Health Net 2015 Annual Report Download - page 39

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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 2015 calendar year will not occur until the second half of 2016, which could
have a material adverse impact on our cash flows and results of operations. See “—If we do not effectively incorporate
the ACA’s premium stabilization and other related provisions into our business, or these provisions are not successful in
mitigating our financial risks, our results of operations may be materially adversely affected” for additional information
about risks related to the settlement of amounts under these premium stabilization provisions.
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. If all remaining option periods under the T-3 contract for our
TRICARE business are exercised, our T-3 contract would expire on March 31, 2018. However, the DoD has
commenced bidding on the next generation TRICARE contracts (the “T-2017 contracts”) that would reduce the three
existing TRICARE regions to two. Service delivery under the T-2017 contracts would commence on April 1, 2017. On
July 23, 2015, we responded to the DoD's request for proposal, and if we are not successful in securing a contract on
favorable terms during the rebidding process, our business, results of operations, cash flows and financial condition
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, CMS announces benchmark payment
rates on an annual basis that impact the payments that we receive in connection with our participation in Medicare
Advantage and Medicare Part D programs. From year to year, these payment rates could represent reduced funding
from the federal government compared to prior periods and adversely impact our expected Medicare revenues. 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. In some instances, declining Medicare Advantage rates
may cause competitors to exit certain counties in which we participate, which may increase adverse selection risk in
such counties and negatively impact our profitability.
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
medical care ratio ("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 decreasing or delaying payments made under such programs.
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 were required to expand our current Medi-Cal offerings to provide LTSS
benefits to all our existing Medi-Cal members, including seniors and persons with disabilities and those who do not
participate in the dual eligibles demonstration portion of the CCI. In addition, under Medicaid expansion in California
and Arizona, we introduced populations with different characteristics from our then-existing Medicaid population and
were required to comply with new regulatory provisions such as California’s Medicaid MLR risk corridors. 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. We have limited operating experience in providing LTSS benefits or
managing these new populations, and if we are not able to accurately predict and successfully manage the associated
costs, fail to obtain suitable rates or otherwise fail to efficiently and effectively incorporate these and other new