Health Net 2007 Annual Report Download - page 47

On September 12, 2007, HNNJ received notification from NJDMAHS that it would assess HNNJ’s provider
network panels as of September 24, 2007 and that NJDMAHS may impose a daily penalty for each network
deficiency (originally $250/day, potentially to increase to $500/day). We are actively working to remediate any
deficiencies, and the NJDMAHS has acknowledged our progress in this area. On November 29, 2007, HNNJ
received a second notification from NJDMAHS imposing a daily penalty as of August 15, 2007 (originally
$250/day, increased to $500/day as of December 12, 2007) against HNNJ until we have demonstrated that our
continuity of care for care management of certain of our populations is in compliance with contractual
requirements. We have filed objections to and appealed this Notice of Imposition of Liquidated Damages on
grounds including lack of due process. HNNJ is actively working to remediate any existing deficiencies
associated with the continuity of care for care management, and expects to complete these efforts in late 2008.
In the ordinary course of our business operations, we are also subject to periodic reviews by various
regulatory agencies with respect to our compliance with a wide variety of rules and regulations applicable to our
business, including, without limitation, rules relating to pre-authorization penalties, payment of out-of-network
claims and timely review of grievances and appeals, which may result in remediation of certain claims and the
assessment of regulatory fines or penalties.
In addition, in the ordinary course of our business operations, we are also party to various other legal
proceedings, including, 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 rendered to our
members, but which allegedly were either denied, underpaid or not paid, and claims arising out of the acquisition
or divestiture of various business units or other assets. We are also subject to claims relating to the performance
of contractual obligations to providers, members, employer groups and others, including the alleged failure to
properly pay claims and challenges to the manner in which we process claims. In addition, we are subject to
claims relating to the insurance industry in general, such as claims relating to reinsurance agreements and
rescission of coverage and other types of insurance coverage obligations.
These other regulatory and legal proceedings 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 cash flow could be materially affected by an ultimate unfavorable resolution of any or all of
these other regulatory and legal 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 all of these other regulatory and legal
proceedings that are pending, after consideration of applicable reserves and potentially available insurance coverage
benefits, should not have a material adverse effect on our financial condition and liquidity.
Potential Settlements
We regularly evaluate litigation matters pending against us, including those described above, to determine if
settlement of such matters would be in the best interests of the Company and its stockholders. The costs
associated with any such settlement could be substantial and, in certain cases, could result in a significant
earnings charge in any particular quarter in which we enter into a settlement agreement. We have recorded
reserves and accrued costs for future legal costs for certain significant matters described above. These reserves
and accrued costs represent our best estimate of probable loss, including related future legal costs for such
matters, both known and incurred but not reported, although our recorded amounts might ultimately be
inadequate to cover such costs. Therefore, the costs associated with the various litigation matters to which we are
subject and any earnings charge recorded in connection with a settlement agreement could have a material
adverse effect on our financial condition or results of operations. As noted above under “Class Action Litigation
—McCoy v. Health Net, Inc. et al, Wachtel v. Health Net, Inc., et al,and Scharfman, et al v. Health Net, Inc., et
al” we are in the process of finalizing an agreement to settle the McCoy, Wachtel and Scharfman cases.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the security holders of the Company, either through
solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2007.
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