Health Net 2004 Annual Report Download - page 34

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state law claims but refused to dismiss plaintiffs’ other causes of action, including those under RICO. We filed our answer and
affirmative defenses on December 22, 2003.
On January 15, 2004, the Court issued an order granting defendants’ motion for a suggestion of remand and informing the MDL
Panel that pretrial proceedings shall be completed and the MDL Panel may remand the lead provider track case on or before August
17, 2004. On October 20, 2004, the Court withdrew its suggestion of remand. On October 27, 2004, the MDL Panel found remand
“inappropriate at this time.”
On June 30, 2004, plaintiffs in MDL 1334 filed a complaint in the Southern District of Florida which they allege to contain
identical allegations to the second amended consolidated class action complaint pending in MDL 1334. On September 7, 2004,
plaintiffs filed an amended complaint, which they also allege to contain identical allegations to the operative complaint in MDL 1334.
On September 17, 2004, defendants, including Health Net, moved to dismiss and compel arbitration. Thereafter, the parties continued
to engage in expert discovery, which was concluded in February 2005.
On February 10, 2005, the Court issued an order bifurcating the trial into a liability phase and a damages phase. On February 28,
2005, the Court dismissed without prejudice tag-along action Comprehensive Neurosurgical, P.C. v. Physicians Health
Services/Health Net of the Northeast upon plaintiff’s motion for voluntary dismissal. Trial in Shane is currently scheduled to begin on
September 6, 2005.
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
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.
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 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 terms and services that should have
been included within specific charges and not billed separately. A smaller number of these arbitrations and litigation relates 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
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