Health Net 2015 Annual Report Download - page 96

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receive the final reconciliation and settlement amount from HHS. Such estimated amounts may differ materially from
actual amounts ultimately received or paid under the provisions, which may have a material impact on our consolidated
results of operations and financial condition.
Reinsurance—The transitional reinsurance program requires us to make reinsurance contributions for calendar
years 2014 through 2016 to a state or HHS established reinsurance entity based on a national contribution rate per
covered member as determined by HHS. While all commercial medical plans, including self-funded plans, are required
to fund the reinsurance entity, only fully-insured non-grandfathered plans in the individual commercial market will be
eligible for recoveries if individual claims exceed a specified threshold. Accordingly, we account for transitional
reinsurance contributions associated with all commercial medical health plans other than non-grandfathered individual
plans as an assessment in general and administrative expenses in our consolidated statement of income. We account for
contributions made by individual commercial plans which are subject to recoveries as contra-health plan services
premium revenue, and we account for any recoveries as contra-health plan services expense in our consolidated
statements of income. Reinsurance assessments and recoveries are classified as current or long-term receivable or
payable based on the timing of expected settlement.
Risk Adjustment—The risk adjustment provision applies to individual and small group business both within and
outside the exchange and requires measurement of the relative health status risk of each insurer’s pool of insured
enrollees in a given market. The risk adjustment provision then operates to transfer funds from insurers whose pools of
insured enrollees have a lower-than-average risk scores to those insurers whose pools have greater-than-average risk
scores. Our estimate for the risk adjustment incorporates our risk scores by state and market relative to the market
average using data provided by the participating insurers and available information about the HHS model. This
information is consistent with our knowledge and understanding of market conditions.
As part of our ongoing estimation process, we consider information as it becomes available at interim dates along
with our actuarially determined expectations, and we update our estimates incorporating such information as
appropriate.
We estimate and recognize adjustments to our health plan services premium revenue for the risk adjustment
provision by projecting our ultimate premium for the calendar year. Such estimated calendar year amounts are
recognized ratably during the year and are revised each period to reflect current experience. We record receivables and/
or payables and classify the amounts as current or long-term in the consolidated balance sheets based on the timing of
expected settlement.
Risk Corridor—The temporary risk corridor program will be in place for three years and applies to individual
and small group business operating both inside and outside of the exchanges. The risk corridor provisions limit health
insurers' gains and losses by comparing allowable medical costs to a target amount, each defined/prescribed by HHS,
and sharing the risk for allowable costs with the federal government. Variances from the target exceeding certain
thresholds may result in HHS making additional payments to us or require us to make payments to HHS.
We estimate and recognize adjustments to our health plan services premium revenue for the risk corridor
provision by projecting our ultimate premium for the calendar year. Such estimated calendar year amounts are
recognized ratably during the year and are revised each period to reflect current experience, including changes in risk
adjustment and reinsurance recoverables. We record receivables and/or payables and classify the amounts as current or
long-term in the consolidated balance sheets based on the timing of expected settlement.
HHS has recognized that it is obligated to make the risk corridors program payments without regard to budget
neutrality in both regulations and guidance. On October 1, 2015, HHS acknowledged a shortfall in the payments for
program year 2014, and stated that it would be making payments to insurers of approximately 12.6 percent of their
requested amounts at this time. HHS confirmed its previously stated intention to fulfill its remaining 2014 risk corridor
obligations with funds collected for program year 2015 and, if necessary, 2016 collections. This payment structure
would be consistent with the Consolidated and Further Continuing Appropriations Act, 2015, which is also referred to
as the “2015 Budget Act" or "Cromnibus." Additionally, HHS has stated that in the event of a shortfall between the
amounts collected from issuers and the payments to issuers, HHS will use other sources of funding for the risk corridors
payments, subject to the availability of appropriations. This use of alternative funding is consistent with general
principles of federal program budgeting and appropriations. Notwithstanding any restrictions imposed by the 2015
Budget Act, which restrictions were repeated in identical language in the 2016 Budget Act, HHS has retained the right
and ability to source risk corridors program payments from user fees under both the risk corridors program and other
programs.
On October 13, 2015, HHS reiterated its continuing obligation to make full payment of its risk corridors
liabilities and stated that HHS recognizes that the ACA requires the Secretary to make full payments to issuers. HHS