Health Net 2005 Annual Report Download - page 23

We may experience losses as a result of the regional concentration of our business.
Our business operations are concentrated in the Northeast (in the states of Connecticut, New York and New
Jersey) and in the states of California, Arizona and Oregon. Due to this concentration in a small number of states,
we are exposed to the risk of a deterioration in our financial results arising from a significant economic downturn
in one or more of these states. If economic conditions in these states significantly deteriorate, we may experience
a reduction in existing and new business, which may have a material adverse effect on our business, financial
condition and results of operations. In addition, if any one of our health plans experiences significant losses, our
consolidated results of operations may be materially and adversely affected. For example, in early 2004, our New
Jersey health plan experienced hospital cost trends significantly higher than the trends we estimated when we
established premiums and potentially higher than those of its competitors. These higher hospital cost trends
caused a deterioration in margins in early 2004 which had an adverse effect on our business, financial condition
and results of operations in 2004. Enrollment in our New Jersey health plan continued to decrease throughout
2005. In addition, in 2005, we began to experience a small number of large group account losses in certain
markets due to employer groups consolidating their business with a single, most often national, competitor. We
expect this trend to continue throughout 2006, which could cause further account losses in the large group
segment. A deterioration in margins in any one of the states in which we operate, or a loss of large accounts to
national competitors, could have an adverse effect on our financial condition or results of operations if we are
unable to offset the deterioration with adequate future premium increases.
Our businesses are highly regulated.
Our businesses are subject to extensive federal and state laws and regulations, including, but not limited to,
financial requirements, licensing requirements, enrollment requirements and periodic examinations by
governmental agencies. These laws and regulations are generally intended to benefit and protect providers and
health plan members rather than stockholders of managed health care companies such as Health Net. The laws
and rules governing our business and interpretations of those laws and rules are subject to frequent change. Broad
latitude is given to the agencies administering these regulations. Existing or future laws and rules could force us
to change how we do business and may restrict our revenue and/or enrollment growth, and/or increase our health
care and administrative costs, and/or increase our exposure to liability with respect to members, providers or
others. In particular, our HMO and insurance subsidiaries are subject to regulations relating to cash reserves,
minimum net worth, premium rates, and approval of policy language and benefits. Although these regulations
have not significantly impeded the growth of our businesses to date, there can be no assurance that we will be
able to continue to obtain or maintain required governmental approvals or licenses or that regulatory changes will
not have a material adverse effect on us. Delays in obtaining or failure to obtain or maintain governmental
approvals, or moratoria imposed by regulatory authorities, could adversely affect our revenue or the number of
our members, increase costs or adversely affect our ability to bring new products to market as forecasted.
Our efforts to capitalize on Medicare business opportunities could prove to be unsuccessful.
Medicare programs represent a significant portion of our business, accounting for approximately 13% of our
total revenue in 2005 and an expected 17% in 2006. In connection with the passage of the MMA and the MMA
implementing regulations adopted in 2005, we have significantly expanded our Medicare health plans and
restructured our Medicare program management team to enhance our ability to pursue business opportunities
presented by the MMA and the Medicare program generally. The MMA and related regulations provide for the
prospect of increased Medicare funding. If the cost and complexity of the recent Medicare changes exceed our
expectations or prevent effective program implementation; if the government alters or reduces funding of
Medicare programs because of the higher-than-anticipated cost to taxpayers of the MMA or for other reasons; if
we fail to design and maintain programs that are attractive to Medicare participants; or if we are not successful in
winning contract renewals or new contracts under the MMA’s competitive bidding process, our current Medicare
business and our ability to expand our Medicare operations could be materially and adversely affected, and we
may not be able to realize any return on our investments in Medicare initiatives.
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