Health Net 2013 Annual Report Download - page 66

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entitled to in the event of a contract termination. See Note 2 to our consolidated financial statements under the heading
“Government Contracts” for additional information on our T-3 contract.
Health Care Reform Legislation
During the first quarter of 2010, President Obama signed into law both the Patient Protection and Affordable
Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), which is causing and
will continue to cause significant changes to the U.S. health care system and alter the dynamics of the health care
insurance industry. As further described below, the breadth and scope of these changes present us with a number of
strategic and operational challenges.
• The ACA imposes significant fees, assessments and taxes on us and other health insurers, health plans and
industry participants. Among others, the ACA imposes a significant non-deductible tax (technically called
a “fee”) on health insurers, effective for calendar years beginning after December 31, 2013. This “health
insurer fee” will be $8 billion nationwide in 2014 assessed on all non-exempt premium revenue on a pro
rata basis and payable in 2014 unless extended pursuant to a bipartisan bill introduced in the House of
Representatives in October 2013. Insurers with exempt premium revenues (e.g., non-profit business) may
be assessed at a lower rate. The health insurer fee will increase after 2014 and will be assessed on the
amount of net premiums written during the previous calendar year, subject to certain exceptions.
• The ACA also requires the establishment of state-run or federally facilitated “exchanges” where
individuals and small groups may purchase health coverage. We are participating as QHPs in the currently
operating exchanges in California, Oregon and Arizona, with the initial open enrollment periods beginning
on October 1, 2013 and continuing through March 31, 2014. For further information on these exchanges,
see “Item 1. Business—Segment Information—Western Region Operations Segment—Western Region
Exchanges”.
• The ACA also contains premium stabilization provisions designed to apportion risk amongst insurers.
These stabilization provisions include permanent risk adjustment provisions applicable to the individual
and small group markets that became effective at the beginning of 2014 and will shape the economics of
health care coverage both within and outside the exchanges. These risk adjustment provisions will
effectively transfer funds from health plans with relatively lower risk enrollees to plans with relatively
higher risk enrollees to help protect against the consequences of adverse selection. The individual and
small group markets are expected to represent a significant portion of our commercial business and the
relevant amounts transferred may be substantial. To adapt to this new economic framework, we have
dedicated significant resources and incurred significant general and administrative costs to implement
numerous strategic and operational initiatives both within and outside the exchanges that, among other
things, require us to focus on and manage different populations of potential members than we have in the
past.
• Other premium stabilization provisions include the temporary reinsurance and risk corridors programs,
which seek to ease the transition into the post-ACA market by helping to stabilize rates and protect against
rate uncertainty in the initial years of the ACA. The final determination and settlement of amounts due or
payable from these premium stabilization provisions will not occur until 2015, and there is no assurance
that the strategy we have executed will be successful or that the investments we have made to incorporate
these provisions will be profitable.
Other provisions of the ACA include, among other things:
• providing funds to expand Medicaid eligibility to all individuals with incomes up to 133 percent of the
federal poverty level, commonly referred to as “Medicaid expansion” (this provision was made optional
for states under the Supreme Court's ruling on the ACA in June 2012);
• imposing an excise tax on high premium insurance policies;
• requiring premium rate reviews in certain lines of business;
• stipulating a minimum medical loss ratio (as adopted by the Secretary of HHS);
• limiting Medicare Advantage payment rates;
• increasing mandated “essential health benefits” in some lines of business;