Health Net 2006 Annual Report Download - page 139

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
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 pretax 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. As of December 31,
2006 the provider disputes settlements have been substantially completed. During the year ended December 31,
2006, no significant modification was made to the original estimated provider dispute liability amount. In
connection with these settlements, we have entered into new contracts with a large portion of our provider
network.
On October 6, 2006 we entered into a Consent Agreement with the California Department of Managed
Health Care (DMHC) with respect to certain claims editing practices which we formerly utilized for certain
contracted hospital claims. Under the terms of the Consent Agreement, we will provide contracted hospitals that
have not previously settled or otherwise resolved these claims with us the ability to resubmit their claims, for
dates of service of January 1, 2004 and later, for readjudication by the Company without the use of these editing
practices. We do not expect the readjudication of the affected claims to have a material impact on our financial
condition or results of operations.
We are the subject of a regulatory investigation in New Jersey that relates principally to the timeliness and
accuracy of our claim payments for services rendered by out-of-network providers. The regulatory investigation
includes an audit of our claims payment practices for services rendered by our out-of-network providers for 1996
through 2005 in New Jersey. Based on the results of the audit, the New Jersey Department of Banking and
Insurance may require remediation of certain claims payments for this period and/or assess a regulatory fine or
penalty on us. We are engaged in on-going discussions with the New Jersey Department of Banking and
Insurance to address these issues.
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 any or all 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 all of these proceedings should not have a material adverse
effect on our financial condition and liquidity.
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,
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