Health Net 2015 Annual Report Download - page 10

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adjustment process that adjusts the capitation payment to HNCS based on the health characteristics of the enrollee
population, and includes risk corridor provisions that limit our upside financial gains and reduce our downside financial
risk. DHCS and CMS also withhold a portion of capitation payments pending and payable upon satisfaction of certain
pre-established quality standards. The financial performance of the Cal MediConnect Contract is included in the
calculation of the settlement account that was established pursuant to the terms of the Settlement Agreement entered
into by DHCS, HNCS and Health Net of California, Inc. on November 2, 2012, which is further discussed above under
the heading “—Western Region Operations Segment—Medicaid and Related Products.”
Term and Termination. Assuming that no party elects to terminate or not to renew the Cal MediConnect Contract,
the dual eligibles demonstration will continue through December 31, 2017. CMS or DHCS may immediately terminate
the Cal MediConnect Contract for various reasons, or may terminate for no reason with 180 days’ prior written notice.
Western Region Exchanges
The ACA required the establishment of state-run or federally facilitated “exchanges” where individuals and small
groups may purchase health coverage. California and Oregon received approval by the U.S. Department of Health and
Human Services (“HHS”) and began operating state-run exchanges in 2014. HHS operates the exchange in Arizona.
We currently participate as Qualified Health Plans ("QHPs") in the exchanges in California and Arizona. Open
enrollment for the coverage year beginning January 1, 2016 began on November 1, 2015 and ended on January
31, 2016. Continued participation in these exchanges and future participation in any other exchanges in the states in
which we operate may be conditioned on the approval of the applicable state or federal government regulator, which
could result in the exclusion of some carriers from the exchanges. Certain factors to be considered for continued
participation in the exchanges may be subject to change. We believe the exchanges represent a significant commercial
business opportunity for us, and the growth we experienced through the first open enrollment period demonstrated that
our tailored network products are particularly well suited to the exchange environment. To illustrate, we have a 17%
market share in the second year of the exchanges with 90% of that concentrated in our tailored network offerings. As of
December 31, 2015, we had 247,310 active individual members through the California, and Arizona exchanges.
We have made and are continuing to make significant efforts to design and implement a cohesive operational and
economic strategy with respect to the exchanges and the ACA’s other relevant provisions, including premium
stabilization provisions designed to apportion risk amongst insurers. Implementation of the exchanges remains ongoing,
as significant portions of the insurance market, including small business groups, entered the exchanges for the first time
in 2015. Moreover, in the second year of the exchanges, we expect that the marketplace will react to the pricing data,
information and other feedback that is and becomes available following the completion of the first two years of the
exchanges. Accordingly, we will need to continue to monitor this market and remain nimble in our strategic approach.
This changing framework may alter the economics and structure of our participation in the exchanges, and if we are not
able to successfully adapt to any such changes in certain areas of our markets, our financial condition, cash flows and
results of operations may be adversely affected. For a discussion of the risks related to the exchanges, and the state and
federal government actions impacting the exchanges and the effect on our competitive landscape, see “Item 1A. Risk
Factors—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,” and “—Various
health insurance reform proposals are also emerging at the state level, which could have an adverse impact on us.”
In California, we collectively operate in 16 of 19 exchange rating regions in the individual market on and off-
exchange, and in all 19 California exchange rating regions in Covered California for Small Business ("CCSB"). On the
exchange in Southern California, we offer HMO and HSP products in the individual market that collectively cover all
metal tiers and the catastrophic category level and offer PPO and EPO products that collectively cover all metal tiers in
CCSB. Outside of Southern California, we offer HSP and EPO products in the individual market that cover all metal
tiers and the catastrophic category level and offer PPO and EPO products that collectively cover all metal tiers in
CCSB. Off-exchange in Southern California, we offer HMO, HSP, EPO, and PPO products in the individual market that
collectively cover all metal tiers and the catastrophic category level and offer HMO, HSP, EPO and PPO products that
collectively cover all metal tiers outside CCSB. Outside of Southern California, we offer HMO, HSP, EPO and PPO
products in the individual market that cover all metal tiers and the catastrophic category level and offer HMO, HSP,
EPO and PPO products that collectively cover all metal tiers in CCSB. In the 2016 Arizona individual market, we offer
HMO products in two counties (Maricopa and Pima) both on- and off-exchange, and PPO plans statewide off-exchange
only. We offer HMO and PPO products to small business groups statewide both on- and off-exchange.