Health Net 2011 Annual Report Download - page 31

and we may not be able to cover these costs by increasing our premium rates. Certain non-profits will not be
subject to this fee and, as a result, may have a competitive advantage over other health insurers, including us, that
will subject to this fee. In addition, many factors may, and often do, cause actual health care costs to exceed those
costs estimated and reflected in premiums or bids. These factors may include increased utilization of services,
increased cost of individual services, catastrophes, epidemics, unanticipated seasonality, insured population
characteristics, new mandated benefits or other regulatory changes, including those included in the ACA or other
state or federal laws. If we are unable to accurately estimate costs and set our premiums accordingly, it could
have a material adverse effect on our business, financial condition or results of operations.
In addition, our ability to increase our premiums may be restricted by law. For example, the ACA requires
the establishment of a process for review of “unreasonable” premium rate increases. In addition, the federal
government and some states where we do business have required prior regulatory approval of premium rate
increases and/or have subjected such increases to heightened scrutiny, such as third-party review. For example,
the California Department of Insurance requires a third-party actuarial review of health insurance carriers’
proposed premium rate increases to confirm compliance with applicable law, resulting in a delay in carriers’
ability to implement rate increases. On May 19, 2011, HHS issued a final rule providing that HHS will perform
rate reviews for states that are determined by HHS not to have an “effective review process” in place for
proposed premium rate increases. Arizona is one of the states determined by HHS not to have “effective review
processes” currently in place. Further, in California, proponents of rate review have begun to circulate an
initiative measure for signature that would, if qualified for the ballot and enacted, impose significant additional
requirements on health plans relating to premium increases. These requirements and proposed changes have in
the past and could in the future, 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.
In 2011 certain of our competitors were asked by the Commissioner of the California Department of Insurance to
voluntarily delay implementation of scheduled premium increases to permit additional review by the California
Department of Insurance, which review led the carriers to reduce proposed rate increases. We have experienced,
and are likely to continue to experience, greater scrutiny by regulators of proposed increases to our premium
rates. For additional detail on the impact of federal health care reform and potential additional changes in federal
and state legislation and regulations on our ability to maintain or increase premium levels, 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” and
“—Various health insurance reform proposals are also emerging at the state level which could have an adverse
impact on us”. Our financial condition or results 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 2011, we saw slight decreases in our total commercial membership primarily resulting from the shrinking
commercial population due to continued high unemployment and strained economic conditions which have
caused purchasers and individuals to discontinue coverage or seek lower cost options. Our tailored network plans
provide lower cost options to our members and employer groups, and the continued membership growth in our
tailored network products and the continued development of innovative provider relationships are an important
part of our business strategy. However, there can be no assurance that we will be able to successfully implement
these strategic initiatives that are intended to position us for health care reform and future profitable growth, that
the products we design in collaboration with certain providers will be successful or developed within the time
periods expected, or that the products that we offer will be preferable to similar products of our competitors.
Failure to successfully implement this strategy may have an adverse impact on our business, results of
operations, financial condition and cash flows.
The ACA and other federal and state legislation and regulations constrain the medical loss ratios maintained
by managed health care companies such as us. The ACA requires premium rebates to the extent that 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
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