Health Net 2006 Annual Report Download - page 138

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and/or concealed material facts relating to the sufficiency of the BIG companies’ reserves and about the BIG
companies’ internal financial condition, including accounts receivables and the status of certain “captive”
insurance programs. Cap Z alleges that it seeks compensatory damages in excess of $100 million, unspecified
punitive damages, costs, and attorneys’ fees.
After removal of the case to federal court and remand back to New York state court, on December 21, 2005,
we filed a motion to dismiss all of Cap Z’s claims. On May 5, 2006, the court issued its decision on our motion
and dismissed all of Cap Z’s claims, including claims for fraud and claim for punitive damages, except for Cap
Z’s claim for indemnification based on the assertion that FHC breached express warranties and covenants under
the stock purchase agreement. On June 7, 2006, Cap Z filed an appeal from the Court’s dismissal of its claims for
breach of the implied covenant and fraud and dismissal of its punitive damage claim. On June 13, 2006, we filed
a cross-appeal from the Court’s refusal to dismiss all of Cap Z’s claims. Oral argument on the appeals was held
on November 17, 2006. No decision on the appeals has yet been issued.
Notwithstanding these appeals, the litigation continued in the trial court. On June 2, 2006, we filed an
answer to Cap Z’s remaining claim for indemnification. On June 23, 2006, the Court signed a scheduling order
providing that all fact discovery is to be completed by February 28, 2007, and expert discovery is to be
completed by April 30, 2007. On October 3, 2006, we filed a motion for summary judgment in the trial court
seeking dismissal of Cap Z’s remaining claim for indemnification. Oral argument on the motion was held on
November 30, 2006. On February 23, 2007, the trial Court granted our motion for summary judgment and
directed that judgment be entered in our favor. That order terminates the proceedings in the trial Court. Cap Z’s
appeal on the three previously dismissed claims and our cross-appeal remain pending.
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. A 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 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.
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.
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