Health Net 2010 Annual Report Download - page 29

costs may adversely affect our ability to predict and control health care costs as well as our financial condition,
results of operations and cash flows. For additional detail on the impact on health care costs of federal health care
reform and potential additional changes in federal and state legislation and regulations, see “—Federal health
care reform legislation, as well as potential additional changes in federal or state legislation and regulations,
could have an adverse impact on our revenues and the costs of operating our business and could materially
adversely affect our business, cash flows, financial condition and results of operations.”
A significant category of our health care costs is the cost of hospital-based products and services. Factors
underlying the increase in hospital costs include, but are not limited to, the underfunding of public programs,
such as Medicaid and Medicare and the constant pressure that places on rates from commercial health plans,
growing rates of uninsured individuals, new technology, state initiated mandates, alleged abuse of hospital
chargemasters, an aging population and, under certain circumstances, relatively low levels of hospital
competition caused by market concentration. Another significant category of our health care costs is costs of
pharmaceutical products and services. Factors affecting our pharmaceutical costs include, but are not limited to,
the price of drugs, utilization of new and existing drugs, changes in discounts and the impact of health care
reform on pharmaceutical manufacturers through such requirements as increased fees. In addition, a large scale
public health epidemic and/or terrorist activity could affect our ability to control health care costs. See “—Large-
scale public health epidemics and/or terrorist activity could cause us to incur unexpected health care and other
costs and could materially and adversely affect our business, financial condition and results of operations.”
As a measure of the impact of medical costs on our financial results, relatively small differences between
predicted and actual medical costs as a percentage of premium revenues can result in significant changes in our
financial results. For example, if medical costs increased by 1% without a proportional change in related
revenues for our health plan products, our annual pre-tax income for 2010 would have been reduced by
approximately $86 million. The inability to accurately forecast and manage our health care costs in all
circumstances could have a material adverse effect on our business, financial condition or results of operations.
We face competitive pressure to contain premium prices.
In addition to the challenge of controlling health care costs, we face competitive pressure to contain
premium prices. While health plans compete on the basis of many factors, including service and the quality and
depth of provider networks, price will continue to be a significant basis of competition. Our premiums are set in
advance of the actual delivery of services, and, in certain circumstances, before contracting with providers. While
we attempt to take into account our estimate of expected health care costs over the premium period in setting the
premiums we charge or bid, factors such as competition, new or changed regulations and other circumstances
may limit our ability to fully base premiums on estimated costs. In addition, many factors may, and often do,
cause actual health care costs to exceed those costs estimated and reflected in premiums or bids. These factors
may include increased utilization of services, increased cost of individual services, catastrophes, epidemics,
unanticipated seasonality, insured population characteristics, new mandated benefits or other regulatory changes,
including those included in the ACA. For example, the ACA requires the establishment of a process for review of
“unreasonable” premium rate increases. In addition, several states are considering legislative proposals to require
prior regulatory approval of premium rate increases, or subjecting such increases to heightened scrutiny. In 2010
the California Department of Insurance required a third-party actuarial review of health insurance carriers’
proposed premium rate increases to confirm compliance with applicable law, resulting in a delay in carriers’
ability to implement rate increases. In addition, earlier this year certain of our competitors were asked by the
Commissioner of the California Department of Insurance to voluntarily delay implementation of scheduled
premium increases for 60 days to permit additional review by the California Department of Insurance. For
additional detail on the impact of federal health care reform and potential additional changes in federal and state
legislation and regulations on our ability to maintain or increase premium levels, see “—Federal health care
reform legislation, as well as potential additional changes in federal or state legislation and regulations, could
have an adverse impact on our revenues and the costs of operating our business and could materially adversely
affect our business, cash flows, financial condition and results of operations.” Our financial condition or results
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