Health Net 2010 Annual Report Download - page 42

penalties in accordance with the United Administrative Services Agreements. We could fail to comply with the
service standards for various reasons, some of which are not within our control. For example, the personnel
needed to provide the administrative services could terminate their employment with us. The amount of penalties
we could incur for violating the service standards could be substantial.
We will continue to serve the members of the Acquired Companies under the United Administrative
Services Agreements until all members are either transitioned to legacy United products or non-renewed, which
is expected to occur on June 30, 2011. After this transition is complete, we will not be providing any services to
members pursuant to the United Administrative Services Agreements. At that time, we will enter into Claims
Servicing Agreements with the Acquired Companies, pursuant to which we will continue to adjudicate run out
claims.
If HNNE is unable to perform all or a material part of the services required under the United Administrative
Services Agreements, and is unable to obtain an alternative means to provide such services, or if HNNE
materially breaches the United Administrative Services Agreements, the service recipients may terminate the
United Administrative Services Agreements. If such a termination occurs prior to the second anniversary of the
closing date of the transaction, we and HNNE will be required to establish (and will be required to pay to United)
a loss reserve, which, depending on when the United Administrative Services Agreements are terminated, could
be substantial and could have a material adverse effect on our business, financial condition or results of
operations. See “—Under the agreements that govern the Northeast Sale, we have retained responsibility for
certain liabilities of the acquired business, which could be substantial,” for additional detail on when the loss
reserve is required to be established and paid. For additional information on the United Administrative Services
Agreements, see “Item 1. Business—Segment Information—Northeast Operations Segment”.
If we fail to effectively maintain our information management systems, it could adversely affect our
business.
Our business depends significantly on effective and efficient information systems. The information gathered
and processed by our information management systems assists us in, among other things, pricing our services,
monitoring utilization and other cost factors, processing provider claims, billing our customers on a timely basis
and identifying accounts for collection. Our customers and providers also depend upon our information systems
for membership verification, claims status and other information. We have many different information systems
for our various businesses and these systems require the commitment of significant resources for continual
maintenance, upgrading and enhancement to meet our operational needs and evolving industry and regulatory
standards. Our merger, acquisition and divestiture activity also requires transitions to or from, and the integration
of, various information management systems.
We plan to take steps to further reduce the number of systems that we operate, and we recently completed
the migration of our data center operations to a third party vendor. Any difficulty or unexpected delay associated
with the transition to or from information systems, including in connection with the decommissioning of a
system or the implementation of a new system; any inability or failure to properly maintain information
management systems; any failure to efficiently and effectively consolidate our information systems, including to
eliminate redundant or obsolete applications; or any inability or failure to successfully update or expand
processing capability or develop new capabilities to meet our business needs, could result in operational
disruptions, loss of existing customers, difficulty in attracting new customers, disputes with customers and
providers, regulatory or other legal or compliance problems, significant increases in administrative expenses and/
or other adverse consequences. If for any reason there is a business continuity interruption resulting in loss of
access to or availability of data, we may not be able to meet the full demands of our customers and, in turn, our
business, results of operations, financial condition and cash flow could be adversely impacted. In addition, we
obtain significant portions of our systems-related and other services and facilities, including our data center, from
independent third parties, which make our operations vulnerable to adverse effects if such third parties fail to
perform adequately. See “—We are subject to risks associated with outsourcing services and functions to third
parties.”
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