Health Net 2010 Annual Report Download - page 33

designed to appropriately reimburse health plans for the relative health care cost risk of its Medicare enrollees.
Under the CMS risk adjustment methodology, all Medicare Advantage plans must collect and submit diagnosis
code data from hospitals and physician providers to CMS by specified deadlines. CMS uses this diagnosis
information to calculate the risk adjusted premium paid to Medicare Advantage plans throughout the year. For
any given year, the final settlement of these risk adjustment payments is generally made in the second or third
quarter of the following year. Because the recorded revenue associated with the risk adjustment reimbursement
mechanism is based on our best estimate at the time, the actual payment we receive from CMS for risk
adjustment reimbursement settlements may be significantly greater or less than the amounts we initially
recognize on our financial statements. 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” for
information on our recent CMS audits including the ongoing audit of the provider medical data supporting the
risk adjustment payments that we received for our Medicare members.
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.
Approximately 56% of our 2010 total revenues relate to federal, state and local government health care
coverage programs, such as Medicare, Medicaid and TRICARE. All of the revenues in our Government
Contracts segment come from the federal government, either directly or as a sub-contractor for a federal
government contract. Under government-funded health programs, the government payor typically determines
premium and reimbursement levels. If the government payor reduces premium or reimbursement levels, such as
Medicare Advantage payment rates as provided in the ACA, or increases them by less than our costs increase,
and we are unable to make offsetting adjustments through supplemental premiums and changes in benefit plans,
we could be adversely affected. The amount of government receivables set forth in our consolidated financial
statements represents our best estimate of the government’s liability to us under TRICARE and other federal
government contracts, or amounts due us as a sub-contractor. In general, government receivables are estimates
and subject to government audit and negotiation. In addition, inherent in government contracts are an uncertainty
of and vulnerability to disagreements with the government. Final amounts we ultimately receive under
government contracts may be significantly greater or less than the amounts we initially recognize on our financial
statements.
Contracts under our government programs are generally subject to frequent change, including changes that
may reduce the number of persons enrolled or eligible, reduce the revenue received by us or increase our
administrative or health care costs under such programs. Changes of this nature could have a material adverse
effect on our business, financial condition or results of operations. Changes to government health care coverage
programs in the future may also affect our willingness to participate in these programs. 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.”
Our Medicaid operations are solely in the state of California. California continues to experience
unprecedented budget deficits. In response to the deficits, the Governor of California has proposed spending cuts
for services as part of the 2011-2012 budget, some of which could result in reductions in enrollment in or
reimbursement from the Medi-Cal and Healthy Families programs. California’s proposed Medi-Cal provider rate
reimbursement reductions are the subject of pending litigation, which will be considered by the United States
Supreme Court. If the state of California prevails and the reimbursement cuts are implemented as currently
proposed, the payments that we receive in connection with our state programs business would be reduced. An
enrollment freeze or significant reduction in payments received in connection with these or similar programs
could adversely affect our business, financial condition or results of operations, particularly as our Medi-Cal
membership increases due to current economic conditions. In addition, California could impose requirements on
the Medi-Cal program that make continued operations not feasible.
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