Health Net 2015 Annual Report Download - page 34

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number of factors that may drive significant demand for these therapies, the associated drugs have increased our health
care costs. These and other aggressively priced pharmaceutical drugs may cause significant increases in our health care
costs in the future. If we are unable to effectively manage these and other similar pharmaceutical related costs, it may
adversely affect our profitability and results of operations.
As a measure of the impact of medical costs on our financial results, relatively small differences between
predicted and actual medical costs as a percentage of premium revenues can result in significant changes in our
financial results. For example, if medical costs increased by 1% without a proportional change in related revenues for
our health plan products, our annual pre-tax income for 2015 would have been reduced by approximately $130.4
million. The inability to accurately forecast and manage our health care costs in all circumstances could have a material
adverse effect on our business, financial condition or results of operations.
We face competitive and regulatory pressure to contain premium prices. If the premiums we charge are insufficient
to cover our costs, it could have a material adverse effect on our business, financial condition or results of
operations.
In addition to the challenge of controlling health care costs, we face competitive pressure to contain premium
prices. While health plans compete on the basis of many factors, including service, plan benefits and the quality and
depth of provider networks, price has been and will continue to be a significant basis of competition. Any future
increase in our premiums could result in the loss of members, particularly in light of continued economic pressures. Our
premiums are set in advance of the actual delivery of services, and, in certain circumstances, before contracting with
providers. While we attempt to take into account our estimate of expected health care and other costs over the premium
period in setting the premiums we charge or bid, factors such as competition, new or changed regulations and other
circumstances may limit our ability to fully base premiums on estimated costs. For example, certain of our competitors
are not subject to the ACA's health insurer fee or are assessed at half the rate that we and other health insurers will pay,
and our ability to incorporate the impact of the health insurer fee into our commercial and Medicare 2016 premium
rates, which are set a year in advance in 2015, was limited, in large part due to these competitive pressures. In addition,
many factors may, and often do, cause actual health care costs to exceed those costs estimated and reflected in
premiums or bids. These factors include, but are not limited to, increased utilization rates, increasing medical cost
trends, catastrophes, public health epidemics, terrorist activity, unanticipated seasonality, changes in insured population
characteristics, new mandated benefits or other regulatory changes, including those included in the ACA or other state
or federal laws. If we are unable to accurately estimate costs and set our premiums accordingly, it could have a material
adverse effect on our business, financial condition or results of operations.
In addition, our ability to increase our premiums may be restricted by law. For example, the ACA requires the
establishment of a process for review of certain premium rate increases to determine whether they are “unreasonable.”
As part of this rate review process, certain insurers may be excluded from participating in the state-based or federally
facilitated exchanges created by the ACA if the review determines that the insurer has demonstrated a pattern or practice
of excessive or unjustified premium rate increases. The federal government and some states in which we do business
have also required prior regulatory approval of premium rate increases and/or have subjected such increases to
heightened scrutiny, such as third-party review. For example, the California Department of Insurance ("CDI") and the
California Department of Managed Health Care (“DMHC”) require a third-party actuarial review of health insurance
carriers' and health plans' proposed premium rate increases to confirm compliance with applicable law, resulting in a
potential delay in carriers' and plans' ability to implement rate increases. Further, in California, beginning in 2016, large
group employer rates will be subject to the same rate review justification requirements. While a California initiative to
impose even further significant additional requirements for premium increases was previously defeated, there can be no
assurance that the California legislature will not consider similar rate regulation measures in the future. These
requirements and proposed changes have in the past and could in the future, among other things, lower the amount of
premium increases we receive or extend the amount of time that it takes for us to obtain regulatory approval to
implement increases in our premium rates. In recent years, certain of our competitors were asked by the Commissioner
of the CDI to voluntarily delay implementation of scheduled premium increases to permit additional review by the CDI,
which review led the carriers to reduce proposed rate increases. We have experienced, and are likely to continue to
experience, greater scrutiny by regulators of proposed increases to our premium rates. For additional detail on the
impact of federal health care reform and potential additional changes in federal and state legislation and regulations on
our ability to maintain or increase premium levels, see “—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,” "—The ACA has been the subject of various legal challenges and legislative
initiatives, which increase the uncertainty of how the law will impact us,"“—Various health insurance reform proposals