Health Net 2013 Annual Report Download - page 46

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In certain cases, there is no pre-established understanding between the provider and the plan about the amount of
compensation that is due to the provider; rather, the plan's obligation is to reimburse the provider based upon the terms
of the member's plan or as otherwise required by law. The amount of provider reimbursement that a plan is obligated to
pay in certain cases is established by a standard set forth in the plan that is not clearly translated into dollar terms, such
as “maximum allowable amount” or “usual, customary and reasonable.” However, in other instances such
reimbursement requirements are defined by statute or regulation and such amounts may, in certain instances, be greater
than those calculated according to the plan standards. For example, the ACA's formula for calculating the minimum
amount that a plan is required to reimburse a provider for out-of-network emergency services will likely result in
increased reimbursements to providers for such services. These statutory requirements related to provider
reimbursements may increase our health care costs, which may adversely affect our business, financial condition or
results of operations. In addition, providers who render out-of-network services may believe they are underpaid for their
services and may either litigate or arbitrate their dispute with the plan or balance bill our member. Regulatory
authorities in various states may also challenge the manner in which we reimburse members for services performed by
non-contracted providers. As a result of litigation or regulatory activity, we may have to pay providers additional
amounts or reimburse members for their out-of-pocket payments. The uncertainty about our financial obligations for
such services and the possibility of subsequent adjustment of our original payments could have an adverse effect on our
financial condition or results of operations.
Physicians and other professional providers, provider groups and hospitals that contract with us have in certain
situations commenced litigation and/or arbitration proceedings against us to recover amounts for which they allege we
are liable, including amounts related to unpaid claims and amounts they allege to be underpayments due to them under
their contracts with us. We are currently a party to matters of this nature and could face additional claims or be subject
to litigation and/or arbitration proceedings in the future in connection with similar matters. We believe that provider
groups and hospitals have become increasingly sophisticated in their review of claim payments and contractual terms in
an effort to maximize their payments from us and have increased their use of outside professionals, including
accounting firms and attorneys, in these efforts. These efforts and the litigation and arbitration that result from them
could have an adverse effect on our results of operations and financial condition.
Adverse economic conditions in the United States may adversely affect our revenues and results of operations.
The U.S. economy continues to experience slow economic growth with concerns about high unemployment
rates, government debt, geopolitical issues and other factors continuing to negatively impact expectations. These events
could adversely affect our revenues and results of operations.
These market conditions expose us to a number of risks, including risks associated with the potential financial
instability of our customers. In light of the substantial uncertainty surrounding the ultimate impact of the ACA and
related state health care reform proposals, how the implementation of these new requirements will affect these risks
remains unclear. If our customer base experiences cash flow problems or other financial difficulties, it could, in turn,
adversely impact membership in our plans. For example, our customers may modify, delay or cancel plans to purchase
our products, or may make changes in the mix of products purchased from us. If our customers experience financial
issues, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Further, our
customers or potential customers may force us to compete more vigorously on factors such as price and service to retain
or obtain their business, and in order to compete effectively in our markets, we also must deliver products and services
that demonstrate value to our customers and that are designed and priced properly and competitively. Prior to the
effective date of the ACA's guaranteed issue requirement, adverse economic conditions may also cause employers to
stop offering certain health care coverage as an employee benefit or elect to offer this coverage on a voluntary,
employee-funded basis as a means to reduce their operating costs. A significant decline in membership in our plans and
the inability of current and/or potential customers to pay their premiums as a result of unfavorable economic conditions
could have a material adverse effect on our business, including our revenues, profitability and cash flow. In addition, a
prolonged economic downturn could negatively impact the financial position of hospitals and other providers and, as a
result, could adversely affect our contracted rates with such parties and increase our medical costs.
High unemployment rates and significant employment layoffs and downsizings may also impact the number of
enrollees in managed care programs and the profitability of our operations. If economic conditions continue to be
difficult and unemployment rates continue to be high, we may experience a reduction in existing and new business,
which may have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2013, our Medi-Cal membership was approximately 1.1 million members, and it is expected
to increase in 2014. Our Medi-Cal membership will increase as a result of Medicaid expansion and our participation in
the CCI. However, the State of California has a recent history of budget deficits. Continued challenging economic