Health Net 2015 Annual Report Download - page 93

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providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines.
We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS.
Under the ACA, commercial health plans with MLRs on fully insured products, as calculated as set forth in the
ACA, that fall below certain targets are required to rebate ratable portions of their premiums annually. We estimate such
rebates based on calculation methodology set forth in the ACA. In addition to the rebates for the commercial health
plans under the ACA, there is also a medical loss ratio corridor for the DHCS adult Medicaid expansion members under
the state Medicaid program in California. If our MLR for this population is below 85%, then we would have to pay
DHCS a rebate. If the MLR is above 95%, then DHCS would have to pay us additional premium. Our Medicaid
contract with the state of Arizona contains profit-sharing or profit ceiling provisions. If our Arizona Medicaid profits
were in excess of the amount we are allowed to fully retain, we record an estimated profit corridor payable balance.
On a monthly basis, we estimate the amount of uncollectible receivables to reflect allowances for doubtful
accounts. The allowances for doubtful accounts are estimated based on the creditworthiness of our customers, our
historical collection rates and the age of our unpaid balances. During this process, we also assess the recoverability of
the receivables, and an allowance is recorded based upon their net realizable value. Those receivables that are deemed
to be uncollectible, such as receivables from bankrupt employer groups, are fully written off against their corresponding
asset account, with a debit to the allowance to the extent such an allowance was previously recorded.
Reserves for claims and other settlements include reserves for claims (IBNR claims and received but unprocessed
claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives
and other reserves for our Western Region Operations reporting segment. Because reserves for claims include various
actuarially developed estimates, our actual health care services expenses may be more or less than our previously
developed estimates. As of December 31, 2015, 75% of reserves for claims and other settlements were attributed to
claims reserves. See Note 15 to our consolidated financial statements for a reconciliation of changes in the reserve for
claims and material prior period reserve development.
We calculate our best estimate of the amount of our IBNR reserves in accordance with GAAP and using standard
actuarial developmental methodologies. This method also is known as the chain-ladder or completion factor method.
The developmental method estimates reserves for claims based upon the historical lag between the month when
services are rendered and the month claims are paid while taking into consideration, among other things, expected
medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key
component of the developmental method is the completion factor, which is a measure of how complete the claims paid
to date are relative to the estimate of the claims for services rendered for a given period. While the completion factors
are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods since a
large portion of health care claims are not submitted to us until several months after services have been rendered.
Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member
per month claims trends developed from the experience in preceding months. This method is applied consistently year-
over-year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product
mix, benefit plan changes and changes in membership, among other things.
An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent
in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns
and medical cost trends. As such, the completion factors and the claims per member per month trend factor are the most
significant factors used in estimating our reserves for claims. Since a large portion of the reserves for claims is
attributed to the most recent months, the estimated reserves for claims are highly sensitive to these factors. The
following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results
caused by these factors:
Completion Factor (a)
Percentage-point
Increase (Decrease)
in Factor
Western Region Operations
Health Plan Services
(Decrease) Increase in
Reserves for Claims
2% $(61.7) million
1% $(31.4) million
(1)% $32.7 million
(2)% $66.7 million