Health Net 2009 Annual Report Download - page 30

Beginning in November 2008, CMS performed a routine audit of certain of our Medicare Advantage,
Private Fee For Service and PDP products and found deficiencies in many of the business areas included in the
review. On August 6, 2009, CMS accepted our corrective action plan relating to the 2008 audit. In December
2009, CMS performed a focused audit to assess our implementation of the corrective action plan. We received
CMS’ report on the focused audit and related corrective action request on January 11, 2010 and submitted our
corrective action plan to CMS for review and approval on February 26, 2010. CMS found deficiencies in many
of the business areas included in the review, including several repeat findings from previous audits, which were
submitted to CMS Central Office for review. If the CMS Central Office believes that the repeat deficiencies are
substantial, it could levy enforcement actions against us, including financial penalties and/or the suspension of
marketing and enrollment into our Medicare products. Additionally, on January 7, 2010, we were notified by
CMS that, due to certain pharmacy claims processing errors, none of our stand-alone PDP plans would be
considered “available” for the purposes of the process through which CMS randomly assigns low-income
subsidy (“LIS”) eligible Medicare beneficiaries not otherwise enrolled in PDP plans into stand-alone PDP plans,
effective February 1, 2010. In its notice to us, CMS indicated that it would work with us to develop a corrective
action plan in this regard, but we have not received a corrective action request from CMS. At this time, we do not
expect the suspension of our auto-enrollment for LIS beneficiaries to have a material adverse effect on our
Medicare business; however, if CMS were to impose substantial financial penalties and/or suspend the marketing
of and enrollment into our other Medicare products for a significant period of time in the future, it could have a
material adverse effect on our Medicare business.
In addition, from time to time, agencies of the U.S. government investigate whether our operations are being
conducted in accordance with regulations applicable to government contractors. Government investigations of us,
whether relating to government contracts or conducted for other reasons, could result in administrative, civil or
criminal liabilities, including repayments, fines and/or penalties being imposed upon us, or could lead to
suspension or debarment from future U.S. government contracting, which could have a material adverse effect on
our financial condition and results of operations.
We face risks related to litigation, which, if resolved unfavorably, could result in substantial penalties and/
or monetary damages, including punitive damages. In addition, we incur material expenses in the defense of
litigation and our results of operations or financial condition could be adversely affected if we fail to
accurately project litigation expenses.
We are currently, and may become in the future, subject to a variety of legal actions to which any
corporation may be subject, including employment and employment discrimination-related suits, employee
benefit claims, wage and hour claims, breach of contract actions, tort claims, fraud and misrepresentation claims,
shareholder suits, including suits for securities fraud, and intellectual property and real estate related disputes. In
addition, we incur and likely will continue to incur potential liability for claims related to the insurance industry
in general and our business in particular, such as claims by members alleging failure to pay for or provide health
care, poor outcomes for care delivered or arranged, improper rescission, termination or non-renewal of coverage,
insufficient payments for out-of-network services and claims relating to information security breaches; claims by
employer groups for return of premiums; and claims by providers, including claims for withheld or otherwise
insufficient compensation or reimbursement, claims related to self-funded business and claims related to
reinsurance matters. Such actions can also include allegations of fraud, misrepresentation, and unfair or improper
business practices and can include claims for punitive damages. Also, there are currently, and may be in the
future, attempts to bring class action lawsuits against various managed care organizations, including us. In some
of the cases pending against us, substantial non-economic or punitive damages are also being sought.
Additionally, in periods prior to and subsequent to acquisitions, divestitures and other significant transactions,
there may be attempts to bring lawsuits or other actions to block or unwind these transactions. For instance, on
January 13, 2010, the Connecticut State Medical Society, together with two member physicians in their
individual capacities, filed an appeal in the Superior Court in New Britain, Connecticut seeking to overturn the
Connecticut Department of Insurance’s approval of the Northeast Sale.
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