Health Net 2009 Annual Report Download - page 32

anticipated, our profitability could be adversely affected. There can be no assurances that these efforts will not
significantly disrupt our operations, thereby negatively impacting our financial performance. Furthermore, our
failure to successfully adjust our overhead and administrative expenses in proportion to the wind-down could
have an adverse effect on our business, financial condition or results of operations.
In addition to managing administrative expenses, our profitability is also affected by our ability to
effectively and quickly respond to events that require significant reductions and changes to the allocation of our
administrative expenses. In the event that our TRICARE North operations are concluded, this will render
redundant many of the management, administrative and operational functions previously required to maintain
those operations. See “—Segment Information—Government Contracts Segment—TRICARE” for additional
detail regarding the status of the T3 North Region award. While we will need to significantly reduce, reallocate
or eliminate these redundant administrative expenses, we cannot guarantee you that we will be successful in
making these cuts and adjustments at a pace that will maintain or increase our profitability. In addition, we would
expect to incur significant restructuring charges due to severance and other costs if we terminate our TRICARE
North operations. Failure to adjust our overhead and other administrative expenses in proportion to these events
could have a material adverse effect on our business, financial condition or results of operations.
If we are unable to maintain good relations with the physicians, hospitals and other providers that we
contract with, our profitability could be adversely affected.
We contract with physicians, hospitals and other providers as a means to assure access to health care
services for our members, to manage health care costs and utilization and to better monitor the quality of care
being delivered. In any particular market, providers could refuse to contract with us, demand higher payments or
take other actions, including litigation, which could result in higher health care costs, less desirable products for
customers and members, disruption to provider access for current members or to support growth, or difficulty in
meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals,
physician/hospital organizations and multi-specialty physician groups, may have significant market positions or
even monopolies. If these providers refuse to contract with us or utilize their market position to negotiate
favorable contracts or place us at a competitive disadvantage, our ability to market our products or to be
profitable in those areas could be adversely affected.
We contract with professional providers in California primarily through capitation fee arrangements. Under
a capitation fee arrangement, we pay a provider group a fixed amount per member on a regular basis and the
provider group accepts the risk of the frequency and cost of member utilization of professional services, and in
some cases, institutional services. Provider groups that enter into capitation fee arrangements generally contract
with specialists and other secondary providers, and may contract with primary care physicians, to provide
services. The inability of provider groups to properly manage costs under capitation arrangements can result in
their financial instability and the termination of their relationship with us. A provider group’s financial instability
or failure to pay secondary providers for services rendered could be exacerbated by the economic recession, and
could lead secondary providers to demand payment from us, even though we have made our regular capitated
payments to the provider group. Depending on state law, we could be liable for such claims. In California, for
instance, the liability of our HMO subsidiaries for unpaid provider claims has not been definitively settled. There
can be no assurance that we will not be liable for unpaid provider claims. There can also be no assurance that
providers with whom we contract will properly manage the costs of services, maintain financial solvency or
avoid disputes with secondary providers, the failure of any of which could have an adverse effect on the
provision of services to members and our operations. Moreover, with the completion of the Northeast Sale our
dependence on capitated provider groups has increased, as 68 percent of our West Operations members were
enrolled with capitated provider groups as of December 31, 2009. Our strategy to expand commercial
membership through narrow network products also places a greater emphasis on our relationships with certain
capitated provider groups, as narrow network products significantly restrict covered members’ access to certain
hospitals and physicians. If these capitated provider groups cannot provide comprehensive services to our
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