Health Net 2005 Annual Report Download - page 36

The provider track includes the following actions involving us: Shane v. Humana, Inc., et al. (including
Health Net, Inc.) (filed in the Southern District of Florida on August 17, 2000 as an amendment to a suit filed in
the Western District of Kentucky), California Medical Association v. Blue Cross of California, Inc., PacifiCare
Health Systems, Inc., PacifiCare Operations, Inc. and Foundation Health Systems, Inc. (filed in the Northern
District of California in May 2000), Klay v. Prudential Ins. Co. of America, et al. (including Foundation Health
Systems, Inc.) (filed in the Southern District of Florida on February 22, 2001 as an amendment to a case filed in
the Northern District of California), Connecticut State Medical Society v. Physicians Health Services of
Connecticut, Inc. (filed in Connecticut state court on February 14, 2001), Lynch v. Physicians Health Services of
Connecticut, Inc. (filed in Connecticut state court on February 14, 2001), Sutter v. Health Net of the Northeast,
Inc. (filed in New Jersey state court on April 26, 2002), Medical Society of New Jersey v. Health Net, Inc., et al.,
(filed in New Jersey state court on May 8, 2002), Knecht v. Cigna, et al. (including Health Net, Inc.) (filed in the
District of Oregon in May 2003), Solomon v. Cigna, et. al. (including Health Net, Inc.) (filed in the Southern
District of Florida on October 17, 2003), Ashton v. Health Net, Inc., et al. (filed in the Southern District of
Florida on January 20, 2004), and Freiberg v. UnitedHealthcare, Inc., et al. (including Health Net, Inc.) (filed in
the Southern District of Florida on February 24, 2004). These actions allege that the defendants, including us,
systematically underpaid providers for medical services to members, have delayed payments to providers,
imposed unfair contracting terms on providers, and negotiated capitation payments inadequate to cover the costs
of the health care services provided and assert claims under the Racketeer Influenced and Corrupt Organizations
Act (RICO), ERISA, and several state common law doctrines and statutes. Shane, the lead physician provider
track action, asserts claims on behalf of physicians and seeks certification of a nationwide class. The Knecht,
Solomon, Ashton and Freiberg cases all are brought on behalf of health care providers other than physicians and
seek certification of a nationwide class of similarly situated health care providers. Other than Shane, all provider
track actions involving us have been stayed.
On May 3, 2005, we and the representatives of approximately 900,000 physicians and state and other
medical societies announced that we had signed an agreement settling Shane, the lead physician provider track
action. The settlement agreement requires us to pay $40 million to general settlement funds and $20 million for
plaintiffs’ legal fees. The deadline for class members to submit claim forms in order to receive a portion of the
settlement funds was September 21, 2005. This deadline was extended by agreement to November 21, 2005 for
class members who reside or practice in a county declared as a disaster area as a result of Hurricane Katrina.
During the three months ended March 31, 2005, we recorded a pretax charge of approximately $65.6 million in
connection with the settlement agreement, legal expenses and other expenses related to the MDL 1334 litigation.
The settlement agreement also includes a commitment that we institute a number of business practice
changes. Among the business practice changes we have agreed to implement are: enhanced disclosure of certain
claims payment practices; conforming claims-editing software to certain editing and payment rules and
standards; payment of electronically submitted claims in 15 days (30 days for paper claims); use of a uniform
definition of “medical necessity” that includes reference to generally accepted standards of medical practice and
credible scientific evidence published in peer-reviewed medical literature; establish a billing dispute external
review board to afford prompt, independent resolution of billing disputes; provide 90-day notice of changes in
practices and policies and implement various changes to standard form contracts; establish an independent
physician advisory committee; and, where physicians are paid on a capitation basis, provide projected cost and
utilization information, provide periodic reporting and not delay assignment to the capitated physician. The
settlement agreement requires us to implement these business practice changes by various dates, and to maintain
them for a four-year period thereafter.
On September 26, 2005, the District Court issued an order granting its final approval of the settlement
agreement and directing the entry of final judgment. In October 2005, Stanley Silverman, M.D., Scott Calig,
M.D., Russell Stovall, M.D. and Forrest Lumpkin, M.D. filed Notices of Appeal to the Eleventh Circuit of the
District Court’s order granting its approval of the settlement agreement. Consequently, the effective date of the
settlement will be delayed pending the appeal. On December 30, 2005, Dr. Lumpkin’s appeal was dismissed for
want of prosecution. He has attempted to revive his appeal through a brief he filed with the Eleventh Circuit on
34