Health Net 2007 Annual Report Download - page 27

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 annual 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.
States periodically consider reducing or reallocating the amount of money they spend for Medicaid.
Currently, many states are experiencing budget deficits, and some states have reduced or have begun to reduce,
or have proposed reductions in, payments to Medicaid managed care providers. Any significant reduction in
payments received in connection with Medicaid could adversely affect our business, financial condition or results
of operations.
In addition, states can impose requirements on Medicaid programs that make continued operations not
feasible. In Connecticut, we are in the process of transitioning out of the Medicaid program due to the state
requiring Medicaid contractors to publicly disclose certain proprietary and trade secret information and persistent
underfunding of the program. We expect to be out of the program completely by the end of the first quarter of
2008. For additional information on our withdrawal from the Connecticut Medicaid program, see “Item 1.
Business—Recent Developments and Other Company Information—Withdrawal from Connecticut Medicaid
Program.”
The amount of government receivables set forth in our consolidated financial statements represents our best
estimate of the government’s liability to us under TRICARE and other federal government contracts. In general,
government receivables are estimates and subject to government audit and negotiation. In addition, inherent in
government contracts are an uncertainty of and vulnerability to disagreements with the government. Final
amounts we ultimately receive under government contracts may be significantly greater or less than the amounts
we initially recognize on our financial statements.
Health care operations under our TRICARE North contract are scheduled to conclude on March 31, 2009. In
the second quarter of 2007, we received a draft Request for Proposal from the Department of Defense for the
next generation of TRICARE contracts. We submitted our comments on the draft to the Department of Defense
and are awaiting the release of the formal Request for Proposal. We anticipate that the government will issue a
formal Request for Proposal in the first half of 2008 and that proposals will be due approximately six months
after the formal Request for Proposal is issued. However, the Department of Defense has the authority to
negotiate with Health Net for an extension of our TRICARE contract for the North region for up to two
additional one-year option periods. If the Department of Defense elects to extend for two additional one-year
option periods and both option periods are exercised, the TRICARE contract for the North region would
conclude on March 31, 2011. If the contract is not extended, and we are not awarded a new TRICARE contract,
or if the terms and conditions of a new contract were significantly changed, it could have a material adverse
effect on our business, results of operation and financial condition.
We may experience losses as a result of the regional concentration of our business.
Our business operations are concentrated in the Northeast (in the states of Connecticut, New York and New
Jersey) and in the states of California, Arizona and Oregon. Our California operations represented approximately
42% of our total revenue in 2007. Due to this concentration in a small number of states, and, in particular,
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