Health Net 2005 Annual Report Download - page 132

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HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2005 Charges
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 (Class Action Settlement Agreement) settling the
lead physician provider track action in the multidistrict class action lawsuit, which is more fully described in
Note 12. The Class Action Settlement Agreement requires us to pay $40 million to general settlement funds and
$20 million for plaintiffs’ legal fees. We plan to make the required payments from operating cash and are not
expecting to draw on our senior credit facility to fund them. In October 2005, Stanley Silverman, M.D., Scott
Calig, M.D., Russell Stovall, M.D. and Forrest Lumpkin, M.D. filed Notices of Appeal of the District Court’s
order granting its approval of the Class Action Settlement Agreement. Consequently, the effective date of the
settlement, as well as the date by which we are obligated to make these payments, 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 January 30, 2006. Plaintiffs and Health
Net, Inc. filed a motion to strike Dr. Lumpkin’s brief. On February 6, 2006, Drs. Silverman and Calig filed an
unopposed motion to dismiss their appeal. On February 9, 2006, the Eleventh Circuit dismissed Dr. Stovall’s
appeal because his notice of appeal was untimely. During the three months ended March 31, 2005, we recorded a
pretax charge of approximately $65.6 million in connection with the Class Action Settlement Agreement, legal
expenses and other expenses which we believe is our best estimate of our loss exposure related to this litigation.
On June 30, 2005, a jury in Louisiana state court returned a $117 million verdict against us in a lawsuit
arising from the 1999 sale of three health plan subsidiaries of the Company (AmCare-TX). On August 2, 2005,
the Court entered final judgment on the jury’s verdict in the AmCare-TX matter. In its final judgment, the Court,
among other things, reduced the compensatory damage award to $44.5 million (which is 85% of the jury’s $52.4
million compensatory damage award) and rejected the AmCare-TX receiver’s demand for a trebling of the
compensatory damages. The judgment also included the award of $65 million in punitive damages. On
August 12, 2005, after entry of judgment in the AmCare-TX matter, we filed post-trial motions with the Court
asking that the judgment be vacated or, alternatively, reduced. On August 19, 2005, the Court heard the motions
and granted us partial relief by reducing the compensatory damage award by an additional 15% (based upon the
fault of other individuals involved in the proceeding) and by reducing the punitive damage award by 30%. As a
result of these reductions, the compensatory damages have been reduced to $36.7 million, and the punitive
damages have been reduced to $45.5 million. The judgment that reflects these reductions has not yet been signed
by the Court and is, therefore, not final. The appeal period will not begin to run until the judgment becomes final.
During the three months ended June 30, 2005, we recorded a pretax charge of $15.9 million representing total
estimated legal defense costs for this litigation and related matters in Louisiana and Oklahoma which we believe
is our best estimate of our loss exposure related to this litigation.
See Note 12 for additional information on these two litigation matters.
2004 Charges
Severance and Related Benefit Costs
On May 4, 2004, we announced that, in order to enhance efficiency and reduce administrative costs, we
would commence an involuntary workforce reduction of approximately 500 positions, which included reductions
resulting from an intensified performance review process, throughout many of our functional groups and
divisions, most notably in the Northeast. The workforce reduction was substantially completed by June 30, 2005
and all of the severance and benefit related costs had been paid out as of December 31, 2005. We used cash flows
from operations to fund these payments.
F-44