Health Net 2005 Annual Report Download - page 121

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
material, and we have agreed to the adjustments. As a result of the examination closure for those years, our
reserve for tax contingencies was adjusted in 2004 to reflect the examination adjustments as well as the reduction
of estimated contingent tax costs in accordance with our policy outlined in Note 2.
Note 11—Regulatory Requirements
All of our health plans as well as our insurance subsidiaries are required to periodically file financial
statements with regulatory agencies in accordance with 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 non-California health plans, as well as our health and
life insurance companies, must comply with their respective state’s minimum regulatory capital requirements
and, in certain cases, maintain minimum investment amounts for the restricted use of the regulators. Within the
scope of state statutes and/or other parameters established by the regulators, we have discretion as to whether we
invest such funds in cash and cash equivalents or other investments. Restricted cash and cash equivalents, as of
December 31, 2005 and 2004, totaled $5.1 million and $18.1 million, respectively. Investment securities held by
trustees or agencies pursuant to state regulatory requirements were $132.1 million and $124.1 million as of
December 31, 2005 and 2004, respectively. See “Restricted Assets” section in Note 2 for additional information.
As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to
restrictions on their ability to make dividend payments, loans or other transfers of cash to us. Such restrictions,
unless amended or waived, limit the use of any cash generated by these subsidiaries to pay our obligations. The
maximum amount of dividends which can be paid by the insurance company subsidiaries to us without prior
approval of the insurance departments is subject to restrictions relating to statutory surplus, statutory income and
unassigned surplus. Management believes that as of December 31, 2005, all of our health plans and insurance
subsidiaries met their respective regulatory requirements.
Note 12—Commitments and Contingencies
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 in the United States District Court for the
District of New Jersey on behalf of a class of subscribers in a number of our large and small employer group
plans in the Northeast. The Wachtel complaint was filed on July 30, 2001 and the McCoy complaint was filed on
April 23, 2003. These two cases have been consolidated for purposes of trial. Plaintiffs allege that Health Net,
Inc., Health Net of the Northeast, Inc. and Health Net of New Jersey, Inc. violated ERISA in connection with
various practices related to the reimbursement of claims for services provided by out-of-network providers.
Plaintiffs seek relief in the form of payment of benefits, disgorgement, injunctive and other equitable relief, and
attorneys’ fees.
During 2001 and 2002, the parties filed and argued various motions and engaged in limited discovery. On
April 23, 2003, plaintiffs filed a motion for class certification seeking to certify a nationwide class of Health Net
subscribers. We opposed that motion and the Court took it under submission. On June 12, 2003, we filed a
motion to dismiss the case, which was ultimately denied. On August 8, 2003, plaintiffs filed a First Amended
Complaint, adding Health Net, Inc. as a defendant and expanding the alleged violations. On December 22, 2003,
plaintiffs filed a motion for summary judgment on the issue of whether Health Net utilized an outdated database
for calculating out-of-network reimbursements, which we opposed. That motion, and various other motions
seeking injunctive relief and to narrow the issues in this case, are still pending.
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