Health Net 2014 Annual Report Download - page 40

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Our contracts with the government are generally subject to a highly-structured competitive bid process and
government discretion in the negotiation process, including with respect to performance requirements. If we fail to
design and maintain programs attractive to our government customers, if we are not successful in winning new
contracts or contract renewals on favorable terms, or if our existing contracts are terminated, our current government
health care coverage or counseling programs business and our ability to expand these businesses could be materially
and adversely affected. Under government-funded health programs, the government payor typically determines
premium and reimbursement levels and generally has the ability to terminate our contract for convenience. Any
reduction in premium or reimbursement levels by the government payor, such as a reduction in Medicare Advantage
payment rates as provided in the ACA, may lead to payment delay or result in premiums that increase at a lower rate
than cost. If we are unable to make offsetting adjustments through supplemental premiums and changes in benefit plans,
we could be adversely affected. In addition, the amount of government receivables set forth in our consolidated
financial statements for our Government Contracts reportable segment represents our best estimate of the government's
liability to us under TRICARE, MFLC, PC3 and other government contracts, or amounts due us as a sub-contractor.
These government receivables are generally estimates subject to government audit and negotiation, and there is an
inherent uncertainty in government contracts based in large part on a vulnerability to disagreements with the
government. As a result, the final amounts we ultimately receive under government contracts for our Government
Contracts reportable segment may be significantly greater or less than the amounts we initially recognize in our
consolidated financial statements. Medicare revenue that we record may also be subject to change due to risk
adjustment reimbursement settlements. See “—Medicare programs represent a significant portion of our business and
are subject to risk” for additional information about risks related to these risk adjustment reimbursement settlements.
Moreover, with respect to the ACA's premium stabilization provisions, the final determination and settlement of
amounts due or payable relating to the 2014 calendar year will not occur until June 2015, which could have a material
adverse impact on our cash flows and results of operations.
Contracts under our government programs are generally subject to frequent change, including but not limited to
changes that may reduce the number of persons enrolled or eligible, expand or reduce the scope of the contract, reduce
the revenue received by us or increase our administrative or health care costs, as applicable, under such programs. An
enrollment freeze or significant reduction in payments from government programs in which we participate could
adversely affect our business, financial condition or results of operations. Such changes may occur during re-
competition of government contracts, for example. The T-3 contract for our TRICARE business expires on March 31,
2015. In June 2014, at the Department of Defense's request, we submitted a proposal to add three additional one-year
options to our existing T-3 contract. The DoD has also informed us that it intends to complete its negotiations with us
for the options prior to March 31, 2015, and that if such negotiations are successful, it intends to exercise the first of the
one-year options by that date. However, there can be no assurance that we will finalize negotiations prior to
March 31, 2015 or that we will do so at rates greater than or equal to those under the current T-3 contract. In the event
the extension results in significantly reduced rates or if we are unable to finalize negotiations and our TRICARE
business is opened up for rebidding and we are unable to secure a contract in the rebidding process, our results of
operations could be adversely impacted. For additional information on our TRICARE operations, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—
Government Contracts Reportable Segment.”
In addition, the reimbursement rates we receive from federal and state governments relating to our government-
funded health care coverage programs may be subject to change. For example, on April 1, 2014, CMS announced final
2015 Medicare Advantage benchmark payment rates for 2015 Medicare Advantage and Part D payments that we
receive in connection with our participation in these programs. These payment rates represent reduced funding from the
federal government compared to prior periods and adversely impacted our expected Medicare revenues for 2014. CMS
announced proposed Medicare Advantage benchmark payment rates for 2016 on February 20, 2015, which set forth
slight reductions to payment rates. Furthermore, if Medicare Advantage rates decline, our competitors may exit certain
counties in which we participate, which may increase adverse selection risk and negatively impact our profitability. Any
significant reduction in the reimbursement rates that we receive in connection with our government-funded health care
coverage programs could adversely affect our business, financial condition or results of operations, particularly as our
membership in and focus on government programs increases.
Furthermore, Medicare remains subject to the automatic spending reductions imposed by the Budget Control Act
of 2011 and the American Taxpayer Relief Act of 2012 (“sequestration”), subject to a 2% cap. Certain other programs,
including Medicaid benefits, are exempt from the sequestration cuts. All parts of the Medicare program, including
Medicare Advantage, were subject to cuts, and these reductions have adversely impacted our Medicare Advantage
MCR. In addition, reductions in defense spending could have an adverse impact on certain government programs in
which we currently participate by, among other things, terminating or materially changing such programs, or by