Health Net 2014 Annual Report Download - page 33

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environment, including, for example, the implementation of the ACA or other state or federal laws and their impact on
our health care costs and our ability to change our premium rates; health care practices; the introduction of new
therapies, treatments or drugs; inflation; new technologies; clusters of high-cost cases; and continued consolidation of
physician, hospital and other provider groups. A significant category of our health care costs is the cost of hospital-
based products and services. Factors underlying the increase in hospital costs include, but are not limited to, the
underfunding of public programs, such as Medicaid and Medicare and the constant pressure that places on rates from
commercial health plans, new technology, state initiated mandates, alleged abuse of hospital chargemasters, an aging
population, changes in the economic environment and, under certain circumstances, relatively low levels of hospital
competition caused by market concentration. Another significant category of our health care costs is costs of
pharmaceutical products and services. Factors affecting our pharmaceutical costs include, but are not limited to, the
price of drugs, utilization of new and existing drugs, changes in discounts and the impact of health care reform on
pharmaceutical manufacturers through such requirements as increased fees. For example, drugs recently approved for
the treatment of hepatitis C have been aggressively priced by pharmaceutical companies. Due to the relatively high
incidence of hepatitis C in populations we serve and a number of factors that may drive significant demand for these
therapies, these products may cause a significant increase in our health care costs and, if we are unable to effectively
manage these costs, it may adversely affect our profitability and results of operations.
As a measure of the impact of medical costs on our financial results, relatively small differences between
predicted and actual medical costs as a percentage of premium revenues can result in significant changes in our
financial results. For example, if medical costs increased by 1% without a proportional change in related revenues for
our health plan products, our annual pre-tax income for 2014 would have been reduced by approximately $113 million.
The inability to accurately forecast and manage our health care costs in all circumstances could have a material adverse
effect on our business, financial condition or results of operations.
We face competitive and regulatory pressure to contain premium prices. If the premiums we charge are insufficient
to cover our costs, it could have a material adverse effect on our business, financial condition or results of
operations.
In addition to the challenge of controlling health care costs, we face competitive pressure to contain premium
prices. While health plans compete on the basis of many factors, including service, plan benefits and the quality and
depth of provider networks, price has been and will continue to be a significant basis of competition. Any future
increase in our premiums could result in the loss of members, particularly in light of continued economic pressures and
the implementation of the ACA. Our premiums are set in advance of the actual delivery of services, and, in certain
circumstances, before contracting with providers. While we attempt to take into account our estimate of expected health
care and other costs over the premium period in setting the premiums we charge or bid, factors such as competition,
new or changed regulations and other circumstances may limit our ability to fully base premiums on estimated costs.
For example, certain of our competitors are not subject to the ACA's health insurer fee or are assessed at half the rate
that we and other health insurers will pay, and our ability to incorporate the impact of the health insurer fee into our
commercial and Medicare 2015 premium rates, which are set a year in advance in 2014, was limited, in large part due to
these competitive pressures. In addition, many factors may, and often do, cause actual health care costs to exceed those
costs estimated and reflected in premiums or bids. These factors include, but are not limited to, increased utilization
rates, increasing medical cost trends, catastrophes, public health epidemics, terrorist activity, unanticipated seasonality,
changes in insured population characteristics, new mandated benefits or other regulatory changes, including those
included in the ACA or other state or federal laws. If we are unable to accurately estimate costs and set our premiums
accordingly, it could have a material adverse effect on our business, financial condition or results of operations.
In addition, our ability to increase our premiums may be restricted by law. For example, the ACA requires the
establishment of a process for review of certain premium rate increases to determine whether they are “unreasonable.”
As part of this rate review process, certain insurers may be excluded from participating in the state-based or federally
facilitated exchanges created by the ACA if the review determines that the insurer has demonstrated a pattern or practice
of excessive or unjustified premium rate increases. The federal government and some states in which we do business
have also required prior regulatory approval of premium rate increases and/or have subjected such increases to
heightened scrutiny, such as third-party review. For example, the CDI and Department of Managed Health Care require
a third-party actuarial review of health insurance carriers' and health plans' proposed premium rate increases to confirm
compliance with applicable law, resulting in a potential delay in carriers' and plans' ability to implement rate increases.
Further, in California, proponents of rate review qualified an initiative measure for the November 2014 ballot that
would have, if approved, imposed significant additional requirements on health plans relating to premium increases.
While the initiative was defeated, there can be no assurance that the California legislature will not consider similar rate
regulation measures in the future. These requirements and proposed changes have in the past and could in the future,