Health Net 2009 Annual Report Download - page 28

the last several years, we have significantly expanded our Medicare health plans and restructured our Medicare
program management team and operations to enhance our ability to pursue business opportunities presented by
the MMA and the Medicare program generally.
The current administration has made it clear that the reduction of Medicare expenditures is an important part
of health reform. If the cost and complexity of any changes to the Medicare program exceed our expectations or
prevent effective program implementation; if the government alters or further reduces funding of Medicare
programs; if we fail to design and maintain programs that are attractive to Medicare participants; if CMS
suspends our ability to market, or enroll members in, our Medicare products; or if we are not successful in
winning contract renewals or new contracts under the MMA’s competitive bidding process, our current Medicare
business and our ability to expand our Medicare operations could be materially and adversely affected, and we
may not be able to realize any return on our investments in Medicare initiatives. See “—Federal and state audits,
review and investigations of us and our subsidiaries could have a material adverse effect on our operations” for
information on our recent CMS audit and details on the recent suspension of our auto-enrollment for LIS
beneficiaries.
There are specific risks associated with our provision of Medicare Part D prescription drug benefits under
the MMA. These risks include potential uncollectibility of receivables, inadequacy of pricing assumptions,
inability to receive and process information and increased pharmaceutical costs, as well as the underlying
seasonality of this business, and extended settlement periods for claims submissions. In addition, in connection
with our participation in the Medicare Advantage and Part D programs, we regularly record revenues associated
with the risk adjustment reimbursement mechanism employed by CMS. This mechanism is designed to
appropriately reimburse health plans for the relative health care cost risk of its Medicare enrollees. Because the
recorded revenue is based on our best estimate at the time, the actual payment we receive from CMS for risk
adjustment reimbursement settlements may be significantly greater or less than the amounts we initially
recognize on our financial statements.
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 51% of our 2009 total 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. 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.
Contracts under our government programs are generally subject to frequent change, including changes that
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.
After the Northeast Sale, our Medicaid operations are solely in the state of California. California is currently
experiencing an unprecedented budget deficit, and the Governor of California has proposed significant spending
cuts for services as part of the 2010 and 2011 budget, some of which could result in reductions in enrollment in
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