Health Net 2014 Annual Report Download - page 42

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or results of operations.” The cumulative impact of reductions in reimbursement rates, funding reductions and other
factors has had an adverse impact on the profitability of our Medicare business in the past, and any further significant
reductions in the reimbursement rates that we receive in connection with our Medicare business could adversely affect
our business, financial condition or results of operations, particularly as our membership in and focus on government
programs increases, including through the dual eligibles demonstration.
If we fail to design and maintain programs that are attractive to Medicare participants; if our Medicare operations
are subject to sanctions or penalties; if we are not successful in winning contract renewals or new contracts; or if our
existing contracts are terminated, our current Medicare business and our ability to expand our Medicare operations
could be materially and adversely affected, negatively impacting our financial performance. There are also specific
additional risks under Title XVIII, Part D of the Social Security Act associated with our provision of Medicare Part D
prescription drug benefits as part of our Medicare Advantage plan offerings. These risks include potential
uncollectibility of receivables, inadequacy of pricing assumptions, inability to receive and process information and
increased pharmaceutical costs, as well as the underlying seasonality of this business, and extended settlement periods
for claims submissions. Our failure to comply with Part D program requirements can result in financial and/or
operational sanctions on our Part D products, as well as on our Medicare Advantage products that offer no prescription
drug coverage.
In connection with our participation in the Medicare Advantage and Part D programs, we regularly record
revenues associated with the risk adjustment reimbursement mechanism employed by CMS. This mechanism is
designed to appropriately reimburse health plans for the relative health care cost risk of its Medicare enrollees. Under
the CMS risk adjustment methodology, all Medicare Advantage plans must collect and submit diagnosis code data from
hospitals and physician providers to CMS by specified deadlines. CMS uses this diagnosis information to calculate the
risk adjusted premium paid to Medicare Advantage plans throughout the year. For any given year, the final settlement of
these risk adjustment payments is generally made in the third quarter of the following year. Because the recorded
revenue associated with the risk adjustment reimbursement mechanism is based on our best estimate at the time, the
actual payment we receive from CMS for risk adjustment reimbursement settlements may be significantly greater or
less than the amounts we initially recognize on our financial statements. See “—Federal and state audits, reviews and
investigations of us and our subsidiaries could have a material adverse effect on our operations, financial condition
and cash flows” for information on potential audits of the coding practices and provider documentation supporting the
risk adjustment payments that we receive for our Medicare members.
In addition, CMS developed the Medicare Advantage Star Ratings system to help consumers choose among
competing plans, awarding between one and five stars to Medicare Advantage plans based on performance on certain
measures of quality. The Star Ratings are used by CMS to award quality bonus payments to Medicare Advantage plans.
Beginning with the 2014 Star Rating, (calculated in the Fall of 2013), Medicare Advantage plans were required to
achieve a minimum of 4 Stars to qualify for a quality bonus payment in 2015. The methodology and measures included
in the Star Ratings system can be modified by CMS annually and Star Ratings thresholds are based on performance of
Medicare Advantage plans nationally. For the 2015 Star rating (2016 payment year), our California HMO and Oregon
HMO and PPO contracts with CMS were measured at 4.0 Stars. Our Arizona HMO contract was measured at 3.5 Stars
and our California PPO contract was measured at 3.0 Stars in the Star Ratings system. This will place approximately
87% of our current membership in 4.0 Star plans for 2015 that qualify for an expected quality bonus payment in 2016.
We are continuing to expand efforts and resources to improve our Star Ratings and other quality measures, but a failure
to achieve a 4 Star Rating, and consequently failure to qualify for a quality bonus payment in any year, would have an
adverse effect on our revenue, income and reputation, and could hinder our ability to compete effectively in the
Medicare marketplace.
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 the level
of our administrative expense in all circumstances. In addition, many of our competitors have substantially greater
financial resources, higher revenues and greater economies of scale than we do, which among other things, may allow
them to more successfully manage their general and administrative expense ratios or make investments in new
technologies. 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, our entrance into new
relationships with third parties, such as the arrangement we entered into with Cognizant in November 2014,