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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001
9TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-12718
HEALTH NET, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4288333
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
21650 OXNARD STREET, WOODLAND HILLS, CA 91367
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 676-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Class A Common Stock, $.001 par value New York Stock Exchange, Inc.
Rights to Purchase Series A Junior
Participating Preferred Stock New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes (No 9
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 9
The aggregate market value of the voting stock held by non-affiliates of the registrant at March 14, 2002
was $3,169,809,868 (which represents 123,820,698 shares of Class A Common Stock held by such
non-affiliates multiplied by $25.60, the closing sales price of such stock on the New York Stock Exchange on
March 14, 2002).
The number of shares outstanding of the registrant’s Class A Common Stock as of March 14, 2002 was
123,961,739 (excluding 3,194,374 shares held as treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Form 10-K incorporates by reference certain information from the registrant’s Annual
Report to Stockholders for the year ended December 31, 2001 (‘‘Annual Report to Stockholders’’). Part III
of this Form 10-K incorporates by reference certain information from the registrant’s definitive proxy
statement for the 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the year ended December 31, 2001.

Table of contents

  • Page 1
    ... (State or Other Jurisdiction of Incorporation or Organization) 21650 OXNARD STREET, WOODLAND HILLS, CA (Address of Principal Executive Offices) 95-4288333 (I.R.S. Employer Identification No.) 91367 (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 676-6000 SECURITIES REGISTERED...

  • Page 2
    ...its contracts, also accepts financial responsibility for a portion of the government programs' health care costs. The Specialty Services Division oversees the provision of supplemental programs to enrollees in our HMOs, as well as to members whose basic medical coverage is provided by non-Health Net...

  • Page 3
    ... their HMO service areas. The pricing of our products is designed to provide incentives to both employers and employees to select and enroll in the products with greater managed health care and cost containment elements. In general, our HMO subsidiaries provide comprehensive health care coverage for...

  • Page 4
    ... Groups as % of enrollment ...58,788 9.1% 24.1% During 2001, our Health Plan Services segment had health plan operations in Arizona, California, Oregon, Connecticut, Florida, New Jersey, New York and Pennsylvania. In Arizona, we believe that our commercial managed care operations rank us third...

  • Page 5
    ... an increase in enrollment in POS products. We did not have any members in Medicare or Medicaid in Oregon as of December 31, 2001 and 2000. In Connecticut, New Jersey and New York, we market mid-size and large employer group commercial HMO, Medicare and Medicaid products directly. However, for small...

  • Page 6
    ...of fee-for-service costs for each Medicaid member enrolled. ADMINISTRATIVE SERVICES ONLY (''ASO'') BUSINESS. We also provide third-party administrative services to large employer groups in Arizona, Connecticut, New Jersey and New York. Under these arrangements, we provide claims processing, customer...

  • Page 7
    ...Alaska and part of Arizona During 2001, enrollment of TRICARE beneficiaries in the HMO option (called ''TRICARE Prime'') of the TRICARE program for the Region 11 contract increased by 34% to 187,340 while the total estimated number of eligible beneficiaries, based on DoD data, decreased by 2% to 237...

  • Page 8
    ... the U.S. Department of Veterans Affairs and one contract with the U.S. Marshals Service for claims re-pricing services. Specialty Services We offer behavioral health, dental and vision products and services as well as managed care products related to bill review, administration and cost containment...

  • Page 9
    ...HMOs, traditional insurance companies, self-funded plans, PPOs and discounted fee-for-service plans. The two companies share a common strategy to maximize the value and quality of managed dental and vision care services while appropriately balancing financial risk assumption among providers, members...

  • Page 10
    ... to insurers, self-funded employers, third-party claims administrators and public agencies. These services include injury reporting and provider referral, automated bill review and PPO network access, field and telephonic case management, direction of care and practice management, claim/benefit...

  • Page 11
    ... services to physicians in the tri-state area of Connecticut, New York and New Jersey. We hold a minority equity position in NaviMedix. Online Enrollment and Billing. We continue to develop online enrollment and billing initiatives for our commercial health plan and TRICARE lines of business...

  • Page 12
    ... with selected hospitals in their service areas. These hospital contracts generally have multi-year terms and provide for payments on a variety of bases, including capitation, per diem rates, case rates and discounted fee-for-service schedules. Covered inpatient hospital care for our HMO members is...

  • Page 13
    ... BUSINESS MARKETING AND SALES. Marketing for group health plan business is a three-step process. We first market to potential employer groups and group insurance brokers. We then provide information directly to employees once the employer has selected our health coverage. Finally, we engage members...

  • Page 14
    ... insurance carriers, Anthem Connecticut, Aetna/U.S. Healthcare, Connecticare and eight other HMOs. Our main competitors in Pennsylvania, New York and New Jersey are Aetna/U.S. Healthcare, Empire Blue Cross, Oxford Health Plans, United Healthcare, Horizon Blue Cross and Keystone Health Plan East...

  • Page 15
    ... HIPAA are to (i) limit pre-existing condition exclusions applicable to individuals changing jobs or moving to individual coverage, (ii) guarantee the availability of health insurance for employees in the small group market, (iii) prevent the exclusion of individuals from coverage under group plans...

  • Page 16
    ...in new HMOs, PPOs and insurance companies, or otherwise expand our geographic markets or diversify our product lines. Insurance Regulations. State departments of insurance (the ''DOIs'') regulate our insurance and third-party administrator businesses under various provisions of state insurance codes...

  • Page 17
    ... provision of administrative services for employers, providers and members; negotiation of agreements with physician groups, hospitals, pharmacies and other health care providers; handling of claims for payment of hospital and other services; provision of data processing services. Our employees are...

  • Page 18
    ... with our sale of our Florida health plan and specified pretax charges relating to the write-off of goodwill) plus 50% of our consolidated net income and 100% of our net cash proceeds from equity issuances. The other covenants in the credit agreements include, among other things, limitations on...

  • Page 19
    ...-current exercise price of such Right, that number of shares of Class A Common Stock having a market value of two time such exercise price. In addition, and subject to certain exceptions contained in the Rights Agreement, in the event that we are acquired in a merger or other business combination in...

  • Page 20
    ... plan members to challenge coverage and benefits decisions in state and federal courts. Although both bills provide for independent review of decisions regarding medical care, the bills differ on the circumstances and procedures under which lawsuits may be brought against managed care organizations...

  • Page 21
    ...30, 2001 (the ''2001 Charge''). The 2001 Charge included severance and benefits related costs of $43.3 million in connection with the enterprise-wide staff reductions. These reductions include the elimination of 1,517 positions throughout all of our functional groups, divisions and corporate offices...

  • Page 22
    ... determinations, provider malpractice and care decisions; • restrict a health plan's ability to limit coverage to medically necessary care; • require third party review of certain care decisions; • expedite or modify grievance and appeals procedures; • reduce the reimbursement or payment...

  • Page 23
    ... PROVIDER RELATIONS. We contract with physicians, hospitals and other providers as a means to manage health care costs and utilization and to monitor the quality of care being delivered. In any particular market providers could refuse to contract with us, demand higher payments or take other actions...

  • Page 24
    ... that strategic direction. The division is developing collaborative approaches with business partners to transform their existing assets and expertise into new e-business opportunities. We believe that net-enabled connectivity among purchasers, consumers, managed care organizations, providers and...

  • Page 25
    ... on our ability to manage health care costs and member utilization of health care. There can be no assurance that we will be able to continue to manage medical costs sufficiently to maintain profitability in our product lines. MANAGEMENT INFORMATION SYSTEMS. Our business depends significantly on...

  • Page 26
    ... medical cost trends and our marketing expenses may all be adversely affected. LITIGATION AND INSURANCE. We are subject to a variety of legal actions to which any corporation may be subject, including employment and employment discrimination-related suits, employee benefit claims, breach of contract...

  • Page 27
    ... costs or customer confusion or dissatisfaction. We also may not be able to manage acquisition-related growth effectively if, among other potential difficulties, we are unable to continue to develop processes and systems to support growing operations. STOCK MARKET. Recently, the market prices...

  • Page 28
    ... The Rancho Cordova facilities house certain operations of our California HMO and our Government Contracts/Specialty Services segment. We also lease a total of approximately 250,000 square feet of office space in Irvine, California and San Rafael, California for certain specialty services operations...

  • Page 29
    .... v. Foundation Health Corporation, Foundation Health Systems, Inc. and Milliman & Robertson, Inc. (M&R), filed on April 28, 2000, in the United States Bankruptcy Court for the Central District of California, case number SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance Group...

  • Page 30
    ... 1, 2001. We intend to vigorously defend the action. IN RE MANAGED CARE LITIGATION The Judicial Panel on Multidistrict Litigation has transferred various class action lawsuits against managed care companies, including us, to the United States District Court for the Southern District of Florida for...

  • Page 31
    ..., a complaint was filed in the United States District Court for the Southern District of Florida in Shane, the lead provider track action in MDL 1334. The complaint seeks certification of a nationwide class action on behalf of physicians and alleges that the defendant managed care companies' methods...

  • Page 32
    ...to physicians who rendered medically necessary health care services to PHS-CT health plan members. The complaint, which is similar to others filed against us and other managed care companies, seeks declaratory and injunctive relief. On March 13, 2001, the Company removed this action to federal court...

  • Page 33
    PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth the high and low sales prices of the Company's Class A Common Stock, par value $.001 per share (the ''Class A Common Stock''), on The New York Stock Exchange, Inc. (''NYSE'') since ...

  • Page 34
    ... the Company's 2001 Annual Report to Stockholders is so incorporated by reference and made a part hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information...

  • Page 35
    ...incorporated herein by reference: 2.1 Agreement and Plan of Merger, dated October 1, 1996, by and among Health Systems International, Inc., FH Acquisition Corp. and Foundation Health Corporation (filed as Exhibit 2.5 to the Company's Registration Statement on Form S-4 (File No. 333-19273) on January...

  • Page 36
    ... Net, Inc., Harris Trust and Savings Bank and Computershare Investor Services, L.L.C. (filed as Exhibit 3 to the Company's Registration Statement on Form 8-A/A (Amendment No. 2) (File No. 1-12718) on May 9, 2001 and incorporated herein by reference). Employment Letter Agreement between Foundation...

  • Page 37
    ...Health Net, Inc. and Steven P. Erwin dated March 15, 2002, a copy of which is filed herewith. Form of Severance Payment Agreement dated December 4, 1998 by and between Foundation Health Systems, Inc. and various of its executive officers (filed as Exhibit 10.21 to the Company's Annual Report on Form...

  • Page 38
    ... copy of which is filed herewith. Foundation Health Systems, Inc. Executive Officer Incentive Plan (filed as Annex A to the Company's definitive proxy statement on March 31, 2000 (File No. 1-12718) and incorporated herein by reference). Health Net, Inc. 401(k) Savings Plan (filed as Exhibit 10.24 to...

  • Page 39
    ... Foundation Health Corporation's Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference). Five-Year Credit Agreement dated as of June 28, 2001 among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent...

  • Page 40
    ... Agreement dated June 29, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.8 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference). Statement relative to computation of per share...

  • Page 41
    INDEPENDENT AUDITORS' REPORT ON SCHEDULES To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We have audited the consolidated financial statements of Health Net, Inc. (the ''Company'') as of December 31, 2001 and 2000 and for each of the three years in the ...

  • Page 42
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED BALANCE SHEETS (Amounts in thousands) December 31, 2001 December 31, 2000 ASSETS Current Assets: Cash and cash equivalents ...Investments-available for sale ...Other assets ......

  • Page 43
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) (Continued) HEALTH NET, INC. CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands) Year Ended December 31, 2001 2000 1999 Revenues: Investment and other income ...Administrative service agreements ......

  • Page 44
    ... SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) (Continued) HEALTH NET, INC. CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2000 1999 2001 Net Cash Flows from Operating Activities ...Cash Flows from Investing Activities: Sales...

  • Page 45
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) (Continued) HEALTH NET, INC. NOTE TO CONDENSED FINANCIAL STATEMENTS NOTE 1-BASIS OF PRESENTATION Health Net, Inc.'s (''HNT'') investment in subsidiaries is stated at cost plus equity in undistributed earnings...

  • Page 46
    SUPPLEMENTAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES HEALTH NET, INC. (Amounts in thousands) Balance at beginning of period Charged to costs and expenses Charged to other accounts(1) Balance at end of period Deductions(2) 2001: Allowance for doubtful Premiums receivable 2000: ...

  • Page 47
    ... thereunto duly authorized. HEALTH NET, INC. By: /s/ MARVIN P. RICH Marvin P. Rich Executive Vice President, Finance and Operations Date: March 18, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 48
    SIGNATURE TITLE DATE /s/ ROGER F. GREAVES Roger F. Greaves Director March 18, 2002 /s/ RICHARD W. HANSELMAN Richard W. Hanselman Director March 18, 2002 /s/ RICHARD J. STEGEMEIER Richard J. Stegemeier Director March 18, 2002 /s/ RAYMOND S. TROUBH Raymond S. Troubh Director March 18, ...