Health Net 2009 Annual Report Download - page 27

it could mean that we set premium prices too high, which could result in a loss of membership. If our actual
liability for claims payments is higher than estimated, it could have a negative impact on our profitability per
enrolled member and, subsequently, our earnings per share in any particular quarter or annual period.
Our businesses are subject to significant government regulation, which increases our cost of doing business
and could adversely affect our ability to grow our businesses.
Our businesses are subject to extensive federal and state laws and regulations, including, but not limited to,
financial requirements, licensing requirements, enrollment requirements and periodic examinations by
governmental agencies. These laws and regulations are generally intended to benefit and protect providers and
health plan members rather than stockholders of managed health care companies such as Health Net. The laws
and rules governing our business and interpretations of those laws and rules are subject to frequent change. Broad
latitude is given to the agencies administering these regulations to interpret them and to impose substantial fines
when they believe violations have occurred. Regulatory agencies have imposed substantial fines against us in the
past, and may impose substantial fines against us in the future if they determine that we have not complied with
applicable laws and regulations. Existing or future laws and rules could force us to change how we do business
and may restrict our revenue and/or enrollment growth, and/or increase our health care and administrative costs,
and/or increase our exposure to liability with respect to members, providers or others. See “—Potential health
care reform legislation being considered by Congress may adversely affect us” and “—Changes to federal and
state legislation and regulations affecting the managed health care industry could adversely affect us.” Further,
individual associates may violate these laws and rules, notwithstanding our internal policies and compliance
programs. See “—If we fail to comply with restrictions on patient privacy and information security, including
taking steps to ensure that our business associates who obtain access to sensitive patient information maintain its
confidentiality, our reputation and business operations could be materially adversely affected.”
Our HMO and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net
worth, premium rates, approval of policy language and benefits, appeals and grievances with respect to benefit
determinations, provider contracting, utilization management, issuance and termination of policies, claims
payment practices and a wide variety of other regulations relating to the development and operation of health
plans. There can be no assurance that we will be able to continue to obtain or maintain required governmental
approvals or licenses, or that regulatory changes will not have a material adverse effect on us. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Statutory Capital
Requirements” for additional information.
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. In addition, we are subject to state and federal false claims laws that
generally prohibit the submission of false claims for reimbursement or payment to government agencies. Courts
have imposed substantial fines and penalties against companies found to have violated these laws. We are also
exposed to other risks associated with U.S. government contracting, including dependence upon Congressional
appropriation and allotment of funds. In addition, 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.
Medicare programs represent a significant portion of our business and are subject to risk.
Medicare programs represent a significant portion of our business, accounting for approximately 31% of our
total premium revenue in our West Operations reportable segment in 2009 and an expected 30% in 2010. Over
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