Health Net 2013 Annual Report Download - page 41

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irregularity in the timing of these payments in future periods may adversely impact our operating cash flow from
quarter to quarter depending on the timing of such payments.
Federal and state audits, reviews and investigations of us and our subsidiaries could have a material adverse effect
on our operations, financial condition and cash flows.
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 government
agencies, state insurance and health and welfare departments and others pertaining to financial performance, market
conduct and regulatory compliance issues. Such audits, reviews and investigations could result in the loss of licensure
or the right to participate or enroll members in certain programs, or the imposition of civil or criminal fines, penalties
and other sanctions, which could be substantial. In addition, disclosure of any adverse investigation, audit results,
sanctions or penalties could negatively affect our reputation in various markets and make it more difficult or impossible
for us to sell our products and services. 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. We have, among other things, entered into consent
agreements relating to, and in some instances have agreed to pay fines in connection with, several recent audits and
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 any claims payment errors and payment of penalties of material amounts that
could have a material adverse effect on our results of operations.
We utilize claims submissions, medical records and other medical data as provided by health care providers as
the basis for payment requests that we submit to CMS under the risk adjustment model for our Medicare Advantage
contracts. CMS and the Office of Inspector General for HHS periodically perform risk adjustment data validation
(“RADV”) audits of selected Medicare health plans, including ours, to validate the coding practices of and supporting
documentation maintained by health care providers. Our Arizona health plan has been recently selected for such an
audit. Such audits may result in retrospective adjustments to payments made to our health plans, fines, corrective action
plans or other adverse action by CMS. In February 2012, CMS published a final RADV audit and payment adjustment
methodology. The methodology contains provisions allowing retroactive contract level payment adjustments for the
year audited, beginning with 2011 payments, using an extrapolation of the “error rate” identified in audit samples and,
for Medicare Advantage plans, after considering a fee-for-service “error rate” adjuster that will be used in determining
the payment adjustment. Depending on the error rate found in those audits, if any, potential payment adjustments could
have a material adverse effect on our results of operations, financial position and cash flows.
We have been sanctioned in the past by CMS and have been advised that we will be subject to targeted
monitoring and heightened surveillance and oversight by CMS going forward. Any future sanctions, fines or penalties
against our Medicare operations may be more severe as a result of our past performance, particularly in circumstances
in which CMS determines that we have repeatedly failed to comply with applicable laws, rules or regulations. If CMS
were to impose financial or other penalties and/or sanctions on us, or terminate our existing Medicare contracts, this
could have a material adverse effect on our Medicare business, our results of operations, cash flows or financial
condition. See “—Medicare programs represent a significant portion of our business and are subject to risk” for
additional information about our Medicare programs and the associated risks.
We contract with independent third party vendors and service providers who provide services to us and our
subsidiaries or to whom we delegate selected functions. Violations of, or noncompliance with, laws and/or regulations
governing our business by such third parties, or governing our dealings with such parties, could subject us to additional
audits, reviews and investigations and adverse effects from such audits, reviews and investigations. In addition, from
time to time, government agencies investigate whether our operations are being conducted in accordance with
regulations applicable to government contractors, including but not limited to regular audits to enforce mandatory
pricing arrangements. 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 government programs or future government
contracting, which could have a material adverse effect on our financial condition, results of operations and cash flows.
See “—We are subject to risks associated with outsourcing services and functions to third parties” for additional detail
regarding risks associated with our relationships with third parties.