Health Net 2009 Annual Report Download - page 29

or reimbursement from the Medi-Cal and Healthy Families programs. Any enrollment freeze or additional
significant reduction in payments received in connection with Medi-Cal, the Healthy Families program or similar
programs could adversely affect our business, financial condition or results of operations, particularly as our
Medi-Cal membership increases due to current economic conditions. In addition, California could impose
requirements on the Medi-Cal program that make continued operations not feasible.
Health care operations under our TRICARE North contract are scheduled to conclude on March 31, 2010,
unless extended by the Department of Defense. We have been formally notified by the Department of Defense
that it intends to exercise two additional option periods under our current North Region contract which, if both
were exercised, would extend our existing TRICARE contract through March 31, 2011. We were not selected to
be the managed care support contractor under the T3 contract for the North Region and protested that decision.
See “Item 1. Business—Segment Information—Government Contracts Segment—TRICARE” for additional
information regarding the T3 contract for the North Region. The filing of our protest triggered an automatic
suspension of the performance of the T3 North contract which had the effect of stalling the transition
implementation of the T3 North contract. The Department of Defense has indicated that if transition work is
resumed, the contractor will be given a ten month transition period prior to the start of health care delivery under
the contract.
There can be no assurance that the Department of Defense will exercise both option periods under our
current TRICARE contract or that it will not shorten the transition period to the new contract to less than ten
months. If the additional option periods under the current contract are not exercised or the transition period under
the new contract is shortened, our results of operations could be adversely affected. In addition, if we are not
awarded the T3 North contract following the re-evaluation of the bids, we may be forced to wind-down our
TRICARE operations after our existing contract concludes. The winding-down process could result in the need to
incur a significant impairment charge due to severance and other costs incurred to terminate the operations that
are in excess of transition-out payments received from the Department of Defense. The loss of the TRICARE
business could have an adverse effect on our financial condition or results of operations.
Federal and state audits, review and investigations of us and our subsidiaries could have a material adverse
effect on our operations and financial condition.
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. From time to time, CMS audits the risk adjustment scores that we
apply to our Medicare members. For additional detail on the risk adjustment reimbursement mechanism
employed by CMS and risks associated with our Medicare business, see Note 2 to our consolidated financial
statements and “—Medicare programs represent a significant portion of our business and are subject to risk.”
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. We have entered into consent agreements relating
to, and in some instances have agreed to pay fines in connection with, several recent audits and investigations. In
addition, state attorneys general have become increasingly active in investigating the activities of health plans,
and we have received in the past, and may continue to receive in the future, subpoenas and other requests for
information as part of these investigations.
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.
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