Health Net 2014 Annual Report Download - page 32

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business and operations. Our exchange strategy relies heavily on our use of tailored network products and whether or
not we are required to make adjustments to our networks, there is no assurance that our tailored network strategy will be
successful over time. See “—The markets in which we do business are highly competitive. If we do not design and price
our product offerings competitively, our membership and profitability could decline” for additional information
regarding our tailored network strategy.
Our continued success on the exchanges is also dependent on our ability to respond to changes in the competitive
market over time. The exchanges are an open market, with pricing and membership data publicly available to both
consumers and our competitors. All exchange participants, including us, have reviewed our competitive positions, and
with this data, our competitors could modify their product features or networks, change their pricing relative to others in
the market and adjust their mix of business within or outside the exchanges. Competitors seeking to gain a foothold in
the changing market may also introduce pricing that we may not be able to match, which may adversely affect our
ability to compete effectively.
Taken together, the exchanges’ untested nature, the evolving marketplace surrounding them and the responses of
state and federal decision makers to these issues have created lingering uncertainty for us and other health insurers
participating in the exchanges. For example, on July 7, 2014, California Senate Bill 1446 (“SB 1446”) was signed into
law effective immediately, allowing insurance carriers to continue non-grandfathered and non-ACA compliant small
group policies that were in effect as of December 31, 2013 and active as of July 7, 2014 for one additional year through
December 31, 2015. Arizona has similarly issued guidance allowing non-compliant plans to renew in some instances.
While we expect that these transitional policies will help to reduce rate impact for many small groups that have not yet
transitioned to ACA-compliant health plans, which in turn may help to reduce membership turnover in our small group
business, these and similar allowances and extensions have demonstrated the ability of state and federal decision
makers to revise the operational rules and regulations relating to the exchanges, in some cases with retroactive effect, in
order to address future implementation or other difficulties. These types of delays or adjustments may in turn impact the
economics of the exchange marketplace and the success of our strategy with respect to the exchanges. The resultant
uncertainty extends to certain aspects of the exchanges that remain under consideration, including among other things,
the premium stabilization provisions described in further detail herein. The fluid and novel nature of the exchange
marketplace impacts our ability to predict exchange enrollment, premiums and costs, which may have an adverse effect
on our revenues and results of operations. If we fail to effectively adapt our business strategy and operations to these
evolving regulations and markets, our financial condition and results of operations may be adversely affected.
Our profitability will depend, in part, on our ability to accurately predict and control health care costs.
A substantial majority of the revenue we receive is used to pay the costs of health care services and supplies
delivered to our members. Many of these costs, including costs associated with physician and hospital care, new
medical technology and prescription drugs, for example, are rising. The total amount of health care costs we incur is
affected by the number and type of individual services we provide and the cost of each service. Our future profitability
will depend, in part, on our ability to accurately predict health care costs and to manage future health care utilization
and costs through product pricing criteria, utilization management, product design, medical management initiatives and
negotiation of favorable professional and hospital contracts. Periodic renegotiations of hospital and other provider
contracts, coupled with continued consolidation of physician, hospital and other provider groups, may result in
increased health care costs or limit our ability to negotiate favorable rates. Government-imposed limitations on
Medicare and Medicaid reimbursement have also caused, and are expected to continue to cause, the private sector to
bear a greater share of increasing health care costs. Additionally, there is always the possibility that adverse risk
selection could occur when members who utilize higher levels of health care services compared with the insured
population as a whole choose to remain with our health plans rather than risk moving to another plan, or, in the case of
the exchanges, that members who elect to purchase products through the exchange will utilize higher levels of health
care services than those in off exchange products. Moreover, the introduction of new populations with which there is
limited cost experience, including through Medicaid expansion, the exchanges and the CCI, as well as the uncertain
impact of premium stabilization provisions on the industry could adversely affect our ability to accurately predict or
control health care costs. Any of these factors could cause our health care costs to be higher than anticipated and
therefore cause our financial results to fall short of expectations.
Other factors that may adversely affect our ability to predict and control health care costs and, as a result,
adversely affect our financial condition, results of operations and cash flows include but are not limited to changes in
utilization rates; demographic characteristics; catastrophes; large scale public health epidemics; terrorist activity;
unanticipated seasonality; changes in provider reimbursement; fluctuations in medical cost trends; the regulatory