Health Net 2004 Annual Report Download - page 27

technology-based companies could enter the market and compete with us on the basis of their streamlined administrative functions.
Customers of ours may decide to perform for themselves functions or services currently provided by us, which could result in a
decrease in our revenues. Our providers and suppliers may decide to market products and services to our customers in competition
with us. In addition, significant merger and acquisition activity has occurred both in our industry and in industries which act as our
suppliers, such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors
and/or result in higher health care costs. In addition, our contracts with government agencies are frequently up for re-bid and the loss
of any one of our significant government contracts to a competitor could have an adverse effect on our financial condition and results
of operations. For example, approximately 72% of our consolidated Medicaid revenues for the year ended December 31, 2004 were
derived from California and 71% of our Medi-Cal revenues for the year ended December 31, 2004 were derived from Los Angeles
County, California. Our contract with the California Department of Health Services for Los Angeles County is scheduled to expire on
March 31, 2006. If the Los Angeles County Medi-Cal contract is awarded to one of our competitors and not to us, it could have a
material adverse effect on our consolidated Medicaid business. To the extent that there is strong competition or that competition
intensifies in any market, our ability to retain or increase customers, our revenue growth, our pricing flexibility, our control over
medical cost trends and our marketing expenses may all be adversely affected.
We face risks related to litigation, which, if resolved unfavorably, could result in substantial monetary damages.
We are subject to a variety of legal actions to which any corporation may be subject, including employment and employment
discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, including for securities
fraud, and intellectual property related litigation. In addition, we incur and likely will continue to incur potential liability for claims
particularly related to our business, such as failure to pay for or provide health care, poor outcomes for care delivered or arranged,
provider disputes, including disputes over withheld compensation, and claims related to self-funded business. Also, there are
currently, and may be in the future, attempts to bring class action lawsuits against various managed care organizations, including us.
In some of the cases pending against us, substantial non-economic or punitive damages are being sought. See “Item 3. Legal
Proceedings” and Note 12 to our consolidated financial statements for additional information regarding our legal proceedings.
While we currently have insurance coverage for some of these potential liabilities, others (such as punitive damages), may not
be covered by insurance, the insurers may dispute coverage or the amount of insurance may not be sufficient to cover the damages
awarded. In addition, insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the
future or the deductible on any such insurance coverage could be set at a level which would result in us effectively self-insuring cases
against us. The deductible on our errors and omissions (“E&O”) insurance has reached such a level. Given the amount of the
deductible, the only cases which would be covered by our E&O insurance are those involving catastrophic claims. We cannot predict
the outcome of any lawsuit with certainty, and we are incurring expenses in the defense of these matters. In addition, recent court
decisions and legislative activity may increase our exposure for any of these types of claims. Although we have established reserves
for litigation costs, we cannot assure you that our recorded reserves are adequate to cover such costs. Therefore, these legal actions
could have a material adverse effect on our financial condition or results of operations and could prompt us to change our operating
procedures.
We have a material amount of indebtedness and may incur additional indebtedness, or need to refinance existing indebtedness,
in the future, which may adversely affect our operations.
Our indebtedness includes $400 million in unsecured Senior Notes. In addition, to provide liquidity, we have a $700 million
five-year revolving senior credit facility that expires in June 2009. As of December 31, 2004, no amounts were outstanding under our
credit facility. We may incur additional debt in the future. If we were to
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