Health Net 2011 Annual Report Download - page 34

Medicare programs represent a significant portion of our business and are subject to risk.
Medicare programs represent a significant portion of our business, accounting for approximately 28% of our
total premium revenue in our Western Region Operations reportable segment in 2011 and an expected 28% in
2012. The ACA includes, among other things, provisions that will significantly reduce the government’s
Medicare payment rates. For more information on the risks associated with the ACA, 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.”
Provisions of the ACA, including the reduction in Medicare payment rates, could have a material adverse effect
on our business, cash flows, financial condition and results of operations.
Effective November 20, 2010, CMS imposed intermediate sanctions against us suspending the marketing to,
and enrollment of, new members into all of our Medicare Advantage, MAPD and stand-alone PDP plans. On
August 1, 2011, CMS lifted the sanctions, and we resumed marketing our Medicare Advantage, MAPD and
stand-alone PDP products and enrolling beneficiaries with effective dates on or after September 1, 2011. See
“—Federal and state audits, reviews and investigations of us and our subsidiaries could have a material adverse
effect on our operations, financial condition and cash flows” for more information about the CMS sanctions.
If we fail to design and maintain programs that are attractive to Medicare participants; if we are sanctioned
again; if we are not successful in winning contract renewals or new contracts; or if our existing contracts are
terminated, our current Medicare business and our ability to expand our Medicare operations could be materially
and adversely affected, negatively impacting our financial performance. There are also specific additional risks
associated with our provision of Medicare Part D prescription drug benefits under Title XVIII, Part D of the
Social Security Act. These risks include potential uncollectibility of receivables, inadequacy of pricing
assumptions, inability to receive and process information and increased pharmaceutical costs, as well as the
underlying seasonality of this business, and extended settlement periods for claims submissions. In addition, our
failure to comply with Part D program requirements can result in financial and/or operational sanctions on our
Part D products, as well as on our Medicare Advantage products that offer no prescription drug coverage. For
example, the CMS sanctions imposed on us in November 2010 were primarily related to our noncompliance with
Part D program requirements, and applied to our Medicare Advantage plans that offer no prescription drug
coverage, as well as to our Medicare Advantage and PDP-only plans that offer prescription drug coverage. On
January 9, 2012, HNL entered into a definitive agreement to sell its Medicare stand-alone PDP business to a
subsidiary of CVS Caremark. Following the closing of this transaction, we will continue to provide Medicare
Part D prescription drug benefits as part of our Medicare Advantage plan offerings. See “Item 1—Segment
Information—Western Region Operations Segment—Medicare Products” and “—Acquisitions, divestitures and
other significant transactions may adversely affect our business” for more information on our agreement to sell
our Medicare stand-alone PDP business.
In connection with our participation in the Medicare Advantage and Part D programs, we regularly record
revenues associated with the risk adjustment reimbursement mechanism employed by CMS. This mechanism is
designed to appropriately reimburse health plans for the relative health care cost risk of its Medicare enrollees.
Under the CMS risk adjustment methodology, all Medicare Advantage plans must collect and submit diagnosis
code data from hospitals and physician providers to CMS by specified deadlines. CMS uses this diagnosis
information to calculate the risk adjusted premium paid to Medicare Advantage plans throughout the year. For
any given year, the final settlement of these risk adjustment payments is generally made in the second or third
quarter of the following year. Because the recorded revenue associated with the risk adjustment reimbursement
mechanism is based on our best estimate at the time, the actual payment we receive from CMS for risk
adjustment reimbursement settlements may be significantly greater or less than the amounts we initially
recognize on our financial statements. See “—Federal and state audits, reviews and investigations of us and our
subsidiaries could have a material adverse effect on our operations, financial condition and cash flows” for
information on our recent CMS audits and potential audits of the provider medical data supporting the risk
adjustment payments that we receive for our Medicare members.
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