Health Net 2004 Annual Report Download - page 123

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HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
respond to this trend by instituting a number of practices designed to reduce the cost of these claims. These practices included line
item review of itemized billing statements and review of, and adjustment to, the level of prices charged on stop-loss claims.
By early 2004, we began to see evidence that our claims review practices were causing significant friction with hospitals
although, at that time, there was a relatively limited number of outstanding arbitration and litigation proceedings. We 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 litigation prompted us to review our approach to our claims review process for stop-loss claims and our
strategy relating to provider disputes. Given that our provider network is a key strategic asset, management decided in the fourth
quarter of 2004 to enter into negotiations in an attempt to settle a large number of provider disputes in our California and Northeast
health plans. The majority of these disputes related to alleged underpayment of stop-loss claims.
During the fourth quarter of 2004 we recorded a $169 million pre-tax charge for expenses associated with settlements with
providers that had been, or are currently in the process of being resolved, principally involving these alleged stop-loss claims
underpayments. The earnings charge was recorded following a thorough review of all outstanding claims and management’s decision
in the fourth quarter of 2004 to enter into negotiations in an attempt to settle a large number of these claims in our California and
Northeast health plans. We have currently settled approximately 59% of the California provider disputes upon which the earnings
charge was based (representing approximately 47% of the amounts reserved for in these disputes), including Tenet Healthcare as
described below, and are in settlement discussions with a substantial number of the remaining providers. In connection with these
settlements, we have entered into new contracts with a large portion of our provider network.
Tenet Healthcare
In July 2003, 39 hospitals owned or operated by Tenet Healthcare Corporation (“Tenet”) filed an arbitration demand against us
alleging a total of approximately $45 million in claim underpayments by our California health plan subsidiary. The arbitration
demand was amended in October 2004 to increase the demand of alleged claim underpayments to approximately $77 million plus
interest, attorneys’ fees and punitive damages, and also asserted various other claims. We filed counterclaims against Tenet on
various theories of recovery, including Tenet’s pricing strategy. In late 2004, Tenet advised us that its demand relating to the alleged
claim underpayments had increased to approximately $120 million, not including interest, attorneys’ fees and punitive damages.
On February 11, 2005, we entered into a settlement agreement with Tenet to resolve all outstanding claims and counter-claims
in the arbitration. As part of the settlement agreement, we agreed to pay Tenet $28.5 million and release our counter-claims in
exchange for Tenet’s release of all of its claims in the arbitration. The settlement agreement also establishes a procedure for
adjudication and resolution of other claims for hospital services through November 1, 2004, the date we entered into a new 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
We and our former wholly-owned subsidiary, Foundation Health Corporation (“FHC”), which merged into Health Net, Inc. in
January 2001, were named in an adversary proceeding, Superior National Insurance Group, Inc. v. Foundation Health Corporation,
Foundation Health Systems, Inc. and Milliman & Robertson, Inc., filed on April 28, 2000, in the United States Bankruptcy Court for
the Central District of California, case number
F-37