Health Net 2009 Annual Report Download - page 26

by significant disparities between the premium increases of our health plans and those of our major competitors
or by limitations on our ability to increase or maintain our premium levels.
In 2009, we continued to see decreases in our total commercial membership as we sought to improve
margins. Any future increase in premiums could result in the loss of members. Additionally, there is always the
possibility that adverse risk selection could occur when members who utilize higher levels of health care services
compared with the insured population as a whole choose to remain with our health plans rather than risk moving
to another plan. This could cause health care costs to be higher than anticipated and therefore cause our financial
results to fall short of expectations.
In the various states in which we do business, premium prices are also constrained by state laws and
regulations which restrict the spread between premiums and benefits, such as laws and regulations that require a
minimum loss ratio of a certain percentage. These laws and regulations not only restrict our ability to raise our
premiums but also create competitive pressure from some of our competitors who may have lower health care
costs than we have and therefore price their premiums at relatively low levels in relation to our cost of care.
As a result of the Northeast Sale, our business is regionally concentrated. In the event our TRICARE North
operations are discontinued, our business could become more regionally concentrated.
As a result of the Northeast Sale, our business operations are now concentrated in the states of California,
Arizona and Oregon, and all of our Medicaid operations are in the state of California. Due to this concentration in
a small number of states, in particular, California, we are exposed to the risk of a deterioration in our financial
results if our health plans in these states, in particular, California, experience significant losses. In addition, our
financial results could be adversely affected by economic conditions in these states. If the economic conditions in
the state of California or in the other states in which we operate continue to deteriorate, we may experience
reductions in existing and new business, which could have a material adverse effect on our business, financial
condition and results of operations. In addition, if reimbursement payments from a state are significantly delayed,
our results of operations could be adversely affected. Losses of accounts or deterioration in margins in any one of
the states in which we operate could have an adverse effect on our financial condition or results of operations.
See “—A significant reduction in revenues from the government programs in which we participate could have an
adverse effect on our business, financial condition or results of operations.”
In July 2009, we were notified by the Department of Defense that we were not selected to by the managed
care support contractor under the new T3 North Region contract. Our protest of this decision was upheld by the
GAO, and the Department of Defense will undertake a re-evaluation of the bids as a result of the protest decision.
At this time, we are unable to determine whether the re-evaluation will have any effect upon the ultimate
outcome of the contract award. See “Item 1. Business —Segment Information—Government Contracts
Segment—TRICARE” for the details regarding the status of the T3 North Region contract award. If our
TRICARE North operations are concluded, the regional concentration of our remaining business will increase
significantly, further increasing our exposure to a deterioration in our financial results if our operations in these
states experience significant losses.
Our inability to estimate and maintain appropriate levels of reserves for claims may adversely affect our
business, financial condition or results of operations.
Our reserves for claims are estimates of incurred costs based on various assumptions. The accuracy of these
estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment,
the judicious administration of claims, medical costs and other factors. Included in the reserves for claims are
estimates for the costs of services that have been incurred but not reported and for claims received but not
processed. These estimates are continually monitored and reviewed and, as settlements are made or estimates
adjusted, differences are reflected in current operations. Given the uncertainties inherent in such estimates, the
actual liability could differ significantly from the amounts reserved. If our actual liability is lower than estimated,
24