Health Net 2010 Annual Report Download - page 30

of operations could be adversely affected by significant disparities between the premium increases of our health
plans and those of our major competitors or by limitations on our ability to increase or maintain our premium
levels.
In 2010, we continued to see decreases in our total commercial membership primarily resulting from the
shrinking commercial population, as unemployment rates increased and purchasers either terminated coverage or
sought lower cost options. Any future increase in premiums could result in the loss of members, particularly in
light of continued economic pressures. Additionally, there is always the possibility that adverse risk selection
could occur when members who utilize higher levels of health care services compared with the insured
population as a whole choose to remain with our health plans rather than risk moving to another plan. This could
cause health care costs to be higher than anticipated and therefore cause our financial results to fall short of
expectations.
The ACA and other federal or state legislation and regulations constrain the medical loss ratios maintained
by managed health care companies such as Health Net. In the various states in which we do business, premium
prices are also constrained by state laws and regulations which restrict the spread between premiums and
benefits, such as laws and regulations that require a minimum loss ratio of a certain percentage. These laws and
regulations not only restrict our ability to raise our premiums but also create competitive pressure from some of
our competitors who may have lower health care costs than we have and therefore price their premiums at
relatively low levels in relation to our cost of care. These laws and regulations also have generated, and could
continue to generate, substantial media attention and strong public opinion. This may create a more conservative
regulatory environment, thereby either delaying any rate increases that we propose or further restraining our
ability to price at levels that can adequately cover our cost and margin goals. 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 business is regionally concentrated in the states of California, Arizona and Oregon.
Our business operations are concentrated in the states of California, Arizona and Oregon, and all of our
Medicaid operations are in the state of California. Due to this concentration in a small number of states, in
particular, California, we are exposed to the risk of a deterioration in our financial results if our health plans in
these states, in particular, California, experience significant losses. In addition, our financial results could be
adversely affected by economic conditions in these states. If the economic conditions in the state of California or
in the other states in which we operate continue or deteriorate further, 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 could be adversely affected. For example, due to budget issues, the state of California delayed several
of its 2010 monthly Medicaid payments to us. Although the state ultimately made these payments, the delay
impacted our operating cash flow for the year ended December 31, 2010.
Losses of accounts or deterioration in margins in any one of the states in which we operate could have an
adverse effect on our financial condition or results of operations.
Our inability to estimate and maintain appropriate levels of reserves for claims may adversely affect our
business, financial condition or results of operations.
Our reserves for claims are estimates of incurred costs based on various assumptions. The accuracy of these
estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment,
the judicious administration of claims, medical costs and other factors. Included in the reserves for claims are
estimates for the costs of services that have been incurred but not reported and for claims received but not
processed. These estimates are continually monitored and reviewed and, as settlements are made or estimates
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