Health Net 2015 Annual Report Download - page 38

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materially adversely affected.”
As a federal and state government contractor, we are subject to U.S. and state government oversight. The
government may investigate our business practices and audit our compliance with applicable rules and regulations.
Depending on the results of those audits and investigations, the government could make claims against us. Under
government procurement regulations and practices, a negative determination resulting from such claims could result in
a contractor being fined, debarred and/or suspended from being able to bid on, or be awarded, new government
contracts for a period of time. In addition, we are subject to state and federal false claims laws that generally prohibit
the submission of false claims for reimbursement or payment to government agencies. We are also subject to the
Foreign Corrupt Practices Act and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010,
which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for
the purpose of obtaining or retaining business. Courts have imposed substantial fines and penalties against companies
found to have violated these laws. We are also exposed to other risks associated with U.S. and state government
contracting, including but not limited to dependence upon Congressional or legislative appropriation and allotment of
funds, the impact that delays in government payments could have on our operating cash flow, and the general ability of
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. 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. See “—Government programs
represent an increasing share of our revenues. If we are unable to effectively administer these programs or if we do not
effectively adapt to changes to these programs, we may experience a significant reduction in revenues from these
government programs, which could have a material adverse effect on our business, financial condition or results of
operations.”
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 or results of operations.
Approximately 65.6% of our total revenues in the year ended December 31, 2015 relate to federal, state and local
government health care coverage or counseling programs, such as Medicare, Medicaid, TRICARE, PC3 and MFLC.
Nearly all of the revenues in our Government Contracts reportable segment, which does not include Medicare and
Medicaid related revenues, come from the federal government, either directly or as a sub-contractor for a federal
government contract. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations” for more information regarding our reportable segments. In addition, a growing
portion of our revenues for our Western Region Operations reportable segment, which includes Medicare and Medicaid
related revenues, relates to government programs. Our Medicaid premium revenues for the year ended December 31,
2015 were approximately $6.4 billion, an increase of 35.2% from the prior year, which accounted for approximately
40% of our total revenues. Due to this concentration of revenues, a significant reduction in revenues from the
government programs in which we participate could have a material adverse effect on our business, financial condition
or results of operations.
Our contracts with the government are generally subject to a highly-structured competitive bid process, and the
government has significant discretion in the negotiation of terms, including with respect to performance requirements.
The government also has discretion in the selection and award process, including whether and to what extent past
performance should be weighted. If we fail to design and maintain programs attractive to our government customers, if
we fail to secure good performance reviews for services under our existing government contracts, 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