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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ÈANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
‘TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12718
HEALTH NET, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4288333
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer
Identification No.)
21650 Oxnard Street, Woodland Hills, CA 91367
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (818) 676-6000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.001 par value New York Stock Exchange, Inc.
Rights to Purchase Series A Junior Participating
Preferred Stock
New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ÈNo ‘
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘No È
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ÈNo ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
ÈLarge accelerated filer ‘Accelerated filer ‘Non-accelerated filer
‘Smaller reporting company
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ‘No È
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 29, 2007 was $5,873,249,078
(which represents 111,235,778 shares of Common Stock held by such non-affiliates multiplied by $52.80, the closing sales price of
such stock on the New York Stock Exchange on June 29, 2007).
The number of shares outstanding of the registrant’s Common Stock as of January 31, 2008 was 110,304,062 (excluding
33,179,429 shares held as treasury stock).
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive proxy statement for the
2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of
the year ended December 31, 2007.

Table of contents

  • Page 1
    ... File Number: 1-12718 (Exact Name of Registrant as Specified in Its Charter) HEALTH NET, INC. Delaware (State or Other Jurisdiction of Incorporation or Organization) 95-4288333 (I.R.S. Employer Identification No.) 21650 Oxnard Street, Woodland Hills, CA (Address of Principal Executive Offices...

  • Page 2
    ... 8-Financial Statements and Supplementary Data ...Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Item 9A-Controls and Procedures ...Item 9B-Other Information ...PART III. Item 10-Directors, Executive Officers of the Registrant and Corporate Governance...

  • Page 3
    ..., dental, vision, behavioral health and disability insurance, including our Medicare Part D Pharmacy coverage under Medicare. Our executive offices are located at 21650 Oxnard Street, Woodland Hills, California 91367, and our Internet web site address is www.healthnet.com. We make available free of...

  • Page 4
    ... groups and individual insureds. As of December 31, 2007, 44% of our commercial members were covered by POS and PPO products, 53% were covered by conventional HMO products and 3% were covered by EPO and fee-for-service products, including new health plans such as consumer-directed health care plans...

  • Page 5
    ... care costs. Consumer Directed Health Plan products such as Health Savings Accounts and Health Reimbursement Accounts. Community stores such as our Medicare stores in Phoenix, Arizona and Meriden, Connecticut and our community enrollment and customer service centers in East Los Angeles, California...

  • Page 6
    ...2007. Northeast. Our Northeast operations are conducted in Connecticut, New Jersey and New York. For our large employer group business, we directly market commercial HMO, PPO and POS products in New Jersey, Connecticut and New York, as well as an EPO product in New York. For our small employer group...

  • Page 7
    ... individual Medicare supplement policies or employer group sponsored coverage. In 2007, we offered Medicare Advantage plans in select counties in nine states (Arizona, California, Connecticut, Hawaii, New Mexico, New York, Oregon, Texas, Washington). Effective October 1, 2007, Health Net of New York...

  • Page 8
    ...Department of Health Care Services ("DHCS") to provide Medicaid service in Los Angeles County, California. As of December 31, 2007, 481,503 of our Medicaid members resided in Los Angeles County, California. This represents approximately 68% of our California Medicaid membership, and 57% of our total...

  • Page 9
    ... our business." Administrative Services Only Business We provide ASO products to large employer groups in Connecticut, New Jersey, New York and, to a more limited extent, California. Under these arrangements, we provide claims processing, customer service, medical management, provider network access...

  • Page 10
    ... and behavioral change programs were introduced and are available as part of MHN's commercial EAP solutions. In addition, MHN provided its workplace and work-life services to members of Health Net affiliated medical plans, including Medicare members. MHN's EAP services extend internationally to...

  • Page 11
    ... in revenues from the government programs in which we participate could have an adverse effect on our business, financial condition or results of operations." TRICARE Our wholly-owned subsidiary, Health Net Federal Services, LLC ("HNFS"), administers a large managed care federal contract with...

  • Page 12
    ...Veterans Affairs medical centers for claims repricing and audit services and one contract with the U.S. Marshals Service for claims re-pricing services. Total revenues for our Veterans Affairs business were approximately $32.0 million for the year ended December 31, 2007, representing a 19% increase...

  • Page 13
    ... network based managed care products and services. Physician Relationships The following table sets forth the number of primary care and specialist physicians contracted either directly with our HMOs or through our contracted participating physician groups ("PPGs") as of December 31, 2007: Primary...

  • Page 14
    ... 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...

  • Page 15
    ... the largest PPO provider in California based on number of enrollees. There are also a number of small, regional-based health plans that compete with Health Net in California, mainly in the small business group market segment. In addition, two of the major national managed care companies, Aetna, Inc...

  • Page 16
    ... members in educating themselves about health care. The web-based program includes WebMD's Subimo estimator tools, Decision PowerSM, prescription drug and hospital comparison tools. In 2007, we expanded our consumer-driven health care initiative by offering a Health Net Health Reimbursement Account...

  • Page 17
    ...our Arizona, California, Connecticut, New Jersey and New York HMO subsidiaries have all received NCQA accreditation with a score of "excellent," which is the highest score NCQA awards. HN California's Medicare line of business also received NCQA accreditation with a score of "excellent." In addition...

  • Page 18
    ... adjustment factor reflects the member's age, gender and health status. The MMA also authorized regional PPOs to serve 26 regions covering the U.S. and its territories, and authorized other products designed to provide a private market option on a broader scale. Our Medicare contracts are subject to...

  • Page 19
    ... health plans and insurance companies. Company Arizona HMO California HMO Connecticut HMO New Jersey HMO New York HMO Oregon HMO Health Net Life Insurance Company Health Net Insurance of New York, Inc. MHN Regulatory Agency Arizona Department of Insurance California Department of Managed Health Care...

  • Page 20
    ...and fees accounting for 100% of our Government Contracts revenue. In addition, the federal government is a significant customer of the Company's Health Plan Services segment as a result of its contract with CMS for coverage of Medicare-eligible individuals, including Part D prescription plans, state...

  • Page 21
    ...marketing and risk sharing arrangements with The Guardian covering primarily small group membership in the States of Connecticut, New York and New Jersey. Under these arrangements, our managed care and indemnity products were marketed to existing insureds of The Guardian. In addition, these products...

  • Page 22
    ... price of such Right, that number of shares of common stock having a market value of two times such exercise price. In addition, and subject to certain exceptions contained in the Rights Agreement, in the event that we are acquired in a merger or other business combination in which the common stock...

  • Page 23
    ...predict and control health care costs. A substantial majority of the revenue we receive is used to pay the costs of health care services or supplies delivered to our members. The total health care costs we incur are affected by the number and type of individual services provided and the cost of each...

  • Page 24
    ... costs or limit our ability to negotiate favorable rates. Changes in utilization rates, demographic characteristics, the regulatory environment, health care practices, inflation, new technologies, clusters of high-cost cases, continued consolidation of physician, hospital and other provider groups...

  • Page 25
    ... could force us to change how we do business and may restrict our revenue and/or enrollment growth, and/or increase our health care and administrative costs, and/or increase our exposure to liability with respect to members, providers or others. Further, individual associates may violate these laws...

  • Page 26
    ...by the MMA and the Medicare program generally. For example, in 2007 we introduced private fee-for-service ("PFFS") Medicare Advantage plans, expanded our Medicare Part D prescription drug benefits plans to all 50 states, and are in the process of enhancing our HMO/ PPO product offerings. This growth...

  • Page 27
    ... participate could have an adverse effect on our business, financial condition or results of operations. Approximately 46% of our annual revenues relate to federal, state and local government health care coverage programs, such as Medicare, Medicaid and TRICARE. All of the revenues in our Government...

  • Page 28
    ...cost of healthcare or administrative services, or restrict our right to manage the member's care through authorization requirements, requirements of medical necessity, or formularies for covered pharmaceuticals; Restrict our ability to contract with and manage access to providers and provider groups...

  • Page 29
    ...plans and insurers in California, under certain defined circumstances, are obligated to pay providers for services they have rendered despite the rescission of a member's policy. On October 23, 2007, the California Department of Managed Health Care ("DMHC") and the California Department of Insurance...

  • Page 30
    ... and reviews by CMS, state insurance and health and welfare departments and others pertaining to financial performance, market conduct and regulatory compliance issues. Such audits, reviews and investigations could result in the loss of licensure or the right to participate in certain programs, or...

  • Page 31
    .... We contract with physicians, hospitals and other providers as a means to assure access to health care services for our members, to manage health care costs and utilization and to better monitor the quality of care being delivered. In any particular market, providers could refuse to contract with...

  • Page 32
    ...and our business in particular, such as claims by members alleging failure to pay for or provide health care, poor outcomes for care delivered or arranged, improper rescission, termination or non-renewal of coverage and insufficient payments for out-of-network services; claims by employer groups for...

  • Page 33
    ... include HMOs, PPOs, self-funded employers, insurance companies, hospitals, health care facilities and other health care providers. In addition, other companies may enter our markets in the future, including emerging competitors in the Medicare program. We believe that increased funding provided by...

  • Page 34
    ..., Arizona, California and Oregon health plans. Our HSA programs represented a very small percentage of our total revenue in 2007. Some of our large competitors, such as Aetna and Blue Cross Blue Shield plans, have made large investments in, and heavily marketed, their consumer-directed health plans...

  • Page 35
    ... by their respective states of domicile. If our regulated subsidiaries are restricted from paying us dividends or otherwise making cash transfers to us, it could have material adverse effect on our results of operations and Health Net, Inc.'s free cash flow. For additional information regarding our...

  • Page 36
    ..., but are not limited to, information technology system providers, medical management providers, claims administration providers, billing and enrollment providers, call center providers and specialty service providers. Our arrangements with third party vendors may make our operations vulnerable if...

  • Page 37
    ... we provide for appropriate protections in our contracts with our business associates, we have limited control over their actions and practices. Compliance with HIPAA and other state and federal privacy regulations may result in cost increases due to necessary systems changes, the development of new...

  • Page 38
    ... seeking, among other things, information regarding provider reimbursement rates and maintenance of preferred drug lists used by managed care organizations contracting with the Connecticut Department of Social Services in connection with the Connecticut Medicaid program. In response to the petition...

  • Page 39
    ... marketing and sales of our products and services, current investigations by the New York Attorney General, New York Department of Insurance, CMS and other regulators, as well as regulatory changes initiated in several states in response to allegedly inappropriate broker conduct and broker payment...

  • Page 40
    ... rent-related obligations for our Woodland Hills facilities were approximately $15.0 million in 2007. We also lease an aggregate of approximately 548,807 square feet of office space in Rancho Cordova, California for certain Health Plan Services and Government Contract operations. Our aggregate rent...

  • Page 41
    ... of claims for services provided by out-of-network (ONET) providers. Plaintiffs seek relief in the form of payment of additional benefits, injunctive and other equitable relief, and attorneys' fees. In September 2006, the District Court in McCoy/Wachtel certified two nationwide classes of Health Net...

  • Page 42
    ... New Jersey state laws relating to ONET and certain other claims payment practices; (2) Health Net will establish a $40 million prove-up fund to compensate eligible class members who can prove that they paid out of pocket for certain ONET claims or who have received balance bills for such services...

  • Page 43
    ... underpaid physicians and other health care providers for medical services to members, have delayed payments to providers, imposed unfair contracting terms on providers, and negotiated capitation payments inadequate to cover the costs of the health care services provided and assert claims under...

  • Page 44
    ... actions against us have been resolved. Four other cases in MDL 1334 were brought on behalf of non-physician health care providers against us and other managed care companies and sought certification of a nationwide class of similarly situated non-physician health care providers. On October 15, 2007...

  • Page 45
    ... California to the practices of health plans and health insurers involving the rescission of members' policies for misrepresenting their health status on applications for coverage. On October 23, 2007, the California Department of Managed Health Care (DMHC) and the California Department of Insurance...

  • Page 46
    ...rights of health plans and insurers to rescind coverage. In addition, effective January 1, 2008, newly enacted legislation in California requires health plans and insurers to pay health care providers who, under certain circumstances, have rendered services to members whose policies are subsequently...

  • Page 47
    ..., 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...

  • Page 48
    ... 25, 2008, the last reported sales price per share of our common stock was $47.00 per share. Securities Authorized for Issuance Under Equity Compensation Plans Information regarding the Company's equity compensation plans is contained in Part III of this Annual Report on Form 10-K under "Item 12...

  • Page 49
    ... repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from the employee stock options. We repurchased 4,322,959 shares during the year ended December 31, 2007, for aggregate consideration of approximately $230 million. We used net free cash available...

  • Page 50
    ... date. During the year ended December 31, 2007, we did not have any repurchase program that expired, and we did not terminate any repurchase program prior to its expiration date. (e) Includes 33,110; 538; 2,287 and 4,196 shares withheld by the Company to satisfy tax withholdings and exercise price...

  • Page 51
    ... does not include the historical performance data of acquired companies. Indexed Total Return (Stock Price Plus Reinvested Dividends) Name 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 Health Net ...Standard & Poor's 500 Index ...Industry Peer Group Index ... $100.00 $100...

  • Page 52
    ... financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K. 2007 Year Ended December 31, 2006 2005 2004 2003 (Dollars in thousands, except per share and PMPM data) REVENUES: Health plan services premiums ...Government contracts ...Net investment income...

  • Page 53
    ...through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as "Part D"), Medicaid, TRICARE and Veterans Affairs programs. Our behavioral health services subsidiary, MHN, provides behavioral health, substance abuse and employee assistance programs (EAPs...

  • Page 54
    ... plan services premiums include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage (which premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care...

  • Page 55
    ... May 31, 2007, we completed the acquisition of, in substance, The Guardian Life Insurance Company of America's 50% interest in managed care and indemnity products called HealthCare Solutions (Guardian Transaction). On March 31, 2006, we completed the acquisition of certain health plan businesses of...

  • Page 56
    ... fiscal years: Year Ended December 31, 2007 2006 2005 (Dollars in thousands, except per share and PMPM data) Revenues Health plan services premiums ...Government contracts ...Net investment income ...Administrative services fees and other income ...Total revenues ...Expenses Health plan services...

  • Page 57
    ...commercial risk enrollment is in the small group and individual market at the end of 2007, up from 31% at the end of 2006. We continue to expand our Medicare membership, which increased by 116,000 members. On January 1, 2007, we began offering Medicare Advantage Private-Fee-For Service plans, and we...

  • Page 58
    ... refinancing of our senior notes. See Note 14 to our consolidated financial statements for additional information on the 2005 litigation and severance and related benefit costs. Our total health plan enrollment increased by 315,000 members in 2006 compared to 2005. Medicare Part D business and the...

  • Page 59
    ...program and by state: Commercial 2007 2006 2005 2007 ASO Medicare Medicaid 2006 2005 2007 2006 2005 2007 2006 2005 (Membership in thousands) Health Plan Total 2007 2006 2005 Arizona ...137 125 117 - California ...1,468 1,483 1,457 6 Connecticut ...161 183 207 32 New Jersey ...90 103 127 17 New York...

  • Page 60
    ... to timely process stand-alone PDP enrollment applications. We do not believe that this temporary suspension will have a material adverse effect on our Medicare business. We participate in state Medicaid programs in California, Connecticut and New Jersey. California membership, where the program is...

  • Page 61
    ... due to an increase in members participating the Medicare Advantage and Medicare Part D prescription drug program and Medicare risk factor adjustments totaling $95.1 million in the year ended December 31, 2007 (see "-Health Plan Services Costs" for detail regarding the increase in capitation expense...

  • Page 62
    ... to the premiums paid to us by CMS for the members participating in the new Medicare Part D prescription drug program effective January 1, 2006 and favorable Medicare risk factor adjustments in our Arizona, California, Connecticut, Oregon and New York plans totaling $92.0 million in the year ended...

  • Page 63
    ... (see "-Health Plan Services Premiums" for detail regarding the increase in premium revenue related to the Medicare rate adjustment). Medicare MCR, including Medicare Advantage and Part D, increased by 210 basis points for the year ended December 31, 2007. Medicaid health care costs increased by $51...

  • Page 64
    ...Medicare expansion plans, an increase in marketing activities for new product development, the addition of the members from the Universal Care Acquisition, new business bid costs and recognition of stock option expense as a result of adopting SFAS No. 123(R). See Note 2 to our consolidated financial...

  • Page 65
    .... In addition to the 2.9 million eligible beneficiaries that we service under the TRICARE contract for the North Region, we administer contracts with the U.S. Department of Veterans Affairs to manage community based outpatient clinics in 9 states covering approximately 26,000 enrollees. Government...

  • Page 66
    ... family counseling business with the Department of Defense. In addition, 2007 includes $36.5 million favorable settlement with the Federal Government regarding prior Option Period 1 health care cost targets. Our TRICARE contract for the North Region includes a target cost and price for reimbursed...

  • Page 67
    ...3, 2005, we announced that we signed a settlement agreement with the representatives of approximately 900,000 physicians and state and other medical societies settling the lead physician provider track action in the multidistrict class action lawsuit. During the three months ended March 31, 2005, we...

  • Page 68
    ... by the McCoy class action lawsuit, and nondeductible class action lawsuit expenses incurred in 2007. The effective income tax rate decreased from 2005 to 2006 primarily due to tax benefits associated with the sale of a subsidiary that formerly held our Pennsylvania health plan and certain of...

  • Page 69
    ... 2004, partially offset by payment of $62 million for physician class action settlement as discussed in "-Litigation, Severance and Related Benefit Costs " above, and net increase of $53 million in amounts receivable, net of $72 million in payables, related to Medicare Part D business that began on...

  • Page 70
    ... repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from the employee stock options. We repurchased 4,322,959 shares during the year ended December 31, 2007, for aggregate consideration of approximately $230 million. We used net free cash available...

  • Page 71
    ... the ability to pay dividends or other distributions with respect to any shares of capital stock or the ability to make or repay loans or advances; make dividends; and alter the character of ours or their business conducted on the closing date of the financing facility. In addition, the financing...

  • Page 72
    ...both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to...

  • Page 73
    ... date of June 30, 2009. Our revolving credit facility provides for aggregate borrowings in the amount of $900 million, which includes a $400 million sub-limit for the issuance of standby letters of credit and a $50 million sub-limit for swing line loans. In addition, we have the ability from time...

  • Page 74
    ... required to maintain minimum levels of statutory net worth. The minimum statutory net worth requirements differ by state and are generally based on balances established by statute, a percentage of annualized premium revenue, a percentage of annualized health care costs, or risk-based capital (RBC...

  • Page 75
    ... Drug Plan and Private Fee for Service products. We have excluded from such table amounts already recorded in our current liabilities on our consolidated balance sheet as of December 31, 2007. We have also excluded from such table various contracts we have entered into with our health care providers...

  • Page 76
    ... plan services premiums include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage (for which premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care...

  • Page 77
    ... per member per month claims trends developed from the experience in preceding months. This method is applied consistently year over year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. An...

  • Page 78
    ...actual costs and predetermined goals. Our HMOs in other states also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital per diems, and case rates under which providers bill the HMOs for each individual service provided...

  • Page 79
    ...to health care services or in the month in which the administrative services are performed or the period that coverage for services is provided. Under our TRICARE contract for the North Region we recognize amounts receivable and payable under the government contracts related to estimated health care...

  • Page 80
    ... unit with goodwill as of December 31, 2007 and 2006. We test goodwill for impairment annually based on the estimated fair value of our Health Plan Services reporting unit. We test for impairment on a more frequent basis in cases where events and changes in circumstances would indicate that we might...

  • Page 81
    ... estimated amount of contingent tax challenges by taxing authorities upon examination, in accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which we adopted as of January 1, 2007. Prior to 2007, we maintained a liability...

  • Page 82
    ... of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The following table presents the expected cash outflows relating to market risk sensitive debt obligations as of December 31, 2007. These cash...

  • Page 83
    ... by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of such period. Management's Report on Internal Control Over Financial Reporting Our management is responsible...

  • Page 84
    Changes in Internal Control Over Financial Reporting There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter ended December 31, 2007 that have materially ...

  • Page 85
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We have audited the internal control over financial reporting of Health Net, Inc., and subsidiaries ("the Company") as of December 31, 2007, based on criteria...

  • Page 86
    ... Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" and to the Company's change in its method of accounting for share-based compensation in 2006 upon adoption of FASB Statement No. 123(R), "ShareBased Payment." /s/ DELOITTE & TOUCHE, LLP Los Angeles, California...

  • Page 87
    ...New York Stock Exchange Listed Company Manual. We have adopted a Code of Business Conduct and Ethics that applies to our employees, directors and officers, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics...

  • Page 88
    ... Health Net, Inc. as issuer, and The Bank of New York Trust Company, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on May 18, 2007 (File No. 1-12718) and incorporated herein by reference). Officer's Certificate, dated May 18, 2007, establishing...

  • Page 89
    ...reference). Employment Agreement between Health Net, Inc. and Linda Tiano dated as of December 27, 2006 (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 1-12718) and incorporated herein by reference). Certain Compensation Arrangements...

  • Page 90
    ...by reference). Amendment Number One to the Health Net, Inc. (formerly Foundation Health Systems, Inc.) Deferred Compensation Plan Trust Agreement between Health Net, Inc. and Union Bank of California, adopted January 1, 2001 (filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the...

  • Page 91
    ... Health Net, Inc. 2006 Executive Officer Incentive Plan (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718) and incorporated herein by reference). Health Systems International, Inc. Second Amended and Restated Non-Employee...

  • Page 92
    ...Number Seven to the Health Net, Inc. 401(k) Savings Plan adopted December 27, 2006 (filed as Exhibit 10.49 to the Company's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 1-12718) and incorporated herein by reference). Foundation Health Systems, Inc. Supplemental Executive...

  • Page 93
    ... by reference.) Third Amendment to Credit Agreement, dated as March 1, 2006, by and among Health Net, Inc., Bank of America, N.A., as Administrative Agent and the other lenders party thereto (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on March 7, 2006...

  • Page 94
    ...herein by reference). Office Lease Agreement dated August 18, 2000 by and between Physicians Health Services of Connecticut, Inc. (predecessor to Health Net of Connecticut, Inc.) and Beard Sawmill, LLC (filed as Exhibit 10.68 to the Company's Annual Report on Form 10-K for the year ended December 31...

  • Page 95
    ...financial statements included as part of this Annual Report on Form 10-K). Subsidiaries of Health Net, Inc., a copy of which is filed herewith. Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, a copy of which is filed herewith. Certification of Chief Executive Officer...

  • Page 96
    ... duly authorized. HEALTH NET, INC. By: /S/ JOSEPH C. CAPEZZA Joseph C. Capezza Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates...

  • Page 97
    ... schedules are filed as part of this Annual Report on Form 10-K: Consolidated Financial Statements Report of Independent Registered Public Accounting Firm ...Consolidated Statements of Operations for each of the three years in the period ended December 31, 2007 ...Consolidated Balance Sheets...

  • Page 98
    ... FIRM To the Board of Directors and Stockholders of Health Net, Inc. Woodland Hills, California We have audited the accompanying consolidated balance sheets of Health Net, Inc. and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of operations...

  • Page 99
    HEALTH NET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) 2007 Year Ended December 31, 2006 2005 Revenues Health plan services premiums ...$11,435,314 $10,364,740 $ 9,506,865 Government contracts ...2,501,677 2,376,014 2,307,483 Net investment income ......

  • Page 100
    ... health care costs payable under TRICARE North contract ...266,767 272,961 Unearned premiums ...176,981 164,099 Loans payable and other financing arrangement ...35,000 200,000 Accounts payable and other liabilities ...463,823 371,263 Total current liabilities ...Senior notes payable ...Loans payable...

  • Page 101
    ... of FIN 48 ... Adjusted balance as of January 1, 2007 ...140,690 Comprehensive income: Net income ...Change in unrealized loss on investments, net of tax impact of $5,738 ...Defined benefit pension plans: Prior service cost and net loss ... Total comprehensive income ...99,202 (125) (4,363...

  • Page 102
    ... of acquisitions and dispositions: Premiums receivable and unearned premiums ...Other current assets, receivables and noncurrent assets ...Amounts receivable/payable under government contracts ...Reserves for claims and other settlements ...Accounts payable and other liabilities ...Net cash provided...

  • Page 103
    ... (HMOs), insured preferred provider organizations (PPOs) and point of service (POS) plans to approximately 6.6 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as "Part D"), Medicaid and TRICARE programs...

  • Page 104
    ...services premium revenues include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide care...

  • Page 105
    ... annually, but it is not a guaranteed renewable product. We report Part D as part of our health plan services reportable segment. The majority of our Part D members fall into the low-income category. Health Net has two primary contracts under Part D, one with the Centers for Medicare and Medicaid...

  • Page 106
    ... evenly over the contract period and reported as part of health plan services premium revenue. Low-income premium subsidy is accounted for as deposit accounting. Low-Income Member Cost Sharing Subsidy-For qualifying low-income members, CMS will reimburse Health Net, on the member's behalf, some or...

  • Page 107
    ... expense related to the Medicare risk factor estimates from 2003 and 2004 in our health plan services costs. TRICARE Contract Target Costs Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs, which is negotiated annually during the term of...

  • Page 108
    ... the company's stock option plans to the prior period. For purposes of this pro forma disclosure, the value of the options is estimated using a BlackScholes option-pricing model and amortized to expense over the options' vesting periods. (Amounts in millions, except per share data) 2005 Net income...

  • Page 109
    ... FINANCIAL STATEMENTS-(Continued) Investments Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost...

  • Page 110
    ... fair value of $1.1 million in our consolidated balance sheet with an offset to net investment income in our consolidated statement of operations for the year ended December 31, 2007. On September 26, 2006, we terminated the interest rate swap contracts (Swap Contracts) that we had used as a part of...

  • Page 111
    ... estimated lives are as follows: Gross Carrying Accumulated Net Amount Amortization Balance (Dollars in millions) Weighted Average Life (in years) As of December 31, 2006: Provider networks ...Employer groups ...Customer relationships and other (Note 3) ...As of December 31, 2007: Provider networks...

  • Page 112
    ...provide us diversity among issuers. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising our customer base. Our 10 largest employer group premiums receivable balances within each of our plans accounted for 27% and 45% of our total...

  • Page 113
    ... with premiums and fees accounting for 100% of our Government Contracts revenue. In addition, the federal Government is a significant customer of the Company's Health Plan Services segment as a result of its contract with CMS for coverage of Medicare-eligible individuals. Medicare revenues accounted...

  • Page 114
    ... financials statements. Under the new standard, noncontrolling interests no longer will be classified within a mezzanine section of the balance sheet but will be reported as a part of equity. The standard also changes a way the consolidated income statement is presented. It requires consolidated net...

  • Page 115
    ...marketing and risk sharing arrangements with The Guardian covering primarily small group membership in the States of Connecticut, New York and New Jersey. Under these arrangements, our managed care and indemnity products were marketed to existing insureds of The Guardian. In addition, these products...

  • Page 116
    ...) The on-going financial results of the HCS business since May 31, 2007 are included in our Health Plan Services reportable segment for the year ended December 31, 2007 and are not material to our consolidated results of operations. Sale-Leaseback of Shelton, Connecticut Property On March 29...

  • Page 117
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 4-Investments As of December 31, 2007 and 2006, the amortized cost, gross unrealized holding gains and losses, and fair value of our available-for-sale investments were as follows: 2007 Gross Gross Unrealized Unrealized ...

  • Page 118
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table shows our investments' gross unrealized losses and fair value for individual securities that have been in a continuous loss position through December 31, 2007: Less than 12 Months Fair Unrealized Value Losses...

  • Page 119
    ... subsidiaries to pay semi-annual distributions, in the amount of $17.5 million, to be paid to a participant in the financing facility. Unless terminated earlier, the final payment under the facility is scheduled to be made on December 19, 2012. The financing facility also provides that the financing...

  • Page 120
    ...not qualify for hedge accounting. Accordingly, the interest rate swap is reflected at positive fair value of $1.1 million in our consolidated balance sheet with an offset to net investment income in our consolidated statement of operations for the year ended December 31, 2007. Senior Notes On May 18...

  • Page 121
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise; failure to perform any other covenant or agreement in the notes or indenture for a period ...

  • Page 122
    ... units (RSUs) and performance share awards to certain employees, officers and non-employee directors. The grant of any award other than an option reduces the number of shares of common stock available for issuance under the 2006 Long-Term Incentive Plan by two shares of common stock for each award...

  • Page 123
    ... Directors approved the termination of our employee stock purchase plan effective June 1, 2005. Prior to June 1, 2005, eligible employees were able to purchase on a monthly basis our Common Stock at 85% of the lower of the market price on either the first or last day of each month. Performance share...

  • Page 124
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) A summary of option activity under our various plans as of December 31, 2007, and changes during the year then ended is presented below: Weighted Average Weighted Remaining Average Contractual Term Aggregate Exercise Price (...

  • Page 125
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) A summary of the status of the Company's restricted common stock as of December 31, 2007, and changes during the year then ended is presented below: Restricted Shares Weighted Average Grant-Date Fair Value Balance at January 1,...

  • Page 126
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) We become entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the stock options, restricted shares and RSUs when vesting occurs, the restrictions are released and the shares ...

  • Page 127
    ... repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from the employee stock options. We repurchased 4,322,959 shares during the year ended December 31, 2007, for aggregate consideration of approximately $230 million. We used net free cash available...

  • Page 128
    ...change the amount of net periodic benefit cost included in net income or address the various measurements issues associated with postretirement benefit plan accounting. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial...

  • Page 129
    ... participants. Under these plans, we pay a percentage of the costs of medical, dental and vision benefits during retirement. The plans include certain cost-sharing features such as deductibles, co-insurance and maximum annual benefit amounts that vary based principally on years of credited service...

  • Page 130
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Amounts recognized in accumulated other comprehensive income as of December 31 consist of: Other Benefits Pension Benefits 2007 2006 2007 2006 (Dollars in millions) Prior service cost ...Net loss (gain) ... $0.8 0.4 $1.2 $1.1 ...

  • Page 131
    ...reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2007: 1-Percentage 1-Percentage Point Point Increase Decrease (Dollars in millions) Effect on total of service and interest cost...

  • Page 132
    ...and the effective income tax rate on income is as follows for the years ended December 31: 2007 2006 2005 Statutory federal income tax rate ...State and local taxes, net of federal income tax effect ...Tax exempt interest income ...Goodwill and intangible assets amortization ...Class action lawsuit...

  • Page 133
    ... the federal and state net operating loss carryforwards, respectively. Accordingly, valuation allowances have been provided to account for the potential limitations on utilization of these tax benefits. Of the $51.5 million total valuation allowance, $13.1 million is related to the prior acquisition...

  • Page 134
    ... on our consolidated balance sheet. In addition, we do not anticipate any significant changes to our liability for unrecognized tax benefits within the next 12 months. During the year ended December 31, 2007, an examination was closed by the Internal Revenue Service of tax years 2003 through 2005...

  • Page 135
    ... of claims for services provided by out-of-network (ONET) providers. Plaintiffs seek relief in the form of payment of additional benefits, injunctive and other equitable relief, and attorneys' fees. In September 2006, the District Court in McCoy/Wachtel certified two nationwide classes of Health Net...

  • Page 136
    ... Court reviews Health Net's financial records; ordering Health Net to pay plaintiffs' counsel's fees and expenses associated with the sanctions motion and motions to enforce the District Court's discovery orders and re-deposing Health Net witnesses. In connection therewith, on June 19, 2007, the...

  • Page 137
    ... New Jersey state laws relating to ONET and certain other claims payment practices; (2) Health Net will establish a $40 million prove-up fund to compensate eligible class members who can prove that they paid out of pocket for certain ONET claims or who have received balance bills for such services...

  • Page 138
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The settlement agreement requires us to pay $40 million to general settlement funds and $20 million for plaintiffs' legal fees and to commit to several business practice changes. During the three months ended March 31, 2005, we ...

  • Page 139
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) actions brought against us by AmCare-TX and AmCare-OK originally were filed in Texas state court on June 7, 2004 and included allegations that after the sale to AmCareco we were nevertheless responsible for the mismanagement of ...

  • Page 140
    ... limiting the rights of health plans and insurers to rescind coverage. In addition, effective January 1, 2008, newly enacted legislation in California requires health plans and insurers to pay health care providers who, under certain circumstances, have rendered services to members whose policies...

  • Page 141
    ... that his office is conducting an industry-wide investigation into the manner in which health insurers calculate "usual, customary and reasonable" charges for purposes of reimbursing members for out-of-network medical services. The NYAG's office has issued subpoenas to 16 health insurance companies...

  • Page 142
    ... agreement to renew our leased office space in Woodland Hills, California for our corporate headquarters. The new lease is for a term of 10 years and has provisions for space reduction at specific times over the term of the lease, but it does not provide for complete cancellation rights. The total...

  • Page 143
    ... our health care providers and facilities, the federal government, IT service companies and other parties within the normal course of our business for the purpose of providing health care services. Certain of these contracts are cancelable with substantial penalties. As of December 31, 2007, future...

  • Page 144
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 13-Related Parties One current executive officer of the Company is a director of an industry-related association, of which the Company is a member and we paid dues of $1.1 million, $1.1 million and $1.0 million in 2007, ...

  • Page 145
    ...the additional following five aggregation criteria Similar managed health care products and services including HMO, PPO and POS, Similar production process as they support similar customer groups and products, Same type of customers, individuals within large and small employer groups and senior and...

  • Page 146
    ... STATEMENTS-(Continued) Presented below are segment data for the three years ended December 31. 2007 Health Plan Services Government Contracts Eliminations (Dollars in millions) Total Revenues from external sources ...Intersegment revenues ...Net investment income ...Administrative services fees...

  • Page 147
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) A reconciliation of the total reportable segments' measures of profit to the Company's consolidated income from continuing operations before income taxes and cumulative effect of a change in accounting principle for the years ...

  • Page 148
    ... on this class action litigation. The following table shows the Company's health plan services capitated and non-capitated expenses for the years ended December 31: 2007 Health Plan Services 2006 2005 (Dollars in millions) Total incurred claims ...Capitated expenses and shared risk ...Pharmacy and...

  • Page 149
    ... following interim financial information presents the 2007 and 2006 results of operations on a quarterly basis: 2007 March 31 June 30(1) September 30 December 31 (Dollars in millions, except per share data) Total revenues ...Health plan services costs ...Government contracts costs ...Income (loss...

  • Page 150
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands) Year Ended December 31, 2007 2006 2005 REVENUES: Net investment income ...$ 8,294 $ 15,269 $ 5,997 Other income ...2,641 2,902 3,213...

  • Page 151
    ... SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED BALANCE SHEETS (Amounts in thousands) December 31, 2007 December 31, 2006 ASSETS Current Assets: Cash and cash equivalents ...Other assets ...Deferred taxes ...Due from subsidiaries ...Total...

  • Page 152
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2007 2006 2005 As Restated As Restated See Note 2 See Note 2 NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES...

  • Page 153
    ... INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. NOTE TO CONDENSED FINANCIAL STATEMENTS Note 1-Basis of Presentation Health Net, Inc.'s (HNT) investment in subsidiaries is stated at cost plus equity in undistributed earnings (losses) of subsidiaries. HNT's share of net income...

  • Page 154
    SUPPLEMENTAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES HEALTH NET, INC. (Amounts in thousands) Balance at Beginning of Period Charged to Costs and Expenses Credited to Other Accounts (1) Balance at End of Period Deductions 2007: Allowance for doubtful accounts: Premiums receivable...

  • Page 155
    ... Health Net, Inc. as issuer, and The Bank of New York Trust Company, N.A., as trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on May 18, 2007 (File No. 1-12718) and incorporated herein by reference). Officer's Certificate, dated May 18, 2007, establishing...

  • Page 156
    ...Form of Restricted Stock Unit Award Agreement utilized for eligible employees of Health Net, Inc., a copy of which is filed herewith. Form of Performance Share Award Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed...

  • Page 157
    ...by reference). Amendment Number One to the Health Net, Inc. (formerly Foundation Health Systems, Inc.) Deferred Compensation Plan Trust Agreement between Health Net, Inc. and Union Bank of California, adopted January 1, 2001 (filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the...

  • Page 158
    ...the Health Net, Inc. 2006 Executive Officer Incentive Plan (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718 and incorporated herein by reference). Health Systems International, Inc. Second Amended and Restated Non-Employee...

  • Page 159
    ...and Restated Deferred Compensation Plan of Foundation Health Corporation (filed as Exhibit 10.49 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference). Foundation Health Corporation Executive Retiree Medical Plan (as...

  • Page 160
    Exhibit Number Description 10.59 Fifth Amendment to Credit Agreement, dated as of November 6, 2006, among Health Net, Inc., the lenders party thereto and Bank of American, N.A., as Administrative Agent (filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended ...

  • Page 161
    ...herein by reference). Office Lease Agreement dated August 18, 2000 by and between Physicians Health Services of Connecticut, Inc. (predecessor to Health Net of Connecticut, Inc.) and Beard Sawmill, LLC (filed as Exhibit 10.68 to the Company's Annual Report on Form 10-K for the year ended December 31...

  • Page 162
    ... 30, 2007 (the "Effective Date"), by and between Health Net, Inc., a Delaware corporation (the "Company"), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and James E. Woys ("Executive"). RECITALS WHEREAS, the Company and Executive are party to...

  • Page 163
    ... unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, "Personal Compensation Information"), may be disclosed in filings with the SEC, the New York Stock Exchange ("NYSE") and/or other regulatory organizations...

  • Page 164
    ... limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information. B. Executive...

  • Page 165
    ...benefit programs and plans include paid time off ("PTO"), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company's 401(k) plan, tuition reimbursement plan, deferred compensation plan and Supplemental Executive Retirement Plan...

  • Page 166
    ... be "grossed up" for income tax purposes at the supplemental federal tax rate and applicable state tax liability. H. Expenses. Subject to and in accordance with the Company's written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out...

  • Page 167
    ... months, with premium payments paid by the Company on Executive's behalf, provided, that Executive properly elects to continue those benefits under COBRA. For purposes of this Agreement, "Change in Control" is defined as any of the following which occurs subsequent to the effective date of Executive...

  • Page 168
    ... authority over Executive to an individual or organization other than Health Net, Inc. B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive's employment is Terminated by the Company...

  • Page 169
    ... the effective date of Termination. In the event that Executive voluntarily Terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set...

  • Page 170
    ... and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive's Benefits for a period of twelve months from the date of Termination and (ii) a lump sum payment equal to one times Executive's Base...

  • Page 171
    ... shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that Executive has received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm...

  • Page 172
    ... the business of the Company or any of its affiliates to which Executive had access during Executive's employment with the Company. For purposes of this Section, "Competitor" shall refer to any health maintenance organization or insurance company that provides managed health care or related services...

  • Page 173
    ...Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive's employment...

  • Page 174
    ... mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid: If to the Company: Health Net, Inc. 21650 Oxnard Street, 22nd Floor Woodland Hills, CA 91367 Attention: General...

  • Page 175
    ... all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company. [Signature Page to Follow] - 14...

  • Page 176
    ..., the parties hereto have executed this Agreement as of the Effective Date set forth above. Executive /s/ James E. Woys By: Name: James E. Woys Title: Executive Vice President and Chief Operating Officer cc: Linda V. Tiano Karin Mayhew Debbie J. Colia/James E. Woys Personnel File Health Net, Inc...

  • Page 177
    ... Termination Date. Executive's participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings...

  • Page 178
    ..., representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions...

  • Page 179
    ... reimbursable business expenses in accordance with the Company's expense policies and procedures then in effect. Executive shall not, without the Company's written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release...

  • Page 180
    ... no other payments or benefits will be asserted or requested by Executive. 15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to...

  • Page 181
    ...the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew. Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become...

  • Page 182
    IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below. Executive By: [EXHIBIT COPY] Name: Title: Dated: [TO BE INSERTED] A-6 Health Net, Inc. [EXHIBIT COPY] By: Name: Title: Dated: [TO BE INSERTED]

  • Page 183
    ..., 2007 (the "Effective Date"), by and between Health Net, Inc., a Delaware corporation (the "Company"), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Stephen D. Lynch ("Executive"). RECITALS WHEREAS, the Company and Executive are party to...

  • Page 184
    ... unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, "Personal Compensation Information"), may be disclosed in filings with the SEC, the New York Stock Exchange ("NYSE") and/or other regulatory organizations...

  • Page 185
    ... limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information. B. Executive...

  • Page 186
    ... and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off ("PTO"), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company's 401(k) plan, tuition reimbursement plan...

  • Page 187
    ...shall be paid to Executive if the Chief Executive Officer, in consultation with the Company's Board of Directors determines, on the Determination Date, that the Company's Health Plan Division has achieved the 2008 market plans for each of the Company's commercial health plan regions; (ii) $1,300,000...

  • Page 188
    ... the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the "Executive Stock Ownership Policy"), Executive is required to own shares of Common Stock of the Company having a value of three times (3x) Executive's Base Salary in effect from time to time pursuant...

  • Page 189
    ... months, with premium payments paid by the Company on Executive's behalf, provided, that Executive properly elects to continue those benefits under COBRA. For purposes of this Agreement, "Change in Control" is defined as any of the following which occurs subsequent to the effective date of Executive...

  • Page 190
    ... authority over Executive to an individual or organization other than Health Net, Inc. B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive's employment is Terminated by the Company...

  • Page 191
    ...for Medicare at age 65. For avoidance of doubt, Executive shall be responsible for paying monthly premiums on such coverage and, if Executive elects to participate in a health plan provided for Company associates, such monthly premiums will not include any Company subsidization typically provided to...

  • Page 192
    ... and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive's Benefits for a period of twelve (12) months from the date of Termination and (ii) a lump sum payment equal to twelve (12) months of...

  • Page 193
    ... business of the Company or any of its affiliates to which Executive had access during Executive's employment with the Company. For purposes of this Section 12, "Competitor" shall refer to any health maintenance organization or insurance company that provides managed health care or related services...

  • Page 194
    ...Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive's employment...

  • Page 195
    ... mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid: If to the Company: Health Net, Inc. 21650 Oxnard Street, 22nd Floor Woodland Hills, CA 91367 Attention: General...

  • Page 196
    ... all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company. [Signature Page to Follow] - 14...

  • Page 197
    ...Effective Date set forth above. Executive /s/ Stephen Lynch By: Name: Stephen Lynch Title: President, Health Plan Division cc: Linda Tiano Karin Mayhew Debbie J. Colia/Stephen Lynch Personnel File Health Net, Inc. /s/ Jay M. Gellert By: Name: Jay M. Gellert Title: President & Chief Executive Officer

  • Page 198
    ... Termination Date. Executive's participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings...

  • Page 199
    ..., representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions...

  • Page 200
    ... reimbursable business expenses in accordance with the Company's expense policies and procedures then in effect. Executive shall not, without the Company's written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release...

  • Page 201
    ... no other payments or benefits will be asserted or requested by Executive. 15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to...

  • Page 202
    ...the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew. Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become...

  • Page 203
    IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below. Executive By: [EXHIBIT COPY] Name: Title: Dated: [TO BE INSERTED] Health Net, Inc. [EXHIBIT COPY] By: Name: Title: Dated: [TO BE INSERTED] A-6

  • Page 204
    ...; and optional medical, dental and vision coverage for non-employee directors and their eligible dependents, which directors can continue to utilize following their retirement from the Board. Non-employee directors will pay monthly premiums for any such coverage they elect at the same rates paid by...

  • Page 205
    ...the Company maintains a deferred compensation plan pursuant to which non-employee directors are eligible to defer up to 100% of their compensation. The compensation deferred under such plan is credited with earnings or losses measured by the rate of return on investments elected by plan participants...

  • Page 206
    ... "Restricted Stock Unit Agreement") is made and entered into as of [DATE OF GRANT] (the "Date of Grant"), by and between Health Net, Inc., a Delaware corporation (the "Company"), and [NAME] (the "Recipient"). WHEREAS, the Compensation Committee (the "Committee") of the Board of Directors (the "Board...

  • Page 207
    ... Employment/Association with Company Competitor. The Recipient hereby agrees that, during (i) the six-month period following a termination of the Recipient's employment with an Employer that entitles the Recipient to receive severance benefits under an agreement with or the policy of the Company or...

  • Page 208
    ...] [ADDRESS] Health Net, Inc. 21650 Oxnard Street Woodland Hills, California 91367 Attention: General Counsel To the Company at: or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only...

  • Page 209
    ... entitle the Recipient to Change in Control severance benefits under an effective employment agreement between the Recipient and the Company or under the Company's Safety Net Security Program, each Restricted Stock Unit shall become fully vested upon such termination and the date of such vesting...

  • Page 210
    ... Recipient has a right to continue to provide services as an officer, director, employee or consultant of the Company and/or the Employer for any period of time or at any specific rate of compensation. Nothing in the Plan or in this Restricted Stock Unit Agreement shall confer upon the Recipient the...

  • Page 211
    ...Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"). If the Recipient is "specified employee" (within the meaning of Section 409A) with respect to the Company at the time of a termination of employment and the Recipient becomes vested in Restricted Stock Units as a consequence...

  • Page 212
    ... Stock Unit Agreement on the day and year first above written. Health Net, Inc. Name: Jay M. Gellert Title: President and Chief Executive Officer THE UNDERSIGNED RECIPIENT HEREBY EXPRESSLY ACKNOWLEDGES AND AGREES THAT HE/SHE IS AN EMPLOYEE AT WILL AND MAY BE TERMINATED BY THE EMPLOYER AT ANY TIME...

  • Page 213
    ...) Health Net Life Reinsurance Company (Cayman Islands) (98-0409907) Health Net Community Solutions, Inc. (54-2174068) Health Net of California Real Estate Holdings, Inc. (54-2174069) Health Net of the Northeast, Inc. (DE)(06-1116976 FOHP, Inc. (NJ)(22-3314813) • Health Net of New Jersey, Inc...

  • Page 214
    ... from time to time). ** National Pharmacy Services, Inc. owns approximately 90% of the outstanding common stock. *** Health Net Foundation, Inc. is a nonprofit, nonstock corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. **** Health Net Managing Partners...

  • Page 215
    ***** Health Net Financing, L.P. - 100% general partnership interest is held by Health Net Funding, Inc., 100% of the Class A limited partnership interest is held by Lodgemore Holdings Inc., and 100% of the Class B limited partnership interest is held by Health Net Investments, LLC.

  • Page 216
    ...in Income Taxes, and to the Company's change in its method of accounting for share-based compensation in 2006 upon adoption of FASB Statement No. 123(R), ShareBased Payment), and the effectiveness of Health Net, Inc.'s internal control over financial reporting appearing in this Annual Report on Form...

  • Page 217
    ... Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Jay M. Gellert, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Health Net, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state...

  • Page 218
    ... Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Joseph C. Capezza, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Health Net, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state...

  • Page 219
    ... Annual Report of Health Net, Inc. (the "Company") on Form 10-K for the year ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Jay M. Gellert, as Chief Executive Officer of the Company, and Joseph C. Capezza, as Chief Financial Officer...