Health Net 2014 Annual Report Download - page 44

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findings could require remediation of any claims payment errors and payment of penalties of material amounts that
could have a material adverse effect on our results of operations.
We utilize claims submissions, medical records and other medical data as provided by health care providers as
the basis for payment requests that we submit to CMS under the risk adjustment model for our Medicare Advantage
contracts. CMS and the Office of Inspector General for HHS periodically perform risk adjustment data validation
(“RADV”) audits of selected Medicare health plans, including ours, to validate the coding practices of and supporting
documentation maintained by health care providers. Our Arizona and California health plans have been selected for
such an audit, though the results will not be known until CMS establishes a baseline “error rate.” Such audits may result
in retrospective adjustments to payments made to our health plans, fines, corrective action plans or other adverse action
by CMS. In February 2012, CMS published a final RADV audit and payment adjustment methodology. The
methodology contains provisions allowing retroactive contract level payment adjustments for the year audited,
beginning with 2011 payments, using an extrapolation of the “error rate” identified in audit samples and, for Medicare
Advantage plans, after considering a fee-for-service “error rate” adjuster that will be used in determining the payment
adjustment. Depending on the error rate found in those audits, if any, potential payment adjustments could have a
material adverse effect on our results of operations, financial position and cash flows.
We have been sanctioned in the past by CMS and have been advised that we will be subject to targeted
monitoring and heightened surveillance and oversight by CMS going forward. Any future sanctions, fines or penalties
against our Medicare operations may be more severe as a result of our past performance, particularly in circumstances
in which CMS determines that we have repeatedly failed to comply with applicable laws, rules or regulations. If CMS
were to impose financial or other penalties and/or sanctions on us, or terminate our existing Medicare contracts, this
could have a material adverse effect on our Medicare business, our results of operations, cash flows or financial
condition. See “—Medicare programs represent a significant portion of our business and are subject to risk” for
additional information about our Medicare programs and the associated risks.
On February 4, 2015, we received a notice from the Arizona Health Care Cost Containment System
(“AHCCCS”), Division of Health Care Management (“DHCM”) that stated that we were in violation of its contract for
Acute Care Medicaid services in Maricopa County. These violations for failure to meet contractual requirements
included, among other things, deficiencies related to staffing and support services, website accessibility, provider
credentialing, claims processing and grievance and appeals. As a result, DHCM imposed a monetary sanction of
$200,000 to be withheld from our future capitation payments, and imposed a cap on auto assignment effective February
13, 2015 until further notice. DHCM also required us to submit corrective action plans as specified in the notice, and
stated that any failure to correct the deficiencies outlined in the notice could result in additional compliance actions,
including additional sanctions up to non-renewal of the one-year option to extend our Arizona Medicaid contract or
termination of the contract in whole or in part. If we were to be subject to additional sanctions or if our contract with
AHCCCS was terminated or not renewed, this could have an adverse impact on our Medicaid business, our reputation,
results of operations, cash flows or financial condition.
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. In addition, in November 2014 we announced that we entered
into a master services agreement with Cognizant for the performance of a significant portion of our business process
and information technology activities, subject to regulatory approval of the transaction. This transaction would
significantly increase the scope of services currently performed for us by third parties. For additional details on the
Cognizant transaction, see the risk factor under the heading “—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.” Violations of, or noncompliance with, laws and/or
regulations governing our business by such third parties, or governing our dealings with such parties, could, among
other things, 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 government
programs or future government contracting, which could have a material adverse effect on our financial condition,
results of operations and cash flows. See “—We are subject to risks associated with outsourcing services and functions
to third parties” for additional detail regarding risks associated with our relationships with third parties.