Health Net 2014 Annual Report Download - page 43

41
acquisitions and divestitures, business or product start-ups or expansions, such as, for example, our participation in the
CCI and the health insurance exchanges, changes in business or regulatory requirements, including compliance with the
ACA, ICD-10 and HIPAA regulations, or other reasons. In addition, any failure to appropriately manage our general
and administrative expenses could require us to increase premium rates in order to cover our health care costs and
general and administrative expenses.
During recent years we have dedicated significant resources to implement programs designed to achieve general
and administrative cost savings and improve our operational performance. As a part of these programs, we have and
will continue to contract with key strategic partners in an effort to ultimately lower our cost structure and incremental
costs and consolidate business and management operations, in particular the recent arrangement with Cognizant. Under
this arrangement, Cognizant would perform a significant portion of our business process and information technology
activities, subject to regulatory approval of the transaction. This transaction would significantly increase the scope of
services currently performed for us by third parties. For additional details on the Cognizant transaction, see the risk
factor under the heading “—We are subject to a number of risks in connection with our decision to enter into a master
services agreement with Cognizant for the performance of a significant portion of our business process and information
technology activities.” However, there can be no assurance that our strategies to reduce our general and administrative
costs and improve our operational performance will be successful or achieve anticipated savings.
In addition, in order to offset some of the reduced revenues from certain of our contracts, we continuously make
efforts to reduce, reallocate or eliminate certain overhead and other administrative expenses. We cannot guarantee that
we will be successful in making these cuts and adjustments at a pace that will maintain or increase our profitability.
Our business is regionally concentrated in the states of California, Arizona and Oregon.
Our business operations are primarily concentrated in three states: California, particularly Southern California,
Arizona and Oregon. The majority of our Medicaid operations are in the state of California, with a high concentration
of operations and members in Los Angeles County, and we now participate in the Medicaid program in Arizona.
Medicaid expansion and our participation in the dual eligibles demonstration has further increased our concentration in
Southern California, particularly Los Angeles County. Due to this geographic concentration, in particular in Southern
California, we are exposed to the risk of a deterioration in our financial results if our health plans in these areas, in
particular, Southern California, experience significant losses. In addition, our financial results could be adversely
affected by economic conditions in these areas. If economic conditions in the state of California or in the other states in
which we operate deteriorate, we may experience reductions in existing and new business, which could have a material
adverse effect on our business, financial condition and results of operations. In addition, if reimbursement payments
from a state are significantly delayed, our results of operations and cash flows could be adversely affected. For
example, in the past, budget issues have led the state of California to delay certain of its monthly Medicaid payments to
us. Any such irregularity in the timing of these payments in future periods may adversely impact our operating cash
flow from quarter to quarter depending on the timing of such payments.
Federal and state audits, reviews and investigations of us and our subsidiaries could have a material adverse effect
on our operations, financial condition and cash flows.
We have been and, in some cases, currently are, involved in various federal and state governmental audits,
reviews and investigations. These include routine, regular and special investigations, audits and reviews by government
agencies, state insurance and health and welfare departments and others pertaining to financial performance, market
conduct and regulatory compliance issues. Such audits, reviews and investigations could result in the loss of licensure
or the right to participate or enroll members in certain programs, or the imposition of civil or criminal fines, penalties
and other sanctions, which could be substantial. In addition, disclosure of any adverse investigation, audit results,
sanctions or penalties could negatively affect our reputation in various markets and make it more difficult or impossible
for us to sell our products and services or negatively impact the trading price of our common stock. State attorneys
general have become increasingly active in investigating the activities of health plans, and we have received in the past,
and may continue to receive in the future, subpoenas and other requests for information as part of these investigations.
We have, among other things, entered into consent agreements relating to, and in some instances have agreed to pay
fines in connection with, several recent audits and investigations.
Many regulatory audits, reviews and investigations in recent years have focused on the timeliness and accuracy
of claims payments by managed care companies and health insurers. Our subsidiaries have been the subject of audits,
reviews and investigations of this nature. Depending on the circumstances and the specific matters reviewed, regulatory