Health Net 2010 Annual Report Download - page 39

If we are unable to maintain good relations with the physicians, hospitals and other providers that we
contract with, our profitability could be adversely affected.
We contract with physicians, hospitals and other providers as a means to assure access to health care
services for our members, to manage health care costs and utilization and to better monitor the quality of care
being delivered. In any particular market, providers could refuse to contract with us, demand higher payments or
take other actions, including litigation, which could result in higher health care costs, less desirable products for
customers and members, disruption to provider access for current members or to support growth, or difficulty in
meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals,
physician/hospital organizations and multi-specialty physician groups, may have significant market positions or
even monopolies. If these providers refuse to contract with us or utilize their market position to negotiate
favorable contracts or place us at a competitive disadvantage, our ability to market our products or to be
profitable in those areas could be adversely affected.
In the changing health care environment, our business strategy includes creating affordable and tailored
customer solutions through, among other things, innovative provider relationships that effectively manage the
cost of care. For example, our product portfolios and services include offerings such as the PremierCareSM HMO,
our recent collaboration with the Sutter Health network. In addition, we offer tailored network health plans that
include cost-effective physician groups and hospitals. Membership in our tailored network products was
approximately 23% of total commercial risk membership as of December 31, 2010, compared with 19% as of
December 31, 2009. For additional information on our tailored network products and innovative provider
relationships, see “Item 1. Business—Segment Information—Western Region Operations Segment—Managed
Health Care Operations.” The continued membership growth in our tailored network products and the continued
development of innovative provider relationships are an important part of our business strategy. However, there
can be no assurance that we will be able to successfully implement these strategic initiatives that are intended to
position us for health reform and future growth, or that the products we collaborate with providers to design will
be successful or developed within the time periods expected. Failure to successfully implement this strategy may
have an adverse impact on our business, results of operations, financial condition and cash flows.
We contract with professional providers in California primarily through capitation fee arrangements. Under
a capitation fee arrangement, we pay a provider group a fixed amount per member on a regular basis and the
provider group accepts the risk of the frequency and cost of member utilization of professional services, and in
some cases, institutional services. Provider groups that enter into capitation fee arrangements generally contract
with primary care physicians, specialists and other secondary providers to provide services. In addition, we
frequently delegate responsibility for certain functions such as claims payment or utilization management to
these providers. The inability of provider groups to properly manage costs under capitation arrangements can
result in their financial instability and the termination of their relationship with us. A provider group’s financial
instability or failure to pay specialists or secondary providers for services rendered could be exacerbated by the
economic recession, and could lead specialists or secondary providers to demand payment from us, even though
we have made our regular capitated payments to the provider group. Depending on state law, we could be liable
for such claims. In California, for instance, the liability of our HMO subsidiaries for unpaid provider claims has
not been definitively settled. There can be no assurance that we will not be liable for unpaid provider claims.
There can also be no assurance that providers with whom we contract will properly manage the costs of services,
maintain financial solvency or avoid disputes with specialists or secondary providers, the failure of any of which
could have an adverse effect on the provision of services to members and our operations.
The provider groups that we contract with are also required to achieve and maintain compliance with
applicable federal and state laws and regulations. The inability of a provider group to pass compliance audits or
otherwise maintain compliance with applicable laws and regulations may cause us to terminate a contract with a
provider or assume responsibility for the noncompliant functions, such as claims payment or utilization
management. Furthermore, violations of, or noncompliance with, applicable laws and/or regulations or contract
terms by providers who perform delegated functions for us could increase our exposure to liability to our
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