Health Net 2007 Annual Report Download - page 25

members who utilize higher levels of health care services compared with the insured population as a whole
choose to remain with our health plans rather than risk moving to another plan. This could cause health care costs
to be higher than anticipated and therefore cause our financial results to fall short of expectations.
In the various states in which we do business, premium prices are also constrained by state laws and
regulations which restrict the spread between premiums and benefits, such as laws and regulations that require a
minimum loss ratio of a certain percentage. These laws and regulations not only restrict our ability to raise our
premiums but also create competitive pressure from some of our competitors who may have lower health care
costs than we have and therefore price their premiums at relatively low levels in relation to our cost of care.
Our inability to estimate and maintain appropriate levels of reserves for claims may adversely affect our
business, financial condition or results of operations.
Our reserves for claims are estimates of incurred costs based on various assumptions. The accuracy of these
estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment,
the judicious administration of claims, medical costs and other factors. Included in the reserves for claims are
estimates for the costs of services that have been incurred but not reported and for claims received but not
processed. These estimates are continually monitored and reviewed and, as settlements are made or estimates
adjusted, differences are reflected in current operations. Given the uncertainties inherent in such estimates, the
actual liability could differ significantly from the amounts reserved. If our actual liability for claims payments is
higher than estimated, it could have a negative impact on our earnings per share in any particular quarter or
annual period. If our actual liability is lower than estimated, it could mean that we set premium prices too high,
which could result in a loss of membership. If we were to lose membership as a result of our premium prices
being set too high, there can be no assurance that we would be able to regain that membership by reducing
premiums.
Our businesses are subject to significant government regulation, which increases our cost of doing business
and could adversely affect our ability to grow our businesses.
Our businesses are 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, and
may be interpreted in ways that differ from our understanding retroactively based upon the decisions of
regulators or courts. Broad latitude is given to the agencies administering these regulations to interpret them and
to impose substantial fines when they believe violations have occurred. Regulatory agencies have imposed
substantial fines against us in the past, and may impose substantial fines against us in the future if they determine
that we have not complied with applicable laws and regulations. See “Item 3. Legal Proceedings—Miscellaneous
Proceedings” for additional information. 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.
Further, individual associates may violate these laws and rules, notwithstanding our internal policies and
compliance programs.
In particular, our HMO and insurance subsidiaries are subject to regulations relating to cash reserves,
minimum net worth, premium rates, approval of policy language and benefits, appeals and grievances with
respect to benefit determinations, provider contracting, utilization management, issuance and termination of
policies and a wide variety of other regulations relating to the development and operation of health plans. 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 us. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Statutory Capital Requirements” for
additional information.
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