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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12718
HEALTH NET, INC.
(Exact Name of Registrant as Specified in Its Charter)
Registrant’s Telephone Number, Including Area Code: (818) 676-6000
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 27, 2004 was $2,880,397,670
(which represents 112,427,701 shares of Common Stock held by such non-affiliates multiplied by $25.62, the closing sales price of
such stock on the New York Stock Exchange on June 25, 2004).
The number of shares outstanding of the registrant’s Common Stock as of March 11, 2005 was 112,334,885 (excluding
23,173,029 shares held as treasury stock).
Documents Incorporated By Reference
Delaware
95-4288333
(State or Other Jurisdiction
of Incor
p
oration or Or
g
anization)
(I.R.S. Employer Identification No.)
21650 Oxnard Street, Woodland Hills, CA
91367
(Address of Princi
p
al Executive Offices) (Zi
p
Code)
Title of each class
Name of each exchange on which registered
Common Stock, $.001 par value
New York Stock Exchange, Inc.
Rights to Purchase Series A Junior Participating Preferred Stock
New York Stock Exchange, Inc.

Table of contents

  • Page 1
    ... File Number: 1-12718 HEALTH NET, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 95-4288333 (I.R.S. Employer Identification No.) 21650 Oxnard Street, Woodland Hills, CA (Address of Principal Executive Offices...

  • Page 2
    Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2004.

  • Page 3
    HEALTH NET, INC. INDEX TO FORM 10-K Page PART I. Item 1-Business General Segment Information Provider Relationships and Responsibilities Additional Information Concerning Our Business Government Regulation Intellectual Property Employees Recent and Other Developments and Other Company Information ...

  • Page 4
    ... ("HMOs"), insured preferred provider organizations ("PPOs") and point-of-service ("POS") plans to approximately 6.5 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE programs. We also offer managed health care products related to...

  • Page 5
    ...service areas. Over the past several years, we have consolidated our health plan operations in six key states, Arizona, California, Connecticut, Oregon, New Jersey and New York and have seen significant growth in our small group business (generally defined as an employer group with 2 to 50 employees...

  • Page 6
    ...Medicaid members in Oregon as of December 31, 2004 or 2003. Northeast. Our Northeast operations are conducted in Connecticut, New Jersey and New York. For our large employer group business, we directly market commercial HMO, PPO and POS products in Connecticut and New York and commercial HMO and POS...

  • Page 7
    ... any Medicaid members in New York as of December 31, 2004 or 2003. Medicare Products We offer our Medicare products directly to individuals and through employer groups. To enroll in one of our Medicare plans, covered persons must be eligible for Medicare. We provide or arrange health care services...

  • Page 8
    Administrative Services Only Business We provide ASO products to large employer groups in California, Connecticut, New Jersey and New York. Under these arrangements, we provide claims processing, customer service, medical management, provider network access and other administrative services without ...

  • Page 9
    ...alone vision products are underwritten by Fidelity Security Life Insurance Company and administered by EyeMed. Government Contracts Segment Our Government Contracts segment includes government-sponsored managed care plans through the TRICARE program and other health care-related government contracts...

  • Page 10
    ...utilize a TRICARE authorized provider who is not a network provider but pay a higher co-payment than under TRICARE Prime or TRICARE Extra. As of December 31, 2004, there were 1,350,153 TRICARE eligibles enrolled in TRICARE Prime under our North Region contract. The total estimated number of eligible...

  • Page 11
    ... a network of qualified physicians, hospitals and other health care providers in each of the states we offer managed care products and services. Physician Relationships The following table sets forth the number of primary care and specialist physicians contracted either directly with our HMOs or...

  • Page 12
    ... fee-for-service schedule, although several have capitation arrangements with certain providers and provider groups in their market areas. Our Connecticut HMO has a capitation contract with the Connecticut State Medical Society IPA ("CSMS"). However, all administration, referral authorization...

  • Page 13
    ... Plans, Horizon Blue Cross and Health Insurance Plan of New York. Marketing and Sales We market our products and services to individual members through independent brokers, agents and consultants and through the Internet. We market our products and services for our group health business utilizing...

  • Page 14
    ..., agents and consultants, we use our limited internal sales staff to serve certain large employer groups. Once selected by a large employer group, we solicit enrollees from the employee base directly. During "open enrollment" periods when employees are permitted to change health care programs, we...

  • Page 15
    ... authorization process reduces inappropriate use of medical resources and achieves efficiencies in cases where reimbursement is based on risksharing arrangements. To limit possible abuse in utilization of hospital services in non-emergency situations, all of our health plans require that a member...

  • Page 16
    ... offering the card to our members in June 2004. These drug cards will cease being available when the voluntary prescription drug benefit program is implemented in January 2006. The MMA changes the methodology for payment to private plans beginning in 2006, when a form of competitive bidding begins...

  • Page 17
    ...act to the extent federally qualified products are offered and sold. ERISA. Most employee benefit plans are regulated by the federal government under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Employment-based health coverage is such an employee benefit plan. ERISA is...

  • Page 18
    ...both claims reimbursement and provider dispute resolution procedures. The DMHC advised health care service plans to implement them for all services provided on and after January 1, 2004. Any material modifications to the organization or operations of HN California and MHN are subject to prior review...

  • Page 19
    ... of administrative services for employers, providers and members; negotiation of agreements with physician groups, hospitals, pharmacies and other health care providers; handling of claims for payment of hospital and other services; and provision of data processing services. Our employees are not...

  • Page 20
    ... then-current exercise price of such Right, that number of shares of common stock having a market value of two times such exercise price. In addition, and subject to certain exceptions contained in the Rights Agreement, in the event that we are acquired in a merger or other business combination in...

  • Page 21
    ... premium pricing in our California and Northeast health plans and increased reserves in the fourth quarter of 2004. Another significant category of our health care costs are costs of pharmaceutical products and services. Although pharmaceutical costs have not been increasing at the level of hospital...

  • Page 22
    ... actual health care costs to exceed those costs estimated and reflected in premiums. These factors may include increased utilization of services, increased cost of individual services, catastrophes, epidemics, seasonality, new mandated benefits or other regulatory changes, and insured population...

  • Page 23
    ... by regulatory authorities, could adversely affect our revenue or the number of our members, increase costs or adversely affect our ability to bring new products to market as forecasted. In December 2000, the Department of Health and Human Services promulgated regulations under HIPAA related to the...

  • Page 24
    ... procedures; hold health plans liable for medical malpractice; restrict the ability of health plans to share or shift the cost of health care services to providers or members; reduce the reimbursement or payment levels for services provided under government programs such as Medicare or Medicaid...

  • Page 25
    .... We contract with physicians, hospitals and other providers as a means to assure access to health care services for our members, to manage health care costs and utilization and to better monitor the quality of care being delivered. In any particular market, providers could refuse to contract with...

  • Page 26
    ... have certain characteristics, capabilities or resources that give them an advantage in competing with us. These competitors include HMOs, PPOs, self-funded employers, insurance companies, hospitals, health care facilities and other health care providers. In addition, financial services or other 23

  • Page 27
    ... failure to pay for or provide health care, poor outcomes for care delivered or arranged, provider disputes, including disputes over withheld compensation, and claims related to self-funded business. Also, there are currently, and may be in the future, attempts to bring class action lawsuits against...

  • Page 28
    ...the fiscal quarter ended December 31, 2005, up to $375 million relating to cash and non-cash, non-recurring charges in connection with litigation and provider settlement payments, any increase in medical claims reserves and any premiums relating to the repayment or refinancing of our Senior Notes to...

  • Page 29
    ... information systems. The information gathered and processed by our management information systems assists us in, among other things, pricing our services, monitoring utilization and other cost factors, processing provider claims, billing our customers on a timely basis and identifying accounts...

  • Page 30
    ... market price of our common stock is subject to volatility. In 2004, the HMO Index, an index comprised of 12 managed care organizations, recorded a 46% rise in its value, while the value of Health Net's stock decreased by approximately 11%. There can be no assurance that our common stock will trade...

  • Page 31
    ... rent and rent related obligations for our Woodland Hills facilities were approximately $13.1 million in 2004. We also lease an aggregate of approximately 490,615 square feet of office space in Rancho Cordova, California for certain Health Plan Services and Government Contract operations. Our...

  • Page 32
    .... Item 3. Legal Proceedings. Class Action Lawsuits McCoy v. Health Net, Inc. et al., and Wachtel v. Guardian Life Insurance Co. These two lawsuits are styled as class actions and were filed on behalf of a class of subscribers in a number of our large and small employer group plans in the Northeast...

  • Page 33
    ...behalf of health plan members, and the provider track, which includes suits brought on behalf of health care providers. On September 19, 2003, the Court dismissed the final subscriber track action involving us, The State of Connecticut v. Physicians Health Services of Connecticut, Inc. (filed in the...

  • Page 34
    ... responded by attempting to negotiate changes to the terms of our hospital contracts, in many cases to incorporate fixed reimbursement payment methodologies intended to reduce our exposure to the stop-loss claims. As we reached the third quarter of 2004, an increase in arbitration requests and other...

  • Page 35
    ... provider service agreement with the Tenet hospitals that incorporates a fixed reimbursement structure that is structured to avoid similar disputes. The settlement amount paid to Tenet was included as part of the fourth quarter 2004 earnings charge described above. Superior National Insurance Group...

  • Page 36
    ... general business activities, such as contract disputes and employment litigation, and claims brought by members seeking coverage or additional reimbursement for services allegedly rendered to our members, but which allegedly were either underpaid or not paid. We are also subject to claims relating...

  • Page 37
    ... regulatory net worth requirements and additional state regulations which may restrict the declaration of dividends by HMOs, insurance companies and licensed managed health care plans. The payment of any dividend is at the discretion of our Board of Directors and depends upon our earnings, financial...

  • Page 38
    ... tax benefits from the exercise of employee stock options) of our common stock under our stock repurchase program. Share repurchases are made under our stock repurchase program from time to time through open market purchases or through privately negotiated transactions. As of December 31, 2004, we...

  • Page 39
    ... information related to repurchases of our common stock during the twelve months ended December 31, 2004: Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the) Plans or Programs) (d) Period Total Number of Shares Purchased (a) Average Price...

  • Page 40
    ... the audited financial statements and notes thereto contained elsewhere in this Annual Report. Year Ended December 31, 2004 2003 2002 2001 2000 (Amounts in thousands, except per share data) STATEMENT OF OPERATIONS DATA (1): REVENUES Health plan services premiums Government contracts Net investment...

  • Page 41
    ... Cumulative effect of changes in accounting principle Net Weighted average shares outstanding: Basic Diluted BALANCE SHEET DATA (2): Cash and cash equivalents and investments available for sale Total assets Senior credit facility and capital leases Senior notes payable Stockholders' equity OPERATING...

  • Page 42
    ... our California health plan and related to claims issues extending as far back as 2001. For additional information regarding our provider disputes, see "Item 3. Legal Proceedings-Provider Disputes" and "-Results of Operations-Health Plan Services Costs." Reserve Developments. The fourth quarter 2004...

  • Page 43
    ... before cumulative effect of a change in accounting principle Health plan services medical care ratio (MCR) Government contracts cost ratio Administrative ratio (1) Selling costs ratio (2) Health plan services premiums per member per month (PMPM) (3) Health plan services PMPM (3) (1) $ 9,560,244...

  • Page 44
    ... change in membership by program and by state between 2004 and 2003. Commercial (including ASO members) 2004 2003 Change Medicare Risk 2004 2003 Change 2004 Medicaid 2003 Change Health Plan Total 2004 2003 Change (Membership in thousands) Arizona California Connecticut New Jersey New York Oregon...

  • Page 45
    ... state between 2003 and 2002. Commercial (including ASO members) 2003 2002 Change Medicare Risk 2003 2002 Change 2003 Medicaid 2002 Change Health Plan Total 2003 2002 Change (Membership in thousands) Arizona California Connecticut New Jersey New York Oregon Pennsylvania Total Government Contracts...

  • Page 46
    ... Life Office. For additional information regarding our TRICARE contract for the North Region and the other government contracts we manage and administer, see "Item 1. Business-Segment Information- Government Contracts Segment." Health Plan Services Premiums 2004 Compared to 2003 Health Plan Services...

  • Page 47
    ... account in California, the loss of members in Arizona and Connecticut, and the withdrawal from our Pennsylvania health plan. We ceased providing coverage for commercial members in our Pennsylvania health plan effective September 30, 2003 and for the members enrolled in the Federal Employee Health...

  • Page 48
    ...in Total Health Plan Services Member Months Increase in Total Health Plan Services Premiums Revenue over Prior Year $511.6 $ 40.3 $ (42.3) $513.6 11.9 % (3.3)% 8.6 % 5.6 % (8.6)% (3.0)% 0.8 % 2.8 % 3.6 % 8.1 % (2.1)% 6.0 % Government Contracts Revenues The increases in Government Contracts revenue...

  • Page 49
    ...provider settlements of $143.5 million relating to claims processing and payment issues that had been or were being resolved in the fourth quarter of 2004. These higher levels of paid claims persisted through the balance of 2004 and contributed to the increase in overall commercial health care costs...

  • Page 50
    ..., 2004 compared to the same period in 2003. Medicare risk health care costs increased primarily as a result of higher hospital costs from higher bed day utilization, higher pharmacy cost trend for HMO products and provider settlements of $14.6 million relating to claims processing and payment issues...

  • Page 51
    ... compared to the same period in 2002. Medicaid health care costs increased primarily due to limited Medicaid fee schedule increases and a significant portion of providers in California being paid capitation on a percentage of premium basis. Health Plan Services MCR decreased to 82.7% for the year...

  • Page 52
    ...ratio (selling costs as a percentage of Health Plan Services premiums) decreased to 2.5% for the year ended December 31, 2004 from 2.6% for the same period in 2003, primarily due to lower broker commissions as a result of the decline in small group and individual enrollment in 2004. Amortization and...

  • Page 53
    ... and details regarding the summary information contained in the chart. 2004 Charges 2003 Charges (Dollars in millions) 2002 Charges Severance and related benefit costs Modification to 2001 restructuring plan Asset impairment charge Real estate lease termination costs Total 2004 Charges $ 25...

  • Page 54
    ... an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. ("CSMS-IPA") for $15.0 million that we expected to recover through future connectivity service capabilities. CSMS-IPA is an association of medical doctors providing health care primarily in...

  • Page 55
    ... are summarized in the following table. 2004 2003 (Dollars in millions) 2002 Subacute subsidiaries Florida health plan Dental and vision subsidiaries Employer Services Group subsidiaries Claims processing subsidiary Buildings held for sale Net gain (loss) on sale of businesses and assets held for...

  • Page 56
    ... Net Plus Managed Care Services, Inc. and Health Net CompAmerica, Inc., collectively known as our employer services group subsidiary, to First Health Group Corp. In connection with this sale, we received $79.5 million in cash. 2002 Divestitures Effective July 1, 2002, we sold our claims processing...

  • Page 57
    ...our amounts receivable from our TRICARE contract for the North Region. Health care receivables related to TRICARE are best estimates of payments that are ultimately collectible or payable. The timing of collection of such receivables is impacted by government audit and negotiation and can extend for...

  • Page 58
    ... receivable/payable under government contracts of $175.3 million, primarily due to the transition to the new TRICARE contract for the North Region, and Delayed receipt of the December 2004 Medicare payment of $66 million for our California and New York health plans. 2003 Compared to 2002 Net cash...

  • Page 59
    ... ended December 31, 2003 as compared to the same period in 2002. Stock Repurchase Program In April 2002, our Board of Directors authorized us to repurchase up to $250 million (net of exercise proceeds and tax benefits from the exercise of employee stock options) of our common stock under a stock 56

  • Page 60
    ... our total authority under our stock repurchase program through 2004 was estimated at $593 million, including the realized exercise proceeds and tax benefits. Share repurchases are made under our stock repurchase program from time to time through open market purchases or through privately negotiated...

  • Page 61
    ... third-party insurance companies in the event that we do not pay our portion of the workers' compensation claims. Due to the additional letters of credit secured, the maximum amount that can be drawn under our senior credit facility as of the date of the filing of this Annual Report on Form 10-K was...

  • Page 62
    ... balance sheet as of December 31, 2004. We have also excluded from such table various contracts we have entered into with our health care providers, health care facilities, the federal government and other contracts that we have entered into for the purpose of providing health care services...

  • Page 63
    ... Annual Report on Form 10-K. Health Plan Services Health plan services premiums include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based on a predetermined prepaid fee, Medicaid...

  • Page 64
    ..., benefit plan changes and changes in membership. An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns and medical cost...

  • Page 65
    ...of December 31, 2004. Government Contracts The TRICARE North Region contract is made up of two major revenue components, health care and administrative services. Health care services revenue includes health care costs, including paid claims and estimated IBNR expenses, for care provided for which we...

  • Page 66
    ...in various disputes with members, health care providers, and other entities, as well as audits by government agencies that relate to our services and/or business practices. We and several of our competitors were named as defendants in a number of significant class action lawsuits alleging violations...

  • Page 67
    ... long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset, significant...

  • Page 68
    ...Inc. Managed Health Network Health Net Life Insurance Company Health Net of Arizona, Inc. Health Net Health Plan of Oregon, Inc. Health Net of Connecticut, Inc. Health Net Insurance of Connecticut, Inc. Health Net of New Jersey, Inc. Health Net of New York, Inc. Health Net Insurance of New York, Inc...

  • Page 69
    ... insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to interest rate...

  • Page 70
    ... Offered Rate plus 399.625 basis points. See Note 6 to our consolidated financial statements for additional information regarding the Swap Contracts. The interest rate on borrowings under our senior credit facility, of which there were none as of December 31, 2004, is subject to change because...

  • Page 71
    .... Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. Because of its inherent limitations...

  • Page 72
    ...of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Health Net, Inc. and...

  • Page 73
    ended December 31, 2004 of the Company and our report dated March 14, 2005 expressed an unqualified opinion on those financial statements and financial statement schedules. /s/ D ELOITTE & TOUCHE LLP Los Angeles, California March 14, 2005 Item 9B. Other Information. None. 70

  • Page 74
    ... adopted a Code of Business Conduct and Ethics that applies to our employees, directors and officers, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is posted on our Internet web site, www.healthnet.com...

  • Page 75
    ... Annual Report on Form 10-K or are incorporated herein by reference: 2.1 Agreement and Plan of Merger, dated October 1, 1996, by and among Health Systems International, Inc., FH Acquisition Corp. and Foundation Health Corporation (filed as Exhibit 2.5 to the Company's Registration Statement on Form...

  • Page 76
    ... Company's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12718) and incorporated herein by reference). Employment Letter Agreement dated as of August 26, 2004 between Health Net, Inc. and Anthony S. Piszel (filed as Exhibit 10.2 to the Company's Quarterly Report on Form...

  • Page 77
    ... herein by reference). Health Net, Inc. (formerly Foundation Health Systems, Inc.) Deferred Compensation Plan Trust Agreement effective September 1, 1998 between Foundation Health Systems, Inc. and Union Bank of California (filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the...

  • Page 78
    ...). Foundation Health Systems, Inc. Third Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 112718) and incorporated herein by reference). Health Net, Inc. Employee Stock...

  • Page 79
    ...'s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 112718) and incorporated herein by reference). Amendment Number One to Foundation Health Systems, Inc. Supplemental Executive Retirement Plan effective as of August 1, 2004 (filed as Exhibit 10.4 to the Company's Quarterly...

  • Page 80
    ...7, 2003 by and among Health Net Life Insurance Company and SafeHealth Life Insurance Company (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-12718) and incorporated herein by reference). Network Access Agreement dated as of April...

  • Page 81
    * Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c) of Form 10-K. †A copy of the exhibit is being filed with this Annual Report on Form 10-K. 78

  • Page 82
    ... Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH NET, INC. By: /s/ ANTHONY S. PISZEL Anthony S. Piszel Executive Vice President and Chief Financial Officer Date: March 14, 2005 Pursuant to the requirements of...

  • Page 83
    Frederick C. Yeager 79

  • Page 84
    ... The following consolidated financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K: Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated...

  • Page 85
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We have audited the accompanying consolidated balance sheets of Health Net, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and ...

  • Page 86
    ...: Reserves for claims and other settlements Health care and other costs payable under government contracts IBNR health care costs payable under TRICARE North contract Unearned premiums Accounts payable and other liabilities Total current liabilities Senior notes payable Other noncurrent liabilities...

  • Page 87
    F-3

  • Page 88
    ... premiums Government contracts Net investment income Other income Total revenues Expenses Health plan services Government contracts General and administrative Selling Depreciation Amortization Interest Severance, asset impairments and restructuring costs Net (gain) loss on sales of businesses...

  • Page 89
    F-4

  • Page 90
    ... grants Employee stock purchase plan Balance as of December 31, 2002 Comprehensive income: Net income Minimum pension liability adjustment Change in unrealized appreciation on investments, net of tax benefit of $6,852 Total comprehensive income Exercise of stock options including related tax benefit...

  • Page 91
    ...of a change in accounting principle Other changes Changes in assets and liabilities, net of effects of dispositions: Premiums receivable and unearned premiums Other assets Amounts receivable/payable under government contracts Reserves for claims and other settlements Tax benefit on stock options and...

  • Page 92
    F-6

  • Page 93
    ... (HMOs), insured preferred provider organizations (PPOs) and point of service (POS) plans to approximately 6.5 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE programs. Our subsidiaries also offer managed health care products...

  • Page 94
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Revenue Recognition Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums ...

  • Page 95
    ... hospital care to enrolled members on a capitation basis. Our HMOs also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital per diems, and case rates under which providers bill the HMOs for each individual service...

  • Page 96
    .... Under the new TRICARE contract for the North Region we recognize amounts receivable and payable under the government contracts related to estimated health care IBNR expenses which are reported separately on the accompanying consolidated balance sheet as of December 31, 2004. These amounts...

  • Page 97
    ... and costs related to computer software developed for internal use for areas of the Health Net One system which are currently in use are amortized over a ten-year period. Expenditures for maintenance and repairs are expensed as incurred. Major improvements which increase the estimated useful life of...

  • Page 98
    ... current estimated useful lives. The changes in the carrying amount of goodwill by reporting unit are as follows (amounts in millions): Health Plans Dental/ Vision Employer Services Group Subacute Total Balance as of January 1, 2003 Goodwill written off related to sale of business unit Balance as...

  • Page 99
    ... respect to premiums receivable are limited due to the large number of payers comprising our customer base. Our 10 largest employer group premiums receivable balances within each of our plans accounted for 54% and 66% of our total premiums receivable as of December 31, 2004 and 2003, respectively...

  • Page 100
    ... to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS...

  • Page 101
    ...employee compensation expense included in reported net income, net of related tax effects Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards subject to SFAS No. 123, net of related tax effects Net income, pro forma Basic earnings per share...

  • Page 102
    ... of tax, in net income were $(4.7) million, $3.2 million and $3.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. Taxes Based on Premiums We provide services in certain states which require premium taxes to be paid by us based on membership or billed premiums. These taxes...

  • Page 103
    ... our consolidated financial position or results of operations. Note 3-Divestitures and Assets Held for Sale The divestitures of our American VitalCare and Managed Alternative Care subsidiaries, employer services group subsidiary, dental, vision, and claims services subsidiaries during 2004, 2003 and...

  • Page 104
    ...reinsurance agreement to transfer the full responsibility for the stand alone dental and vision policies of Health Net Life Insurance Company to SafeHealth Life Insurance Company (SafeHealth Life). As a result of the sales, we no longer underwrite or administer stand alone dental and vision products...

  • Page 105
    ... commercial health plan from the commercial market in the Commonwealth of Pennsylvania. Coverage for our members enrolled in the Federal Employee Health Benefit Plan was discontinued on January 11, 2004, however, we have maintained our network of providers in Pennsylvania to service our New Jersey...

  • Page 106
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) EOS Claims Services Subsidiary Effective July 1, 2002, we sold our claims processing subsidiary, EOS Claims Services, Inc. (EOS Claims), to Tristar Insurance Group, Inc. (Tristar). In connection with the sale, we received $500,...

  • Page 107
    ... available-for-sale investments were as follows: 2004 Gross Unrealized Holding Gains Gross Unrealized Holding Losses Amortized Cost Carrying Value (Amounts in thousands) Mortgage-backed securities U.S. government and agencies Obligations of states and other political subdivisions Corporate debt...

  • Page 108
    ...The following table shows the number of our individual securities that have been in a continuous loss position at December 31, 2004. Less than 12 Months 12 Months or More Total Mortgage-backed U.S. government and agency Obligation of state and other political subdivisions Corporate debt 49 58 7 25...

  • Page 109
    ... of (1) the Bank of America prime rate and (2) the federal funds rate plus 0.5%, plus a margin of up to 12.5 basis points. We have also incurred and will continue to incur customary fees in connection with the senior credit facility. As of December 31, 2004, no amounts were outstanding under our...

  • Page 110
    ...the fiscal quarter ended December 31, 2005, up to $375 million relating to cash and non-cash, non-recurring charges in connection with litigation and provider settlement payments, any increase in medical claims reserves and any premiums relating to the repayment or refinancing of our Senior Notes to...

  • Page 111
    ... stock option plans which cover certain employees, officers and non-employee directors, and an employee stock purchase plan under which substantially all of our full-time employees are eligible to participate. The stockholders have approved these plans except for the 1998 Stock Option Plan which...

  • Page 112
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table summarizes the weighted average exercise price and weighted average remaining contractual life for significant option groups outstanding at December 31, 2004: Options Outstanding Weighted Average Remaining ...

  • Page 113
    ...3 to our registration statement on Form 8-A/A filed with the SEC on July 26, 2004. Stock Repurchase Program In April 2002, our Board of Directors authorized us to repurchase up to $250 million (net of exercise proceeds and tax benefits from the exercise of employee stock options) of our common stock...

  • Page 114
    ... Board of Directors. In connection therewith, the Company amended and restated its existing deferred compensation plan to provide that, among other things, non-employee members of the Board are no longer eligible participants under that plan. Prior to May 1997, certain members of management, highly...

  • Page 115
    ... defined benefit health care and life insurance plans that provide postretirement medical and life insurance benefits to directors, key executives, employees and dependents who meet certain eligibility requirements. The Health Net health care plan is non-contributory for employees retired prior to...

  • Page 116
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31 (amounts in thousands): 2004 2003 Projected benefit obligation Accumulated benefit obligation Fair value of plan ...

  • Page 117
    ...reported for the health care plans. A onepercentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2004 (amounts in thousands): 1-Percentage Point Increase 1-Percentage Point Decrease Effect on total of service and interest cost...

  • Page 118
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 10-Income Taxes Significant components of the provision for income taxes are as follows for the years ended December 31 (amounts in thousands): 2004 2003 2002 Current: Federal State Total current Deferred: Federal State ...

  • Page 119
    ...statutory accounting and reporting practices. Under the Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must comply with certain minimum capital or tangible net equity requirements. Our nonCalifornia health plans, as well as our health and life insurance companies, must...

  • Page 120
    ... Legal Proceedings Class Action Lawsuits McCoy v. Health Net, Inc. et al., and Wachtell v. Guardian Life Insurance Co. These two lawsuits are styled as class actions and were filed on behalf of a class of subscribers in a number of our large and small employer group plans in the Northeast...

  • Page 121
    ...behalf of health plan members, and the provider track, which includes suits brought on behalf of health care providers. On September 19, 2003, the Court dismissed the final subscriber track action involving us, The State of Connecticut v. Physicians Health Services of Connecticut, Inc. (filed in the...

  • Page 122
    ... involving providers. A number of these arbitrations and litigation relate to alleged stop-loss claim underpayments, where we paid a portion of the provider's billings and denied certain charges based on a line-by-line review of the itemized billing statement to identify terms and services that...

  • Page 123
    ... provider service agreement with the Tenet hospitals that incorporates a fixed reimbursement structure that is structured to avoid similar disputes. The settlement amount paid to Tenet was included as part of the fourth quarter 2004 earnings charge described above. Superior National Insurance Group...

  • Page 124
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) SV00-14099GM. The lawsuit related to the 1998 sale of Business Insurance Group, Inc. ("BIG"), a holding company of workers' compensation insurance companies operating primarily in California, by FHC to Superior National ...

  • Page 125
    ...lease agreement to renew its leased office space in Woodland Hills, California for its executive offices commencing on January 1, 2005. As part of the lease renewal, we amended our existing lease, which was scheduled to expire on December 31, 2004, to provide for favorable reductions to our costs in...

  • Page 126
    ... day of the month based on the number of designated beneficiaries. Pharmacy Benefit Services On April 1, 2004 we entered into a new three-year agreement with an external third-party service provider for it to provide pharmacy claims processing services for all of our health plans beginning April...

  • Page 127
    ... of our liability balances for severance and related benefit costs incurred in connection with the May 2004 Plan is as follows (amounts in millions): Health Plan Services Government Contracts Total Reportable Segments Corporate and Other Total Balance as of January 1, 2004 Amount incurred during...

  • Page 128
    ... an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. (CSMS-IPA) for $15.0 million that we expected to recover through future connectivity service capabilities. CSMS-IPA is an association of medical doctors providing health care primarily in...

  • Page 129
    ...our health plans in the states of Arizona, California, Connecticut, New Jersey, New York and Oregon, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. Our Government Contracts reportable segment includes government-sponsored...

  • Page 130
    ...). 2004 Health Plan Services Government Contracts Corporate And Other (1) Total Revenues from external sources Intersegment revenues Net investment income Other income Interest expense Depreciation and amortization Severance, asset impairments and restructuring costs Gain on sale of businesses...

  • Page 131
    ... center subsidiaries. Provider settlements and related legal costs recorded in the fourth quarter of 2004 are excluded from our Health Plan Services reportable segment profit. Severance, asset impairments, restructuring costs and net loss on assets held for sale and sale of businesses and properties...

  • Page 132
    .... Related to provider settlements associated with claims processing and payment issues resolved during the fourth quarter of 2004. For incurred claims related to prior years, a negative amount would mean that our actual health care service claims related to prior years were less than the estimates...

  • Page 133
    ... claims and reported but unprocessed claims. For incurred claims related to prior years, the pre-tax income impact is 30% of the amounts shown, due to the risk sharing features of the contracts. Additionally, health care change orders and/or bid price adjustments to revenue of $65.6 million in 2004...

  • Page 134
    ...shows the Company's government contracts total incurred claims and administrative and other costs for the years ended December 31, (amounts in thousands): Government Contracts 2004 2003 2002 Total incurred claims Costs incurred related to our TRICARE contract for the North Region Administrative and...

  • Page 135
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 18-Subsequent Events Effective February 28, 2005, we completed the sale of Gem Holding Corporation and its subsidiary, Gem Insurance Company (collectively Gem), to SafeGuard Health Enterprises, Inc. We received a promissory...

  • Page 136
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED BALANCE SHEETS (Amounts in thousands) December 31, 2004 December 31, 2003 ASSETS Current Assets: Cash and cash equivalents Investments-available for sale Other assets Deferred ...

  • Page 137
    F-50

  • Page 138
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands) Year Ended December 31, 2004 2003 2002 REVENUES: Net investment income Other income Administrative service agreements Total revenues...

  • Page 139
    ... SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2004 2003 2002 NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Sales...

  • Page 140
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. NOTE TO CONDENSED FINANCIAL STATEMENTS Note 1-Basis of Presentation Health Net, Inc.'s ("HNT") investment in subsidiaries is stated at cost plus equity in undistributed earnings (losses) of ...

  • Page 141
    SUPPLEMENTAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES HEALTH NET, INC. (Amounts in thousands) Balance at Beginning of Period Charged to Costs and Expenses Credited to Other Accounts (1) Balance at End of Period Deductions (2) 2004: Allowance for doubtful accounts: Premiums ...

  • Page 142
    ...and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ JAY M. GELLERT b) Date: March 14, 2005 Jay M. Gellert President and Chief Executive...

  • Page 143
    ... information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ A NTHONY S. PISZEL b) Date: March 14, 2005 Anthony S. Piszel Executive Vice President and Chief...

  • Page 144
    ... Annual Report of Health Net, Inc. (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Jay M. Gellert, as Chief Executive Officer of the Company, and Anthony S. Piszel, as Chief Financial Officer...