Health Net 2014 Annual Report Download - page 70

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attendant risks and enrollment information, see Note 2 to our consolidated financial statements, "—Western Region
Operations Reportable Segment—Western Region Operations Segment Membership" and "Item 1A. Risk Factors."
Health Insurer Fee
Our operating results for the year ended December 31, 2014 were impacted by fees imposed under the ACA,
including $141.4 of amortization of the deferred cost of the annual non-deductible health insurer fee calculated on 2013
net premiums written (the "health insurer fee"). In September 2014, we paid the federal government a lump sum
of $141.4 million for our portion of the health insurer fee calculated based on 2013 premiums. In 2014, due to the non-
deductibility of the health insurer fee for federal income tax purposes, our full-year effective income tax rate was
adversely affected by 24.8 percentage points. While we are required to accrue for the health insurer fee on a pro rata
basis throughout the year, in future years we could experience significant volatility in our cash flow from operations
relative to our results of operations in a given period because the health insurer fee is payable in a single lump sum.
While certain types of entities and benefits are fully or partially exempt from 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 offerings. Consequently, the health insurer fee
represents a higher percentage of our premium revenues than those of our competitors who have business lines that are
exempt from the health insurer fee or whose non-profit status results in a reduced health insurer fee. We generally are
also unable to match those competitors’ ability to support reduced premiums by virtue of making changes to distribution
arrangements, decreasing spending on non-medical product features and services, or otherwise adjusting operating costs
and reducing general and administrative expenses, which may have an adverse effect on our profitability and our ability
to compete effectively with these competitors. For more information on this and other ACA related fees, including the
associated risks, see Note 2 to our consolidated financial statements, "—Results of Operations—Consolidated Results"
and "Item 1A. Risk Factors."
Premium Stabilization Programs
The ACA also includes premium stabilization provisions designed to apportion risk amongst insurers, including
the reinsurance, risk adjustment, and risk corridors programs.
The permanent risk adjustment program is applicable to plans in the individual and small group markets that are
subject to the ACA's market reforms. This risk adjustment program became effective at the beginning of 2014 and has
and will continue to shape the economics of health care coverage both within and outside the exchanges. These risk
adjustment provisions will effectively transfer funds from health plans with relatively lower risk enrollees to plans with
relatively higher risk enrollees to help protect against the consequences of adverse selection. In addition to these
permanent risk adjustment provisions, the ACA implements temporary reinsurance and risk corridors programs, which
seek to ease the transition into the post-ACA market by helping to stabilize rates and protect against rate uncertainty in
the initial years of the ACA.
The individual and small group market represent a significant portion of our commercial business and the
relevant amounts transferred under applicable premium stabilization provisions may be substantial. Calculating these
premium stabilization provisions requires us to estimate receivables and payables. Until the final calculations are
performed that determine the amounts collectible and payable, the estimates can vary and the final amounts may
materially differ from those estimates. The final determination and settlement of amounts due or payable from these
premium stabilization provisions for 2014 will not occur until at least June 2015. If we are required to make material
adjustments from our prior estimates, our financial condition, cash flows and results of operations could be materially
adversely affected.
We have made and are continuing to make significant efforts to design and implement a cohesive strategy with
respect to the exchanges and these premium stabilization programs, but these programs are subject to risks inherent in
untested initiatives, and the relevant regulatory framework for the exchanges remains subject to change and
interpretation over time. Whether due to 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 our markets, our financial condition, cash flows and results of operations
may be materially adversely affected. See Note 2 to our consolidated financial statements, "—Critical Accounting
Estimates-Accounting for Certain Provisions of the ACA" and "Item 1A. Risk Factors" for additional information on
these premium stabilization programs or "3Rs".