Health Net 2011 Annual Report Download - page 32

amounts in rebates in the future. In the various states in which we do business, premium prices are also
constrained by state laws and regulations which restrict the spread between premiums and benefits, such as laws
and regulations that require a minimum loss ratio of a certain percentage. These laws and regulations not only
restrict our ability to raise our premiums but also create additional competitive pressure from some of our
competitors who may have lower health care costs than we have and therefore price their premiums at relatively
low levels in relation to our cost of care. These laws and regulations also have generated, and could continue to
generate, substantial media attention and strong public opinion. This may create a more conservative regulatory
environment, thereby either delaying any rate increases that we propose or further restraining our ability to price
at levels that can adequately cover our cost and margin goals. See “—Federal health care reform legislation
could have an adverse impact on our revenues and the costs of operating our business and could materially
adversely affect our business, cash flows, financial condition and results of operations” and “—Various health
insurance reform proposals are also emerging at the state level which could have an adverse impact on us”.
Our business is regionally concentrated in the states of California, Arizona and Oregon.
Our business operations are primarily concentrated in the states of California, Arizona and Oregon, and all
of our Medicaid operations are in the state of California. Due to this concentration in a small number of states, in
particular, California, we are exposed to the risk of a deterioration in our financial results if our health plans in
these states, in particular, California, experience significant losses. In addition, our financial results could be
adversely affected by economic conditions in these states. If the challenging economic conditions in the state of
California or in the other states in which we operate do not materially improve or deteriorate further, we may
experience reductions in existing and new business, which could have a material adverse effect on our business,
financial condition and results of operations. In addition, if reimbursement payments from a state are
significantly delayed, our results of operations and cash flows could be adversely affected. For example, due to
budget issues, the state of California delayed certain of its 2011 monthly Medicaid payments to us. Although the
state ultimately made these payments, the delays impacted our operating cash flow from quarter to quarter in
2011. The irregular timing of these payments could continue into future periods and, depending on the timing of
such payments, impact cash flow in future periods.
Our inability to estimate and maintain appropriate levels of reserves for claims may adversely affect our
business, financial condition or results of operations.
Our reserves for claims are estimates of incurred costs based on various assumptions. The accuracy of these
estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment,
the judicious administration of claims, medical costs and other factors. Included in the reserves for claims are
estimates for the costs of services that have been incurred but not reported and for claims received but not
processed. These estimates are continually monitored and reviewed and, as settlements are made or estimates
adjusted, differences are reflected in current operations. Given the uncertainties inherent in such estimates, the
actual liability could differ significantly from the amounts reserved. If our actual liability is lower than estimated,
it could mean that we set premium prices too high, which could result in a loss of membership. If our actual
liability for claims payments is higher than estimated, it could have a negative impact on our profitability per
enrolled member and, subsequently, our earnings per share in any particular quarter or annual period.
Our businesses are subject to laws and significant rules and regulations, which increases our cost of doing
business and could impact our financial performance by restricting our ability to conduct business or
adversely affecting our ability to grow our businesses.
Our businesses are subject to extensive federal and state laws, rules, and regulations, including, but not
limited to, financial requirements, licensing requirements, enrollment requirements and periodic examinations by
governmental agencies. Our HMO and insurance subsidiaries are subject to regulations relating to cash reserves,
minimum net worth, premium rates, approval of policy language and benefits, appeals and grievances with
respect to benefit determinations, provider contracting, utilization management, issuance and termination of
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