Health Net 2015 Annual Report Download - page 36

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In addition, while certain types of entities and benefits are exempt from the calculation of the health insurer fee,
including, among others, government entities, certain non-profit insurers and self-funded plans, we are unable to take
advantage of any significant exemptions due to our current mix of plans and product lines. Consequently, the health
insurer fee will represent a higher percentage of our premium revenues than those of certain of our competitors who are
able to exempt all or a portion of their premium revenues from the health insurer fee allocation. Moreover, some of our
competitors may have greater economies of scale or a different mix of business, which, among other things, may lead to
lower expense ratios and higher profit margins than we have. For additional discussion of how the ACA continues to
affect the competitive landscape in which we operate, see the ACA Risk Factors above.
In recent years, there has been significant merger and acquisition activity in our industry and in industries that act
as our suppliers, such as the hospital, medical group, pharmaceutical and medical device industries. This activity may
create stronger competitors and/or result in higher health care costs. Furthermore, since the adoption of the ACA, we
have seen further provider consolidation, which in turn could make it more difficult for us to negotiate competitive
rates. In addition, our contracts with government agencies, such as our Medicaid contracts, T-3 contract for the
TRICARE North Region and MFLC contracts, are from time to time up for re-bid. If we were to lose any significant
government contract to a competitor, or if we were to win the bid for such contract on less favorable terms, it could
have an adverse effect on our profitability, financial condition and results of operations. See “—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” for more information regarding our government contracts. To the extent that there is strong competition or
that competition intensifies in any market, our ability to retain or increase our number of customers, our revenue
growth, our pricing flexibility, our control over medical cost trends and our marketing expenses, among other things,
may all be adversely affected.
Tailored network products are an important part of our business strategy. Recently we have seen aggressive
pricing by our competitors on certain tailored network products, and we will need to continue developing innovative
provider relationships to remain competitive. For example, we invest in building strategic alliances with provider
groups and other stakeholders in the health care system through various cost sharing arrangements, including
Accountable Care Organizations (“ACOs”), that have seen increasing support as state and federal governments and the
health care industry seek to improve the quality of care while controlling the costs of such care. Cost conscious large
group customers that have embraced tailored networks are important to our ability to maintain scale in tailored network
products, and some of these customers, including certain Medicare customers, may demand that we provide ACO or
similar arrangements to reduce costs, or may seek to join a private health insurance exchange to pool risk and lower
costs. Our ability to successfully implement such arrangements or design products for the private exchanges may be
necessary to remain competitive for these accounts. There can be no assurance that we will be able to successfully
implement and maintain these strategic initiatives that are intended to position us for future profitable growth in the
post-ACA marketplace; that the products we have designed in collaboration with certain providers will be successful or
developed within the time periods expected; or that the products that we offer will be preferable to similar products of
our competitors. The loss of large group customers in tailored networks may make it more difficult to efficiently
execute our tailored network strategy, which could have a material adverse impact on our commercial business.
These tailored networks are based on provider networks that may not include all hospitals or medical
professionals. We cannot control the capacity of these organizations to serve new membership coming from other health
plans or as a result of the ACA. With the growth in tailored network offerings in the State of California, there has been
increased scrutiny by regulators and consumer watchdog groups with respect to network adequacy. For example, recent
regulatory action and class action lawsuits have raised concerns regarding provider network size, network capacity and
the adequacy of communication between health insurers and their consumers with respect to network composition for
exchange products. Such regulatory action and lawsuits may require us to make changes to our provider networks,
which could result in higher costs, deterioration in our competitive position and in membership loss. Failure to
successfully implement our tailored network strategy may have an adverse impact on our business, results of
operations, financial condition and cash flows.
If we do not compete effectively in our markets, if we do not design and price our products appropriately and
competitively, if we are unable to innovate and deliver products and services that demonstrate value to our customers, if
we set rates too high or too low for highly competitive markets, if we lose membership in more profitable products
while retaining or increasing membership in less profitable products, if we do not provide satisfactory service levels, if
membership or demand for our services does not increase as we expect or if membership or demand for our services
declines, it could have a material adverse effect on our business, financial condition and results of operations.