Health Net 2013 Annual Report Download - page 40

38
In addition, CMS developed the Medicare Advantage Star Ratings system to help consumers choose among
competing plans, awarding between one and five stars to Medicare Advantage plans based on certain measures of
quality. The Star Ratings are used by CMS to award quality-based payments to Medicare Advantage plans. Beginning
with the 2014 Star Rating, (calculated in the Fall of 2013), Medicare Advantage plans that achieve a minimum of 4
Stars will receive a quality-based payment in 2015. Quality-based payments related to the 2011, 2012 and 2013 benefit
years have been based on a Quality-Based Payment Demonstration. The methodology and measures used in the Star
Ratings system are changed annually and Star Ratings thresholds are based on performance of Medicare Advantage
plans nationally. For the 2014 Star rating (2015 payment year), our California HMO and Oregon PPO contracts with
CMS were measured at 4.0 Stars, our Arizona HMO was measured at 3.5 Stars and our Oregon HMO and California
PPO were measured at 3.0 Stars under the Star Ratings system. This will place approximately 80% of our current
membership in 4.0 Star plans for 2014 that are expected to receive a quality-based payment in 2015. We are continuing
to make efforts to improve our Star Ratings and other quality measures, but a failure to achieve a 4 Star Rating, and
consequently to receive a quality-based payment in any year, would have an adverse effect on our revenue, income and
reputation, and could hinder our ability to compete effectively in the Medicare marketplace.
If we are unable to manage our general and administrative expenses, our business, financial condition or results of
operations could be harmed.
The level of our administrative expenses can affect our profitability, and we may not be able to manage the level
of our administrative expense in all circumstances. In addition, many of our competitors have substantially greater
financial resources, higher revenues and greater economies of scale than we do, which among other things, may allow
them to more successfully manage their general and administrative expense ratios. While we attempt to effectively
manage such expenses, including through the development of online functionalities and other projects designed to
create administrative efficiencies, increases in staff-related and other administrative expenses may occur from time to
time. These increases could be caused by any number of things, including difficulties or delays in projects designed to
create administrative efficiencies, reliance on outsourced services, acquisitions and divestitures, business or product
start-ups or expansions, such as, for example, our scheduled participation in the CCI and the health insurance
exchanges, changes in business or regulatory requirements, including compliance with the ACA, ICD-10 and HIPAA
regulations, or other reasons. In addition, any failure to appropriately manage our general and administrative expenses
could require us to increase premium rates in order to cover our health care costs and general and administrative
expenses.
During recent years we have dedicated significant resources to implement programs designed to achieve general
and administrative cost savings and improve our operational performance. As a part of these programs, we have and
will continue to contract with key strategic partners in an effort to lower our cost structure and incremental costs and
consolidate business and management operations. In addition, we are continuing to explore opportunities to address our
scale issues including without limitation opportunities to outsource other business process functions. However, there
can be no assurance that our strategies to reduce our general and administrative costs and improve our operational
performance will be successful or achieve anticipated savings.
In addition, in order to offset some of the reduced revenues from certain of our contracts, we continue our efforts
to reduce, reallocate or eliminate certain overhead and other administrative expenses. We cannot guarantee that we will
be successful in making these cuts and adjustments at a pace that will maintain or increase our profitability.
Our business is regionally concentrated in the states of California, Arizona and Oregon.
Our business operations are primarily concentrated in three states: California, particularly Southern California,
Arizona and Oregon. The majority of our Medicaid operations are in the state of California, with a high concentration
of operations and members in Los Angeles County, and we now participate in the Medicaid program in Arizona. Our
scheduled participation in the dual eligibles demonstration will further increase our concentration in Southern
California, particularly Los Angeles County. Due to this geographic concentration, in particular in Southern California,
we are exposed to the risk of a deterioration in our financial results if our health plans in these areas, in particular,
Southern California, experience significant losses. In addition, our financial results could be adversely affected by
economic conditions in these areas. If economic conditions in the state of California or in the other states in which we
operate deteriorate, we may experience reductions in existing and new business, which could have a material adverse
effect on our business, financial condition and results of operations. In addition, if reimbursement payments from a state
are significantly delayed, our results of operations and cash flows could be adversely affected. For example, in the past,
budget issues have led the State of California to delay certain of its monthly Medicaid payments to us. Any such