Health Net 2014 Annual Report Download - page 47

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could increase the costs associated with the operation of our business or have an adverse impact on our business and
reputation. In addition, we currently outsource and may in the future outsource key services and functions to third
parties, including companies doing business in foreign jurisdictions, which exposes us to risks inherent in conducting
business outside of the United States, including international economic and political conditions, and additional costs
associated with complying with foreign laws and U.S. laws applicable to operations in foreign jurisdictions, such as the
Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010.
We face a wide range of risks, and our success depends on our ability to identify, prioritize and appropriately manage
our enterprise risk exposures.
As a large company operating in a complex and highly-regulated industry, we encounter a variety of risks. The
risks we face include, among others, a range of strategic, regulatory, competitive, financial, operational, information
technology, information security, reputational, external and industry risks identified in this Risk Factors discussion. The
third party vendors and service providers to which we outsource key functions are required to achieve and maintain
compliance with applicable federal and state laws and regulations and contractual requirements. Any violations of, or
noncompliance with, laws and/or regulations governing our business, or the terms of our contracts, by third party
vendors or service providers could increase our enterprise risk exposure. As we further outsource 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 could adversely affect our
profitability, our ability to retain or grow business or adversely affect our business, financial condition or results of
operations.
If we fail to develop and maintain satisfactory relationships on competitive terms with the hospitals, provider groups
and other providers that provide services to our members, our profitability could be adversely affected.
We contract with hospitals, provider groups 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 help ensure the delivery of quality care. In
any particular market, providers could refuse to contract with us, demand higher payments, or other contract terms that
are unfavorable to us or take other actions, including litigation, which could result in higher health care costs, less
desirable or uncompetitive products for customers and members, disruption to provider access or limited 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 contract terms that are unfavorable to us or otherwise place us at a competitive
disadvantage, our ability to market our products or to be profitable in those areas could be adversely affected. The
continuing trend of consolidation of hospitals, provider groups and other providers may further enhance this risk,
particularly if such consolidation involves large high cost hospitals, providers or provider groups that we currently have
under contract.
As the health care environment has evolved, we have developed and are continuously working to monitor
strategic provider relationships with respect to the new market driven by, among other things, the ACA, the CCI and
other federal and state health care reforms, regulations and initiatives. Accordingly, our business strategy includes
creating tailored network products and other customized customer solutions through, among other things, strategic
provider relationships that help manage the cost of care. For example, our product portfolios and services include
offerings such as SmartCareSM, ExcelCareSM, PureCareSM and CommunityCareSM, which are recent collaborations with
our provider partners. Through these types of arrangements, we offer tailored network product offerings served by more
cost-effective physician groups and hospitals. Membership in our tailored network products was approximately 50% of
total commercial membership as of December 31, 2014, compared with approximately 38% as of December 31, 2013.
For additional information on our tailored network products and innovative provider relationships, see “Item 1.
Business—Segment Information—Western Region Operations Segment—Managed Health Care Operations.” The
success of our tailored network products and continued development of strategic provider relationships are important
parts of our business strategy. In addition, we will need to manage our provider network to support our participation in
the CCI, including the provision of LTSS benefits for dual eligibles and other individuals, a service that we have not
previously provided or managed. There can be no assurance that we will be able to successfully implement these
strategic initiatives, that the products we design in collaboration with certain providers will be successful or developed
within the time periods expected, or the products that we offer will be preferable to similar products of our competitors.
Moreover, recent regulatory action and class action lawsuits have raised concerns regarding provider network size,
network capacity and the adequacy of communication between health insurers and their consumers with respect to