Health Net 2011 Annual Report Download - page 28

• require the creation of government controlled “exchanges” where individuals and small business
groups may purchase health coverage.
For a further discussion regarding the ACA and related legislation, see “Item 1—Government Regulation—
Federal Legislation and Regulations”.
Various aspects of the health care reform legislation could have an adverse impact on our revenues,
enrollment and premium growth in certain products and market segments and the cost of operating our business.
Among other things, the legislation will require premium rate review in certain market segments, and require
premium rebates in the event minimum medical loss ratios are not met. We do not believe that we will be
required to pay a material amount in rebates with respect to our 2011 business, however, we cannot be certain
that we will not be required to pay material amounts in rebates in the future. In addition, the legislation will lower
the rates of Medicare payments we receive, may make it more difficult for us to attract and retain members, and
will increase the amount of certain taxes and fees we pay, which is expected to increase our effective tax rate in
future periods. The new legislation will also 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). 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. 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.” Because of the magnitude, scope and complexity of the new
legislation, we also 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 legislation, implementing regulations
and actions of our competitors 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 legislation, with clarifying regulations and other
guidance expected over several years. Additional guidance on certain provisions of the federal reform legislation
has been issued. However, we are still awaiting further final guidance on a number of key provisions, including
regarding essential health benefits, the calculation of the health insurer fee, and federal criteria for participation
in state-based exchanges. There remains considerable uncertainty around the ultimate requirements of the
legislation, as the 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 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.
Adding to the uncertainty, there also have been Congressional and legal challenges to federal health care
reform that, if ultimately successful, could result in changes to the existing legislation or the repeal of ACA in its
entirety. Since its passage, a number of state governors have strenuously opposed certain of the ACA’s
provisions, and initiated lawsuits challenging its constitutionality. These challenges are pending final
adjudication in several jurisdictions, including the U.S. Supreme Court. Congress has also proposed a number of
legislative initiatives, including possible repeal of the ACA. In 2011, the President signed legislation to eliminate
$2.2 billion of the $6 billion in start-up funding that the ACA provided to support the launch of health insurance
cooperatives, and Congress may also withhold the funding necessary to implement the ACA. At this time, it
remains unclear whether there will be any changes made to the ACA, whether to certain provisions or its entirety.
If the individual mandate is removed from the ACA, but provisions relating to “guaranteed issue” are
implemented, people with greater needs for health care services could make up a greater portion of our
membership, which would have an adverse impact on our medical loss ratios, profitability and earnings. These
effects could be exacerbated if we are unable to obtain, or are delayed in obtaining, regulatory approval of
adequate premium rates for the risk we assume.
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