Health Net 2013 Annual Report Download - page 45

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We contract with professional providers in California for HMO primarily through capitation fee arrangements.
Generally, under a capitation fee arrangement, we pay a provider group a fixed amount per member per month 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 primary
care physicians, specialists and other secondary providers to provide services. In addition, we frequently delegate
responsibility for certain functions such as claims payment or utilization management to these providers under a
"delegated HMO" model. 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 specialists or secondary providers for services rendered could be exacerbated by the current
economic conditions, and could lead specialists or secondary providers to demand payment from us, even though we
have made our capitated payments to the provider group. Health Net will be relying on our delegated, capitated
physician groups to disperse this additional payment to their eligible providers. Depending on state law, we could be
liable for such claims. In California, for instance, although legal precedent to date has held that health plans are
normally not liable for unpaid provider claims under these circumstances, there can be no assurance that the law will
not change, or that we will not be found liable for unpaid provider claims in the future. 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 specialists or secondary providers, the failure of any of which could have an adverse effect on the
provision of services to members and our operations.
In addition, certain provisions of the ACA, including for example, the risk adjustment program, may make our
existing provider fee arrangements less successful in certain of our market segments. The risk adjustment program
defines a health plan's average actuarial risk and subsequently determines such health plan's risk adjustment payment
allocation based on the collection of encounter data from providers. This structure puts more heavily capitated health
plans such as ours at a disadvantage because providers receiving fixed fees from health insurers do not have the same
incentive to provide accurate and complete encounter data with respect to services rendered when compared to
providers under fee for service arrangements. This incentive problem is particularly acute under the delegated HMO
model, which is prevalent in our California health plans. Under this model, third party intermediaries assume
responsibility for certain utilization management and care coordination responsibilities, including the collection of
encounter data. As a result, we have been working with providers to enhance our traditional capitation arrangements to
help better align our and our providers' interests in capturing accurate and complete encounter data and determining an
accurate average actuarial risk. In the case of our CommunityCare product offering we have a hybrid fee arrangement,
which includes direct fee for service (FFS) payment to certain providers. For additional detail on the risk adjustment
program and how the ACA and related proposals and initiatives are changing the health care landscape, see the Health
Care Reform Risk Factor above, “—Various health insurance reform proposals are also emerging at the state level,
which could have an adverse impact on us.” There can be no assurance that we will be able to successfully agree with
providers to implement these modifications or manage health care costs efficiently under an FFS payment model.
Failure to successfully implement this strategy may have an adverse impact on our results of operations, financial
condition and cash flows.
Our dependence on capitated provider groups is substantial in our Western Region Operations reportable
segment. Approximately 71% of our Western Region Operations members were enrolled with capitated provider groups
as of December 31, 2013. Our use of tailored network products also places a greater emphasis on our relationships with
certain capitated provider groups, as tailored network products restrict covered members' access to certain physician
groups. If these capitated provider groups cannot provide comprehensive services to our members in tailored network
products or encounter financial difficulties, it could have an adverse effect on the provision of services to members and
our operations. In addition, the use of tailored network products could create an increased risk of out of network claims
issues, which could result in higher medical costs to us.
The provider groups that we contract with are also required to achieve and maintain compliance with applicable
federal and state laws and regulations. The inability of a provider group to pass compliance audits or otherwise maintain
compliance with applicable laws and regulations may cause us to terminate a contract with a provider or assume
responsibility for the noncompliant functions, such as claims payment or utilization management. Furthermore,
violations of, or noncompliance with, applicable laws and/or regulations or contract terms by providers who perform
delegated functions for us could increase our exposure to liability to our members or sanctions and/or fines from the
regulators that oversee our business, among other things. If we fail to adequately monitor and regulate the performance
of these delegated entities, we could be subject to additional risk. For additional information, see “—We are subject to
risks associated with outsourcing services and functions to third parties.”
Some providers that render services to our members and insureds who have coverage for out-of-network
services, or who obtain out-of-network emergency services, are not contracted with our plans and insurance companies.