Health Net 2013 Annual Report Download - page 31

29
plan sold outside of the exchanges is considered a QHP subject to the risk corridors program. In addition, there have
been recent discussions regarding legislation to repeal the risk corridors program or reduce its funding. Whether due to
such regulatory uncertainty or otherwise, if these premium stabilization programs prove ineffective in mitigating our
financial risks, including adverse selection risk, or we are unable to successfully adapt our strategy to any future
changes in certain of our markets, our financial condition, cash flows and results of operations may be materially
adversely affected.
A related provision of the ACA requires us to maintain certain minimum medical loss ratios, or “MLRs”. In the
event we fail to maintain such minimum MLRs, we will be required to rebate ratable portions of our premiums to our
customers annually. Certain state Medicaid programs, including with respect to the Medi-Cal expansion population, are
imposing MLR requirements on Medicaid managed care organizations that generally require such plans to rebate
ratable portions of their premiums to their state customers if they cannot demonstrate they have met the minimum
MLRs. In addition, beginning in 2014, commercial MLRs must now incorporate the effect of the aforementioned
premium stabilization provisions for individual and small group markets. Due in part to the uncertainty with respect to
these premium stabilization provisions, we may be unable to accurately predict our MLR rebates, which may cause
meaningful disruptions in our market share and our results of operations, financial position and cash flows could be
materially adversely affected.
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 product pricing criteria, utilization management, product design, medical management initiatives 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 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, or, in the case of
the exchanges, that members who elect to purchase products through the exchange will utilize higher levels of health
care services than those in off exchange products. Moreover, the introduction of new populations with which there is
limited cost experience, including through Medicaid expansion, the exchanges and the CCI, as well as the uncertain
impact of premium stabilization provisions on the industry could adversely affect our ability to accurately predict or
control health care costs. Any of these factors could cause our health care costs to be higher than anticipated and
therefore cause our financial results to fall short of expectations.
Other factors that may adversely affect our ability to predict and control health care costs and, as a result,
adversely affect our financial condition, results of operations and cash flows include but are not limited to changes in
utilization rates; demographic characteristics; catastrophes; large scale public health epidemics; terrorist activity;
unanticipated seasonality; changes in provider reimbursement; fluctuations in medical cost trends; 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; the introduction of new
therapies, treatments or drugs; inflation; new technologies; clusters of high-cost cases; and continued consolidation of
physician, hospital and other provider groups. 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, 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. For example, on December 6, 2013, the
Food and Drug Administration approved the drug Sovaldi for treatment of hepatitis C, which is currently priced at
approximately $84,000 for a 12-week course of treatment. Due to the relatively high incidence of hepatitis C in