Health Net 2006 Annual Report Download - page 32

The markets in which we do business are highly competitive. If we do not design and price our products
competitively, our membership and profitability could decline.
We are in a highly competitive industry. Many of our competitors may have certain characteristics,
capabilities or resources, such as greater market share, superior supplier arrangements and existing business
relationships, that give them an advantage in competing with us. These competitors include HMOs, PPOs, self-
funded employers, insurance companies, hospitals, health care facilities and other health care providers. In
addition, other companies may enter our markets in the future, including emerging competitors in the Medicare
program and in consumer-directed health plans. We believe that increased funding provided by the MMA will
increase the number of competitors in senior health services and could affect our Medicare Advantage program.
For example, in 2006, a large PPG in Kern County, California was able to secure a Knox-Keene license and a
contract with CMS and is now in direct competition with our Medicare operations in that county.
In addition, financial services or other technology-based companies could enter the market and compete
with us on the basis of their streamlined administrative functions. The addition of new competitors can occur
relatively easily and customers enjoy significant flexibility in moving between competitors. There is a risk that
our customers may decide to perform for themselves functions or services currently provided by us, which could
result in a decrease in our revenues. In addition, our providers and suppliers may decide to market products and
services to our customers in competition with us.
In recent years, there has been significant merger and acquisition activity in our industry and in industries
that 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 significant government contract to a
competitor could have an adverse effect on our financial condition and results of operations. 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.
In the past several years we have experienced significant turnover in senior management. If we are unable
to manage succession of our key executives, it could adversely affect our business.
We have experienced a high turnover in our senior management team in recent years. While we have
succession plans in place and have employment arrangements with certain of our key executives, these do not
guarantee that the services of these key executives will continue to be available to us. We would be adversely
affected if we fail to adequately plan for future turnover of our senior management team.
Our efforts to capitalize on business opportunities provided by consumer-directed healthcare could prove to
be unsuccessful.
Nearly every major managed care organization has launched, announced or is developing HSA-compatible
high-deductible health plans. We have launched HSA programs in our Northeast, Arizona, California and Oregon
health plans. Our HSA programs represented a very small percentage of our total revenue in 2006. Some of our
large competitors, such as Aetna and Blue Cross Blue Shield plans, have made large investments in, and heavily
marketed, their consumer-directed health plans and have gained more enrollment in many markets across the
country. If their enrollment trend continues, it may widen the competitive gap between us over the next several
years. If we fail to design, maintain and effectively market consumer-directed health care programs that are
attractive to consumers and, as a result, are unable to achieve a competitive market share in the consumer-
directed care category, it could have a material adverse effect on our business, financial condition or results of
operations.
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