Health Net 2015 Annual Report Download - page 94

92
Medical Cost Trend (b)
Percentage-point
Increase (Decrease)
in Factor
Western Region Operations
Health Plan Services
Increase (Decrease) in
Reserves for Claims
2% $32.8 million
1% $16.4 million
(1)% $(16.4) million
(2)% $(32.8) million
__________
(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how
complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an
increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.
(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the
most recent three months.
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.
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
favorable development. However, any favorable prior period reserve development would increase current period net
income only to the extent that the current period provision for adverse deviation is less than the benefit recognized from
the prior period favorable development. If moderately adverse conditions occur and are more acute than we estimated,
then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease
current period net income.
For the year ended December 31, 2015, we had $107.4 million in favorable reserve developments related to prior
years. This reserve development for the year ended December 31, 2015 consisted of $29.7 million in favorable prior
year development and a release of $77.7 million of the provision for adverse deviation held at December 31, 2014. We
believe that the $29.7 million favorable development for the year ended December 31, 2015 was primarily due to the
growth of the new Medicaid expansion population in 2014. For the year ended December 31, 2014, we had $14.6
million in net favorable reserve developments related to prior years. This reserve development for the year ended
December 31, 2014 consisted of $36.6 million in unfavorable prior year development primarily due to the existence of
moderately adverse conditions and a release of $51.2 million of the provision for adverse deviation held at December
31, 2013. We believe that the $36.6 million unfavorable development for the year ended December 31, 2014 was
primarily due to unanticipated benefit utilization in our commercial business arising from dates of service in the fourth
quarter of 2013 as a result of an uncertain environment related to the ACA. The reserve developments related to prior
years for the years ended December 31, 2015 and 2014, when considered together with the provision for adverse
deviation recorded as of December 31, 2015 and 2014, respectively, did not have a material impact on our operating
results or financial condition.
We assess the profitability of contracts for providing health care services when operating results or forecasts
indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include
premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under a
capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers. Contracts
are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing
anticipated premiums to estimates for the total of health care related costs less reinsurance recoveries, if any, and the