Health Net 2003 Annual Report Download - page 24

approximately $6.7 million in 2003 and expect to spend approximately $1.6 million in 2004 on HIPAA related expenses.
However, certain regulations under HIPAA have yet to be finalized and there is a risk that we may be required to spend
additional amounts in the future in order to comply with these regulations, which amounts, depending on the outcome of
the regulations, may or may not be significant. If we were to incur significant additional cost in order to comply with these
regulations, it could have a material adverse impact on our business and results of operations.
A significant portion of our revenue is derived from Medicare. Recently enacted Medicare reform legislation is
complex and wide-ranging and changes to the current operation of our Medicare services could have a material adverse
effect on our results of operations. It has recently been reported that the costs of the MMA may substantially exceed
original estimates. If the MMA is rescinded or amended, our ability to maintain our current level of revenue from our
Medicare business or to add additional Medicare revenue could be materially and adversely affected. We expect that the
MMA will be implemented by the enactment of regulations which could address, among other things, the competitive
bidding process to be implemented for Medicare private market plans in 2005 and 2006, and the characteristics of private
market products under the MMA. If regulations under the MMA result in increased costs or complexities for the operation
of our Medicare program, then our current Medicare program business could be materially and adversely affected and we
may not be able to realize any return on our investments made to capitalize on opportunities presented by the MMA. See
“Government Regulation – Federal Regulations – Medicare Legislation” for additional information regarding the MMA.
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.
A significant reduction in revenues from the government programs in which we participate could have an adverse
effect on our business, financial condition and results of operations.
Approximately 40% of our revenues relate to federal, state and local government health care coverage programs,
such as Medicare, Medicaid and TRICARE. Under government-funded health programs, the government payor typically
determines premium and reimbursement levels. If the government payor reduces premium or reimbursement levels or
increases them by less than our costs increase, and we are unable to make offsetting adjustments through supplemental
premiums and changes in benefit plans, we could be adversely affected. Contracts under these programs 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. Changes of this nature
could have a material adverse effect on our business. Changes to government health care coverage programs in the future
may also affect our willingness to participate in these programs.
States periodically consider reducing or reallocating the amount of money they spend for Medicaid. Currently, many
states are experiencing budget deficits, and some states, including California, have begun to reduce, or have proposed
reductions in, payments to Medicaid managed care providers. Any significant reduction in payments received in
connection with Medicaid could adversely affect our business.
The amount of government receivables set forth in our consolidated financial statements represents our best estimate
of the government’s liability under TRICARE and other federal government contracts. 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.
There are risks associated with our new TRICARE contract for the North Region.
On August 21, 2003, the Department of Defense announced that our wholly-owned subsidiary, HNFS, was awarded
the new TRICARE contract for the North Region. See “Segment Information – Government Contracts Segment –
TRICARE” for additional information regarding the new contract for the North Region. Shortly after we were awarded
the contract, Sierra Military Health Services, Inc. (“Sierra”) and Aetna Government Health Plans (“Aetna”) filed protests
with the United States General Accounting Office (the “GAO”) of the award of the North Region contract. The GAO
denied Sierra and Aetna’s protests on December 5, 2003. In March 2004, we entered into an agreement with Sierra for the
purchase of certain assets related to its provider network and regional TRICARE service center operations. In connection
with that agreement, Sierra agreed to end its formal protest of the North Region contract award. Aetna, however, has the
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