Health Net 2011 Annual Report Download - page 37

have entered into consent agreements relating to, and in some instances have agreed to pay fines in connection
with, several recent audits and investigations.
Many regulatory audits, reviews and investigations in recent years have focused on the timeliness and
accuracy of claims payments by managed care companies and health insurers. Our subsidiaries have been the
subject of audits, reviews and investigations of this nature. Depending on the circumstances and the specific
matters reviewed, regulatory findings could require remediation of any claims payment errors and payment of
penalties of material amounts that could have a material adverse effect on our results of operations.
From time to time, CMS audits certain Medicare Advantage plans, including ours, to validate the coding
practices and the supporting documentation maintained by health care providers to support risk adjustment
payments made to plans pursuant to their Medicare Advantage contracts. We utilize claims submissions, medical
records and other medical data as provided by health care providers as the basis for payment requests that we
submit to CMS under the risk adjustment model for our Medicare Advantage contracts. CMS may conduct risk
adjustment data validation (“RADV”) contract level audits for payment years 2011 or later. On February 24,
2012, CMS published its final payment error calculation methodology for such RADV audits. While the
methodology is complex, generally, CMS will use enrollee-level samples to estimate an error rate across the
contract. In the event of such an audit, CMS may require payment from Health Net based on any error estimate.
Any such risk adjustment payment adjustments could have an adverse effect on our results of operations,
financial condition and cash flows. The laws and regulations governing the audits for these risk adjustment
payments are extremely complex and subject to interpretation. As a result, it is possible that our recorded revenue
estimates with respect to risk adjustment payments may change by a material amount. For additional detail on the
risk adjustment reimbursement mechanism employed by CMS and risks associated with our Medicare business,
see “—Medicare programs represent a significant portion of our business and are subject to risk.”
In January 2010, we were notified by CMS that, due to certain pharmacy claims processing errors, none of our
stand-alone PDP plans would receive auto-assignment of LIS-eligible Medicare beneficiaries under CMS’ LIS auto-
assignment process, effective February 1, 2010. On September 24, 2010, CMS notified us that they would not
reassign any LIS beneficiaries to us for the 2011 plan year. On August 1, 2011, CMS notified us that our stand-
alone PDP plans will continue to be excluded from the PDPs into which CMS carries out daily auto-enrollments or
annual reassignment of LIS-eligible beneficiaries until at least March 1, 2012 and that this prohibition will remain in
place until CMS verifies that we are appropriately administering the LIS benefit to current enrollees. At this time,
we do not expect the continued suspension of our auto-enrollment for LIS beneficiaries or CMS’ LIS beneficiary
reassignment decision to have a material adverse effect on our Medicare business.
In August 2010, CMS conducted a targeted audit of our Medicare Advantage, MAPD and stand-alone PDP
plan operations, including the areas of membership accounting, premium billing, Part D formulary administration,
Part D appeals, grievances and coverage determinations, and our compliance program. Based on the results of the
audit, effective November 2010, CMS imposed sanctions against us suspending the marketing to and enrollment of
new members into all of our Medicare Advantage, MAPD and stand-alone PDP products. 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. In connection with the lifting of these
sanctions, CMS stated that it will closely monitor our Medicare operations and that we will be subject to targeted
monitoring and heightened surveillance and oversight. These sanctions did not have a material adverse effect on our
results of operations, financial condition, cash flows and liquidity in 2011; however, any future sanctions against our
Medicare operations could have a material adverse impact on our Medicare business and could negatively impact
our results of operations and financial condition. Any future sanctions imposed by CMS may be more severe as a
result of our past performance, particularly in circumstances in which CMS determines that we have repeatedly
failed to comply with applicable laws, rules or regulations. If CMS were to impose financial penalties and/or
additional sanctions on us, or terminate our existing Medicare contracts, this could have a material adverse effect on
us. See “—Medicare programs represent a significant portion of our business and are subject to risk” for additional
information about our Medicare programs and the associated risks.
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