Health Net 2005 Annual Report Download - page 128

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We intend to defend ourselves vigorously against Cap Z’s claims. This case is subject to many uncertainties,
and, given its complexity and scope, its final outcome cannot be predicted at this time. It is possible that in a
particular quarter or annual period our results of operations and cash flow could be materially affected by an
ultimate unfavorable resolution of the Cap Z Action depending, in part, upon the results of operations or cash
flow for such period. However, at this time, management believes that the ultimate outcome of the Cap Z Action
should not have a material adverse effect on our financial condition and liquidity.
Provider Disputes
In the ordinary course of our business operations, we are party to arbitrations and litigation involving
providers. A number of these arbitrations and litigation matters 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 supplies and services that should have been included within specific
charges and not billed separately. A smaller number of these arbitrations and litigation matters relate to alleged
stop-loss claim underpayments where we paid a portion of the provider’s billings and denied the balance based
on the level of prices charged by the provider.
In late 2001, we began to see a pronounced increase in the number of high dollar, stop-loss inpatient claims
we were receiving from providers. As stop-loss claims rose, the percentage of payments made to hospitals for
stop-loss claims grew as well, in some cases in excess of 50%. The increase was caused by some hospitals
aggressively raising chargemasters and billing for items separately when we believed they should have been
included in a base charge. Management at our California health plan at that time decided to 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 pretax 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. As of December 31,
2005 we have currently settled approximately 87% of the California provider disputes upon which the earnings
charge was based, and are in settlement discussions with a substantial number of the remaining providers. The
remaining balance at December 31, 2005 is approximately $35 million. During the year ended December 31,
2005, no significant modification was made to the original estimated provider dispute liability amount, as we
believed that the amount is adequate in all material respects to cover the outstanding estimated provider dispute
settlements. In connection with these settlements, we have entered into new contracts with a large portion of our
provider network.
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