Health Net 2010 Annual Report Download - page 38

increases could be caused by any number of things, including difficulties or delays in projects designed to create
administrative efficiencies, reliance on outsourced services, acquisitions and divestitures, business or product
start-ups or expansions, changes in business or regulatory requirements, including compliance with the ACA,
ICD-10 and HIPAA regulations, or other reasons. In addition, any failure to appropriately manage our general
and administrative expenses could impact our ability to satisfy minimum medical loss ratio requirements,
including those specified in the ACA.
In November 2007, we announced a reorganization plan referred to as our “operations strategy” to enhance
efficiency and achieve general and administrative cost savings. As part of the operations strategy, we
substantially reduced our headcount. We completed the operations strategy work in 2010, and we believe that it
has enabled us to streamline our operations, including combining duplicative administrative and operational
functions and outsourcing certain operations where appropriate. However, there can be no assurance that our
operations strategy work will continue to produce the anticipated savings.
As a result of the Northeast Sale and the impending transition to the new T-3 TRICARE contract, we are
now targeting further reductions in our general and administrative expenses associated with those businesses. We
refer to this as our “stranded costs” initiative. Under the United Administrative Services Agreements, HNNE has
agreed to provide certain administrative services to the Acquired Companies until all of their members have
either transitioned to legacy United products or non-renewed, which is expected to occur on June 30, 2011. Upon
the termination of the United Administrative Services Agreements, we are required to enter into Claims
Servicing Agreements with United, pursuant to which we will continue to provide run-out services to the
Acquired Companies, including the payment of claims for services provided prior to the termination of the
United Administrative Services Agreements. As these operations wind-down, we will seek to reduce the scale of,
and ultimately eliminate, certain of our administrative and operational functions. We also will need to reduce the
scale of our overhead to reflect the smaller size of the remaining company. In the event that the costs of the wind-
down are greater than we anticipated, our profitability could be adversely affected. There can be no assurances
that these efforts will not significantly disrupt our operations, thereby negatively impacting our financial
performance. Furthermore, our failure to successfully adjust our overhead and administrative expenses in
proportion to the wind-down could have an adverse effect on our business, financial condition or results of
operations. In addition, in order to offset some of the reduced revenues expected from the T-3 TRICARE
contract, we will seek to reduce, reallocate or eliminate certain overhead and other administrative expenses as
part of our stranded costs reduction initiative. We cannot guarantee that we will be successful in making these
cuts and adjustments at a pace that will maintain or increase our profitability. In addition, we expect to incur
significant charges due to severance and other costs as part of our stranded costs reduction efforts. Failure to
adjust our overhead and other administrative expenses in proportion to these events could have an adverse effect
on our business, financial condition or results of operations.
We face a wide range of risks, and our success depends on our ability to identify, prioritize and
appropriately manage our enterprise risk exposures.
As a large company operating in a complex and highly-regulated industry, we encounter a variety of risks.
The risks we face include, among others, the range of regulatory, competitive, financial, operational,
reputational, external and industry risks identified in this Risk Factors discussion. The third party vendors and
service providers that we contract with are also required to achieve and maintain compliance with applicable
federal and state laws and regulations. Any violations of, or noncompliance with, laws and/or regulations
governing our business, or the terms of our contracts, by third party vendors or service providers could increase
our enterprise risk exposure. We continue to devote resources to further develop and integrate our enterprise-
wide risk management processes. Failure to identify, prioritize and appropriately manage or mitigate these risks,
including risk concentrations across different industries, segments and geographies, can adversely affect our
profitability, our ability to retain or grow business or our business, financial condition or results of operations.
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