Health Net 2007 Annual Report Download - page 21

Recent Developments and Other Company Information
Withdrawal from Connecticut Medicaid Program
The contract between HNCT and the Connecticut Department of Social Services (“DSS”), under which our
Connecticut Medicaid program has operated, expired on June 30, 2007. From June 30, 2007 to December 7,
2007, HNCT and DSS amended the contract to extend the term of the contract on a month-to-month basis. On
November 19, 2007, the managed care responsibilities of four contractors, including HNCT, in the state's
Medicaid program were terminated by the state, effective December 1, 2007, over the issue of the contractors'
challenge to the state Freedom of Information Commission’s determination that Medicaid managed care
contractors should be subject to the state’s Freedom of Information Act (“CT FOIA”) and, as such, are required
to disclose their commercial provider reimbursement rates and other proprietary and trade secret information.
In December 2007, DSS required, as a condition of contracting with DSS for the provision of services under
the Connecticut Medicaid program, that each contractor agree to a material change in the nature and scope of the
contractor’s obligations and, additionally, agree to a provision acknowledging that the contractor performs a
“government function” subject to public disclosure under CT FOIA.
After careful review and consideration, HNCT determined that agreement to such contractual provisions
could have a material adverse effect on HNCT’s ability to contract with providers and vendors, as well as on
HNCT’s ability to compete effectively in the Connecticut Medicaid and commercial markets. Based on DSS’s
FOIA requirements and certain other factors, HNCT made the decision to discontinue its participation in the
Connecticut Medicaid program. As part of a transition arrangement with DSS, HNCT has agreed to continue to
perform administrative services for the Connecticut Medicaid program until at least February 29, 2008, though
DSS and HNCT may mutually agree to extend the arrangement. HNCT is working with DSS to develop and
implement an appropriate transition plan so that all HNCT Medicaid members receive uninterrupted coverage
and ongoing access to health care services. We expect to have completely exited the Connecticut Medicaid
program by the end of the first quarter of 2008.
Operations Strategy
On November 8, 2007, we announced that we are undertaking a company-wide operations strategy intended
to enable Health Net to streamline its operations, including consolidating technology platforms, combining
duplicative administrative and operational functions and outsourcing certain operations where appropriate. We
are targeting annual G&A expense savings of approximately $100 million by 2010 and expect to incur pretax
restructuring charges relating to the reorganization of between $40 million and $50 million over the course of
2008.
Purchase of The Guardian’s Interest in HealthCare Solutions
In 1995, we entered into a 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 were distributed through the brokerage community in an integrated marketing effort under the trade
name HealthCare Solutions, or HCS. As part of these arrangements, The Guardian generally had the exclusive
right to market and sell our HMO, PPO and POS products to small employer groups, and we and The Guardian
each retained 50% of the premiums and claims. In addition, we recovered from The Guardian a specified portion
of the administrative expenses and the direct marketing costs, which were shared equally. In 2006, various new
products were launched for the HCS product portfolio, including Health Savings Accounts and our preferred line
of products, called Outlook.
On February 27, 2007, we announced that we had entered into an agreement with The Guardian to, in
substance, purchase The Guardian’s 50% interest in HCS for $80.3 million in cash (the “Guardian Transaction”).
On May 31, 2007, we completed the Guardian Transaction, which included terminating all pre-existing
marketing and risk sharing arrangements and acquiring certain intangible rights from The Guardian. As a result,
we recognize 100% of the HCS revenues, claims and administrative and marketing expenses.
19