Health Net 2005 Annual Report Download - page 26

take other actions which could result in higher health care costs, less desirable products for customers and
members, disruption to provider access for current members or to support growth, or difficulty in meeting
regulatory or accreditation requirements.
In some markets, certain providers, particularly hospitals, physician/hospital organizations and multi-
specialty physician groups, may have significant market positions or even monopolies. Some of these providers
may compete directly with us. If these providers refuse to contract with us or utilize their market position to
negotiate favorable contracts or place us at a competitive disadvantage, our ability to market our products or to
be profitable in those areas could be adversely affected.
We contract with professional providers in California primarily through capitation fee arrangements. We
also use capitation fee arrangements in areas other than California, but to a lesser extent. Under a capitation fee
arrangement, we pay a provider group a fixed amount per member on a regular basis and the provider group
accepts the risk of the frequency and cost of member utilization of professional services. Provider groups that
enter into capitation fee arrangements generally contract with specialists and other secondary providers, and may
contract with primary care physicians, to provide services. The inability of provider groups to properly manage
costs under capitation arrangements can result in their financial instability and the termination of their
relationship with us. A provider group’s financial instability or failure to pay secondary providers for services
rendered could lead secondary providers to demand payment from us, even though we have made our regular
capitated payments to the provider group. Depending on state law, we could be liable for such claims. In
California, the liability of our HMO subsidiaries for unpaid provider claims has not been definitively settled.
There can be no assurance that we will not be liable for unpaid provider claims. There can also be no assurance
that providers with whom we contract will properly manage the costs of services, maintain financial solvency or
avoid disputes with secondary providers, the failure of any of which could have an adverse effect on the
provision of services to members and our operations.
Some providers that render services to our members and insureds are not contracted with our plans and
insurance companies. In those cases, there is no pre-established understanding between the provider and the plan
about the amount of compensation that is due to the provider. In some states and product lines, the amount of
compensation is defined by law or regulation, but in most instances it is either not defined or it is established by a
standard that is not clearly translated into dollar terms. In such instances providers may believe they are
underpaid for their services and may either litigate or arbitrate their dispute with the plan or balance bill our
member. We may then have an obligation to protect our members against financial harm, either by paying the
provider the additional amount demanded or by reimbursing the member for his/her out-of-pocket payment. The
uncertainty of the amount to pay and the possibility of subsequent adjustment of the payment could adversely
affect our financial position or results of operations.
Provider groups and hospitals have in certain situations commenced litigation and/or arbitration proceedings
against us to recover amounts they allege to be underpayments due to them under their contracts with us. We
believe that provider groups and hospitals have become increasingly sophisticated in their review of claim
payments and contractual terms in an effort to maximize their payments from us and have increased their use of
outside professionals, including accounting firms and attorneys, in these efforts. These efforts and the litigation
and arbitration that results from them could have a material adverse effect on our results of operations and
financial condition. During the fourth quarter of 2004, we recorded a $169 million pretax charge related to
expenses associated with settlements involving provider disputes that have been, or are currently in the process
of being, resolved. For additional information regarding provider disputes, see “Item 3. Legal
Proceedings—Provider Disputes.”
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