Health Net 2010 Annual Report Download - page 31

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,
it could mean that we set premium prices too high, which could result in a loss of membership. If our actual
liability for claims payments is higher than estimated, it could have a negative impact on our profitability per
enrolled member and, subsequently, our earnings per share in any particular quarter or annual period.
Our businesses are subject to significant government regulation, which increases our cost of doing business
and could impact our financial performance by restricting our ability to conduct business or adversely
affecting our ability to grow our businesses.
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 to interpret them and to impose substantial fines
or restrict our ability to do business when they believe violations have occurred. Regulatory agencies have
imposed substantial fines against us and restricted our business activities in the past, and may impose substantial
fines against us and restrict our business activities in the future if they determine that we have not complied with
applicable laws and regulations. For example, effective November 2010, CMS imposed sanctions against us
suspending the marketing to and enrollment of new members into all of our Medicare Advantage, Medicare
Advantage Prescription Drug and stand-alone PDP plans. For additional information on the suspension of our
Medicare marketing and enrollment activities, see “—Federal and state audits, reviews and investigations of us
and our subsidiaries could have a material adverse effect on our operations and financial condition and cash
flows”. Existing or future laws and rules could force us to change how we do business and may restrict our
revenue and/or enrollment growth, increase our health care and administrative costs, and/or increase our
exposure to liability with respect to members, providers or others. See “—Federal health care reform legislation,
as well as potential additional changes in federal or state legislation and regulations, could have an adverse
impact on our revenues and the costs of operating our business and could materially adversely affect our
business, cash flows, financial condition and results of operations.” Further, individual Health Net associates
may violate these laws and rules, notwithstanding our internal policies and compliance programs. See “—If we
fail to comply with requirements relating to patient privacy and information security, including taking steps to
ensure that our business associates who obtain access to sensitive patient information maintain the privacy and
security of such information, our reputation and business operations could be materially adversely affected.”
Our HMO and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net
worth, premium rates, approval of policy language and benefits, appeals and grievances with respect to benefit
determinations, provider contracting, utilization management, issuance and termination of policies, claims
payment practices and a wide variety of other regulations relating to the development and operation of health
plans. 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.
As a federal and state government contractor, we are subject to U.S. and state government oversight. The
government may ask about and investigate our business practices and audit our compliance with applicable rules
and regulations. Depending on the results of those audits and investigations, the government could make claims
against us. Under government procurement regulations and practices, a negative determination resulting from
such claims could result in a contractor being fined, debarred and/or suspended from being able to bid on, or
awarded, new government contracts for a period of time. In addition, we are subject to state and federal false
claims laws that generally prohibit the submission of false claims for reimbursement or payment to government
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