Health Net 2015 Annual Report Download - page 33

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operate. These kinds of state regulations and legislation could, among other things, limit or delay our ability to increase
premiums in future years even where actuarially supported, and thereby could adversely impact our revenues and
profitability. This also could increase the competition we face from companies that have lower health care or
administrative costs than we do and therefore can price their premiums at lower levels than we can.
Further, the interaction of current and new federal regulations and the continuing implementation of federal
health care reform by the various states in which we do business will continue to create substantial uncertainty for us
and other health insurance companies about the requirements under which we must operate. States may disagree in their
interpretations of the federal statute and regulations, and state “guidance” that is issued could be unclear or untimely. In
the case of the ACA exchanges, we are required to operate under and comply with the regulatory authority of the federal
government in addition to the laws, rules and regulations of each of the states that establish and administer their own
exchanges. State exchange standards and processes related to areas such as enrollment, payment, certification standards,
and other areas have differed and may differ in the future from those of the federally-facilitated exchanges. In some
cases, it may not be clear whether federal or state guidelines apply, and federal and state guidelines may not align
perfectly. If we do not successfully implement the various state law requirements of the ACA, including with respect to
the exchanges, our financial condition and results of operations may be adversely affected.
Our profitability will depend, in part, on our ability to accurately predict and control health care costs.
A substantial majority of the revenue we receive is used to pay the costs of health care services and supplies
delivered to our members. Many of these costs, including costs associated with physician and hospital care, new
medical technology and prescription drugs, for example, are rising. The total amount of health care costs we incur is
affected by the number and type of individual services we provide and the cost of each service. Our future profitability
will depend, in part, on our ability to accurately predict health care costs and to manage future health care utilization
and costs through product pricing criteria, utilization management, product design, medical management initiatives and
negotiation of favorable professional and hospital contracts. Periodic renegotiations of hospital and other provider
contracts, coupled with continued consolidation of physician, hospital and other provider groups, may result in
increased health care costs or limit our ability to negotiate favorable rates. Government-imposed limitations on
Medicare and Medicaid reimbursement also have caused, and are expected to continue to cause, the private sector to
bear a greater share of increasing health care costs. Additionally, there is always the possibility that adverse risk
selection could occur when members who utilize higher levels of health care services compared with the insured
population as a whole choose to remain with our health plans rather than risk moving to another plan. In the case of the
exchanges, members that elect to purchase products through the exchange may utilize higher levels of health care
services than those in off exchange products, and potential abuses of special enrollment periods on the exchanges may
further adversely impact our risk pool. Moreover, the introduction of markets and populations with which there is
limited cost experience, including through Medicaid expansion, the exchanges and the CCI, as well as the uncertain
impact of premium stabilization provisions on the industry could adversely affect our ability to accurately predict or
control health care costs. Any of these factors could cause our health care costs to be higher than anticipated and
therefore cause our financial results to fall short of expectations.
Other factors that may adversely affect our ability to predict and control health care costs and, as a result,
adversely affect our financial condition, results of operations and cash flows include but are not limited to changes in
utilization rates; demographic characteristics; catastrophes; large scale public health epidemics; terrorist activity;
unanticipated seasonality; changes in provider reimbursement; fluctuations in medical cost trends; and provider fraud;
the regulatory environment, including, for example, the ACA or other state or federal laws and their impact on our
health care costs and our ability to change our premium rates; health care practices; the introduction of new therapies,
treatments or drugs; inflation; new technologies; clusters of high-cost cases; and continued consolidation of physician,
hospital and other provider groups. A significant category of our health care costs is the cost of hospital-based products
and services. Factors underlying the increase in hospital costs include, but are not limited to, the underfunding of public
programs, such as Medicaid and Medicare and the constant pressure that places on rates from commercial health plans,
new technology, state initiated mandates, alleged abuse of hospital chargemasters, an aging population, changes in the
economic environment and, under certain circumstances, relatively low levels of hospital competition caused by market
concentration. Another significant category of our health care costs is costs of pharmaceutical products and services.
Factors affecting our pharmaceutical costs include, but are not limited to, the price of drugs; the timeline for approval
of, and the eligible population of, new drugs, particularly specialty drugs; the utilization of new and existing drugs; any
changes in discounts and the impact of health care reform on pharmaceutical manufacturers through such requirements
as increased fees. In recent years, pharmaceutical companies have aggressively priced drugs upon release or subjected
them to substantial price increases. As an example, drugs approved in 2014 for the treatment of hepatitis C were
aggressively priced upon release. Due to the relatively high incidence of hepatitis C in populations we serve and a