Health Net 2014 Annual Report Download - page 16

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generally compete for state Medicaid contracts with other managed health care companies, both for profit and not-for-
profit.
Our Oregon health plan competes primarily with Regence Blue Cross Blue Shield of Oregon, Kaiser Permanente,
Moda Health Plan, Inc., Providence Health Plan, and PacificSource Health Plans.
With respect to the T-3 contract for the TRICARE North Region, and our MFLC and PC3 contracts, our primary
competitors in the bidding process include Humana, United HealthGroup, Inc., Aetna, Inc., Anthem, Inc., Magellan
Health Services, ValueOptions, Inc. and TriWest Healthcare Alliance, among others.
If we fail to compete effectively to maintain or increase our market share, our results of operations, financial
condition and cash flows could be materially adversely affected. For additional information on competitive conditions
in our business, see “Item 1A. Risk Factors—The markets in which we do business are highly competitive. If we do not
design and price our product offerings competitively, our membership and profitability could decline.”
Cognizant Transaction
On November 2, 2014, we entered into a Master Services Agreement (as subsequently amended and restated, the
"Master Services Agreement") with Cognizant Healthcare Services, LLC, a wholly owned subsidiary of Cognizant
Technology Solutions Corporation (collectively, "Cognizant"). Under the terms of the Master Services Agreement,
Cognizant will, among other things, provide us with certain consulting, technology and administrative services in the
following areas: claims management, membership and benefits configuration, customer contact center services,
information technology, quality assurance, appeals and grievance services, and non-clinical medical management
support (collectively, the "BP and IT Services"). We will retain responsibility for our security policies and regulatory
oversight.
Concurrent with executing the Master Services Agreement, we entered into an asset purchase agreement with
Cognizant (the "Asset Purchase Agreement"), through which Cognizant will purchase certain software assets and
related intellectual property from us for $50 million. These assets will include one of our claims processing systems,
which will be used to perform a portion of the BP and IT Services. See Note 3 to our consolidated financial statements
under the heading “Assets Held for Sale” for additional information on the assets sold in this transaction.
The transaction, including the related asset purchase (the "Cognizant Transaction"), is expected to close in the
first half of 2015, subject to the receipt of required regulatory approvals. We expect that certain of our employees will
become employees of Cognizant or its subcontractors, and that certain positions will be eliminated, as part of the
Cognizant Transaction.
The initial term of the Master Services Agreement is seven years, commencing on the later of (i) ten business
days following final regulatory approval of the Cognizant Transaction, and (ii) March 1, 2015 (the "Commencement
Date"). We have two options to extend the Master Services Agreement for one year each by giving notice to Cognizant
no less than three months prior to the end of the then existing term.
We will pay Cognizant for the BP and IT Services through a combination of fixed and variable fees, with the
variable fees fluctuating based on our actual need for such services. Based on the currently projected usage of BP and
IT Services over the initial term of the Master Services Agreement, we expect to pay Cognizant approximately $2.8
billion, subject to price adjustments described in the Master Services Agreement. The Master Services Agreement is
expected to generate approximately $150 million to $200 million in annual general and administrative and depreciation
expense savings for us by 2017.
Some of the BP and IT Services will be provided on our premises, while other BP and IT Services will be
performed at Cognizant facilities. Cognizant will provide us with transition services required to migrate those activities
that will be performed at Cognizant facilities. The anticipated cost of such transition services is included in the expected
cost of the BP and IT Services over the initial term described above.
To protect our expectations regarding Cognizant’s performance, the Master Services Agreement has minimum
service levels that Cognizant must meet or exceed. Failure to meet these minimum service levels will result in service
level credits to us as described in the Master Services Agreement.
We retain the right to terminate the Master Services Agreement, in whole or in part, for, among other things,
cause, convenience (including prior to the Commencement Date), certain performance failures, failure to obtain
regulatory approvals, changes in law, force majeure, a change in the control of either Cognizant or us, a termination of
the associated Business Associate Agreement, an adverse change in Cognizant’s financial condition, if Cognizant
becomes a competitor of ours or if damages paid by Cognizant to us pursuant to the Master Services Agreement exceed
a certain level. If we terminate the Master Services Agreement prior to the Commencement Date, we shall pay