Health Net 2005 Annual Report Download - page 35

Discovery has concluded and a final pre-trial order was submitted to the District Court in McCoy/Wachtel
on June 28, 2005. Both sides have moved for summary judgment, and briefing on those motions has been
completed. In their summary judgment briefing, plaintiffs also sought appointment of a monitor to act as an
independent fiduciary to oversee the administration of our Northeast health plans (including claims payment
practices). We have opposed the appointment of a monitor. Notwithstanding our pending Third Circuit appeal of
the District Court’s class certification order, a trial date was set for September 19, 2005. On July 29, 2005, we
filed a motion in the District Court to stay the District Court action and the trial in light of the pending Third
Circuit appeal. On August 4, 2005, the District Court denied our motion to stay and instead adjourned the
September 19 trial date and ordered that the parties be prepared to go to trial on seven days’ notice as of
September 19, 2005. We immediately filed a request for a stay with the Third Circuit seeking an order directing
the District Court to refrain from holding any trial or entering any judgment or order that would have the effect of
resolving any claims or issues affecting the disputed class until the Third Circuit rules on the class certification
order. Plaintiffs cross-moved for dismissal of the class certification appeal. On September 27, 2005, the Third
Circuit granted our motion for a stay and denied plaintiffs’ cross-motion. Plaintiffs have not specified the amount
of damages being sought in this litigation and, although these proceedings are subject to many uncertainties,
based on the proceedings to date, we believe the amount of damages ultimately asserted by plaintiffs could be
material.
On August 9, 2005, Plaintiffs filed a motion with the District Court seeking sanctions against us for a
variety of alleged acts of serious misconduct, discovery abuses and fraud on the District Court. The sanctions
sought by plaintiffs and being considered by the Court include, among others, entry of a default judgment,
monetary sanctions, including a substantial award for plaintiffs’ legal fees, and either the appointment of a
monitor to oversee our claims payment practices and our dealings with state regulators or the appointment of an
independent fiduciary to replace the company as a fiduciary with respect to our claims adjudications for
members. On September 12, 2005, we responded to plaintiffs’ motion denying that any sanctionable misconduct,
discovery abuses or fraud had occurred. The District Court held hearings on plaintiffs’ motion for sanctions
October 17 and 18, 2005, November 15 – 17, 2005, November 22, 2005, December 19 and 20, 2005 and
January 5, 2006. Throughout the hearing process, the parties took additional depositions and submitted additional
briefs on issues that arose during the hearings. The hearings have recessed but not concluded.
We intend to defend ourselves vigorously in this litigation. These proceedings are subject to many
uncertainties, and, given their complexity and scope, their 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 these proceedings or the incurrence of substantial legal fees or
discovery expenses during the pendency of the proceedings 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 these
proceedings should not have a material adverse effect on our financial condition and liquidity.
In Re Managed Care Litigation
Various class action lawsuits against managed care companies, including us, were transferred by the Judicial
Panel on Multidistrict Litigation (“JPML”) to the United States District Court for the Southern District of Florida
for coordinated or consolidated pretrial proceedings in In re Managed Care Litigation, MDL 1334. This
proceeding was divided into two tracks, the subscriber track, comprising actions brought on behalf of health plan
members, and the provider track, comprising actions 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 District of Connecticut on September 7, 2000), on
grounds that the State of Connecticut lacked standing to bring the ERISA claims asserted in the complaint. That
same day, the Court ordered that the subscriber track be closed “in light of the dismissal of all cases in the
Subscriber Track.” The State of Connecticut appealed the dismissal order to the Eleventh Circuit Court of
Appeals and on September 10, 2004, the Eleventh Circuit affirmed the District Court’s dismissal. On
February 22, 2005, the Supreme Court of the United States denied plaintiffs’ Petition for Writ of Certiorari on the
Eleventh Circuit’s decision to uphold the dismissal.
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