Health Net 2011 Annual Report Download - page 40

projects or other relationships we enter into with third party vendors and service providers, as a result of
regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations to the third party,
vendor or service provider noncompliance with contract terms or violations of laws and/or regulations, or
otherwise. This could result in substantial costs or other operational or financial problems that could adversely
impact our business, financial condition and results of operations.
Violations of, or noncompliance with, laws and/or regulations governing our business or noncompliance
with contract terms by third party vendors and service providers could increase our exposure to liability to our
members, providers or other third parties, or sanctions and/or fines from the regulators that oversee our business.
In turn, this could increase the costs associated with the operation of our business or have an adverse impact on
our business and reputation. In addition, we currently outsource and may in the future outsource key services and
functions to third parties, including U.S. companies doing business in foreign jurisdictions, which exposes us to
risks inherent in conducting business outside of the United States, including international economic and political
conditions, and additional costs associated with complying with foreign laws and U.S. laws applicable to
operations in foreign jurisdictions, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010.
If we are unable to manage our general and administrative expenses, our business, financial condition or
results of operations could be harmed.
The level of our administrative expenses can affect our profitability, and we may not be able to manage our
administrative expense in all circumstances. While we attempt to effectively manage such expenses, including
through the development of online functionalities and other projects designed to create administrative
efficiencies, increases in staff-related and other administrative expenses may occur from time to time. These
increases could be caused by any number of things, including difficulties or delays in projects designed to create
administrative efficiencies, reliance on outsourced services, acquisitions and divestitures, business or product
start-ups or expansions, changes in business or regulatory requirements, including compliance with the ACA,
ICD-10 and HIPAA regulations, or other reasons. In addition, any failure to appropriately manage our general
and administrative expenses could impact our ability to satisfy minimum medical loss ratio requirements,
including those specified in the ACA.
During recent years we have dedicated significant resources to implement programs designed to achieve
general and administrative cost savings and improve our operational performance. As a part of these programs,
we have and will continue to contract with key strategic partners in an effort to lower our cost structure and
incremental costs and consolidate business and management operations. In addition, we are continuing to explore
further opportunities to outsource certain other business process functions. However, there can be no assurance
that our strategies to reduce our general and administrative costs and improve our operation performance will be
successful or achieve anticipated savings.
In addition, in order to offset some of the reduced revenues from the T-3 contract, we are being required to
reduce, reallocate or eliminate certain overhead and other administrative expenses. We cannot guarantee that we
will be successful in making these cuts and adjustments at a pace that will maintain or increase our profitability.
The markets in which we do business are highly competitive. If we do not design and price our product
offerings competitively, our membership and profitability could decline.
We are in a highly competitive industry. Many of our competitors may have certain characteristics,
capabilities or resources, such as greater market share, superior provider and supplier arrangements and existing
business relationships, that give them an advantage in competing with us. These competitors include HMOs,
PPOs, self-funded employers, insurance companies, hospitals, health care facilities and other health care
providers. In addition, other companies may enter our markets in the future.
The addition of new competitors in our industry can occur relatively easily and customers enjoy significant
flexibility in moving between competitors. There is a risk that our customers may decide to perform for
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