Health Net 2015 Annual Report Download - page 95

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cost of maintaining the contracts. Losses, if any, are recognized in the period the losses are determined and are
classified as health plan services. As of December 31, 2015, and 2014 we held no premium deficiency reserves.
Accounting for Certain Provisions of the ACA
Starting in 2014, our critical accounting estimates have been and will continue to be impacted as a result of the
implementation of certain provisions of the ACA, including three premium stabilization provisions ("3Rs"): permanent
risk adjustment, temporary risk corridor and transitional reinsurance as described below. See Note 2, under the heading
"Accounting for Certain Provisions of the ACA," to our consolidated financial statements for additional information.
Premium-based Fee on Health Insurers
The ACA mandated significant reforms to various aspects of the U.S. health insurance industry. Among other
things, the ACA imposes an annual premium-based fee on health insurers (the "health insurer fee") for each calendar
year beginning on or after January 1, 2014 which is not deductible for federal income tax purposes and in many state
jurisdictions. The health insurer fee is levied based on a ratio of an insurer's net health insurance premiums written for
the previous calendar year compared to the U.S. health insurance industry total. We are required to estimate a liability
for our portion of the health insurer fee and record it in full once qualifying insurance coverage is provided in the
applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized ratably to
expense over the calendar year that it is payable.
Public Health Insurance Exchanges
The ACA requires the establishment of state-based, state and federal partnership or federally facilitated health
insurance exchanges ("exchanges") where individuals and small groups may purchase health insurance coverage under
regulations established by U.S. Department of Health and Human Services ("HHS"). We currently participate in
exchanges in Arizona and California. Effective January 1, 2014, the ACA includes permanent and temporary premium
stabilization provisions for transitional reinsurance, permanent risk adjustment, and temporary risk corridors
(collectively referred to as the "3Rs"), which are applicable to those insurers participating inside, and in some cases
outside, of the exchanges.
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