Health Net 2014 Annual Report Download - page 35

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In addition, in response to changes in the health care market, including those related to federal and state health
care reform, our competitors have in the past and could in the future modify their product features or benefits, change
their pricing relative to others in the market and adjust their mix of business within or outside the exchanges, or even
exit segments of the market. We may not be able to match our competitors' ability to support reduced premiums by
virtue of any full or partial exemptions from the fees and taxes imposed by the ACA, or by making changes to their
distribution arrangements, decreasing spending on non-medical product features and services, or otherwise adjusting
their operating costs and reducing general and administrative expenses. New competitors seeking to gain a foothold in
the changing market may also introduce product offerings or pricing that we may not be able to match, which may
adversely affect our ability to compete effectively. The response to the ACA over time by our existing competitors and
related adjustments to their offerings, if any, could cause meaningful disruption in local health care markets in which we
operate.
In addition, while certain types of entities and benefits are exempt from the calculation of 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 lines. Consequently, the health
insurer fee will represent a higher percentage of our premium revenues than those of certain of our competitors who are
able to exempt all or a portion of their premium revenues from the health insurer fee allocation. 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. For additional discussion of how the ACA continues to
affect the competitive landscape in which we operate, see the ACA Risk Factors above.
In recent years, there has been significant merger and acquisition activity in our industry and in industries that act
as our suppliers, such as the hospital, medical group, pharmaceutical and medical device industries. This activity may
create stronger competitors and/or result in higher health care costs. Furthermore, since the adoption of the ACA, we
have seen further provider consolidation, which in turn could make it more difficult for us to negotiate competitive
rates. In addition, our contracts with government agencies, such as our Medicaid contracts, T-3 contract for the
TRICARE North Region and MFLC contracts, are from time to time up for re-bid. If we were to lose any significant
government contract to a competitor, or if we were to win the bid for such contract on less favorable terms, it could
have an adverse effect on our profitability, financial condition and results of operations. See “—Government programs
represent an increasing share of our revenues. If we are unable to effectively administer these programs or if we do not
effectively adapt to changes to these programs, we may experience a significant reduction in revenues from these
government programs, which could have a material adverse effect on our business, financial condition or results of
operations” for more information regarding our government contracts. To the extent that there is strong competition or
that competition intensifies in any market, our ability to retain or increase our number of customers, our revenue
growth, our pricing flexibility, our control over medical cost trends and our marketing expenses may all be adversely
affected.
Tailored network products are an important part of our business strategy. Recently we have seen aggressive
pricing by our competitors on certain tailored network products, and we will need to continue developing innovative
provider relationships to remain competitive. For example, we have been working to build alliances with provider
groups and other stakeholders in the health care system through shared risk arrangements, including Accountable Care
Organizations (“ACOs”), that have seen increasing support as state and federal governments and the health care
industry seek to improve the quality of care while controlling the costs of such care. Cost conscious large group
customers that have embraced tailored networks are important to our ability to maintain scale in tailored network
products, and some of these customers, including certain Medicare customers, may demand that we provide ACO or
similar arrangements to reduce costs, or may seek to join a private health insurance exchange to pool risk and lower
costs. Our ability to successfully implement such arrangements or design products for the private exchanges may be
necessary to remain competitive for these accounts. There can be no assurance that we will be able to successfully
implement and maintain these strategic initiatives that are intended to position us for future profitable growth in the
post-ACA marketplace; that the products we have designed in collaboration with certain providers will be successful or
developed within the time periods expected; or that the products that we offer will be preferable to similar products of
our competitors. The loss of large group customers in tailored networks may make it more difficult to efficiently
execute our tailored network strategy, which could have a material adverse impact on our commercial business.
These tailored networks are based on provider networks that may not include all hospitals or medical
professionals. We cannot control the capacity of these organizations to serve new membership coming from other health
plans or as a result of the ACA. With the growth in tailored network offerings in the State of California, there has been
increased scrutiny by regulators and consumer watchdog groups with respect to network adequacy. For example, recent
regulatory action and class action lawsuits have raised concerns regarding provider network size, network capacity and
the adequacy of communication between health insurers and their consumers with respect to network composition for