Health Net 2005 Annual Report Download - page 40

In January 2004, we removed the Cap Z Action from New York state court to the United States District
Court for the Southern District of New York. We then filed a motion to dismiss all of Cap Z’s claims, and Cap Z
filed a motion to remand the action back to New York state court. On November 2, 2005, the District Court
remanded this action to the New York state court in New York City, without addressing our motion to dismiss.
The action has now been assigned to the Commercial Division of the New York state court. The Commercial
Division is staffed by judges who have more experience in handling complex commercial litigation.
On December 21, 2005, we filed a motion to dismiss all of Cap Z’s claims. Cap Z filed an opposition to the
motion on January 20, 2006. Our reply was filed on February 7, 2006. The court has set the hearing on the
motion for February 16, 2006. In addition, the court held a “preliminary conference” on January 24, 2006. At that
conference, the court allowed Cap Z to begin document discovery, but otherwise held discovery in abeyance
through the hearing on our motion to dismiss. No pretrial or trial dates have yet been set in the action.
We intend to defend ourselves vigorously against Cap Z’s claims. This case is subject to many uncertainties,
and, given its complexity and scope, its 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 the Cap Z Action 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 the Cap Z Action
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. In recent years, a number of these arbitrations and litigation matters have related 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 supplies and services that should have been
included within specific charges and not billed separately. A smaller number of these arbitrations and litigation
matters relate 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 (see Note 12 to our consolidated financial
statements).
We have settled or otherwise resolved a significant number of the provider disputes that were included as
part of the $169 million earnings charge that we recorded in the fourth quarter of 2004 (see Note 12 to our
consolidated financial statements). However, we are currently the subject to a review by the California
Department of Managed Health Care (“DMHC”) with respect to hospital claims with dates of service from and
after January 1, 2004. In addition, we are the subject of a regulatory investigation in New Jersey that relates to
the timeliness and accuracy of our claim payments for services rendered by out-of-network providers. We are
engaged in on-going discussions with the DMHC and the New Jersey Department of Banking and Insurance to
address these issues. See “Item 1A. Risk Factors—Federal and state audits, review and investigations of us and
our subsidiaries could have a material adverse effect on our operations” for additional information.
Miscellaneous Proceedings
In the ordinary course of our business operations, we are also party to various other legal proceedings,
including, without limitation, litigation arising out of our general business activities, such as contract disputes,
employment litigation, wage and hour claims, real estate and intellectual property claims and claims brought by
members seeking coverage or additional reimbursement for services allegedly rendered to our members, but
which allegedly were either denied, underpaid or not paid, and claims arising out of the acquisition or divestiture
of various business units or other assets. We are also subject to claims relating to the performance of contractual
obligations to providers, members, employer groups and others, including the alleged failure to properly pay
claims and challenges to the manner in which we process claims. In addition, we are subject to claims relating to
the insurance industry in general, such as claims relating to reinsurance agreements and rescission of coverage
and other types of insurance coverage obligations.
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