Health Net 2011 Annual Report Download - page 29

Due to the unsettled nature of these reforms and the numerous steps required to implement them, we cannot
predict how future regulations and laws, including state laws, implementing the health care reform legislation
will impact our business. Depending in part on the ultimate requirements of the legislation, it could have a
material adverse effect on our business, financial condition and results of operations.
Various health insurance reform proposals are also emerging at the state level which could have an adverse
impact on us.
In addition to the federal health care reform legislation, various health insurance reform proposals are also
emerging at the state level. Many of the states in which we operate are already implementing parts of the federal
health care reform and many states have added new requirements that are more exacting than the federal health
care reform requirements. Also, many states may continue to consider legislation to extend coverage to the
uninsured through Medicaid expansions, mandate minimum medical loss ratios, implement rate reforms and
enact benefit mandates that go beyond essential benefits. In addition, 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 passed legislation in 2010
establishing a state-based insurance exchange and authorizing an oversight board to negotiate the price of plans
sold on the insurance exchange. These kinds of state regulations and legislations could increase the pressure on
us to contain our premium prices and thereby could negatively impact our revenues and profitability. This 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.
State regulators are also considering new requirements that would restrict our ability to implement changes
to our premium rates. For example, in California, an initiative is circulating that, if qualified and enacted, would
impose significant prior approval requirements for rate changes for individual and small groups. These changes
could, among other things, lower the amount of premium increases we receive or extend the amount of time that
it takes for us to obtain regulatory approval to implement increases in our premium rates, and we have begun to
experience greater scrutiny by regulators of proposed increases to our premium rates.
Health insurance reform proposals at the state level, or other initiatives undertaken by state regulators, could
have a material adverse effect on our business, financial condition and results of operations.
Our profitability will depend, in part, on our ability to accurately predict and control health care costs.
A substantial majority of the revenue we receive is used to pay the costs of health care services and supplies
delivered to our members. Many of these costs, including costs associated with physician and hospital care, new
medical technology and prescription drugs, for example, are rising. The total amount of health care costs we
incur is affected by the number and type of individual services we provide and the cost of each service. Our
future profitability will depend, in part, on our ability to accurately predict health care costs and to manage future
health care utilization and costs through underwriting criteria, utilization management, product design and
negotiation of favorable professional and hospital contracts. Periodic renegotiations of hospital and other
provider contracts, coupled with continued consolidation of physician, hospital and other provider groups, may
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