Health Net 2014 Annual Report Download - page 27

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health insurers, effective for calendar years beginning after December 31, 2013. In 2014, this “health insurer fee” was
assessed at a total of $8 billion nationwide. In 2015, it is expected to be assessed at a total of $11.3 billion nationwide in
2015 and will increase annually thereafter. The health insurer fee will be allocated pro rata amongst industry
participants based on a ratio of net health insurance premiums written for the previous calendar year to total net
premiums written for the U.S. health insurance industry, subject to certain exceptions and adjustments. In September
2014, we paid the federal government a lump sum of $141.4 million for our portion of the health insurer fee based on
2013 net premiums written. We currently estimate that our allocable share of the health insurer fee payable in 2015,
based upon 2014 premiums, will be approximately $230 million. However, this estimate is subject to inherent
uncertainty as the amount of industry premiums upon which the fee allocation is based has not been announced and the
Internal Revenue Service (“IRS”) is not expected to provide additional information on the 2014 health insurer fee until
June 2015. While we are required to accrue for the health insurer fee on a pro rata basis throughout the year, in future
years, we could experience significant volatility in our cash flow from operations relative to our results of operations in
a given period because the health insurer fee is payable in a single lump sum based on prior year premiums. In 2014,
due to the non-deductibility of the health insurer fee for federal income tax purposes, our full-year effective income tax
rate was adversely affected by 24.8 percentage points. In future periods, we expect that the non-deductibility of the
health insurer fee will continue to have a material impact on our effective income tax rate.
In addition, while certain types of entities and benefits are fully or partially exempt from the health insurer fee,
including, among others, government entities, certain non-profit insurers and self-funded plans, we are unable to take
advantage of any significant exemptions due to our current mix of plans and product offerings. Consequently, the health
insurer fee has represented and will continue to represent a higher percentage of our premium revenues than those of
our competitors who have business lines that are exempt from the health insurer fee or whose non-profit status may
result in a reduced health insurer fee. Moreover, some of our competitors may have greater economies of scale or a
different mix of business, which, among other things, may lead to lower expense ratios and higher profit margins than
we have. Since the health insurer fee is not tax deductible and is based on net health insurance premiums written, rather
than profits, it generally also will represent a higher percentage of our profits as compared to those competitors. We
generally will be unable to match those competitors’ ability to support reduced premiums by virtue of making changes
to distribution arrangements, decreasing spending on non-medical product features and services, or otherwise adjusting
operating costs and reducing general and administrative expenses. As a result, the health insurer fee may adversely
affect our profitability and ability to compete.
As a whole, the ACA’s fees, assessments and taxes will increase the costs of operating our business and could
adversely affect our business, cash flows, financial condition and results of operations.
In addition, while the ACA does also present significant new business opportunities for us, we and other health
insurance companies continue to face uncertainty and execution risk due to the multiple, complex ACA
implementations that were and continue to be required in abbreviated time frames in new markets. Additionally, in
many cases, our operational and strategic initiatives are being implemented in evolving regulatory environments and
without the benefit of established market data. While we were able to implement several strategic and operational ACA
initiatives during 2014, the relative lack of operating experience in these new marketplaces for insurers and, in certain
cases, providers and consumers, has fostered a dynamic marketplace that requires us to continuously adjust our
operating and strategic initiatives over time, particularly in these first few years of the ACA. There is no assurance that
insurers, including us, will be able to successfully make these adjustments on an ongoing basis. Our execution risk
encapsulates, among other things, our simultaneous participation in the exchanges, Medicaid expansion and California’s
Coordinated Care Initiative (“CCI”), as further described in "Item 1. Business—Segment Information—Western Region
Operations Segment—California Coordinated Care Initiative.” These initiatives involved the incorporation of new and
expanded populations and, among other things, have required that we restructure our provider network in response, and
will require us to remain diligent in monitoring the market to, among other things, effectively and efficiently adapt to
the ACA’s dynamic environment. Any delay or failure by us to successfully execute our operational and strategic
initiatives with respect to health care reform or otherwise appropriately react to changes to the legislation, implementing
regulations, actions of our competitors and the changing marketplace could result in operational disruptions, disputes
with our providers or members, increased exposure to litigation, regulatory issues, damage to our existing or potential
member relationships or other adverse consequences that may have an adverse impact on our business, financial
condition, cash flows and results of operations.