Health NetHealth Net

Steve SellPresident, Health Net of California

& Western Region Health Plan

2010 Health Care Forecast ConferenceIrvine, CA

February 25-26, 2010

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AgendaAgenda

I.The Environment (Economy and Health Care

Reform)

II.Implications

III.Evolution of Healthcare Model

IV.The Health Net Experience

V.The Outlook

Economic Conditions: Economic Conditions: Where Does Your Health Care Dollar Go?Where Does Your Health Care Dollar Go?

Hospital Payment to Cost Ratios

70%

80%

90%

100%

110%

120%

130%

140%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

1. Unprecedented Unemployment (peaked) 2. Job loss increases public burden

9.0%

1%

Increase in National Unemployment Rate

=

1.01.1

Increase in Medicaid and

SCHIP Enrollment(million)

Increase in Uninsured(million)

&

$2.0

$1.4

$3.4

Increase in Medicaid and SCHIP Spending

(billion)

State

Federal

3. Providers increasingly cost shift to private sector

4. Premiums escalate (Start Back at Step (1)

California Unemployment

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

Commercial

Medicare

Medicaid

Economic Conditions: Economic Conditions: “The Escalation of Unaffordability”“The Escalation of Unaffordability”

Health Care Reform: Health Care Reform: A Solution to Universal Affordable Access to A Solution to Universal Affordable Access to Health CareHealth Care

Accelerates the “Escalation of Unaffordability” Expands Government Programs (escalates the cost structure) Increases Opportunity for high risk population to have access to

coverage (a good thing but escalates cost structure) Collapses administrative fees as a percentage to commercial insurers

and adds additional tax burden (caps 13% of the cost structure + adds cost)

The Senate Bill: Health Insurance Reform (No Pre-Existing Conditions, UW restrictions

etc.) Insurance Exchange with Subsidies for individuals up to 400% FPL Alternatives to the Private Market (Co-Op Plan) Expansion of Medicaid Medicare Advantage Cuts Insurer Fees, Medical Loss Ratio Limits Tax Incentives (“requirement”) for Individuals to Purchase Coverage

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6

Implications:Implications:Insurers/ Providers must Provide Affordable Insurers/ Providers must Provide Affordable SolutionsSolutions

1. Health Care is Unaffordable (with or without reform)• Employers can not afford increases in premiums• Individuals can not afford the increases in coinsurance or contributions

2. The Private Sector Must Respond (with or without reform)• Legislation does not fundamentally address affordability• Legislation may increase the cost shift• The private sector needs to maintain affordability with an increase in risk

3. Delivery System Viability will depend on Cost Management and Commercial Volume (with or without reform)• Will need increased Commercial volume to offset Medicaid expansion & Medicare cuts • Commercial premium inflation is unsustainable and they are 87% of the premium dollars

Implications:Implications:Back to the Future of HMOBack to the Future of HMO

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Re-emergence of HMO and managed care model:• The HMO model manages cost without passing the burden to the consumer• HMO share grew 7% since 2007 in CA• HDHP growth has changed little during the same period

Sources: California Health Care Foundation (CHCF)/NORC California Employer Health Benefits Survey: 2007-2009, 2005-2006, 2004, Kaiser/HRET CHCF Survey: 2001-2003, 2001-2009, December 2008

54%

47%

49%

52%

54%

31%

35%

34%

29%

25%

11%

13%

17%

17%

21%

5%

4%

1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2009

2007

2005

2003

2001

Conventional

HMO

PPO

POS

HDHP/SO

California Commercial Market Share by Product Type

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Value of Capitation/HMO Model• A distinct business model built on provider relationships• A “medical home” to manage overall health• Predictable: costs and pricing • The most cost-effective delivery system• Integrates care/avoids duplicative or unnecessary

procedures• Care starts at low cost setting, “steps-up” only as

necessary• Provides health plan with a quarterback to collaborate on

cost and quality initiatives (reduced risk)• Capitated HMO 30% less vs. PPO (So CA)

Affordable Premiums

Minimum Benefit Sets

HMO Model+

Implications:Implications:Back to the Future of HMOBack to the Future of HMO

The Health Net ExperienceThe Health Net ExperienceNarrow Network HMO has grown through The Narrow Network HMO has grown through The RecessionRecession

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200,000

210,000

220,000

230,000

240,000

250,000

260,000

270,000

280,000

Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 Q4'09

Total NarrowNetworkProducts

Health Net Narrow Network Products Membership

OutlookOutlook

•Economic recession/HC reform serves as a catalyst (regardless of economic improvement) for a re-emergence of HMO and managed care models

• Industry will find ways to manage cost

– Evidence of escalating healthcare cost combined with lowering revenue (not sustainable in the long run)

– Requires better integration of the delivery system and aligned incentives (i.e. risk sharing)

– Especially important with health care reform

•Commercial business will continue to subsidize government business (cost shift)

– Delivery systems will strive to find innovative solutions to capture commercial business

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