Health Net 2001 Annual Report Download - page 23

• restrict or eliminate the use of prescription drug formularies.
We cannot predict the outcome of any of these legislative or regulatory proposals, nor the extent
to which we may be affected by the enactment of any such legislation or regulation. Legislation or
regulation which causes us to change our current manner of operation or increases our exposure to
liability could have a material adverse effect on our results of operations, financial condition and ability
to compete.
In addition, in December 2000, the Department of Health and Human Services promulgated
regulations under HIPAA related to the privacy and security of electronically transmitted protected
health information (‘‘PHI’’). The new regulations require health plans, clearinghouses and providers to
(a) comply with various requirements and restrictions related to the use, storage and disclosure of PHI,
(b) adopt rigorous internal procedures to safeguard PHI and (c) enter into specific written agreements
with business associates to whom PHI is disclosed. The regulations also establish significant criminal
penalties and civil sanctions for non-compliance. In addition, the regulations could expose us to
additional liability for, among other things, violations of the regulations by our business associates. We
believe that the costs required to comply with these regulations will be significant and could have a
material adverse impact on our business or results of operations.
PROVIDER RELATIONS. We contract with physicians, hospitals and other providers as a means
to manage health care costs and utilization and to monitor the quality of care being delivered. In any
particular market providers could refuse to contract with us, demand higher payments or take other
actions which could result in higher health care costs, less desirable products for customers and
members, insufficient provider 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. Many of
these providers may compete directly with us. If these providers refuse to contract with us or utilize
their market position to negotiate favorable contracts or place us at a competitive disadvantage, our
ability to market our products or to be profitable in those areas could be adversely affected.
We contract with providers in California and Connecticut primarily through capitation fee
arrangements. We also use capitation fee arrangements in areas other than California and Connecticut,
but to a lesser extent. Under a capitation fee arrangement, we pay 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. Providers who enter into capitation fee arrangements generally contract with
specialists and other secondary providers to provide services not offered by the primary provider. The
inability of providers to properly manage costs under capitation arrangements can result in their
financial instability and the termination of their relationship with us. In addition, payment or other
disputes between the primary provider and specialists with whom the primary provider contracts can
result in a disruption in the provision of services to our members or a reduction in the services
available. A primary provider’s financial instability or failure to pay secondary providers for services
rendered could lead secondary providers to demand payment from us, even though we have made our
regular capitated payments to the primary provider. Depending on state law, we could be liable for
such claims. In California, the liability of our HMO subsidiaries for unpaid provider claims has not
been definitively settled. There can be no assurance that our subsidiaries will not be liable for unpaid
provider claims. There can also be no assurance that providers with whom we contract will properly
manage the costs of services, maintain financial solvency or avoid disputes with secondary providers, the
failure of any of which could have an adverse effect on the provision of services to members and our
operations.
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