Health Net 1999 Annual Report Download - page 23

date of disposal. On December 10, 1998, the Company
completed the sale of the workers’ compensation segment.
The assets sold consisted primarily of investments, premi-
ums and reinsurance receivables.The selling price was $257
million in cash.
Impact of Inflation and Other Elements
The managed health care industry is labor intensive and its
profit margin is low; hence, it is especially sensitive to infla-
tion. Increases in medical expenses or contracted medical
rates without corresponding increases in premiums could
have a material adverse effect on the Company.
Various federal and state legislative initiatives regarding
the health care industry have been proposed during recent
legislative sessions, and health care reform and similar issues
continue to be in the forefront of social and political dis-
cussion. If health care reform or similar legislation is
enacted, such legislation could impact the Company. Man-
agement cannot at this time predict whether any such ini-
tiative will be enacted and, if enacted, the impact on the
financial condition or results of operations of the Company.
The Company’s ability to expand its business is depen-
dent, in part, on competitive premium pricing and its abil-
ity to secure cost-effective contracts with providers. Achiev-
ing these objectives is becoming increasingly difficult due
to the competitive environment. In addition, the Com-
pany’s profitability is dependent, in part, on its ability to
maintain effective control over health care costs while pro-
viding members with quality care. Factors such as health
care reform, integration of acquired companies, increased
cost of individual services, regulatory changes, utilization,
new technologies, hospital costs, major epidemics and
numerous other external influences may affect the Com-
pany’s operating results. Accordingly, past financial perfor-
mance is not necessarily a reliable indicator of future per-
formance, and investors should not use historical records to
anticipate results or future period trends.
The Company’s HMO and insurance subsidiaries are
required to maintain reserves to cover their estimated ulti-
mate liability for expenses with respect to reported and
unreported claims incurred.These reserves are estimates of
future payments based on various assumptions. Establishment
of appropriate reserves is an inherently uncertain process,
and there can be no certainty that currently established
reserves will prove adequate in light of subsequent actual
experience, which in the past has resulted, and in the future
could result, in loss reserves being too high or too low.The
accuracy of these estimates may be affected by external
forces such as changes in the rate of inflation, the regulatory
environment, the judicial administration of claims, medical
costs and other factors. Future loss development or govern-
mental regulators could require reserves for prior periods to
be increased, which would adversely impact earnings in
future periods. In light of present facts and current legal
interpretations, management believes that adequate provi-
sions have been made for claims and loss reserves.
The Company’s HMO subsidiaries contract with
providers in California, and to a lesser degree in other areas,
primarily through capitation fee arrangements. Under a
capitation fee arrangement, the Company’s subsidiary pays
the provider a fixed amount per member on a regular basis
and the provider accepts the risk of the frequency and cost
of member utilization of services.The inability of providers
to properly manage costs under capitation arrangements
can result in financial instability of such providers. Any
financial instability of capitated providers could lead to
claims for unpaid health care against the Company’s HMO
subsidiaries, even though such subsidiaries have made their
regular payments to the capitated providers. Depending on
state law, the Company’s HMO subsidiaries may be liable
for such claims. In California, the issue of whether HMOs
can be liable for unpaid provider claims has not been defin-
itively settled.The Department of Corporations (“DOC”)
has issued a written statement to the effect that HMOs are
not liable for such claims, but there is currently ongoing lit-
igation challenging that ruling.
Year 2000
The Company undertook an extensive effort to assess and
modify its computer applications and business processes to
provide for their continued functionality in light of the
“Year 2000” issue.
The “Year 2000” issue is the result of computer pro-
grams having been written in a language that used two
digits rather than four to define the applicable year. Any of
the Company’s computer programs that have time-sensitive
software and the outdated software language may recognize
a date using “00” as the year 1900 rather than the year
2000.This could result in a system failure or miscalculations
causing disruptions of operations, including, among other
things, a temporary inability to process transactions, prepare
invoices or engage in normal business activities. In addition,
the Year 2000 problems of the Company’s providers and
customers, including governmental entities, can affect the
Company’s operations, which are highly dependent upon
information technology for processing claims, determining
eligibility and exchanging information.
FOUNDATION HEALTH SYSTEMS, INC. 21