Health Net 2010 Annual Report Download - page 34

On May 13, 2010, we were awarded the T-3 contract for the TRICARE North Region. The transition-in-
period for the T-3 contract contractually commenced on May 13, 2010, and health care delivery under the new
contract is scheduled to commence on April 1, 2011. The T-3 contract has five one-year option periods, however,
the Department of Defense has indicated that it intends to exercise option period 2 (without exercising option
period 1), due to a delay of approximately one year in the government’s initial award of the T-3 North Region
contract. Accordingly, option period 2 will commence on April 1, 2011, and if all remaining option periods are
exercised, the T-3 North Region contract would conclude on March 31, 2015. However, there can be no
assurance that the Department of Defense will exercise all of the remaining option periods under the contract. If
all of the option periods are not exercised, our results of operations could be adversely impacted. For additional
information on our TRICARE operations, see “Item 1. Business — Segment Information – Government
Contracts Segment – TRICARE.”
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.
We have been and, in some cases, currently are, involved in various federal and state governmental audits,
reviews and investigations. These include routine, regular and special investigations, audits and reviews by CMS,
state insurance and health and welfare departments and others pertaining to financial performance, market
conduct and regulatory compliance issues. Such audits, reviews and investigations could result in the loss of
licensure or the right to participate or enroll members in certain programs, or the imposition of civil or criminal
fines, penalties and other sanctions, which could be substantial. In addition, disclosure of any adverse
investigation or audit results or sanctions could negatively affect our reputation in various markets and make it
more difficult or impossible for us to sell our products and services. State attorneys general have become
increasingly active in investigating the activities of health plans, and we have received in the past, and may
continue to receive in the future, subpoenas and other requests for information as part of these investigations. We
have entered into consent agreements relating to, and in some instances have agreed to pay fines in connection
with, several recent audits and investigations.
Many regulatory audits, reviews and investigations in recent years have focused on the timeliness and
accuracy of claims payments by managed care companies and health insurers. Our subsidiaries have been the
subject of audits, reviews and investigations of this nature. Depending on the circumstances and the specific
matters reviewed, regulatory findings could require remediation of claims payment errors and payment of
penalties of material amounts that could have a material adverse effect on our results of operations.
From time to time, CMS audits certain Medicare Advantage plans, including ours, to validate the coding
practices and the supporting documentation maintained by health care providers to support risk adjustment
payments made to plans pursuant to their Medicare Advantage contracts. We utilize claims submissions, medical
records and other medical data as provided by health care providers as the basis for payment requests that we
submit to CMS under the risk adjustment model for our Medicare Advantage contracts. CMS is currently
performing a targeted audit of the medical record documentation for 2006 dates of service which determine the
2007 risk adjustment payments for certain of our Medicare Advantage contracts, and in the future could also
audit this category of information for other contract years. We have not received CMS’ audit results and do not
know what the results may be. In addition, CMS has not yet formally announced whether it will require payment
adjustments to be made using an audit methodology without comparison to original Medicare coding and how its
method of extrapolating audit findings to the entire contract population will be performed. CMS, however, has
indicated that it may make retroactive contract-level payment adjustments, and a proposed methodology issued
by CMS in December 2010 reflected such an approach. Comments to CMS on the draft methodology were due
January 21, 2011, and CMS recently announced that it anticipates making changes to its proposed methodology
based on input it received during the comment process. At this time, we are unable to predict the extent of any
changes that CMS may make. The laws and regulations governing the audits for these risk adjustment payments
are extremely complex and subject to interpretation. As a result, it is possible that our recorded revenue estimates
with respect to risk adjustment payments may change by a material amount.
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