Health Net 2006 Annual Report Download - page 14

Third Party Network arrangement, Health Net is licensed by a third party to access provider contracts under the
network and pay the claims of these physicians pursuant to the pricing terms of their contracts with the Third
Party Network.
Hospital Relationships
Our health plan subsidiaries arrange for hospital care primarily through contracts with selected hospitals in
their service areas. These hospital contracts generally have multi-year terms or annual terms with automatic
renewals and provide for payments on a variety of bases, including capitation, per diem rates, case rates and
discounted fee-for-service schedules.
Covered inpatient hospital care for our HMO members is comprehensive. It includes the services of
hospital-based physicians, nurses and other hospital personnel, room and board, intensive care, laboratory and
x-ray services, diagnostic imaging and generally all other services normally provided by acute-care hospitals.
HMO or PPG nurses and medical directors are actively involved in discharge planning and case management,
which often involves the coordination of community support services, including visiting nurses, physical therapy,
durable medical equipment and home intravenous therapy.
In 2004, we began to see evidence that claims review practices by our California health plan, such as line
item review of itemized billing statements and adjustments to the level of prices charged on stop-loss claims,
were causing significant friction with hospitals. 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 a result, we experienced an increase in arbitration requests and
other litigation involving providers. In the fourth quarter of 2004, we entered into negotiations in an attempt to
settle a large number of provider disputes in our California and Northeast health plans, the majority of which
related to alleged underpayment of stop-loss claims.
During the fourth quarter of 2004, we recorded a pretax charge of $169 million for expenses associated with
provider settlements that had been or were in the process of being resolved, principally involving the alleged
underpayment of stop-loss claims. As of December 31, 2006, the provider dispute settlements were substantially
completed, and during 2006 no significant modifications were 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.
HN California’s hospital claims editing practices were subsequently investigated by the California
Department of Managed Health Care (“DMHC”). Following the investigation and as a result of discussions
between the DMHC and HN California, on October 6, 2006, HN California entered into a Consent Agreement
with the DMHC. Under the Consent Agreement, HN California agreed to allow contracted providers to resubmit
their claims for dates of service after January 1, 2004, if such claims had been subjected to line item review or
adjustments to the level of prices charged on the claims, so that such claims could be re-adjudicated without such
editing practices and additional payment could be made if due. Hospitals that had settled such claims with HN
California in the provider dispute settlements discussed above are not permitted to resubmit claims under the
process established pursuant to the Consent Agreement. In addition, HN California agreed to pay an
administrative penalty of $100,000 and to cease using these editing practices.
Ancillary and Other Provider Relationships
Our health plan subsidiaries arrange for ancillary and other provider services, such as ambulance,
laboratory, radiology and home health, primarily through contracts with selected providers in their service areas.
These contracts generally have multi-year terms or annual terms with automatic renewals and provide for
payments on a variety of bases, including capitation, per diem rates, case rates and discounted fee-for-service
schedules. In certain cases, these provider services are included in contracts our health plan subsidiaries have
with PPGs and hospitals.
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