Health Net 2001 Annual Report Download - page 24

GOVERNMENT PROGRAMS AND REGULATION. Our business is subject to extensive federal
and state laws and regulations, including, but not limited to, financial requirements, licensing
requirements, enrollment requirements and periodic examinations by governmental agencies. The laws
and rules governing our business and interpretations of those laws and rules are subject to frequent
change. Existing or future laws and rules could force us to change how we do business and may restrict
our revenue and/or enrollment growth, and/or increase its health care and administrative costs, and/or
increase our exposure to liability with respect to members, providers or others. In particular, our HMO
and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net worth,
premium rates, and approval of policy language and benefits. Although these regulations have not
significantly impeded the growth of our business to date, there can be no assurance that we will be able
to continue to obtain or maintain required governmental approvals or licenses or that regulatory
changes will not have a material adverse effect on our business. Delays in obtaining or failure to obtain
or maintain governmental approvals, or moratoria imposed by regulatory authorities, could adversely
affect our revenue or the number of our members, increase costs or adversely affect our ability to bring
new products to market as forecasted. In addition, efforts to enact changes to Medicare could impact
the structure of the Medicare program, benefit designs and reimbursement. Changes to the current
operation of our Medicare services could have a material adverse affect on our results of operations.
A significant portion of our revenues relate to federal, state and local government health care
coverage programs, such as Medicare, Medicaid and TRICARE programs. Such contracts are generally
subject to frequent change including changes which may reduce the number of persons enrolled or
eligible, reduce the revenue received by us or increase our administrative or health care costs under
such programs. In the event government reimbursement were to decline from projected amounts, our
failure to reduce the health care costs associated with such programs could have a material adverse
effect upon our business. Changes to government health care coverage programs in the future may also
affect our willingness to participate in these programs.
We are also subject to various federal and state governmental audits and investigations. These
audits and investigations could result in the loss of licensure or the right to participate in certain
programs, or the imposition of fines, penalties and other sanctions. In addition, disclosure of any
adverse investigation or audit results or sanctions could negatively affect our reputation in various
markets and make it more difficult for us to sell our products and services.
The amount of government receivables set forth in our financial statements represents our best
estimate of the government’s liability under TRICARE and other federal government contracts. In
December, 2000, our subsidiary, Federal Services, and the United States Department of Defense agreed
to a settlement of approximately $389 million for outstanding receivables, of which we received
$60 million in December 2000 and the remainder in January 2001. See ‘‘Government Contracts and
Specialty Services Segment—Government Contracts—TRICARE’’ for a description of the settlement.
In general, government receivables are estimates and subject to government audit and negotiation. In
addition, inherent in government contracts are an uncertainty of and vulnerability to government
disagreements. Final amounts we actually receive under government contracts may be significantly
greater or less than the amounts we recognize.
INTERNET-RELATED OPERATIONS. We believe that the Internet and related new technologies
will fundamentally change managed care organizations. Our Business Transformation and Innovation
Services Division focuses on our strategic direction in light of the Internet and related technologies and
pursues opportunities consistent with that strategic direction. The division is developing collaborative
approaches with business partners to transform their existing assets and expertise into new e-business
opportunities. We believe that net-enabled connectivity among purchasers, consumers, managed care
organizations, providers and other trading partners is a prerequisite to creating and capturing
e-business opportunities. We are developing business concepts to take advantage of those market
opportunities that provide value to consumers, purchasers of benefits and the providers of medical and
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