Health Net 2007 Annual Report Download - page 26

As a government contractor, we are subject to U.S. government oversight. The government may ask about
and investigate our business practices and audit our compliance with applicable rules and regulations. Depending
on the results of those audits and investigations, the government could make claims against us. Under
government procurement regulations and practices, a negative determination resulting from such claims could
result in a contractor being fined, debarred and/or suspended from being able to bid on, or be awarded, new
government contracts for a period of time. We are also exposed to other risks associated with U.S. government
contracting, including dependence upon Congressional appropriation and allotment of funds.
In addition, laws or regulations adopted in the future could adversely affect our business. See “—Proposed
federal and state legislation and regulations affecting the managed care industry could adversely affect us.”
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 20% of our
total revenue in 2007 and an expected 23% in 2008. 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, in 2007 we 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 third party vendors to administer the
enrollment, claims and billing functions for stand-alone PDP and 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. In January
2008, we were directed by the CMS to temporarily cease the sale of our stand-alone PDP products due to certain
administrative deficiencies relating to our ability to timely process stand-alone PDP enrollment applications. We
do not believe that this temporary suspension will 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 uncollectibility 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,
and extended settlement periods for claims submissions. 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.
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