Health Net 2010 Annual Report Download - page 62

claims processing, enrollment, customer services and other services unique to the managed care support contract
with the government. Government Contracts revenue and expenses include the impact from underruns and
overruns relative to our target cost under the applicable contracts.
We measure our Northeast Operations segment profitability based on pretax income. The pretax income is
calculated as Northeast Operations segment total revenues, including Northeast administrative services fees, less
Northeast segment total expenses, including Northeast administrative services expenses. Under the United
Administrative Services Agreements, we provide claims processing, customer services, medical management,
provider network access and other administrative services. Administrative services fees are recognized as
revenue in the period services are provided. See “—Results of Operations—Northeast Operations Reportable
Segment Results” for a calculation of our pretax income.
Health Care Reform Legislation
During the first quarter of 2010, the President signed the ACA into law, which will result in significant
changes to the U.S. health care system and alter the dynamics of the health care insurance industry. For a
description of the provisions of the new legislation and a discussion of the timing of their implementation, see
“Item 1. Business—Government Regulation—Federal Legislation and Regulation—Health Care Reform
Legislation.”
Various aspects of the health care reform legislation could have an adverse impact on our revenues and the
cost of operating our business. For example, the new legislation will lower the rates of Medicare payments we
receive, may make it more difficult for us to attract and retain members, increase the amount of certain taxes and
fees we pay, impose a sales tax on medical device manufacturers and increase the amount of fees pharmaceutical
manufacturers pay (both of which in turn could increase our medical costs), require rebates related to minimum
medical loss ratios and require premium rate review. We could also face additional competition as competitors
seize on opportunities to expand their business as a result of the new legislation, though there remains
considerable uncertainty about the impact of these changes on the health insurance market as a whole and what
actions our competitors could take. Because of the magnitude, scope and complexity of the new legislation, we
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.
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. 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 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, the U.S. Department of 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 raise a question as to
whether or not the NAIC’s methodology was adopted in whole. 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 operation.
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