Health Net 2010 Annual Report Download - page 37

the best interests of the Company and its stockholders. We record reserves and accrue costs for certain significant
legal proceedings which represent our best estimate of the probable loss, including related future legal costs, for
such matters, both known and unknown. However, our recorded amounts might differ materially from the
ultimate amount of any such costs. The costs associated with any settlement of or judgment relating to the
various legal proceedings to which we are or may be subject from time to time, including those described in Note
13, could be substantial and, in certain cases, could result in a significant earnings charge in any particular
quarter. As a result, these costs could have a material adverse effect on our financial condition, results of
operations, cash flow and/or liquidity.
We are subject to risks associated with outsourcing services and functions to third parties.
We contract with independent third party vendors and service providers who provide services to us and our
subsidiaries or to whom we delegate selected functions. These third parties provide a material amount of services
to us, and include, but are not limited to, information technology system providers, medical management
providers, claims administration providers, billing and enrollment providers, third party providers of actuarial
services, call center providers and specialty service providers. Our arrangements with third party vendors and
service providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us,
including their obligations to maintain and protect the security and confidentiality of our information and data.
Additionally, we may not be adequately indemnified against all possible losses through the terms and conditions
of our contracts with third party vendors and service providers. Our outsourcing arrangements could be adversely
impacted by changes in the vendors’ or service provider’s operations or financial condition or other matters
outside of our control. If we fail to adequately monitor and regulate the performance of our third party vendors
and service providers, we could be subject to additional risk.
Violations of, or noncompliance with, laws and/or regulations governing our business or noncompliance
with contract terms by third party vendors and service providers could increase our exposure to liability to our
members, providers or other third parties, or sanctions and/or fines from the regulators that oversee our business.
In turn, this could increase the costs associated with the operation of our business or have an adverse impact on
our business and reputation. In addition, we outsource selected services and selected functions to third parties,
including U.S. companies doing business in foreign jurisdictions, which exposes us to risks inherent in
conducting business outside of the United States, including international economic and political conditions, and
additional costs associated with complying with foreign laws and U.S. laws applicable to operations in foreign
jurisdictions, such as the Foreign Corrupt Practices Act. For additional information on the Foreign Corrupt
Practices Act, see “Item 1. Business. Government Regulation—Federal Legislation and Regulation—Other
Federal Regulations.” Moreover, if these vendor and service provider relationships were terminated for any
reason, we may not be able to find alternative partners in a timely manner or on acceptable financial terms, and
may incur significant costs in connection with any such vendor or service provider transition. As a result, we may
not be able to meet the full demands of our customers and, in turn, our business, financial condition and results of
operations may be harmed. In addition, we may not fully realize the anticipated economic and other benefits
from our outsourcing projects or other relationships we enter into with third party vendors and service providers,
as a result of regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations to the
third party, vendor or service provider noncompliance with contract terms or violations of laws and/or
regulations, or otherwise. This could result in substantial costs or other operational or financial problems that
could adversely impact our business, financial condition and results of operations.
If we are unable to manage our general and administrative expenses, our business, financial condition or
results of operations could be harmed.
The level of our administrative expenses can affect our profitability, and our ability to manage
administrative expense increases is difficult to predict. While we attempt to effectively manage such expenses,
including through the development of online functionalities and other projects designed to create administrative
efficiencies, increases in staff-related and other administrative expenses may occur from time to time. These
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