Health Net 2014 Annual Report Download - page 49

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Some providers that render services to our members and insureds who have coverage for out-of-network
services, or who obtain out-of-network emergency services, are not contracted with our plans and insurance companies.
In certain cases, there is no pre-established understanding between the provider and the plan about the amount of
compensation that is due to the provider; rather, the plan's obligation is to reimburse the provider based upon the terms
of the member's plan or as otherwise required by law. The amount of provider reimbursement that a plan is obligated to
pay in certain cases is established by a standard set forth in the plan that is not clearly translated into dollar terms, such
as “maximum allowable amount” or “usual, customary and reasonable.” However, in other instances such
reimbursement requirements are defined by statute or regulation and such amounts may, in certain instances, be greater
than those calculated according to the plan standards. These statutory requirements related to provider reimbursements
may increase our health care costs, which may adversely affect our business, financial condition or results of operations.
In addition, providers who render out-of-network services may believe they are underpaid for their services and may
either litigate or arbitrate their dispute with the plan or balance bill our member. Regulatory authorities in various states
may also challenge the manner in which we reimburse members for services performed by non-contracted providers. As
a result of litigation or regulatory activity, we may have to pay providers additional amounts or reimburse members for
their out-of-pocket payments. The uncertainty about our financial obligations for such services and the possibility of
subsequent adjustment of our original payments could have an adverse effect on our financial condition or results of
operations.
Physicians and other professional providers, provider groups and hospitals that contract with us have in certain
situations commenced litigation and/or arbitration proceedings against us to recover amounts for which they allege we
are liable, including amounts related to unpaid claims and amounts they allege to be underpayments due to them under
their contracts with us. We are currently a party to matters of this nature and could face additional claims or be subject
to litigation and/or arbitration proceedings in the future in connection with similar matters. We believe that provider
groups and hospitals have become increasingly sophisticated in their review of claim payments and contractual terms in
an effort to maximize their payments from us and have increased their use of outside professionals, including
accounting firms and attorneys, in these efforts. These efforts and the litigation and arbitration that result from them
could have an adverse effect on our results of operations and financial condition.
Adverse general economic conditions could adversely affect our revenues and results of operations.
Adverse general economic conditions could expose us to a number of risks, including risks associated with the
potential financial instability of our customers. In light of the substantial uncertainty surrounding the ultimate impact of
the ACA and related state health care reform proposals, how the implementation of these new requirements will affect
these risks remains unclear. If our customer base experiences cash flow problems or other financial difficulties, it could,
in turn, adversely impact membership in our plans. For example, our customers could modify, delay or cancel plans to
purchase our products, or may make changes in the mix of products purchased from us. If our customers experience
financial issues, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Further,
our customers or potential customers may force us to compete more vigorously on factors such as price and service to
retain or obtain their business, and in order to compete effectively in our markets, we also must deliver products and
services that demonstrate value to our customers and that are designed and priced properly and competitively. A
significant decline in membership in our plans and the inability of current and/or potential customers to pay their
premiums as a result of unfavorable economic conditions, particularly our individual customers on the exchanges, could
have a material adverse effect on our business, including our revenues, profitability and cash flow. In addition, a
prolonged economic downturn could negatively impact the financial position of hospitals and other providers and, as a
result, could adversely affect our contracted rates with such parties and increase our medical costs.
As of December 31, 2014, our Medi-Cal membership was approximately 1.6 million members, and it is expected
to continue to increase in 2015 as a result of Medicaid expansion and our participation in the CCI. However, the State of
California has experienced budget deficits in the recent past. Challenging economic conditions, another economic
downturn or continued government efforts to contain medical costs and health care related expenditures could adversely
affect state and federal budgets, including California's, resulting in reduced or delayed reimbursements or payments in
our federal and state government-funded health care coverage programs, including Medicare and Medi-Cal or
reimbursements or payments in these programs that do not keep pace with our cost trends. Any future state budget
difficulties may also threaten the ongoing viability of the CCI, as discussed further in the risk factor under the heading,
“—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.”
For additional discussion on budget issues at the federal level and the potential risks to our business, see the risk
factor under the heading “—Government programs represent an increasing share of our revenues. If we are unable to