Health Net 2014 Annual Report Download - page 31

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revenues from these government programs, which could have a material adverse effect on our business, financial
condition or results of operations.”
Whether due to such regulatory uncertainty or otherwise, if these premium stabilization programs prove
ineffective in mitigating our financial risks, including adverse selection risk, or we are unable to successfully adapt our
strategy to any future changes in certain of our markets, our financial condition, cash flows and results of operations
may be materially adversely affected. For additional information on these premium stabilization programs, see Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Health Care Reform
Legislation and Implementation—Premium Stabilization Programs and Note 2 to our consolidated financial statements.
We cannot assure you that our participation in the ACA’s health insurance exchanges will continue to be a success.
The ACA required the establishment of state-run or federally facilitated “exchanges” where individuals and small
groups may purchase health coverage. We currently participate as QHPs in the exchanges in California and Arizona.
Our continued participation in the exchanges and future participation in any other exchanges in the states in which we
operate is conditioned on the approval of the applicable state or federal government regulator, which could result in the
exclusion of some carriers, including us, from the exchanges.
We believe the exchanges have, and will continue to represent a significant commercial business opportunity for
us. For example, our individual commercial enrollment increased nearly 190 percent during 2014, driven in large part
by enrollment in the exchanges through the first open enrollment period. However, as we complete our second
enrollment period, changing economic conditions, the dynamic competitive environment on the exchanges, various
legislative and legal developments and the ongoing evolution of the regulatory framework for the exchanges may alter
the economics and structure of our participation in the exchanges, which remain a new marketplace with which we have
limited experience. If we are not able to successfully adapt to any such changes in our markets, our financial condition,
cash flows and results of operations may be adversely affected. As an example, the size and mix of the exchange market
pool is subject to change based on changes in the U.S. economy, changes to eligibility rules and processes and any
changes to the validity of premium tax credits on FFEs. The exchange market pool is also impacted by changes in
unemployment rates, average household income, and changes in employer coverage. In addition, the exchange market
pool is impacted by the new processes for redetermination of eligibility based on income, employer coverage and
eligibility management activities. These factors are generally beyond our control.
Furthermore, the complexity of the process may cause confusion for new consumers seeking to enroll for the first
time as well as renewing consumers who may see changes in their plans and premium responsibility. In some cases,
individuals have been terminated from exchange coverage or had their eligibility for subsidies adjusted or terminated
due to a failure to provide documentation verifying eligibility, which results in additional administrative costs or
membership losses for issuers. This complexity has required us to increase our consumer outreach and education efforts
and modify our information systems to adapt to these new rules. In addition, while we have adapted our products and
sales practices to the new direct-to-consumer channel opened by the exchanges, the exchanges have also required, and
will continue to require, us to market to and administer premium collection through a new population with which we
have limited experience. This new exchange population presents additional operational challenges, including the
potential for discontinuance of coverage due to premium delinquency. Any failure to successfully implement these
initiatives or modifications in response to developing regulations may have an adverse impact on our exchange
membership and profitability on the exchanges.
Due to legislative developments and regulatory allowances designed to help smooth the transition into the ACA,
there are a number of other aspects of the exchanges that have yet to be fully implemented or where there are still
outstanding questions, including many of the primary functionalities of the SHOP plans, which were delayed until 2015,
and certain aspects of the ACA’s premium stabilization provisions. For additional information, see the risk factor above
under the heading, “—If we do not effectively incorporate the ACA’s premium stabilization and other related provisions
into our business, or these provisions are not successful in mitigating our financial risks, our results of operations may
be materially adversely affected.” In addition, recent lawsuits filed by stakeholders on the exchanges have raised
questions for exchange participants, including us, surrounding provider network size, network capacity and the
adequacy of communication between health insurers and their consumers with respect to network composition for
exchange products. In addition, state and federal regulators have expressed concern about provider network adequacy
for exchange products. For example, the CDI recently issued an emergency regulation to establish stronger
requirements for health insurers to create and maintain sufficient medical provider networks to provide timely access to
medical care. In order to comply with the regulation, which was effective as of February 2, 2015, we and other health
insurers will need to devote resources and incur significant costs. These and other similar actions by courts or regulators
in this area may require us to adjust our tailored network exchange strategy or make other material modifications to our