Health Net 2010 Annual Report Download - page 32

agencies. We are also subject to FCPA and similar worldwide anti-corruption laws, including the U.K. Bribery
Act of 2010, which generally prohibit companies and their intermediaries from making improper payments to
non-U.S. officials for the purpose of obtaining or retaining business. Courts have imposed substantial fines and
penalties against companies found to have violated these laws. We are also exposed to other risks associated with
U.S. and state government contracting, including dependence upon Congressional or legislative appropriation
and allotment of funds. In addition, 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. For more
information on the government programs in which we participate, 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.”
Medicare programs represent a significant portion of our business and are subject to risk.
Medicare programs represent a significant portion of our business, accounting for approximately 31% of our
total premium revenue in our Western Region Operations reportable segment in 2010 and an expected 27% in
2011. The ACA includes, among other things, provisions that will significantly reduce the government’s
Medicare payment rates, including freezing 2011 Medicare Advantage reimbursement rates based on 2010 levels,
with additional reductions in future years based on regionally-adjusted benchmarks. For more information on the
risks associated with the ACA, 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.” Provisions of the ACA, including the reduction in Medicare payment rates,
could have a material adverse effect on our business, cash flows, financial condition and results of operations.
Effective November 20, 2010, CMS imposed intermediate 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. These sanctions do not impact the enrollment status of our existing Medicare enrollees.
See“-Federal and state audits, reviews and investigations of us and our subsidiaries could have a material
adverse effect on our operations, financial condition and cash flows” for more information about the CMS
sanctions. At this time, we believe that these sanctions will not have a material adverse effect on our results of
operations, financial condition, cash flows and liquidity; however, the continued suspension of the marketing of,
and enrollment into, our Medicare products for a significant period of time could have a material adverse impact
on our Medicare business and could negatively impact our results of operations, and financial condition.
If we fail to design and maintain programs that are attractive to Medicare participants; if the current
sanctions continue for a significant length of time; if we are not successful in winning contract renewals or new
contracts; or if our existing contracts are terminated, our current Medicare business and our ability to expand our
Medicare operations could be further materially and adversely affected, and we may not be able to realize any
return on our investments in Medicare initiatives. There are also specific additional risks associated with our
provision of Medicare Part D prescription drug benefits under Title XVIII, Part D of the Social Security Act.
These risks include potential uncollectibility of receivables, inadequacy of pricing assumptions, inability to
receive and process information and increased pharmaceutical costs, as well as the underlying seasonality of this
business, and extended settlement periods for claims submissions. In addition, our failure to comply with Part D
program requirements can result in financial and/or operational sanctions on our Part D products, as well as on
our Medicare Advantage products that offer no prescription drug coverage. For example, the CMS sanctions
imposed on us in November 2010 were primarily related to our noncompliance with Part D program
requirements, and applied to our Medicare Advantage-only plans that offer no prescription drug coverage, as well
as to our Medicare Advantage and PDP-only plans that offer prescription drug coverage.
In connection with our participation in the Medicare Advantage and Part D programs, we regularly record
revenues associated with the risk adjustment reimbursement mechanism employed by CMS. This mechanism is
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