Health Net 2004 Annual Report Download - page 23

losses, our consolidated results of operations may be materially and adversely affected. For example, in early 2004, our New Jersey
health plan experienced hospital cost trends significantly higher than the trends we estimated when we established premiums and
potentially higher than those of its competitors. These higher hospital cost trends caused a deterioration in margins in early 2004. The
deterioration in margins in New Jersey had an adverse effect on our business, financial condition and results of operations in 2004. A
similar deterioration in margins in any one of the other small number of states we operate in could also have an adverse effect on our
financial condition and results of operations if we are unable to offset the deterioration with adequate future premium increases.
Our businesses are highly regulated.
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. These laws and regulations are
generally intended to benefit and protect providers and health plan members rather than stockholders of managed health care
companies such as Health Net. 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 our 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 December 2000, the Department of Health and Human Services promulgated regulations under HIPAA related to the privacy
and security of electronically transmitted PHI. The 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. States may enact laws imposing
privacy standards that differ from and/or are more strict than those imposed under HIPAA. The states’ ability to promulgate stricter
rules, and uncertainty regarding many aspects of the regulations, make compliance with the relatively new regulatory landscape
difficult.
A significant portion of our revenue is derived from Medicare. The Medicare reform legislation enacted in 2003, or the MMA, 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. Final regulations implementing the MMA were adopted in January
2005. These regulations 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 these regulations 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 Legislation and Regulation—Medicare Legislation” for additional information
regarding the MMA.
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