Health Net 2013 Annual Report Download - page 32

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populations we serve and a number of factors that may drive significant demand for the product, Sovaldi may cause a
significant increase in our health care costs and adversely affect our profitability 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 2013 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 and regulatory pressure to contain premium prices. If the premiums we charge are insufficient
to cover our costs, it could have a material adverse effect on our business, financial condition or results of
operations.
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, plan benefits 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 our premiums could result in the loss of members, particularly in light of continued economic pressures and
the implementation of the ACA. 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 and other 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.
For example, certain of our competitors are not subject to the ACA's health insurer fee or are assessed at half the rate
that we and other health insurers will pay. As a result, if, in the future we attempt to cover our increased costs from the
health insurer fee through corresponding increases in our premium rates, we may not remain price competitive in the
marketplace, including in the new health care exchanges. 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 include, but are not
limited to, increased utilization rates, increasing medical cost trends, catastrophes, public health epidemics, terrorist
activity, unanticipated seasonality, changes in 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. As part of this rate review process,
certain insurers may be excluded from participating in the state-based or federally facilitated exchanges created by the
ACA if the review determines that the insurer has demonstrated a pattern or practice of excessive or unjustified
premium rate increases. The federal government and some states in which we do business have also 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 CDI and Department of Managed Health Care require a third-party actuarial review
of health insurance carriers' and health plans' proposed premium rate increases to confirm compliance with applicable
law, resulting in a potential delay in carriers' and plans' ability to implement rate increases. Further, in California,
proponents of rate review have qualified an initiative measure for the November 2014 ballot that would, if approved,
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 recent years, certain of our competitors were asked by the Commissioner of the CDI to voluntarily
delay implementation of scheduled premium increases to permit additional review by the CDI, 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 has had and will continue to have an adverse
impact on the costs of operating our business and could materially adversely affect our business, cash flows, financial
condition and results of operations” (the “Health Care Reform Risk Factor”) 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.
The ACA and other federal and state legislation and regulations require a reconciliation of premiums based on a
final assessment of the relative medical risk a health plan incurs in the individual and small group market. Since the