Health Net 1998 Annual Report Download - page 27

F O U N DAT IO N HEALT H SYSTEMS, I N C . 2 5
Third Parties –The Company has commenced
an inventory of third party relationships,identifying
them and analyzing their strategic importance to the
Company and their Year 2000 readiness.The strate-
gically important third party relationships identified
by the Company are general purpose utility ve n d o rs ,
care delivery organizations (such as providers),and
customer service ve n d o rs .The Company now antici-
pates completing its risk assessment for third parties
in the second quarter of 1999.T h e r e can be no assur-
ance that the systems of other companies on which
the Company relies will be compliant on a timely
basis,or that the failure by a third party to be com-
pliant would not have a material adverse effect on
the Company.
Costs– The Company is evaluating on an
on-going basis the related costs to resolve its poten-
tial Year 2000 problems.The Company currently
estimates that the total cost for the project will be
approximately $42.7 million,excluding the costs to
accelerate the replacement of hardware or software
otherwise re q u i red to be purchased by the Company.
Through 1998,the Company expended a p p r ox i-
mately $13.6 million relating to, among other things,
the cost to repair or replace software and re l a t e d
h a rd wa re pro bl e m s , cost of assessment, a n a l y s i s and
planning and internal and external communications.
The Company estimates that the percentages of
its total expenditures for Year 2000 issues will be
approximately as follows:35% for internal costs,
37% for outside consultants and contractors,6.5%
for software-related costs,and 21.5% for hardware-
related costs.The Company has established a line-
item in its overall operating budget specifically for
Year 2000 costs.The operating subsidiaries for each
line of business of the Company, however, are paying
for the costs of assessment,planning, remediation
and testing of Year 2000 issues for their respective
operations.
Notwithstanding the foregoing,the costs of
the project and the timetable in which the Company
plans to complete the Year 2000 compliance re q u i r e-
ments are based on estimates derived from utilizing
numerous assumptions of future events including
the continued availability of certain resources, third
party modification plans and other factors.There
can be no assurances that these estimates will be
achieved and actual results and costs could differ
materially from these estimates.
Certain insurance coverages for defense costs
associated with Year 2000 litigation have already been
secured under the Company’s Directors and Officers
Liability Insurance policy and will be re-evaluated
upon re n ewal of that policy.At this time, it is unclear
as to the extent of existing insurance coverage, if
any, the Company may have to cover potential Year
2000 costs and liabilities under its other insurance
policies.The Company is currently analyzing the
availability of such coverage under other existing
and future insurance policies and products.
Contingency Planning. An important part of
the Company’sYear 2000 project involves identify-
ing worst case scenarios and seeking to develop
contingency plans.Each geographical and specialty
services division of the Company is prioritizing its
mission critical business functions in order to address
the most critical issues first in remediation efforts
and to develop alternatives to these critical processes
as part of contingency planning.A mission critical
business activity or system is one that cannot be
without an automated or functional system for a
period of 21 days without causing significant busi-
ness impact to the particular line of business.Among
other things,the Company’s divisions are assessing
potential negative impacts on a valid member’s ability
to receive services,the ability to generate revenue,
the need for additional expenditures,compliance
with legal, regulatory or accreditation requirements,
meeting contractual obligations and reimbursing
providers, vendors and agents.The Company is cur-
rently projecting to complete the assessment of its
most critical business functions by the end of the
first quarter of 1999 and the documentation and
validation of its contingency plans by the end of the
second quarter of 19 99.The Company currently
anticipates that its contingency plans will include
the use of manual as well as on-line files of its
members to avoid disruption in the verification of
membership and eligibility for the provision of
health care services to its members.
Risks– The Company is highly dependent
upon its own information technology systems and
that of its providers and customers.Failure by the
Company or a third party to correct a material
Year 2000 problem could result in a failure of or an
i n t e rruption in the Company ’s business activities and
operations.Such interruptions and failures could
materially and adversely affect the Company’s results
of operations,liquidity and financial condition.Due
to the general uncertainty inherent in the Year 2000