Health Net 2007 Annual Report Download - page 37

We must comply with restrictions on patient privacy and information security, including taking steps to
ensure compliance by our business associates with HIPAA.
In December 2000, the Department of Health and Human Services promulgated regulations under HIPAA
related to the privacy and security of electronically transmitted PHI. The regulations require health plans,
clearinghouses and providers to: comply with various requirements and restrictions related to the use, storage and
disclosure of PHI; adopt rigorous internal procedures to safeguard PHI; and enter into specific written
agreements with business associates to whom PHI is disclosed. The regulations also establish significant criminal
penalties and civil sanctions for non-compliance. In addition, the regulations could expose us to additional
liability for, among other things, violations of the regulations by our business associates, including the third party
vendors involved in our outsourcing projects. Although we provide for appropriate protections in our contracts
with our business associates, we have limited control over their actions and practices. Compliance with HIPAA
and other state and federal privacy regulations may result in cost increases due to necessary systems changes, the
development of new administrative processes and the effects of potential noncompliance by our business
associates.
Negative publicity regarding the managed health care industry could adversely affect our ability to market
and sell our products and services.
Managed health care companies have received and continue to receive negative publicity reflecting the
public perception of the industry. For example, the Company and the managed health care industry have been
subject to negative publicity surrounding practices in connection with the rescission of individual health
insurance policies. In addition, political campaigns frequently mention health care and related health care reform
proposals. Such political discourse can often generate publicity that portrays managed care in a negative light.
Our marketing efforts may be affected by the amount of negative publicity to which the industry has been
subject, as well as by speculation and uncertainty relating to merger and acquisition activity among companies in
our industry. Speculation, uncertainty or negative publicity about us, our industry or our lines of business could
adversely affect our ability to market and sell our products or services, require changes to our products or
services, or stimulate additional legislation, regulation, review of industry practices or litigation that could
adversely affect us.
If we are unable to manage our general and administrative expenses, our business, financial condition or
results of operations could be harmed.
The level of our administrative expenses can affect our profitability, and administrative expense increases
are difficult to predict. While we attempt to effectively manage such expenses, including through the
development of online functionalities and other projects designed to create administrative efficiencies, increases
in staff-related and other administrative expenses may occur from time to time due to business or product
start-ups or expansions, growth, membership declines or changes in business, difficulties or delays in projects
designed to create administrative efficiencies, acquisitions, reliance on outsourced services, regulatory
requirements, including compliance with HIPAA regulations, or other reasons. For example, in 2005 we spent
approximately $29 million in general and administrative expenses on Medicare-related opportunities. In 2006,
our general and administrative expenses increased as a result of our focus on investing in commercial enrollment
growth in targeted small group segments and for our ongoing investment in Medicare as we prepared for entry
into the private fee-for-service market. In 2007, our administrative expenses increased as we continued to support
expected commercial growth. On November 8, 2007, we announced that we are undertaking a reorganization
plan to enhance efficiency and achieve general and administrative cost savings. The reorganization is intended to
enable us to streamline our operations, including consolidating technology platforms, combining duplicative
administrative and operational functions and outsourcing certain operations where appropriate. We are targeting
annual savings of $100 million in general and administrative expenses by 2010 in connection with the
reorganization. However, there can be no assurance that the reorganization will produce the anticipated savings
or that the reorganization will not significantly disrupt operations thereby negatively impacting our financial
performance. In addition, there can be no assurance that we will be able to successfully manage our
administrative expenses, which could have an adverse effect on our business, financial condition or results of
operations.
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