Health Net 2015 Annual Report Download - page 30

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be invested in the ACA implementation, require investment of additional resources and, depending on the nature of the
modification, could have a material adverse effect on our business and the trading price of our common stock.
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 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
provisions are intended to 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. The individual and small
group markets represent a significant portion of our commercial business and the relevant amounts transferred may be
substantial. To adapt to this new economic framework, we have dedicated significant resources and incurred significant
costs to implement numerous strategic and operational initiatives both within and outside the exchanges that, among
other things, require us to focus on and manage different populations of potential members than we have in the past.
The success of these initiatives relies on our ability to achieve an accurate risk adjustment allocation, which in turn
depends in large part on our ability to accurately assess our health plans’ risk and incorporate that into the risk
adjustment calculus. This calculation relies primarily on encounter data to define a health plan’s average actuarial risk.
The process of accurately collecting this data presents disadvantages to more heavily capitated health plans such as ours
because providers receiving fixed fees from health insurers may not have the same incentive to provide accurate and
complete encounter data with respect to services rendered when compared to providers under fee for service
arrangements. This incentive problem may be particularly acute for health plans operating under the delegated HMO
model, which is prevalent in our California health plans. Under this model, third party intermediaries assume
responsibility for certain utilization management and care coordination responsibilities, including the collection of
encounter data. We have been refining our health plan infrastructure and provider network to help ensure that we are
accurately capturing this data. However, if we are unable to successfully execute this strategy, our revenues and results
of operations may be adversely affected. In addition, assuming we accurately capture complete encounter data, HHS
has indicated that several changes to the risk adjustment methodology may be implemented in the future, and has also
expressed a willingness to discuss additional changes with insurers going forward. Lingering uncertainty or any delay in
the data collection process and the evaluation of preliminary risk scores in the context of our competitive market may
limit our ability to accurately predict receivables or payables under the program and adversely impact our ability to set
premium rates for future periods.
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.
We have made and are continuing to make significant efforts to design and implement a cohesive strategy with
respect to these premium stabilization programs and the exchanges, but these programs are subject to risks inherent in
estimated calculations and untested initiatives and, as noted above, the relevant regulatory framework for the ACA
remains subject to change and interpretation over time. 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
reconciliation and settlement with HHS of the premium and cost sharing subsidies and other amounts related to the
premium stabilization provisions for the current year generally will be completed in the following year. 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.
Many of the operational aspects relating to these premium stabilization programs, as well as related to advanced
payments of premium tax credits for exchange plans, such as reporting data to HHS and the calculation of payments
and charges, were not fully operationalized until 2015, including with respect to the small group market, and the data
required and operational procedures for such reporting may still be subject to change. Any inability by Health Net to
obtain and submit complete data for reporting under these premium stabilization programs or to reconcile our data with
CMS or state exchanges as needed, could adversely affect our performance under these programs.
In addition, there have been legislative and regulatory developments with respect to the risk corridors program.