Health Net 2010 Annual Report Download - page 35

Any such risk adjustment payment adjustments could occur as early as 2011, and could be effective before
we and other Medicare Advantage plans have the opportunity to appeal CMS’ audit payment adjustment
methodology and account for the methodology in our 2012 product bids. If CMS requires payment adjustments
to be made using a methodology without comparison to original Medicare coding and using a method of
extrapolating findings to the entire contract population, and if we are unable to prevent such payment
adjustments from being implemented, such adjustments would have a material adverse effect on our results of
operations, financial condition and cash flows. For additional detail on the risk adjustment reimbursement
mechanism employed by CMS and risks associated with our Medicare business, see “—Medicare programs
represent a significant portion of our business and are subject to risk.”
In November 2008, CMS performed a routine audit of certain of our Medicare Advantage and PDP products
and found deficiencies in many of the business areas included in the review. In December 2009, CMS performed
a focused audit to assess our implementation of the corrective action plan associated with the November 2008
audit. CMS found deficiencies in many areas included in the review, including several repeat findings from
previous audits, which were submitted to CMS Central Office for review. In March 2010, CMS accepted Health
Net’s corrective action plan associated with the December 2009 focused audit. In January 2011, CMS formally
closed the corrective action plan relating to the 2008 audit and the 2009 targeted audit, but notified us that they
will reevaluate our compliance in the areas originally found to be deficient during the 2008 and 2009 audits as
part of their future evaluations of us in connection with their August 2010 audit, as described in more detail
below.
In January 2010, we were notified by CMS that, due to certain pharmacy claims processing errors, none of
our stand-alone PDP plans would receive auto-assignment of LIS-eligible Medicare beneficiaries under CMS’
LIS auto-assignment process, effective February 1, 2010. In May 2010, CMS accepted our corrective action plan.
On September 24, 2010, CMS notified us that based on their “LIS readiness” assessment (i) they would continue
to suspend LIS auto-assignment to us until the issues identified in the January 2010 notification and their August
2010 audit (described in more detail below) are corrected and (ii) they would not reassign any current LIS
beneficiaries to us for the 2011 plan year. At this time, we do not expect the continued suspension of our auto-
enrollment for LIS beneficiaries or CMS’ LIS beneficiary reassignment decision to have a material adverse effect
on our Medicare business.
In August 2010, CMS conducted a targeted audit of our Medicare Advantage, Medicare Advantage
Prescription Drug and stand-alone PDP plan operations, including the areas of membership accounting, premium
billing, Part D formulary administration, Part D appeals, grievances and coverage determinations, and our
compliance program. Based on the results of the audit, effective November 20, 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. These sanctions do not impact the enrollment
status of our existing Medicare enrollees. CMS has granted us a limited waiver from these sanctions which
allows us to enroll a group/employer’s retirees into our existing group/employer Medicare Advantage and PDP
plans as they become eligible for Medicare. The sanctions will remain in effect until CMS is satisfied that the
deficiencies upon which the determination was based have been corrected and are not likely to recur. In addition,
as described above, CMS has indicated that it will reevaluate our LIS readiness and our compliance in the areas
originally found to be deficient during the 2008 and 2009 audits of certain of our Medicare Advantage and PDP
products as part of its future evaluations of us in connection with the marketing and enrollment sanctions. We are
actively working with CMS to address their concerns. 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. In addition, if CMS were to impose financial penalties and/or additional
sanctions on us, or terminate our existing Medicare contracts, this could have a material adverse effect on us. See
“—Medicare programs represent a significant portion of our business and are subject to risk” for additional
information about our Medicare programs and the associated risks.
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