Health Net 2011 Annual Report Download - page 38

We contract with independent third party vendors and service providers who provide services to us and our
subsidiaries or to whom we delegate selected functions. Violations of, or noncompliance with, laws and/or
regulations governing our business by such third parties, or governing our dealings with such parties, could
subject us to additional audits, reviews and investigations and adverse effects from such audits, reviews and
investigations. In addition, from time to time, government agencies investigate whether our operations are being
conducted in accordance with regulations applicable to government contractors, including but not limited to
regular audits to enforce mandatory pricing arrangements. Government investigations of us, whether relating to
government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities,
including repayments, fines and/or penalties being imposed upon us, or could lead to suspension or debarment
from future government contracting, which could have a material adverse effect on our financial condition and
results of operations.
We face risks related to litigation, which, if resolved unfavorably, could result in substantial penalties and/or
monetary damages, including punitive damages. In addition, we incur material expenses in the defense of
litigation and our financial condition, results of operations, cash flow and/or liquidity could be adversely
affected if litigation expenses are greater than we project.
We are currently, and may become in the future, subject to a variety of legal actions, including but not
limited to employment and employment discrimination-related suits, employee benefit claims, wage and hour
claims, breach of contract actions, tort claims, fraud and misrepresentation claims, shareholder suits, including
suits for securities fraud, intellectual property and real estate related disputes, and claims arising from or in
connection with acquisitions, divestitures and other significant transactions, including but not limited to actions
to block or unwind such transactions. In addition, we incur and likely will continue to incur potential liability for
claims related to the insurance industry in general and our business in particular, such as claims by members
alleging failure to pay for or provide health care, poor outcomes for care delivered or arranged, improper
rescission, termination or non-renewal of coverage, and insufficient payments for out-of-network services; claims
by employer groups for return of premiums; claims by providers, including claims for withheld or otherwise
insufficient compensation or reimbursement, claims related to self-funded business and claims related to
reinsurance matters; and claims alleging information security incidents and breaches. For example, we currently
are party to various putative class action lawsuits filed in federal and state courts in connection with our
announcement that certain server drives containing protected health information or personally identifying
information of certain individuals are unaccounted for in connection with the migration of our data center to a
facility owned and operated by a third party vendor. These actions assert a variety of legal claims, including
claims under the California Confidentiality of Medical Information Act, and seek damages under that statute as
well as other compensatory damages, restitution, injunctive relief and attorneys’ fees. See “Part I—Item 3. Legal
Proceedings” and “—If we fail to comply with requirements relating to patient privacy and information security,
including taking steps to ensure that our business associates who obtain access to sensitive patient information
maintain the privacy and security of such information, our reputation and business operations could be
materially adversely affected” for additional information. The legal actions to which we are currently and in the
future could be subject can also include allegations of fraud, misrepresentation, unfair or improper business
practices and violations of state or federal antitrust laws and can include claims for punitive damages and various
forms of injunctive relief. Also, there are currently, and may be in the future, attempts to bring class action
lawsuits against various managed care organizations, including us. In some of the cases pending against us,
substantial non-economic or punitive damages are also being sought.
We cannot predict the outcome of any lawsuit with certainty, and we are incurring material expenses in the
defense of litigation matters, including without limitation, substantial discovery costs. Recent court decisions and
legislative activity may increase our exposure for any of the types of claims we face. There is a risk that we could
incur substantial legal fees and expenses, including discovery expenses, in any of the actions we defend in excess
of any amounts budgeted for defense. Plaintiffs’ attorneys have increasingly used expansive electronic discovery
requests as a litigation tactic. Responding to these requests, the scope of which may exceed the normal capacity
of our historical systems for archiving and organizing electronic documents, may require application of
36