Health Net 2011 Annual Report Download - page 42

could increase our enterprise risk exposure. As we consider further outsourcing of key functions, this risk
increases. We continue to devote resources to further develop and integrate our enterprise-wide risk management
processes. Failure to identify, prioritize and appropriately manage or mitigate these risks, including risk
concentrations across different industries, segments and geographies, can adversely affect our profitability, our
ability to retain or grow business or our business, financial condition or results of operations.
If we are unable to maintain good relations with the physicians, hospitals and other providers with which we
contract, our profitability could be adversely affected.
We contract with physicians, hospitals and other providers as a means to provide access to health care
services for our members, to manage health care costs and utilization and to better monitor the quality of care
being delivered. In any particular market, providers could refuse to contract with us, demand higher payments or
take other actions, including litigation, which could result in higher health care costs, less desirable products for
customers and members, disruption to provider access for current members or to support growth, or difficulty in
meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals,
physician/hospital organizations and multi-specialty physician groups, may have significant market positions or
even monopolies. If these providers refuse to contract with us or utilize their market position to negotiate
favorable contracts or place us at a competitive disadvantage, our ability to market our products or to be
profitable in those areas could be adversely affected.
In the changing health care environment, our business strategy includes creating affordable and tailored
customer solutions through, among other things, innovative provider relationships that effectively manage the
cost of care. For example, our product portfolios and services include offerings such as PremierCareSM,
ExcelCareSM and CommunityCareSM, which are recent collaborations with provider partners in California,
Arizona and Oregon, respectively. Through these types of partnerships, we offer tailored network product
offerings served by cost-effective physician groups and hospitals. Membership in our tailored network products
was approximately 31% of total commercial risk membership as of December 31, 2011, compared with 23% as
of December 31, 2010. For additional information on our tailored network products and innovative provider
relationships, see “Item 1—Segment Information—Western Region Operations Segment—Managed Health Care
Operations.” The continued membership growth in our tailored network products and the continued development
of innovative provider relationships are an important part of our business strategy. However, there can be no
assurance that we will be able to successfully implement these strategic initiatives that are intended to position us
for health care reform and future profitable growth, that the products we design in collaboration with certain
providers will be successful or developed within the time periods expected, or that the products that we offer will
be preferable to similar products of our competitors. Failure to successfully implement this strategy may have an
adverse impact on our business, results of operations, financial condition and cash flows.
We contract with professional providers in California primarily through capitation fee arrangements. Under
a capitation fee arrangement, we pay a provider group a fixed amount per member on a regular basis and the
provider group accepts the risk of the frequency and cost of member utilization of professional services, and in
some cases, institutional services. Provider groups that enter into capitation fee arrangements generally contract
with primary care physicians, specialists and other secondary providers to provide services. In addition, we
frequently delegate responsibility for certain functions such as claims payment or utilization management to
these providers. The inability of provider groups to properly manage costs under capitation arrangements can
result in their financial instability and the termination of their relationship with us. A provider group’s financial
instability or failure to pay specialists or secondary providers for services rendered could be exacerbated by the
current economic conditions, and could lead specialists or secondary providers to demand payment from us, even
though we have made our capitated payments to the provider group. Depending on state law, we could be liable
for such claims. In California, for instance, although legal precedent to date has held that health plans are
normally not liable for unpaid provider claims under these circumstances, there can be no assurance that the law
will not change, or that we will not be found liable for unpaid provider claims in the future. There can also be no
assurance that providers with whom we contract will properly manage the costs of services, maintain financial
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