Health Net 2015 Annual Report Download - page 97

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further stated that it is recording those amounts that remain unpaid following its 12.6 percent prorated payment this
winter as fiscal year 2015 obligations of the United States Government for which full payment is required.
Government Contracts
On April 1, 2011, we began delivery of administrative services under the T-3 contract for the TRICARE North
Region. For additional information on our T-3 contract, see "—Government Contracts Reportable Segment."
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. We also provided assistance in the
transition into the T-3 contract, and will provide assistance in any transition out of the T-3 contract. 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.
In accordance with GAAP, we evaluate, at the inception of the contract and as services are delivered, all
deliverables in the service arrangement to determine whether they represent separate units of accounting. The delivered
items are considered separate units of accounting if the delivered items have value to the customer on a standalone basis
(i.e., they are sold separately by any vendor) and no general right of return exists relative to the delivered item. While
we identified two separate units of accounting within the T-3 contract, no determination of estimated selling price was
performed because both units of accounting are performed ratably over the option periods and, accordingly, the same
methodology of revenue recognition applies to both units of accounting.
Therefore, we recognize revenue related to administrative services on a straight-line basis over the option period,
when the fees become fixed and determinable.
The T-3 contract 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.
Revenues and expenses associated with the T-3 contract are reported as part of government contracts revenues
and government contracts expenses, respectively, in the consolidated statements of operations and included in our
Government Contracts reportable segment.
Amounts receivable under government contracts are comprised primarily of contractually defined billings,
accrued contract incentives under the terms of the contract and amounts related to change orders for services not
originally specified in the contract. Pursuant to our T-3 contract, the government has the right to unilaterally modify the
contract in certain respects by issuing change orders directing us to implement terms or services that were not originally
included in the contract. Following receipt of a change order, we have a contractual right to negotiate an equitable
adjustment to the contract terms to account for the impact of the change order. We start to perform under such change
orders and begin to incur associated costs after we receive the government's unilateral modification, but before we have
negotiated the final scope and/or value of the change order. In these situations, costs are expensed as incurred, and we
estimate and record revenue when we have met all applicable revenue recognition criteria. These criteria include the
requirements that change order amounts are determinable, that we have performed under the change orders, and that
collectability of amounts payable to us is reasonably assured.
Reserves For Contingent Liabilities
In the course of our operations, we are involved on a routine basis in various disputes with members, health care
providers, and other entities or individuals, as well as audits or investigations by government agencies and elected
officials that relate to our services and/or business practices that expose us to potential losses.
We recognize an estimated loss, which may represent damages, assessment of regulatory fines or penalties,
settlement costs, future legal expenses or a combination of the foregoing, as appropriate, from such loss contingencies
when it is both probable that a loss will be incurred and the amount of the loss can be reasonably estimated. Our loss
estimates are based in part on an analysis of potential results, the stage of the proceedings, consultation with outside
counsel and any other relevant information available.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a result of various business acquisitions. Goodwill consists
of the excess of the cost of acquisitions over the tangible and intangible assets acquired and liabilities assumed. Other