Health Net 2013 Annual Report Download - page 37

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A significant reduction in revenues from the government programs in which we participate or other changes to these
programs could have a material adverse effect on our business, financial condition or results of operations.
Approximately 52% of our total revenues in the year ended December 31, 2013 relate to federal, state and local
government health care coverage or counseling programs, such as Medicare, Medicaid, TRICARE and MFLC. Nearly
all of the revenues in our Government Contracts reportable segment, which does not include Medicare and Medicaid
related revenues, come from the federal government, either directly or as a sub-contractor for a federal government
contract. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Results of Operations” for more information regarding our reportable segments. In addition, a growing portion of our
revenues for our Western Region Operations reportable segment, which includes Medicare and Medicaid related
revenues, relates to government programs, and this portion will increase in 2014 due to, among other things, Medicaid
expansion and the scheduled implementation of the dual eligibles demonstration. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations-Results of Operations-Western Region Operations
Reportable Segment-California Coordinated Care Initiative” and “—Our participation in the duals demonstration
portion of the California Coordinated Care Initiative in Los Angeles and San Diego Counties may prove to be
unsuccessful for a number of reasons” for more information regarding our opportunities under the CCI and related
risks. Due to this concentration of revenues, a significant reduction in revenues from the government programs in which
we participate could have a material adverse effect on our business, financial condition or results of operations.
Our contracts with the government are generally subject to a highly structured competitive bid process and
government discretion in the negotiation process, including with respect to performance requirements. If we fail to
design and maintain programs attractive to our government customers, if we are not successful in winning new
contracts or contract renewals on favorable terms, or if our existing contracts are terminated, our current government
health care coverage or counseling programs business and our ability to expand these businesses could be materially
and adversely affected. Under government-funded health programs, the government payor typically determines
premium and reimbursement levels and generally has the ability to terminate our contract for convenience. Any
reduction in premium or reimbursement levels by the government payor, such as Medicare Advantage payment rates as
provided in the ACA, delays payments to us or increases premiums by less than our costs increase. If we are unable to
make offsetting adjustments through supplemental premiums and changes in benefit plans, we could be adversely
affected. In addition, the amount of government receivables set forth in our consolidated financial statements for our
Government Contracts reportable segment represents our best estimate of the government's liability to us under
TRICARE, MFLC, Patient Centered Community Care (“PC3”) and other government contracts, or amounts due us as a
sub-contractor. These government receivables are generally estimates subject to government audit and negotiation, and
there is an inherent uncertainty in government contracts based in large part on a vulnerability to disagreements with the
government. As a result, the final amounts we ultimately receive under government contracts for our Government
Contracts reportable segment may be significantly greater or less than the amounts we initially recognize in our
consolidated financial statements. Medicare revenue that we record may also be subject to change due to risk
adjustment reimbursement settlements. See “—Medicare programs represent a significant portion of our business and
are subject to risk” for additional information about risks related to these risk adjustment reimbursement settlements.
Moreover, with respect to the ACA's new premium stabilization provisions, the final determination and settlement of
amounts due or payable relating to the 2014 calendar year will not occur until June 2015, which could have a material
adverse impact our cash flows and results of operations.
Contracts under our government programs are generally subject to frequent change, including but not limited to
changes that may reduce the number of persons enrolled or eligible, expand or reduce the scope of the contract, reduce
the revenue received by us or increase in our administrative or health care costs, as applicable, under such programs. An
enrollment freeze or significant reduction in payments from government programs in which we participate could
adversely affect our business, financial condition or results of operations. Such changes may occur during re-
competition of government contracts. The T-3 contract for our TRICARE business has one remaining one-year option
period. The Department of Defense has notified us of its intent to exercise the remaining option period, which would
extend our T-3 contract through March 31, 2015. The DoD has also informed us that it intends to request that we submit
a proposal to add three additional one-year option periods to the T-3 contract. However, there can be no assurance that
the Department of Defense will exercise the remaining option period under the contract, and if it is not exercised, our
TRICARE business is opened up for rebidding and we are unable to secure a contract in the rebidding process, our
results of operations could be adversely impacted. For additional information on our TRICARE operations, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—
Government Contracts Reportable Segment.”