Health Net 2014 Annual Report Download - page 36

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exchange products. Such regulatory action and lawsuits may require us to make changes to our provider networks,
which could result in higher costs, deterioration in our competitive position and in membership loss. Failure to
successfully implement our tailored network strategy may have an adverse impact on our business, results of
operations, financial condition and cash flows.
If we do not compete effectively in our markets, if we do not design and price our products appropriately and
competitively, if we are unable to innovate and deliver products and services that demonstrate value to our customers, if
we set rates too high or too low for highly competitive markets, if we lose membership in more profitable products
while retaining or increasing membership in less profitable products, if we do not provide satisfactory service levels, if
membership or demand for our services does not increase as we expect or if membership or demand for our services
declines, it could have a material adverse effect on our business, financial condition and results of operations.
Our inability to estimate and maintain appropriate levels of reserves for claims may adversely affect our business,
financial condition or results of operations.
Our reserves for claims are estimates of incurred costs based on a number of assumptions. An extensive degree
of actuarial judgment is used in this estimation process and considerable variability is inherent in such estimates. The
accuracy of these estimates also may be affected by external forces such as, for example, changes in medical claims
submissions and payment patterns and medical cost trends. Included in the reserves for claims are estimates for the
costs of services that have been incurred but not reported (“IBNR”) and for claims received but not processed. Our
methodology for calculating these estimates is consistently applied from period to period, and our IBNR best estimate is
made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period IBNR best
estimates are included in the current period. As additional information becomes known to us, we adjust our assumptions
accordingly to change our estimate of IBNR. Given the uncertainties inherent in such estimates, the actual liability
could differ materially from the amounts reserved. If such a revision in our estimates results in significant unfavorable
development, it could adversely affect current period net income, profitability per enrolled member and, subsequently,
our earnings per share in any particular quarter or annual period. Our stock price could also be negatively impacted. If
our actual claims liability is lower than estimated, it could mean that we set premium prices too high, which could result
in a loss of membership. For additional information regarding our methodology in establishing our reserves for claims
and other settlements, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Critical Accounting Estimates”.
Our businesses are subject to laws and significant rules and regulations, which increases our cost of doing business
and could impact our financial performance by restricting our ability to conduct business or adversely affecting our
ability to grow our businesses.
Our businesses are subject to extensive federal and state laws, rules, and regulations, including, but not limited
to, financial requirements, licensing requirements, enrollment requirements and periodic examinations by governmental
agencies. Our HMO and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net worth,
premium rates, approval of policy language and benefits, appeals and grievances with respect to benefit determinations,
provider contracting, utilization management, issuance and termination of policies, claims payment practices and a wide
variety of other regulations relating to the development and operation of health plans. These laws, rules, and regulations
are generally intended to benefit and protect providers and health plan members rather than stockholders of managed
health care companies such as Health Net. There can be no assurance that we will be able to continue to obtain or
maintain required governmental approvals or licenses. The laws, rules, and regulations governing our business and
interpretations of those laws, rules, and regulations are subject to frequent change, and there is no guarantee that
legislative or regulatory changes will not have a material adverse effect on us. Broad latitude is given to the agencies
administering these laws, rules, and regulations to interpret them and to impose substantial fines or restrict our ability to
do business when they believe violations or failures to meet standards or requirements have occurred. Regulatory
agencies, such as the California Department of Managed Health Care, the California Department of Health Care
Services, the CDI, CMS, the U.S. Department of Health & Human Services' Office of Civil Rights and state
departments of insurance, have the authority to impose substantial fines and/or penalties against us, require us to change
how we do business and restrict our business activities. Certain of these agencies have done so in the past, and may
impose substantial fines and/or penalties against us, require us to change how we do business and restrict our business
activities in the future if they determine that we have not complied with applicable laws, rules, and regulations. Further,
such fines, penalties and restrictions may be more severe in circumstances in which regulatory agencies determine that
we have repeatedly failed to comply with applicable laws, rules or regulations. See “—Federal and state audits, reviews
and investigations of us and our subsidiaries could have a material adverse effect on our operations, financial