Health Net 2015 Annual Report Download - page 48

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We face a wide range of risks, and our success depends on our ability to identify, prioritize and appropriately manage
our enterprise risk exposures.
As a large company operating in a complex and highly-regulated industry, we encounter a variety of risks. The
risks we face include, among others, a range of strategic, regulatory, competitive, financial, operational, information
technology, information security, reputational, external and industry risks identified in these Risk Factors. The third
party vendors and service providers to which we outsource key functions are required to achieve and maintain
compliance with applicable federal and state laws and regulations and contractual requirements. Any violations of, or
noncompliance with, laws and/or regulations governing our business, or the terms of our contracts, by third party
vendors or service providers could increase our enterprise risk exposure. To the extent we further outsource key
functions, this risk increases. We continue to devote resources to further develop and integrate our enterprise-wide risk
management processes. Failure to identify, prioritize and appropriately manage or mitigate these risks could adversely
affect our profitability, our ability to retain or grow business or adversely affect our business, financial condition or
results of operations.
If we fail to develop and maintain satisfactory relationships on competitive terms with the hospitals, provider groups
and other providers that provide services to our members, our profitability could be adversely affected.
We contract with hospitals, provider groups and other providers as a means to provide access to health care
services for our members, to manage health care costs and utilization and to help ensure the delivery of quality care. In
any particular market, providers could refuse to contract with us, demand higher payments, or other contract terms that
are unfavorable to us or take other actions, including litigation, which could result in higher health care costs, less
desirable or uncompetitive products for customers and members, disruption to provider access or limited access for
current members or to support growth, or difficulty in meeting regulatory or accreditation requirements. In some
markets, certain providers, particularly hospitals, physician/hospital organizations and multi-specialty physician groups,
may have significant market positions or even monopolies. If these providers refuse to contract with us or utilize their
market position to negotiate contract terms that are unfavorable to us or otherwise place us at a competitive
disadvantage, our ability to market our products or to be profitable in those areas could be adversely affected. The
continuing trend of consolidation of hospitals, provider groups and other providers may further enhance this risk,
particularly if such consolidation involves large high cost hospitals, providers or provider groups that we currently have
under contract.
As the health care environment has evolved, we have developed and are continuously working to monitor
strategic provider relationships with respect to the new market driven by, among other things, the ACA, the CCI and
other federal and state health care reforms, regulations and initiatives. Accordingly, our business strategy includes
creating tailored network products and other customized customer solutions through, among other things, strategic
provider relationships that help manage the cost of care. For example, our product portfolios and services include
offerings such as SmartCareSM, ExcelCareSM, PureCareSM and CommunityCareSM, which are recent collaborations with
our provider partners. Through these types of arrangements, we offer tailored network product offerings served by more
cost-effective physician groups and hospitals. Membership in our tailored network products was approximately 51% of
total commercial membership as of December 31, 2015. For additional information on our tailored network products
and innovative provider relationships, see “Item 1. Business-Segment Information—Western Region Operations
Segment-Managed Health Care Operations.” The success of our tailored network products and continued development
of strategic provider relationships are important parts of our business strategy. In addition, we are managing our
provider network to support our participation in CCI, including the provision of LTSS benefits for dual eligibles and
other individuals, a service with which we have limited operating experience. There can be no assurance that we will be
able to successfully implement these strategic initiatives, that the products we design in collaboration with certain
providers will be successful or developed within the time periods expected, or the products that we offer will be
preferable to similar products of our competitors. Moreover, recent regulatory action and class action lawsuits have
raised concerns regarding provider network size, network capacity and the adequacy of communication between health
insurers and their consumers with respect to network composition for exchange products, which may require us to
modify our tailored network strategy. See “—The markets in which we do business are highly competitive. If we do not
design and price our product offerings competitively, our membership and profitability could decline.” Failure to
successfully implement these strategic initiatives may have an adverse impact on our business, results of operations,
financial condition and cash flows.
We contract with professional providers in California for HMO primarily through capitation fee arrangements.
Generally, under a capitation fee arrangement, we pay a provider group a fixed amount per member per month and the
provider group accepts the risk of the frequency and cost of member utilization of professional services, and in some