Health Net 2014 Annual Report Download - page 34

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among other things, lower the amount of premium increases we receive or extend the amount of time that it takes for us
to obtain regulatory approval to implement increases in our premium rates. In recent years, certain of our competitors
were asked by the Commissioner of the CDI to voluntarily delay implementation of scheduled premium increases to
permit additional review by the CDI, which review led the carriers to reduce proposed rate increases. We have
experienced, and are likely to continue to experience, greater scrutiny by regulators of proposed increases to our
premium rates. For additional detail on the impact of federal health care reform and potential additional changes in
federal and state legislation and regulations on our ability to maintain or increase premium levels, see “—Federal
health care reform legislation has had and will continue to have an adverse impact on the costs of operating our
business and a failure to successfully execute our operational and strategic initiatives with respect thereto could
adversely affect our business, cash flows, financial condition and results of operations,” "—The ACA has been the
subject of various legal challenges and legislative initiatives, which increase the uncertainty of how the law will impact
us,"“—Various health insurance reform proposals continue to emerge at the state level, which could have an adverse
impact on us,” "—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," and "—We cannot assure you that our participation in the ACA’s health insurance
exchanges will continue to be a success" (collectively the "ACA Risk Factors"). Our financial condition or results of
operations could be adversely affected by significant disparities between the premium increases of our health plans and
those of our major competitors or by limitations on our ability to increase or maintain our premium levels.
The ACA and other federal and state legislation and regulations require a reconciliation of premiums based on a
final assessment of the relative medical risk a health plan incurs in the individual and small group market. Since the
risk value is based on a health plan’s score relative to the industry and enrollment growth of new populations with
limited cost experience under ACA, we may be required to accrue additional liabilities based on the risk profile of the
overall population. In addition, the ACA requires us to maintain certain minimum medical loss ratios, or “MLRs”. In
the event we fail to maintain such minimum MLRs, we will be required to rebate ratable portions of our premiums to
our customers annually. Certain state Medicaid programs, including with respect to the Medi-Cal expansion population,
are imposing MLR requirements on Medicaid managed care organizations that generally require such plans to rebate
ratable portions of their premiums to their state customers if they cannot demonstrate they have met the minimum
MLRs. With respect to our Medi-Cal expansion population, this MLR requirement acts as a “corridor”, with rebates
paid to DHCS for MLRs under 85% and additional premium paid to us by DHCS if MLRs exceed 95%. Beginning in
2014, we have been required to incorporate the effect of the aforementioned premium stabilization provisions for
individual and small group markets into our commercial MLRs. Due in part to the uncertainty with respect to these
premium stabilization provisions, which as noted above will be calculated for the first time in the summer of 2015 for
the 2014 benefit year, it may be difficult to accurately predict our commercial MLR rebates, which may cause
meaningful disruptions in our market share and our results of operations, financial position and cash flows could be
materially adversely affected. For further information on MLRs, see Note 2 to our consolidated financial statements,
and for further information on premium stabilization provisions, see "—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."
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.
We are in a highly competitive industry that is currently subject to significant changes from, among other things,
legislative reform, business consolidations and new strategic alliances. Many of our competitors may have certain
characteristics, capabilities or resources, such as greater market share, greater economies of scale, superior provider and
supplier arrangements and existing business relationships, which give them an advantage in competing with us. These
competitors include HMOs, PPOs, self-funded employers, insurance companies, hospitals, health care facilities and
other health care providers. In addition, other companies may enter our markets in the future.
The addition of new competitors in our industry can occur relatively easily and customers enjoy significant
flexibility in moving between competitors. For example, the new developing marketplace created by the ACA's state-
based and federally facilitated exchanges has and may continue to encourage new market participants and lead to
increased competition in the individual and small group markets. There also is a risk that our customers may decide to
perform for themselves functions or services currently provided by us, which could result in a decrease in our revenues.
In addition, our providers and suppliers may decide to market products and services to our customers in competition
with us.