Health Net 2010 Annual Report Download - page 27

also will need to dedicate substantial resources and incur material expenses to implement the new legislation,
including implementing the current and future regulations that will provide guidance and clarification on
important parts of the legislation.
Any delay or failure by us to execute our operational and strategic initiatives with respect to health care
reform or otherwise appropriately react to the new legislation and implementing regulations could result in
operational disruptions, disputes with our providers or members, regulatory issues, damage to our existing or
potential member relationships or other adverse consequences. Moreover, there are numerous steps required to
implement this new legislation, with clarifying regulations and other guidance expected over several years
including, for example, guidance with respect to the methodology of calculating minimum medical loss ratios. In
October 2010, the NAIC finalized its recommended methodology for calculating the minimum medical loss ratio
as required by the ACA. Among other things, the NAIC’s model language provided for capitation expenses to be
included, in full, as medical expenses for purposes of the calculation. In December 2010, HHS issued interim
final rules regarding medical loss ratios, effective as of January 1, 2011, which specified in the preamble that
HHS was adopting the NAIC model language. Nonetheless, certain language included in the interim final rules
raises a question as to whether or not the NAIC’s methodology was adopted in whole or in part. In the event that
the final regulations ultimately issued by HHS are determined to alter the NAIC model for calculating minimum
medical loss ratios, it could have an adverse impact on our business and results of operations.
New guidance on certain other provisions of the federal reform legislation has been issued (for example,
guidance relating to guaranteed issuance of coverage to children under age 19, coverage for preventive health
services without cost-sharing, lifetime and annual limits, rescissions and patient protections), but we are still
awaiting further final guidance on a number of key topics such as rate review of unreasonable rates (a Notice of
Proposed Rulemaking was issued by HHS on December 21, 2010 with requirements for establishing a process
for review of “unreasonable” premium increases filed or effective on or after July 1, 2011), essential benefits, the
application of the health insurer fee, and federal criteria for participation in state-based exchanges, among others.
Though the federal government has issued interim final regulations, there remains considerable uncertainty
around the ultimate requirements of the legislation, as the interim final regulations are sometimes unclear or
incomplete, and are subject to further change. The federal government has also issued additional forms of
“guidance” that may not be consistent with the interim final regulations. As a result, many of the impacts of
health care reform will not be known for certain until the ultimate requirements of the legislation have been
definitively determined.
In addition to new federal regulations, various health insurance reform proposals are also emerging at the
state level. Many of the states in which we operate are expected to seek to implement parts of the federal health
care reform and even to add new requirements, such as prior approval of rates. Some states have passed
legislation or are considering proposals to establish an insurance exchange within the state to comply with
provisions of the health care reform legislation that become effective in 2014. For example, California recently
passed legislation establishing a state-based insurance exchange and authorizing an oversight board to negotiate
the price of plans sold on the insurance exchange. This could increase the pressure on us to contain our premium
prices and thereby could negatively impact our revenues and profitability. This legislation also could increase the
competition we face from companies that have lower health care or administrative costs than we do and therefore
can price their premiums at lower levels than we can. See “—We face competitive pressure to contain premium
prices.” California is the first state to adopt such a structure for a state-based insurance exchange in response to
the ACA. If other states in which we operate adopt a similar format for their exchanges, that could further
increase the competition that we face and the pressure on us to contain our premiums. At least some states and
possibly the federal government may condition health carrier participation in an exchange on a number of
factors, which could mean that some carriers would be excluded from participation. Even in cases where state
action is limited to implementing federal reforms, new or amended state laws will be required in many cases.
States also may disagree in their interpretations of the federal statute and regulations, and state “guidance” that is
issued could be unclear or untimely. The interaction of new federal regulations and the implementation efforts of
the various states in which we do business will create substantial uncertainty for us and other health insurance
companies about the requirements under which we must operate.
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