Health Net, DHCS Settle Rates Lawsuit
Health Net has settled a long-running lawsuit with the Department of Health Care Services over the rates the agency paid for providing services to Medi-Cal managed care enrollees for much of the last decade.
The terms reached between Health Net and the DHCS, which administers the Medi-Cal program, are unusual: they will be based entirely on the insurer’s pre-tax profit margins from managing its Medi-Cal population over the next seven years.
DHCS is being sued by several health plans over the issue, with the payers accusing them of setting Medi-Cal managed rates between 2003 and 2010 that were faulty.
Meanwhile, California’s state budget has been groaning under multi-billion dollar deficits for several years, prompting government agencies such as DHCS to find creative resolutions to lawsuits that could inflict even more financial damage – all while keeping its safety net payer network intact.
“What we wanted to do was resolve these lawsuits in a way that provides a framework for reducing very costly litigation,” said DHCS spokesman Norman Williams.
Whether Health Net actually reaps anything from the settlement remains to be seen. It could receive hundreds of millions of dollars – or the DHCS may have to pay nothing at all to the Woodland Hills-based insurer.
The payment terms were delineated in documents filed earlier this week with the Securities and Exchange Commission. Health Net’s pre-tax margins for its Medi-Cal managed care business must reach 3.25% for each year between 2013 and 2016. If it falls below that threshold, its actual margin would be subtracted from the 3.25%, then multiplied by 50% to 75% of the premiums Health Net was paid. That amount would be part of the settlement sum paid Health Net. The threshold drops to 1.25% between 2016 and 2019.
Conversely, if Health Net’s margins are above the 3.25% threshold in any year, it would have an equivalently calculated sum subtracted from what DHCS would owe.
When the final payout is determined as early as 2019, it will ultimately be capped at $264 million, according to Williams. The DHCS has options to extend the settlement terms through 2022 and not pay up until then.
According to Health Net spokesperson David Olson, the settlement allows Health Net to earn what is considered a reasonable profit from its Medi-Cal book of business: in a range of 2% to 4%.
“They want the plans to be profitable so they continue to reinvest in the business,” he said. “It’s not in their interest to have plans leave (the state) and disrupt operations.”
Olson noted that the original lawsuit was not based on how much Health Net was earning on its population, but how the payments were structured.
“This was about the actuarial soundness of the rates. It did not hinge on whether Health Net made a profit,” he said.
Litigation aside, the issue of Medi-Cal payments is expected to loom larger in the coming years as the Medi-Cal program expands under the Patient Protection and Affordable Care Act, and the state will rely even more on a dependable payer network.
The settlement will cover all Medi-Cal lives enrolled in Health Net over at least the next seven years, Olson noted.
 Health Net currently has just over 1 million Medi-Cal enrollees under its management, and the number is expected to rise under ACA, according to Olson.
“We believe that our new agreement with California’s Department of Health Care Services sets the stage for steadier performance in our state health plans going forward,” said Jay Gellert, Health Net’s chief executive officer.
