Health Net 2015 Annual Report Download - page 43

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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 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 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 may investigate 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 of managed care companies and health insurers in recent
years have focused on the timeliness and accuracy of claims payments and the timeliness of review of appeals and
grievances. Our subsidiaries have been the subject of audits, reviews and investigations of this nature. Depending on the
circumstances and the specific matters reviewed, regulatory findings could require remediation of any claims payment
errors and payment of penalties of material amounts, among other things, that could have a material adverse effect on
our results of operations.
We utilize claims submissions, medical records and other medical data as provided by health care providers as
the basis for payment requests that we submit to CMS under the risk adjustment model for our Medicare Advantage
contracts. CMS and the Office of Inspector General for HHS periodically perform risk adjustment data validation
(“RADV”) audits of selected Medicare health plans, including ours, to validate the coding practices of and supporting
documentation maintained by health care providers. Our Arizona and California health plans have been selected for
such an audit, though the results will not be known until CMS establishes a baseline “error rate.” Such audits may result
in retrospective adjustments to payments made to our health plans, fines, corrective action plans or other adverse action
by CMS. In February 2012, CMS published a final RADV audit and payment adjustment methodology. The
methodology contains provisions allowing retroactive contract level payment adjustments for the year audited,
beginning with 2011 payments, using an extrapolation of the “error rate” identified in audit samples and, for Medicare
Advantage plans, after considering a fee-for-service “error rate” adjuster that will be used in determining the payment
adjustment. Depending on the error rate found in those audits, if any, potential payment adjustments could have a
material adverse effect on our results of operations, financial position and cash flows.
We have been sanctioned in the past by CMS and have been advised that we will be subject to targeted
monitoring and heightened surveillance and oversight by CMS going forward. Any future sanctions, fines or penalties
against our Medicare operations may be more severe as a result of our past performance, particularly in circumstances
in which CMS determines that we have repeatedly failed to comply with applicable laws, rules or regulations. If CMS
were to impose financial or other penalties and/or sanctions on us, or terminate our existing Medicare contracts, this
could have a material adverse effect on our Medicare business, our results of operations, cash flows or financial