Health Net 2006 Annual Report Download - page 143

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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. 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. Four
physicians appealed the order approving the settlement, but each of the physicians moved to dismiss their
appeals, and all of the appeals were dismissed by the Eleventh Circuit by June 20, 2006. Consequently, the Class
Action Settlement Agreement became effective on July 1, 2006, and on July 6, 2006, we made payments,
including accrued interest, totaling approximately $61.9 million as required by that agreement. The payment had
no material impact to our results of operations for the year ended December 31, 2006, as the cost had been fully
accrued in the prior year. The payments were funded by cash flows from operations. As a result of the physician
settlement agreement, the dismissals of various appeals, and the filing of an agreed motions to dismiss the tag
along actions involving physician providers, all cases and proceedings relating to the physician provider track
actions against us have been resolved.
On August 2, 2005 and November 4, 2005, a total of three separate judgments were entered against us in
connection with a lawsuit arising from the 1999 sale of three of our health plan subsidiaries to Amcareco, Inc.
The aggregate amount of the judgments was $108.7 million. During the three months ended June 30, 2005, we
recorded a pretax charge of $15.9 million representing total estimated legal defense costs related to this litigation.
As of December 31, 2006, no modifications have been made to the original estimated cost. The Company did not
accrue any amount for the compensatory or punitive damages awards as of December 31, 2005 and intends to
vigorously appeal this judgment.
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-49