Health Net 2015 Annual Report Download - page 31

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In December of 2014, Congress passed and the President signed the Consolidated and Further Continuing
Appropriations Act, 2015 (Public Law 113-235) (the “2015 Budget Act” or “Cromnibus”), which contained language
restricting the ability of HHS to use certain sources of funding to make payments under the risk corridors program for
2015. HHS has recognized that it is obligated to make the risk corridors program payments without regard to budget
neutrality in both regulations and guidance. On October 1, 2015, HHS acknowledged a shortfall in the payments for
program year 2014, and stated that it would be making payments to insurers of approximately 12.6 percent of their
requested amounts at that time. HHS confirmed its previously stated intention to fulfill its remaining 2014 risk corridor
obligations with funds collected for program year 2015 and, if necessary, 2016 collections. This payment structure
would be consistent with the 2015 Budget Act. Additionally, HHS has stated that in the event of a shortfall between the
amounts collected from issuers and the payments to issuers, HHS will use other sources of funding for the risk corridors
payments, subject to the availability of appropriations. This use of alternative funding is consistent with general
principles of federal program budgeting and appropriations. Notwithstanding any restrictions imposed by the 2015
Budget Act, which restrictions were repeated in identical language in the 2016 Budget Act, HHS has retained the right
and ability to source risk corridors program payments from user fees under both the risk corridors program and other
programs.
On October 13, 2015, HHS reiterated its continuing obligation to make full payment of its risk corridors
liabilities and stated that HHS recognizes that the ACA requires the Secretary to make full payments to issuers. HHS
further stated that it is recording those amounts that remain unpaid following its 12.6 percent prorated payment this
winter as fiscal year 2015 obligations of the United States Government for which full payment is required.
The risk corridor receivable balance included in other current receivables as of December 31, 2015 was $1.8
million and the risk corridor receivable balance included in other noncurrent assets as of December 31, 2015 was
$212.5 million. If we experience payment delays that are extended for any significant period of time, it may require us
to modify our strategic and operational initiatives with respect to both our on and off exchange products, and could have
a material adverse effect on our results of operations, financial position, cash flows or liquidity. For additional
discussion of the risks associated with participation in programs involving a government payor, see the risk factor
below under the heading, “—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.”
Whether due to legislative or regulatory developments 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 certain of our markets, our financial condition, cash flows and results of
operations may be materially adversely affected. For additional information on these premium stabilization programs,
see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Health Care
Reform Legislation and Implementation-Premium Stabilization Programs” and Note 2 to our consolidated financial
statements.
We cannot assure you that our participation in the ACA’s health insurance exchanges will continue to be a success.
The ACA required the establishment of state-run or federally facilitated “exchanges” where individuals and small
groups may purchase health coverage. We currently participate as QHPs in the exchanges in California and Arizona.
Our continued participation in the exchanges and future participation in any other exchanges in the states in which we
operate is conditioned on the approval of the applicable state or federal government regulator, which could result in the
exclusion of some carriers, including us, from the exchanges.
We believe that the exchanges continue to represent a significant commercial business opportunity for us, and we
continue 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. However, the exchanges remain a relatively new
marketplace, and the competitive landscape may change significantly, particularly in its early years as market
participants continue to adjust and react to pricing data, information and other feedback. The exchanges are an open
market, with pricing and membership data publicly available to both consumers and our competitors. All exchange
participants, including us, have reviewed our competitive positions, and with this data, our competitors could modify
their product features or networks, change their pricing relative to others in the market and adjust their mix of business
within or outside the exchanges. Competitors seeking to gain a foothold in the changing market may also introduce
pricing that we may not be able to match, which may adversely affect our ability to compete effectively. Competitors
may also choose to exit the market altogether, which could adversely impact the pool of potential insured. Our
continued success in the exchanges is dependent on our ability to successfully respond to these changes in the