Health Net 2015 Annual Report Download - page 37

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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 and penalties, require
us to change how we do business, restrict our ability to do business or otherwise sanction us when they believe
violations or failures to meet standards or requirements have occurred. Regulatory agencies, such as DMHC, DHCS,
CDI, the Arizona Department of Insurance, the Arizona Health Care Cost Containment System (“AHCCCS”), 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, restrict our
business activities or otherwise sanction us. 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, restrict our business activities or
otherwise sanction us in the future if they determine that we have not complied with applicable laws, rules, and
regulations. Further, such fines, penalties, sanctions and other 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 condition and cash flows” for further discussion on the impact of
any fines, penalties or restrictions that may be imposed against us. As we have members in various states and are
therefore subject to the regulatory oversight of multiple jurisdictions, we have been in the past, and could be in the
future, subject to fines and/or penalties imposed by multiple regulatory agencies relating to the same incident. Existing
or future laws, rules, and regulations, including the ACA and related health care reform initiatives could, among other
things, force us to change how we do business and may restrict our revenue and/or enrollment growth, increase our
health care and administrative costs, and/or increase our exposure to liability with respect to members, providers or
others. See the ACA Risk Factors above. Further, we may be liable for violations of laws, rules and regulations by
individual Health Net associates notwithstanding our internal policies and compliance programs. For example, see “—If
we or our business associates that handle certain information on our behalf fail to comply with requirements relating to
patient privacy and information security, among other things, our reputation and business operations could be