Health Net 2007 Annual Report Download - page 30

unfavorable resolution of these cases depending, in part, upon the results of operations or cash flow for such
period. At this time, management believes that the ultimate outcome of these cases could have a material adverse
effect on our financial condition and liquidity.
Federal and state audits, review and investigations of us and our subsidiaries could have a material adverse
effect on our operations.
We have been and, in some cases, currently are, involved in various federal and state governmental audits,
reviews and investigations. These include routine, regular and special investigations, audits and reviews by CMS,
state insurance and health and welfare departments and others pertaining to financial performance, market
conduct and regulatory compliance issues. Such audits, reviews and investigations could result in the loss of
licensure or the right to participate in certain programs, or the imposition of civil or criminal fines, penalties and
other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively
affect our reputation in various markets and make it more difficult for us to sell our products and services.
Many regulatory audits, reviews and investigations in recent years have focused on the timeliness and
accuracy of claims payments by managed care companies and health insurers. Our subsidiaries have been the
subject of audits, reviews and investigations of this nature. Depending on the circumstances and the specific
matters reviewed, regulatory findings could require remediation of claims payment errors and payment of
penalties of material amounts that could have a material adverse effect on our results of operations. For example,
we are currently the subject of a regulatory investigation in New Jersey that relates to the timeliness and accuracy
of our claim payments for services rendered by out-of-network providers. This investigation includes an audit of
our claims payment practices for services rendered by out-of-network providers for 1996 through 2005 in New
Jersey. The New Jersey Department of Banking and Insurance (“DOBI”) has informed us that, based on the
results of the audit, we will be required to remediate certain claims payments for this period and will be assessed
a regulatory fine. We have reached an agreement with DOBI regarding the claims that will require remediation
and have had preliminary discussions with DOBI regarding the amount of the fine. We expect to finalize an
agreement with DOBI on the amount of the fine, which could be substantial, and enter into a consent order in the
near future. A portion of the $296.8 million charge that we recorded in the third quarter of 2007 relates to the
remediation of the New Jersey claims and the fine to be assessed by DOBI.
In addition, on February 13, 2008, the New York Attorney General (“NYAG”) announced that his office is
conducting an industry-wide investigation into the manner in which health insurers calculate “usual, customary
and reasonable” charges for purposes of reimbursing members for out-of-network medical services. The
NYAG’s office has issued subpoenas to 16 health insurance companies, including us, in connection with this
investigation. As described by the NYAG in a press conference on February 13, 2008, the threatened claims
appear to be similar to those asserted by the plaintiffs in the McCoy, Wachtel and Scharfman cases described
above. We intend to respond to the subpoena and cooperate with the NYAG as appropriate in his investigation.
Our New Jersey, Connecticut and New York health plans have also been subject to other investigations by
DOBI and the New York Department of Insurance on a variety of other matters and in some cases have entered
into consent agreements relating to, and have agreed to pay fines in connection with, these practices. Similarly,
Health Net of California, our California HMO, has entered into a Consent Agreement with the California DMHC
regarding its prepayment line item review and repricing processes, and both the California and Oregon plans are
currently undergoing reviews relating to rescission practices.
In addition, from time to time, agencies of the U.S. government investigate whether our operations are being
conducted in accordance with regulations applicable to government contractors. Government investigations of us,
whether relating to government contracts or conducted for other reasons, could result in administrative, civil or
criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension
or debarment from future U.S. government contracting, which could have a material adverse effect on our
financial condition and results of operations.
28