Health Net 2007 Annual Report Download - page 31

If we are unable to maintain good relations with the physicians, hospitals and other providers that we
contract with, our profitability could be adversely affected.
We contract with physicians, hospitals and other providers as a means to assure access to health care
services for our members, to manage health care costs and utilization and to better monitor the quality of care
being delivered. In any particular market, providers could refuse to contract with us, demand higher payments or
take other actions, including litigation, which could result in higher health care costs, less desirable products for
customers and members, disruption to provider access for current members or to support growth, or difficulty in
meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals,
physician/hospital organizations and multi-specialty physician groups, may have significant market positions or
even monopolies. Some of these providers may compete directly with us. If these providers refuse to contract
with us or utilize their market position to negotiate favorable contracts or place us at a competitive disadvantage,
our ability to market our products or to be profitable in those areas could be adversely affected.
We contract with professional providers in California primarily through capitation fee arrangements. Under
a capitation fee arrangement, we pay a provider group a fixed amount per member on a regular basis and the
provider group accepts the risk of the frequency and cost of member utilization of professional services. Provider
groups that enter into capitation fee arrangements generally contract with specialists and other secondary
providers, and may contract with primary care physicians, to provide services. The inability of provider groups to
properly manage costs under capitation arrangements can result in their financial instability and the termination
of their relationship with us. A provider group’s financial instability or failure to pay secondary providers for
services rendered could lead secondary providers to demand payment from us, even though we have made our
regular capitated payments to the provider group. Depending on state law, we could be liable for such claims. In
California, the liability of our HMO subsidiaries for unpaid provider claims has not been definitively settled.
There can be no assurance that we will not be liable for unpaid provider claims. There can also be no assurance
that providers with whom we contract will properly manage the costs of services, maintain financial solvency or
avoid disputes with secondary providers, the failure of any of which could have an adverse effect on the
provision of services to members and our operations.
Some providers that render services to our members and insureds that have coverage for out of network
services are not contracted with our plans and insurance companies. In those cases, there is no pre-established
understanding between the provider and the plan about the amount of compensation that is due to the provider;
rather, the plan’s obligation is to reimburse the member based upon the terms of the member’s plan. In some
states and product lines, the amount of reimbursement is defined by law or regulation, but in most instances it is
established by a standard set forth in the plan that is not clearly translated into dollar terms, such as “usual,
customary and reasonable.” In such instances providers may believe they are underpaid for their services and
may either litigate or arbitrate their dispute with the plan or balance bill our member. Regulatory authorities in
various states may also challenge the manner in which we reimburse members for services performed by
non-contracted providers. For example, as described in more detail in “Item 3. Legal Proceedings—
Miscellaneous Proceedings,” the NYAG recently announced that his office is in the process of conducting such
an investigation. As a result of litigation or regulatory activity, we may have to pay providers additional amounts
or reimburse members for their out-of-pocket payments. The uncertainty about our financial obligations for such
services and the possibility of subsequent adjustment of our original payments could have a material adverse
effect on our financial position or results of operations.
In addition, provider groups and hospitals that do contract with us have in certain situations commenced
litigation and/or arbitration proceedings against us to recover amounts they allege to be underpayments due to
them under their contracts with us. We believe that provider groups and hospitals have become increasingly
sophisticated in their review of claim payments and contractual terms in an effort to maximize their payments
from us and have increased their use of outside professionals, including accounting firms and attorneys, in these
efforts. These efforts and the litigation and arbitration that result from them could have a material adverse effect
on our results of operations and financial condition. For additional information regarding provider disputes, see
“Item 3. Legal Proceedings.”
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