Health Net 2011 Annual Report Download - page 35

A significant reduction in revenues from the government programs in which we participate could have an
adverse effect on our business, financial condition or results of operations.
Approximately 49% of our 2011 total revenues relate to federal, state and local government health care
coverage programs, such as Medicare, Medicaid, TRICARE and MFLC. Nearly all of the revenues in our
Government Contracts segment come from the federal government, either directly or as a sub-contractor for a
federal government contract. Our contracts with the government are generally subject to a competitive bid
process and government discretion, and if we fail to design and maintain programs attractive to our government
customers, if we are not successful in winning new contracts or contract renewals, or if our existing contracts are
terminated, our current government health care coverage programs business and our ability to expand this
business could be materially and adversely affected. See “Item 1—Segment Information—Western Region
Operations Segment—Medicaid and Related Products” for more information regarding certain of our
opportunities to expand our business with government customers. Under government-funded health programs,
the government payor typically determines premium and reimbursement levels. If the government payor reduces
premium or reimbursement levels, such as Medicare Advantage payment rates as provided in the ACA, or
increases them by less than our costs increase, and we are unable to make offsetting adjustments through
supplemental premiums and changes in benefit plans, we could be adversely affected. The amount of government
receivables set forth in our consolidated financial statements represents our best estimate of the government’s
liability to us under TRICARE, MFLC and other government contracts, or amounts due us as a sub-contractor. In
general, government receivables are estimates and subject to government audit and negotiation. In addition,
inherent in government contracts are an uncertainty of and vulnerability to disagreements with the government.
Final amounts we ultimately receive under government contracts may be significantly greater or less than the
amounts we initially recognize on our financial statements.
Contracts under our government programs are generally subject to frequent change, including but not
limited to changes that may reduce the number of persons enrolled or eligible, reduce the revenue received by us
or increase our administrative or health care costs, as applicable, under such programs. Such changes are more
likely during re-competition of government contracts. For example, in connection with the pending MFLC re-
competition, the government may elect to award a contract that covers only a portion of the current contract
scope. Depending on the scope or terms of the contract actually awarded to us, if any, our revenue and
profitability could be adversely affected. Accordingly, these and other changes to contracts for our government
programs could have a material adverse effect on our business, financial condition or results of operations. For
additional information on our MFLC contract and the pending re-competition of this contract see “Item 1—
Segment Information—Government Contracts Segment—Other Department of Defense Contracts.” Changes to
government health care coverage programs in the future may also affect our willingness to participate in these
programs.
Our Medicaid operations are solely in the state of California. California continues to experience
unprecedented budget deficits. In response to the deficits, the State of California enacted proposed spending cuts
for services as part of the 2011-2012 budget, some of which could result in reductions in enrollment in or
reimbursement from the Medi-Cal and Healthy Families programs. Prior Medi-Cal provider and health plan rate
reimbursement reductions are the subject of pending litigation and certain of the cuts proposed as a part of the
2011-12 budget are also currently subject to litigation and/or review by CMS. If the state of California prevails
and the reimbursement cuts are implemented as currently proposed, the payments that we receive in connection
with our state health programs business would be reduced. An enrollment freeze or significant reduction in
payments received in connection with these or similar programs could adversely affect our business, financial
condition or results of operations, particularly as our Medi-Cal membership increases. In addition, California
could impose requirements on the Medi-Cal program that make our continued operations not feasible and could
be unable to fund programs authorized by federal health care reform.
On April 1, 2011, we began delivering administrative services under the T-3 contract for the TRICARE
North Region. The T-3 contract has five one-year option periods; however, the Department of Defense exercised
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