Health Net 2005 Annual Report Download - page 31

clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage
and disclosure of PHI, (b) adopt rigorous internal procedures to safeguard PHI and (c) enter into specific written
agreements with business associates to whom PHI is disclosed. The regulations also establish significant criminal
penalties and civil sanctions for non-compliance. In addition, the regulations could expose us to additional
liability for, among other things, violations of the regulations by our business associates. Although we provide
for appropriate protections in our contracts with our business associates, we have limited control over their
actions and practices. Compliance with HIPAA and other state and federal privacy regulations may result in cost
increases due to necessary systems changes, the development of new administrative processes and the effects of
potential noncompliance by our business associates.
Negative publicity regarding the managed health care industry could adversely affect our ability to market
and sell our products and services.
Managed health care companies have received and continue to receive negative publicity reflecting the
public perception of the industry. The managed health care industry has also recently experienced significant
merger and acquisition activity, giving rise to speculation and uncertainty regarding the status of companies in
our industry. Our marketing efforts may be affected by the amount of negative publicity to which the managed
health care industry has been subject, as well as by speculation and uncertainty relating to merger and acquisition
activity among companies in our industry. Speculation, uncertainty or negative publicity about us, our industry or
our lines of business could adversely affect our ability to market and sell our products or services, require
changes to our products or services, or stimulate additional legislation, regulation, review of industry practices or
private litigation that could adversely affect us.
If we are unable to manage our general and administrative expenses, our business, financial condition or
results of operations could be harmed.
The level of our administrative expenses can affect our profitability, and administrative expense increases
are difficult to predict. While we attempt to effectively manage such expenses, including through the
development of online functionalities and other projects designed to create administrative efficiencies (such as
the Health Net One systems consolidation project), increases in staff- related and other administrative expenses
may occur from time to time due to business or product start-ups or expansions (such as Medicare Advantage),
growth, membership declines or changes in business, difficulties or delays in projects designed to create
administrative efficiencies, acquisitions, reliance on outsourced services, regulatory requirements, including
compliance with HIPAA regulations, or other reasons. For example, in 2005 we spent approximately $29 million
in general and administrative expenses on Medicare-related opportunities. We expect our general and
administrative expenses to increase throughout 2006 as a result of our focus on investing in growth and for our
ongoing investment in Medicare. If our growth opportunities or the benefits we expect from our Medicare
investment are not realized, we could be required to cut costs. Cost reductions could include, among other things,
an involuntary workforce reduction or further delays in our Health Net One systems consolidation project.
Changes in the value of our investment assets could have a negative effect on our results of operations and
stockholders’ equity.
Substantially all of our investment assets are in interest-yielding debt securities of varying maturities or
equity securities. The value of fixed-income securities is highly sensitive to fluctuations in short- and long-term
interest rates, with the value decreasing as such rates increase and increasing as such rates decrease. In addition,
our regulated subsidiaries are also subject to state laws and regulations that govern the types of investments that
are allowable and admissible in those subsidiaries’ portfolios. There can be no assurance that our investment
assets will produce total positive returns or that we will not sell investments at prices that are less than the
carrying value of these investments. Changes in the value of our investment assets, as a result of interest rate
fluctuations or otherwise, could have a negative affect on our stockholders’ equity. In addition, if it became
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