Health Net 2014 Annual Report Download - page 41

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decreasing or delaying payments made under such programs. In addition, legislation is currently being considered to
repeal the “sustainable growth rate” formula that is used to calculate Medicare physician payments and replacing it with
a new formula. While it is not currently clear what the details of any such legislation would be, such legislation, if
finalized, could possibly make further cuts to Medicare payments or various related programs in order to offset the cost
of the new payment formula.
Federal and state governments could also choose to require benefits to be delivered to new populations of
potential members or require us to deliver new services to existing populations. If we have limited cost experience with
these new populations or services, we may not be able to accurately predict or adequately control the associated health
care costs. For example, as part of the CCI, we are required to expand our current Medi-Cal offerings to provide LTSS
benefits to all our existing Medi-Cal members, including SPDs and those who do not participate in the dual eligibles
demonstration portion of the CCI. We have limited operating experience in providing LTSS benefits, and if we are not
able to successfully manage the associated costs, our financial condition and results of operations may be adversely
affected.
In addition, our entrance into the Medicaid program in Arizona and Medicaid expansion in both California and
Arizona have and will continue to significantly increase our Medicaid enrollment. This population of members may
have different characteristics than our Medicaid population prior to Medicaid expansion. Moreover, both Medicaid
expansion and the transition of individuals between the California individual exchange and Medi-Cal will result in
changes to enrollment in both Medi-Cal and our exchange population, which will require us to maintain efficient
information systems and coordinate efforts with multiple state and local agencies to help ensure that these individuals
maintain continuous coverage. If we do not accurately predict the costs of providing benefits to these new populations,
fail to obtain suitable rates or otherwise fail to efficiently and effectively incorporate these new and changing
populations into our existing business, our results of operations, financial condition and cash flows could be adversely
affected.
Finally, we are also exposed to other risks associated with U.S. and state government contracting or participating
in programs involving a government payor, including but not limited to the general ability of the federal and/or state
government to terminate contracts with it, in whole or in part, without prior notice, for convenience or for default based
on performance; potential regulatory or legislative action that may materially modify amounts owed; and our
dependence upon Congressional or legislative appropriation and allotment of funds and the impact that delays in
government payments could have on our operating cash flow and liquidity. For example, due to the federal government
shutdown in October 2013, the Office of the Assistant Secretary of Defense, Health Affairs, Defense Health Agency
delayed reimbursement payments owed to us for underwritten claims under the T-3 contract for our TRICARE business.
These reimbursement payments were ultimately received following the conclusion of the government shutdown, and
the delay did not have a material adverse effect on our results of operations or financial position. However, there can be
no assurance that we will avoid similar payment delays in the future, which, if extended for any significant period of
time, could have a material adverse effect on our results of operations, financial position, cash flows or liquidity. In
addition, delays in obtaining, or failure to obtain or maintain, governmental approvals, or moratoria imposed by
regulatory authorities, could adversely affect our revenue or membership, increase costs or adversely affect our ability
to bring new products to market as forecasted.
Other changes to our government programs could affect our willingness or ability to participate in these
programs or otherwise have a material adverse effect on our business, financial condition or results of operations.
Medicare programs represent a significant portion of our business and are subject to risk.
Medicare programs represent a significant portion of our business, accounting for approximately 23% of our total
premium revenue in our Western Region Operations reportable segment in 2014 and an expected 19% in 2015. The
ACA includes, among other things, provisions that significantly reduce the government’s Medicare payment rates. For
more information on the risks associated with the ACA, see the ACA Risk Factors above. These ACA mandated
reductions in Medicare payment rates have in the past and may continue in the future to have an adverse effect on our
business, cash flows, financial condition and results of operations. For example, on February 20, 2015, CMS announced
proposed Medicare Advantage benchmark payment rates for 2016, which reflected slight funding reductions from the
prior year. In addition, all parts of the Medicare program, including Medicare Advantage, are subject to the risks of
reduced government funding, including in connection with significant spending reductions in connection with the
Budget Control Act of 2011. For additional detail on these cuts and the potential effect on our Medicare business, see
“—Government programs represent an increasing share of our revenues. If we are unable to effectively administer these
programs, if we do not effectively adapt to changes to these programs, or if we experience a significant reduction in
revenues from these government programs, it could have a material adverse effect on our business, financial condition