Health Net 2015 Annual Report Download - page 40

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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. As an example, as more fully described
above under the heading “—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,” payments under the ACA’s risk corridor provision have been subject
to delay. There can be no assurance that we will avoid additional payment delays on these or other payments from
government payors 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 19.8% of our
total premium revenue in our Western Region Operations reportable segment in 2015 and an expected 17.0% in 2016.
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. 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 or results of operations.” The cumulative impact of
reductions in reimbursement rates, funding reductions and other factors has had an adverse impact on the profitability
of our Medicare business in the past, and any significant future reductions in the reimbursement rates that we receive in
connection with our Medicare business could adversely affect our business, financial condition or results of operations,
particularly as our membership in and focus on government programs increases.
If we fail to design and maintain programs that are attractive to Medicare participants; if our Medicare operations
are subject to sanctions or penalties; if we are not successful in winning contract renewals or new contracts; or if our
existing contracts are terminated, our current Medicare business and our ability to expand our Medicare operations
could be materially and adversely affected, negatively impacting our financial performance. There are also specific
additional risks under Title XVIII, Part D of the Social Security Act associated with our provision of Medicare Part D
prescription drug benefits as part of our Medicare Advantage plan offerings. These risks include potential
uncollectibility of receivables, inadequacy of pricing assumptions, inability to receive and process information and
increased pharmaceutical costs, as well as the underlying seasonality of this business, and extended settlement periods
for claims submissions. Our failure to comply with Part D program requirements can result in financial and/or
operational sanctions on our Part D products, as well as on our Medicare Advantage products that offer no prescription
drug coverage.
In connection with our participation in the Medicare Advantage and Part D programs, we regularly record
revenues associated with the risk adjustment reimbursement mechanism employed by CMS. This mechanism is
designed to appropriately reimburse health plans for the relative health care cost risk of its Medicare enrollees. Under
the CMS risk adjustment methodology, all Medicare Advantage plans must collect and submit diagnosis code data from
hospitals and physician providers to CMS by specified deadlines. CMS uses this diagnosis information to calculate the
risk adjusted premium paid to Medicare Advantage plans throughout the year. For any given year, the final settlement of
these risk adjustment payments is generally made in the third quarter of the following year. Because the recorded
revenue associated with the risk adjustment reimbursement mechanism is based on our best estimate at the time, the