit,
and the utilization rates represent the volume of health care consumption by our members.
G&A expenses include, among other things, those costs related to employees and benefits, consulting and
professional fees, marketing, business expansion and cost reduction initiatives, premium taxes and assessments, Patient
Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the "ACA")
related fees, occupancy costs and litigation and regulatory-related costs. Such costs are driven by membership levels,
introduction of new products or provision of new services, system consolidations, outsourcing activities and compliance
requirements for changing regulations, among other things. These expenses also include expenses associated with
corporate shared services and other costs to reflect the fact that such expenses are incurred primarily to support health
plan services. Selling expenses consist of external broker commission expenses and generally vary with premium
volume.
We measure our Government Contracts segment profitability based on pretax income and net income. Pretax
income is calculated as Government Contracts revenue less Government Contracts cost. Net income is calculated as
pretax income less income tax provision. See “—Results of Operations—Government Contracts Reportable Segment—
Government Contracts Segment Results” for a calculation of the government contracts pretax income and net income.
Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services
including provider network management, referral management, medical management, disease management, enrollment,
customer service, clinical support service, and claims processing. These services are structured as cost reimbursement
arrangements for health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, and
contingent fees and payments based on various incentives and penalties. We recognize revenue related to administrative
services on a straight-line basis over the option period, when the fees become fixed and determinable. The TRICARE
North Region members are served by our network and out-of-network providers in accordance with the T-3 contract.
We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such
payments. Under the terms of the T-3 contract, we are not the primary obligor for health care services and accordingly,
we do not include health care costs and related reimbursements in our consolidated statements of operations. The T-3
contract also includes various performance-based incentives and penalties. For each of the incentives or penalties, we
adjust revenue accordingly based on the amount that we have earned or incurred at each interim date and are legally
entitled to in the event of a contract termination. See Note 2 to our consolidated financial statements under the heading
"Government Contracts" and "—Results of Operations—Government Contracts Reportable Segment" for additional
information on our T-3 contract.