Health Net 2006 Annual Report Download - page 26

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.
Our efforts to capitalize on Medicare business opportunities could prove to be unsuccessful.
Medicare programs represent a significant portion of our business, accounting for approximately 18% of our
total revenue in 2006 and an expected 20% in 2007. Over the last several years we have significantly expanded
our Medicare health plans and restructured our Medicare program management team and operations to enhance
our ability to pursue business opportunities presented by the MMA and the Medicare program generally. For
example, we recently introduced private fee-for-service (“PFFS”) Medicare Advantage plans, expanded our
Medicare Part D prescription drug benefits plans to all 50 states, and are in the process of enhancing our HMO/
PPO product offerings. This growth requires substantial administrative and operational capabilities which we
have developed or for which we have contracted. For example, we use a third party vendor to administer the
enrollment and billing functions for Medicare Part D and PFFS, as well as processing claims for PFFS. If the
execution of these key operational functions is not successful, or we are unable to develop administrative
capabilities to address the additional needs of our growing Medicare programs, it could have a material adverse
effect on our Medicare business.
Particular risks associated with our providing Medicare Part D prescription drug benefits under the MMA
include potential uncollectability of receivables, inadequacy of pricing assumptions, inability to receive and
process information and increased pharmaceutical costs, (as well as the underlying seasonality of this business).
In addition, in connection with our participation in the Medicare Advantage and Part D programs, we regularly
record revenues associated with the risk adjustment reimbursement mechanism employed by CMS. This
mechanism is designed to appropriately reimburse health plans for the relative health care cost risk of its
Medicare enrollees. While we have historically recorded revenue and received payment for risk adjustment
reimbursement settlements, there can be no assurance that we will receive payment from CMS for the levels of
the risk adjustment premium revenue recorded in any given quarter.
If the cost and complexity of the recent Medicare changes exceed our expectations or prevent effective
program implementation; if the government alters or reduces funding of Medicare programs because of the
higher-than-anticipated cost to taxpayers of the MMA or for other reasons; if we fail to design and maintain
programs that are attractive to Medicare participants; or if we are not successful in winning contract renewals or
new contracts under the MMA’s competitive bidding process, our current Medicare business and our ability to
expand our Medicare operations could be materially and adversely affected, and we may not be able to realize
any return on our investments in Medicare initiatives.
A significant reduction in revenues from the government programs in which we participate could have an
adverse effect on our business, financial condition or results of operations.
Approximately 46% of our revenues relate to federal, state and local government health care coverage
programs, such as Medicare, Medicaid and TRICARE. All of the revenues in our Government Contracts segment
come from the federal government. 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, financial
condition or results of operations. Changes to government health care coverage programs in the future may also
affect our willingness to participate in these programs.
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