Health Net 2004 Annual Report Download - page 35

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 pre-tax 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. We have currently settled approximately 59% of the California provider disputes upon which the earnings
charge was based (representing approximately 47% of the amounts reserved for in these disputes), including Tenet Healthcare, as
described below, and are in settlement discussions with a substantial number of the remaining providers. In connection with these
settlements, we have entered into new contracts with a large portion of our provider network.
Tenet Healthcare
In July 2003, 39 hospitals owned or operated by Tenet Healthcare Corporation (“Tenet”) filed an arbitration demand against us
alleging a total of approximately $45 million in claim underpayments by our California health plan subsidiary. The arbitration
demand was amended in October 2004 to increase the demand of alleged claim underpayments to approximately $77 million plus
interest, attorneys’ fees and punitive damages, and also asserted various other claims. We filed counterclaims against Tenet on
various theories of recovery, including Tenet’s pricing strategy. In late 2004, Tenet advised us that its demand relating to the alleged
claim underpayments had increased to approximately $120 million, not including interest, attorneys’ fees and punitive damages.
On February 11, 2005, we entered into a settlement agreement with Tenet to resolve all outstanding claims and counter-claims
in the arbitration. As part of the settlement agreement, we agreed to pay Tenet $28.5 million and release our counter-claims in
exchange for Tenet’s release of all of its claims in the arbitration. The settlement agreement also establishes a procedure for
adjudication and resolution of other claims for hospital services through November 1, 2004, the date we entered into a new provider
service agreement with the Tenet hospitals that incorporates a fixed reimbursement structure that is structured to avoid similar
disputes. The settlement amount paid to Tenet was included as part of the fourth quarter 2004 earnings charge described above.
Superior National Insurance Group
We and our former wholly-owned subsidiary, Foundation Health Corporation (“FHC”), which merged into Health Net, Inc. in
January 2001, were named in an adversary proceeding, Superior National Insurance Group, Inc. v. Foundation Health Corporation,
Foundation Health Systems, Inc. and Milliman & Robertson, Inc., filed on April 28, 2000, in the United States Bankruptcy Court for
the Central District of California, case number SV00-14099GM. The lawsuit related to the 1998 sale of Business Insurance Group,
Inc. (“BIG”), a holding company of workers’ compensation insurance companies operating primarily in California, by FHC to
Superior National Insurance Group, Inc. (“Superior”).
On October 22, 2003, we entered into an agreement with SNTL Litigation Trust, successor-in-interest to Superior, to settle all
outstanding claims under the Superior National Insurance Group, Inc. v. Foundation Health Corporation, et. al. litigation. As part of
the settlement agreement, we agreed to pay the SNTL Litigation Trust $137 million and receive a release of all of the SNTL
Litigation Trust’s claims against us. We have accounted for the settlement with SNTL Litigation Trust as discontinued operations on
our condensed consolidated statements of operations for the year ended December 31, 2003.
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