Health Net 2013 Annual Report Download - page 38

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In addition, the reimbursement rates we receive from federal and state governments relating to our government-
funded health care coverage programs may be subject to change. For example, on April 1, 2013, CMS announced final
2014 Medicare Advantage benchmark payment rates for 2014 Medicare Advantage and Part D payments that we
receive in connection with our participation in these programs. These payment rates represent reduced funding from the
federal government compared to prior periods and adversely impacted our expected Medicare revenues for 2014. CMS
announced proposed Medicare Advantage benchmark payment rates for 2015 on February 21, 2014, which involved
further reductions to payments. As another example of our changing reimbursement rates, the State of California’s
decision to transition its Healthy Families program members into Medi-Cal effectively reduced our reimbursement
rates, as the rates we receive for Medi-Cal members are lower than those we received through the Healthy Families
program. Any significant reduction in the reimbursement rates that we receive in connection with our government-
funded health care coverage programs could adversely affect our business, financial condition or results of operations,
particularly as our membership in and focus on government programs increases.
Furthermore, on August 2, 2011, the Budget Control Act of 2011 was enacted in order to increase the federal
government's debt limit and reduce the federal deficit. The Budget Control Act established a 12-member joint
committee of Congress known as the Joint Select Committee on Deficit Reduction (the “Joint Select Committee”). The
Joint Select Committee was tasked with proposing legislation to reduce the United States federal deficit by at least $1.2
trillion for fiscal years 2012-21 by December 23, 2011. Because the Joint Select Committee did not propose such
legislation by the proposed deadline, approximately $1.2 trillion in domestic and defense spending reductions over
fiscal years 2013-21 were to be automatically implemented beginning on January 1, 2013. The implementation of such
reductions was delayed until April 1, 2013 as a result of the American Taxpayer Relief Act of 2012, and the reductions
are split evenly (in dollar terms) between defense and non-defense spending. Medicare is subject to automatic spending
reductions, subject to a 2% cap. Certain other programs, including Medicaid benefits, are exempt from the sequestration
cuts. All parts of the Medicare program, including Medicare Advantage, were subject to cuts, and these reductions have
adversely impacted our Medicare Advantage MCR. In addition, reductions in defense spending could have an adverse
impact on certain government programs in which we currently participate by, among other things, terminating or
materially changing such programs, or by decreasing or delaying payments made under such programs. Preliminary
budget legislation passed in December 2013 and an omnibus appropriations bill passed in January 2014 reduced or
eliminated many of the sequestration cuts. However, the Medicare reductions (capped at 2%) were not eliminated and
were extended for an additional two years, through 2023. In addition, legislation is currently being considered to repeal
the “sustainable growth rate” formula that is used to calculate Medicare physician payments and replacing it with a new
formula. While it is not currently clear what the details of any such legislation would be, such legislation, if finalized,
could possibly make further cuts to Medicare payments or various related programs in order to offset the cost of the
new payment formula.
Federal and state governments could also choose to require benefits to be delivered to new populations of
potential members or require us to deliver new services to existing populations. If we have limited cost experience with
these new populations or services, we may not be able to accurately predict or adequately control the associated health
care costs. For example, California began mandatory Medi-Cal enrollment of SPDs in June 2011, and the higher than
expected claims experience in this population contributed in part to the higher than expected health care costs we
reported in 2012. In addition, as part of the CCI, we will be required to expand our current Medi-Cal offerings to
provide LTSS benefits to all our existing Medi-Cal members, including SPDs and those who do not participate in the
duals demonstration portion of the CCI. We have limited operating experience in providing LTSS benefits. Finally,
California also recently enacted a bill under which DHCS will require us to expand the list of required services to our
Medi-Cal population. Under this legislation, effective as of January 1, 2014, we are required to administer certain
mental health outpatient benefits to all our Medi-Cal members, including those newly eligible as a result of Medicaid
expansion. If we are unable to effectively make such arrangements on favorable terms or otherwise fail to adequately
administer these new benefits, including successfully managing the associated costs, our financial condition and results
of operations may be adversely affected.
In addition, Medicaid expansion in California and our entrance into Medicaid in Arizona have and will continue
to significantly increase our Medicaid enrollment. This new population of members may have different characteristics
than our existing Medicaid population. If we do not accurately predict the costs of providing benefits to this new
population, fail to obtain suitable rates or otherwise fail to effectively incorporate this new population into our existing
Medicaid business, our results of operations, financial condition and cash flows could be adversely affected.
Finally, we are also exposed to other risks associated with U.S. and state government contracting, including but
not limited to the general ability of the federal and/or state government to terminate contracts with it, in whole or in
part, without prior notice, for convenience or for default based on performance; and our dependence upon
Congressional or legislative appropriation and allotment of funds and the impact that delays in government payments