Health Net 2011 Annual Report Download - page 30

result in increased health care costs or limit our ability to negotiate favorable rates. Government-imposed
limitations on Medicare and Medicaid reimbursement have also caused, and are expected to continue to cause,
the private sector to bear a greater share of increasing health care costs. 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 our health care costs to be higher than anticipated and therefore cause our
financial results to fall short of expectations. Changes in utilization rates; demographic characteristics; the
regulatory environment, including, for example, the implementation of the ACA or other state or federal laws
and their impact on our health care costs and our ability to change our premium rates; health care practices;
inflation; new technologies; clusters of high-cost cases; continued consolidation of physician, hospital and other
provider groups and numerous other factors may adversely affect our ability to predict and control health care
costs and, as a result, our financial condition, results of operations and cash flows. For additional detail on the
impact on health care costs resulting from federal health care reform and potential additional changes in federal
and state legislation and regulations, see “—Federal health care reform legislation 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,” “—Various health insurance reform proposals are also
emerging at the state level which could have an adverse impact on us” and “—A significant reduction in
revenues from the government programs in which we participate could have an adverse effect on our business,
financial condition or 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, changes in the economic environment 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 2011 would have been reduced by
approximately $89 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 has been and will continue to be a significant basis of competition. Any future
increase in premiums could result in the loss of members, particularly in light of continued economic pressures.
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,
the ACA imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014
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