Health Net 2010 Annual Report Download - page 41

effectively in our markets, we also must deliver products and services that demonstrate value to our customers
and that are designed and priced properly and competitively. Prior to the effective date of the ACA’s guaranteed
issue requirement, the adverse economic conditions may also cause employers to stop offering certain health care
coverage as an employee benefit or elect to offer this coverage on a voluntary, employee-funded basis as a means
to reduce their operating costs. A significant decline in membership in our plans and the inability of current and/
or potential customers to pay their premiums as a result of unfavorable economic conditions could have a
material adverse effect on our business, including our revenues, profitability and cash flow. In addition, a
prolonged economic downturn could negatively impact the financial position of hospitals and other providers
and, as a result, could adversely affect our contracted rates with such parties and increase our medical costs.
High unemployment rates and significant employment layoffs and downsizings may also impact the number
of enrollees in managed care programs and the profitability of our operations. For example, in 2010, our
commercial membership decreased by 4.4 percent due, in part, to the difficult economic conditions in the regions
where we do business. If economic conditions continue to be difficult and unemployment rates continue to be
high, we may experience a reduction in existing and new business, which may have a material adverse effect on
our business, financial condition and results of operations.
Largely as a result of the recent economic conditions, we saw an increase in our Medi-Cal membership of
approximately 44,000 members, or 5.1%, in 2010. However, the state of California is currently experiencing
unprecedented budget deficits. An extended economic downturn could continue to adversely affect state and
federal budgets, including California’s, resulting in reduced reimbursements or payments in our federal and state
government health care coverage programs, including Medicare, Medi-Cal and CHIP. A reduction in California’s
Medi-Cal reimbursement rates could be implemented retrospectively to payments already negotiated and/or
received from the government and could adversely affect our revenues and financial results. This risk is
amplified as our Medi-Cal membership increases. In addition, state and federal budgetary pressures could cause
new or higher levels of assessments or taxes for our commercial programs, such as surcharges on select fee-for-
service and capitated medical claims or premium taxes on insurance companies and health maintenance
organizations, and could adversely affect our results of operations. To help balance the budget, California has
proposed, among other things, to reduce certain provider reimbursements and introduce copayments for certain
services such as emergency room visits and inpatient hospital stays. These changes would require federal
approval, but if implemented, also could reduce the amounts of payments that we receive from the state in
connection with our state health programs business. Moreover, any enrollment freeze or significant delay in
reimbursement payment could adversely affect our business, financial condition or results of operations. For
example, due to budget issues, the state of California delayed several of its 2010 monthly Medicaid payments to
us, impacting our operating cash flow for the year ended December 31, 2010 by $64.3 million.
Under the United Administrative Services Agreements, we are obligated to provide administrative services in
connection with the wind-down and run-off of the acquired business, which exposes us to operational and
financial risks.
At the closing of the Northeast Sale, we entered into the United Administrative Services Agreements
pursuant to which our subsidiary, HNNE, provides administrative services to the HMO and insurance
subsidiaries formerly engaged in our Northeast operations. The scope of these administrative services include
substantially all of the day-to-day operational functions of these entities, including (i) claims payment services
and operations, (ii) medical management services, (iii) financial planning and analysis, (iv) actuarial and
underwriting services, (v) corporate finance services, (vi) regulatory relations services, (vii) organization
effectiveness (human resources) services, (viii) legal services, (ix) customer care operations, (x) information
technology services, (xi) premium tax filing services, (xii) administration of governmental assessments,
(xiii) broker commissions payment services, and (xiv) other administrative services.
The United Administrative Services Agreements require HNNE to perform the administrative services in
accordance with specified service standards and other requirements. Subject to certain terms and conditions, if
HNNE fails to comply with the service standards, among other things, it will be required to pay specified
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