Health Net 2014 Annual Report Download - page 37

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condition and cash flows” for further discussion on the impact of any fines, penalties or restrictions that may be
imposed against us. As we have members in various states and are therefore subject to the regulatory oversight of
multiple jurisdictions, we have been in the past, and could be in the future, subject to fines and/or penalties imposed by
multiple regulatory agencies relating to the same incident. Existing or future laws, rules, and regulations, including the
ACA and related health care reform initiatives could, among other things, force us to change how we do business and
may restrict our revenue and/or enrollment growth, increase our health care and administrative costs, and/or increase
our exposure to liability with respect to members, providers or others. See the ACA Risk Factors above. Further, we
may be liable for violations of laws, rules and regulations by individual Health Net associates notwithstanding our
internal policies and compliance programs. For example, see “—If we or our business associates that handle certain
information on our behalf fail to comply with requirements relating to patient privacy and information security, among
other things, our reputation and business operations could be materially adversely affected.”
As a federal and state government contractor, we are subject to U.S. and state government oversight. The
government may investigate our business practices and audit our compliance with applicable rules and regulations.
Depending on the results of those audits and investigations, the government could make claims against us. Under
government procurement regulations and practices, a negative determination resulting from such claims could result in
a contractor being fined, debarred and/or suspended from being able to bid on, or be awarded, new government
contracts for a period of time. In addition, we are subject to state and federal false claims laws that generally prohibit
the submission of false claims for reimbursement or payment to government agencies. We are also subject to the
Foreign Corrupt Practices Act and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010,
which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for
the purpose of obtaining or retaining business. Courts have imposed substantial fines and penalties against companies
found to have violated these laws. We are also exposed to other risks associated with U.S. and state government
contracting, including but not limited to dependence upon Congressional or legislative appropriation and allotment of
funds, the impact that delays in government payments could have on our operating cash flow, and the general ability of
federal and/or state government to terminate contracts with it, in whole or in part, without prior notice, for convenience
or for default based on performance. In addition, delays in obtaining, or failure to obtain or maintain, governmental
approvals, or moratoria imposed by regulatory authorities, could adversely affect our revenue or membership, increase
costs or adversely affect our ability to bring new products to market as forecasted. See “—Government programs
represent an increasing share of our revenues. If we are unable to effectively administer these programs or if we do not
effectively adapt to changes to these programs, we may experience a significant reduction in revenues from these
government programs, which could have a material adverse effect on our business, financial condition or results of
operations.”
We are subject to a number of risks in connection with our decision to enter into a master services agreement with
Cognizant for the performance of a significant portion of our business process and information technology
activities.
On November 2, 2014, we entered into a master services agreement (as subsequently amended and restated, the
“Cognizant MSA”) with a subsidiary of Cognizant Technology Solutions Corporation, a Delaware corporation
(“Cognizant”) for the performance of a significant portion of our business process and information technology
activities. As a result of the agreement, we anticipate a material reduction in our annual general and administrative and
depreciation expense by 2017. However, the agreement is conditioned upon regulatory approval of the transaction, and
there can be no assurance that such approval will be obtained in a timely manner or at all. Regulators may also require
us to make changes to the current structure of the transaction (including, without limitation, the scope of services
covered by the transaction) as a condition precedent to approval. If regulatory approval is not obtained, substantially
delayed or conditioned on changes to the terms of the transaction being made, we may not be able to fully realize
anticipated cost savings or other expected benefits of the transaction. We have incurred material costs and will continue
to incur material incremental costs and devote substantial resources to prepare for the Cognizant transaction. If
regulatory approval is not obtained or the Cognizant MSA is otherwise terminated prior to Cognizant’s commencement
of services, we will lose some or all of the resources that have been and will be invested in this transaction through such
date, which could have a material adverse impact on our business.
The Cognizant MSA covers a broad range of consulting, technological and administrative services in claims
management, membership and benefits configuration, customer contact center services, information technology, quality
assurance, appeals and grievance services, and medical management support. We also expect that certain of our
employees will become employees of Cognizant or its subcontractors, and that certain positions will be eliminated, as
part of the transaction. Given the scope of services that will be provided by Cognizant, and assuming the transaction
closes, the transition presents considerable execution risk inherent to large scale strategic and operational initiatives,