Health Net 2007 Annual Report Download - page 140

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
including the actions for nullification, post-trial motions and appeals, and the prosecution of our pending but
stayed cross-claims against other parties. During the three months ended June 30, 2005, we recorded a pretax
charge of $15.9 million representing the estimated legal defense costs for this litigation.
These proceedings are subject to many uncertainties, and, given their complexity and scope, their outcome,
including the outcome of any appeal, 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 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 these proceedings should not have a
material adverse effect on our financial condition and liquidity.
Litigation Relating to Rescission of Policies
In recent years, there has been growing public attention in 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 (DOI) announced their intention to issue joint regulations 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circumstances, have rendered services to members whose policies are subsequently rescinded. The issue of
rescissions has also attracted increasing media attention, and the DMHC has been conducting surveys of the
rescission practices of health plans, including ours. Other government agencies have also announced their interest
in investigating rescission and related activities of health plans.
On February 20, 2008, the Los Angeles City Attorney filed a complaint against Health Net in the Los
Angeles Superior Court relating to our underwriting practices and rescission of certain individual policies. The
complaint seeks equitable relief and civil penalties for, among other things, alleged false advertising, violations
of unfair competition laws and violations of the California Penal Code.
We are party to arbitrations and litigation in which rescinded members allege that we unlawfully rescinded
their coverage. In addition, we have been threatened with two class action lawsuits that would be brought on
behalf of all individuals whose policies were rescinded for misrepresentation. The lawsuits generally seek not
only the cost of medical services that were not paid for as a result of the rescission, but in some cases they also
seek damages for emotional distress, attorney fees and punitive damages. On February 21, 2008, we received an
arbitration decision in a case involving the rescission of an individual insurance policy. The arbitration decision
ordered us to pay approximately $9.4 million in medical service costs, emotional distress and punitive damages.
To provide for this judgment, we have accrued $10.0 million, including estimated attorney fees, in our financial
statements for the year ended December 31, 2007. The payment of this judgment will be funded by operating
cash flow.
We intend to defend ourselves vigorously in each of the cases involving rescission. The cases 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/or financial condition could
be materially affected by an ultimate unfavorable resolution of these cases depending, in part, upon the results of
operations or cash flow for such period.
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