Health Net 2011 Annual Report Download - page 36

option period 2 (without exercising option period 1), due to a delay of approximately one year in the
government’s initial award of the T-3 contract. Accordingly, option period 2 commenced on April 1, 2011, and if
all remaining option periods are exercised, the T-3 contract would conclude on March 31, 2015. There can be no
assurance that the Department of Defense will exercise all of the remaining option periods under the contract. If
all of the option periods are not exercised, our results of operations could be adversely impacted. For additional
information on our TRICARE operations, see “Item 1—Segment Information—Government Contracts
Segment—TRICARE.”
In addition, the reimbursement rates we receive from federal and state governments relating to our
government health care coverage programs are subject to risk. For example, on October 27, 2011, CMS approved
certain elements of California’s 2011-2012 budget proposals to reduce Medi-Cal provider reimbursement rates as
authorized by California Assembly Bill 97 (“AB 97”). The elements approved by CMS include a 10 percent
reduction in a number of provider reimbursement rates. The California Department of Health Care Services has
preliminarily indicated that the Medi-Cal managed care rate reductions could be effective retroactive to July 1,
2011. Recently, the United States District Court for the Central District of California issued a series of
injunctions barring the California Department of Health Care Services from implementing the rate reductions as
to various classes of providers. If AB 97 is ultimately implemented as proposed, we believe that the approved
reductions in provider payments would result in a premium reduction from the Medi-Cal business conducted in
our California health plan. In addition, our ability to obtain health care cost recoveries from providers relating to
any implemented rate cuts could affect the financial results of our California health plan. However, due to the
preliminary injunction in effect and other uncertainty regarding the final implementation of AB 97, we cannot
reasonably estimate the range of reductions in premiums and/or related health care cost recoveries that may result
in connection with AB 97.
Furthermore, on August 2, 2011, the Budget Control Act of 2011 was enacted in order to increase the
federal government’s debt limit and reduce the federal deficit. The Budget Control Act establishes a twelve-
member joint committee of Congress known as the Joint Select Committee on Deficit Reduction (the “Joint
Select Committee”). The Joint Select Committee was tasked with proposing legislation to reduce the United
States federal deficit by $1.5 trillion for fiscal years 2012-2021 by December 23, 2011. The Joint Select
Committee did not pass such legislation by the proposed deadline. As a result, approximately $1.2 trillion in
domestic and defense spending reductions will automatically begin on January 1, 2013 and will be split evenly
between domestic and defense spending. Medicare will be subject to these automatic spending reductions,
subject to a 2% cap. All parts of the Medicare program, including Medicare Advantage, could be subject to cuts,
but it is unclear how they would be applied. If Medicare reimbursement rates from the federal government are
cut, it could have an adverse impact on our Medicare business. For additional information on the risks associated
with our Medicare program, see “—Medicare programs represent a significant portion of our business and are
subject to risk.”
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.
We have been and, in some cases, currently are, involved in various federal and state governmental audits,
reviews and investigations. These include routine, regular and special investigations, audits and reviews by
government agencies, state insurance and health and welfare departments and others pertaining to financial
performance, market conduct and regulatory compliance issues. Such audits, reviews and investigations could
result in the loss of licensure or the right to participate or enroll members in certain programs, or the imposition
of civil or criminal fines, penalties and other sanctions, which could be substantial. In addition, disclosure of any
adverse investigation or audit results or sanctions could negatively affect our reputation in various markets and
make it more difficult or impossible for us to sell our products and services. State attorneys general have become
increasingly active in investigating the activities of health plans, and we have received in the past, and may
continue to receive in the future, subpoenas and other requests for information as part of these investigations. We
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