Health Net 2014 Annual Report Download - page 46

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associated with any settlement of or judgment relating to the various legal proceedings to which we are or may be
subject from time to time, such as the proceedings described in Note 13, could have a material adverse effect on our
financial condition, results of operations, cash flow and/or liquidity and may affect our reputation.
We may not be able to manage our membership growth effectively.
We have experienced rapid growth in our membership as a result of the changing health care environment
including the implementation of the exchanges, the CCI and Medicaid expansion in California and Arizona. We have
devoted significant resources to manage this rapid growth in our membership, and continuing growth could
significantly strain our management and other resources in the future. Our ability to continue managing membership
growth effectively will depend, in part, on our ability to modify operational, financial and management information
systems and functions on a timely basis and to attract, train, and retain skilled employees. In the event that we are
unable to manage our membership growth effectively, this could have a material adverse effect on our business,
financial condition, cash flows, or results of operations. See “—We cannot assure you that our participation in the
ACA’s health insurance exchanges will continue to be a success," "—Our participation in the dual eligibles
demonstration portion of the California Coordinated Care Initiative in Los Angeles and San Diego Counties may prove
to be unsuccessful for a number of reasons," and "—Government programs represent an increasing share of our
revenues. If we are unable to effectively administer these programs, if we do not effectively adapt to changes to these
programs, or if we experience a significant reduction in revenues from these government programs, it could have a
material adverse effect on our business, financial condition or results of operations"” for additional information. on the
growth we have experienced in certain lines of business.
We are subject to risks associated with outsourcing services and functions to third parties.
We currently contract with independent third party vendors and service providers who provide services to us and
our subsidiaries or to whom we delegate selected functions. These third parties provide a material amount of services to
us, and include, but are not limited to, information technology infrastructure and applications solutions providers,
medical management providers, claims administration providers, billing and enrollment providers, third party providers
of actuarial services, call center providers and specialty service providers. In addition, in November 2014 we announced
that we entered into a master services agreement with Cognizant for the performance of additional activities, including a
significant portion of our business process and information technology activities, subject to regulatory approval of the
transaction. 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.” Our current and
any future arrangements with third party vendors and service providers may make our operations vulnerable if those
third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and
confidentiality of our information and data. In addition, we may have disagreements with third party vendors and
service providers regarding relative responsibilities for any such failures under applicable business associate agreements
or other applicable outsourcing agreements. Any contractual remedies and/or indemnification obligations we may have
for vendor or service provider failures may not be adequate to fully compensate us for any losses suffered as a result of
any vendor's failure to satisfy its obligations to us or under applicable law. Our current and any future outsourcing
arrangements could be adversely impacted by changes in the vendor's or service provider's operations, security posture
or vulnerabilities, financial condition or other matters outside of our control. If we fail to adequately monitor and
regulate the performance of our third party vendors and service providers, we could be subject to additional risk. If
these vendor and service provider relationships were terminated for any reason, we may not be able to find alternative
partners in a timely manner or on acceptable financial terms, may be required to pay a termination fee, which may be
significant, and may incur significant costs and/or disruption to our operations in connection with any such vendor or
service provider transition. As a result, we may not be able to meet the full demands of our customers and, in turn, our
business, financial condition and results of operations may be harmed. In addition, we may not fully realize the
anticipated economic and other benefits from our outsourcing projects or other relationships we enter into with third
party vendors and service providers, as a result of regulatory restrictions on outsourcing, unanticipated delays or
difficulties 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 or disputes 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