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_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________
FORM 10-K
______________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 2012
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 The New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred Stock The New York Stock Exchange
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 No
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
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
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.
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):
Large 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
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 29, 2012 was $1,976,958,453 (which
represents 81,456,879 shares of Common Stock held by such non-affiliates multiplied by $24.27, the closing sales price of such stock on
the New York Stock Exchange on June 29, 2012).
The number of shares outstanding of the registrant’s Common Stock as of February 25, 2013 was 79,250,561 (excluding 70,645,233
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 its 2013
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, 2012.
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Table of contents

  • Page 1
    ... from to Commission File Number: 1-12718 _____ HEALTH NET, INC. (Exact Name of Registrant as Specified in Its Charter) _____ 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...

  • Page 2
    HEALTH NET, INC. INDEX TO FORM 10-K Page PART I. Item 1-Business...General...Segment Information ...Provider Relationships ...Additional Information Concerning Our Business ...Government Regulation ...Intellectual Property...Employees...Dependence Upon Customers...Shareholder Rights Plan......

  • Page 3
    ...charge upon request. Please direct your written request to Investor Relations, Health Net, Inc., 21650 Oxnard Street, Woodland Hills, California 91367, or contact Investor Relations by telephone at (818) 676-6000. We have included our Internet website address throughout this Annual Report on Form 10...

  • Page 4
    ... physicians in the group, as long as such services are available from group physicians. A significant majority of our California membership is in HMO plans. PPO Plans: Our preferred provider organization or PPO plans offer coverage for services received from any health care provider, with benefits...

  • Page 5
    ... conducted by our subsidiaries, Health Net of Arizona, Inc. and Health Net Life Insurance Company ("HNL"). Our commercial membership in Arizona was 140,381 as of December 31, 2012. Our Medicare Advantage membership in Arizona was 43,414 as of December 31, 2012. We did not have any Medicaid members...

  • Page 6
    ... Medicare Advantage contractors based on membership of 233,751 members. We contract with CMS under the Medicare Advantage program to provide Medicare Advantage products directly to Medicare beneficiaries and through employer and union groups. We provide or arrange health care benefits for services...

  • Page 7
    ...-Western Region Operations Segment Membership" for detailed information regarding our Medicaid enrollment. Medi-Cal is a public health insurance program that provides health care services for low-income individuals resident in California, and is financed by California and the federal government. As...

  • Page 8
    ... medical, behavioral health, long-term institutional, and home- and community-based services for dual eligibles through a single health plan, and will require that all MediCal beneficiaries in participating counties join a Medi-Cal managed care health plan to receive their Medi-Cal benefits...

  • Page 9
    ... Life Insurance Company, the buyer of our Medicare PDP business in 2012. HNPS manages these benefits in an effort to achieve the highest quality outcomes at the lowest cost for Health Net members. HNPS contracts with national health care providers, vendors, drug manufacturers and pharmacy...

  • Page 10
    ... vision services we provide to our Medi-Cal and Healthy Families vision program enrollees in California. Government Contracts Segment Our Government Contracts segment includes our government-sponsored managed care federal contract with the Department of Defense under the TRICARE program in the North...

  • Page 11
    ... cost reimbursement arrangements for health care costs plus administrative fees received in the form of fixed prices, fixed unit prices, and contingent fees and payments based on various incentives and penalties. For additional information regarding our previous TRICARE contract for the North Region...

  • Page 12
    ... claims. In our PPO plans, members are not required to select a primary care physician and generally do not require prior authorization for specialty care. For services provided under our PPO products and the out-of-network benefits of our POS products, we ordinarily reimburse physicians pursuant...

  • Page 13
    ...the largest managed health care company in California and Anthem Blue Cross of California is the largest PPO provider in California. There are also a number of small, regional health plans that compete with Health Net in California, mainly in the small business group market segment. In addition, two...

  • Page 14
    ... in, our service areas. Premiums are also affected by applicable state and federal law and regulations that may directly or indirectly affect premium setting. For example, California law limits experience rating of small group accounts (taking the group's past health care utilization and costs into...

  • Page 15
    ... for a managed care company. Among the medical management techniques we utilize to contain the growth of health care costs are pre-authorization or certification for outpatient and inpatient hospitalizations and a concurrent review of active inpatient hospital stays and discharge planning. We...

  • Page 16
    ... and services, or otherwise adjusting their operating costs and reducing general and administrative expenses. In addition, the ACA requires the establishment of state-based or federally facilitated "exchanges" where individuals and small groups may purchase health coverage. California, Oregon and...

  • Page 17
    ...U.S. Department of Health and Human Services ("HHS")); limiting Medicare Advantage payment rates; increasing mandated "essential health benefits" in some market segments; specifying certain actuarial value and cost-sharing requirements; eliminating medical underwriting for medical insurance coverage...

  • Page 18
    ... of fees pharmaceutical manufacturers pay imposed by the ACA, could, in turn, also increase our medical costs. Further, it is not yet clear how state regulators will respond to rate filings that include requests to increase premiums to cover increased costs resulting from the health insurer fee or...

  • Page 19
    ...in California to require prior approval for individual and small group rates by the CDOI has qualified for the 2014 ballot. In addition, oversight boards associated with the state-based exchanges in California, Oregon and Washington will negotiate the price of coverage sold on these exchanges. These...

  • Page 20
    ... Families program is regulated by the Managed Risk Medical Insurance Board. Federal funding remains critical to the viability of these programs, particularly in light of California's recent history of state budget deficits. Federal law permits the federal government to oversee and, in some cases...

  • Page 21
    ... of certain benefit plans and employer groups, including the availability of legal remedies under state law. Regulations established by the U.S. Department of Labor provide additional rules for claims payment and member appeals under health care plans governed by ERISA. Other Federal Regulations. We...

  • Page 22
    ...Care. Health Net Community Solutions Oregon HMO Health Net Life Insurance Company (Arizona and California PPO) MHN California Department of Health Care Services (Medi-Cal) and the Managed Risk Medical Insurance Board (Healthy Families) Oregon Department of Consumer and Business Services California...

  • Page 23
    ... of administrative services for employers, providers and members; negotiation of agreements with physician groups, hospitals, pharmacies and other health care providers; handling of claims for payment of hospital and other services; and provision of data processing services. Our employees are not...

  • Page 24
    ... 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 25
    ... or Medicaid businesses; our ability to successfully participate in the duals demonstrations; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care, the Centers for Medicare & Medicaid Services, the Office...

  • Page 26
    ... of fees pharmaceutical manufacturers pay imposed by the ACA, could, in turn, also increase our medical costs. Further, it is not yet clear how state regulators will respond to rate filings that include requests to increase premiums to cover increased costs resulting from the health insurer fee or...

  • Page 27
    ... available to low-income individuals who purchase insurance through federally facilitated exchanges. A successful challenge in this area could significantly affect the affordability of insurance to low-income individuals in states that do not administer their own exchanges, such as Arizona. Finally...

  • Page 28
    ...in California to require prior approval for individual and small group rates by the CDOI has qualified for the 2014 ballot. In addition, oversight boards associated with the state-based exchanges in California, Oregon and Washington will negotiate the price of coverage sold on these exchanges. These...

  • Page 29
    ...-based products and services. Factors underlying the increase in hospital costs include, but are not limited to, the underfunding of public programs, such as Medicaid and Medicare and the constant pressure that places on rates from commercial health plans, growing rates of uninsured individuals, new...

  • Page 30
    ... rate increases. The federal government and some states in which we do business have also required prior regulatory approval of premium rate increases and/or have subjected such increases to heightened scrutiny, such as third-party review. For example, the CDOI and Department of Managed Health Care...

  • Page 31
    ...our commercial business in 2012 for 2013 to either obtain better pricing for these accounts or, in some cases, to discontinue business with them. Our strategy remains focused on growing membership in tailored network products that provide lower cost options to our members and employer groups. Growth...

  • Page 32
    ... Managed Health Care, the California Department of Health Care Services, CMS, the U.S. Department of Health & Human Services' Office of Civil Rights and state departments of insurance, have the authority to impose substantial fines and/or penalties against us, require us to change how we do business...

  • Page 33
    ...long-term institutional, and home- and community-based services for individuals that are fully eligible for Medicare and Medi-Cal benefits ("dual eligibles") through a single health plan. The CCI will also require that all Medi-Cal beneficiaries in participating counties join a Medi-Cal managed care...

  • Page 34
    ... our Western Region Operations reportable segment in 2012 and an expected 26% in 2013. The ACA includes, among other things, provisions that will significantly reduce the government's Medicare payment rates. For more information on the risks associated with the ACA, see "-Federal health care reform...

  • Page 35
    ... on our business, financial condition or results of operations. Approximately 48% of our 2012 total revenues relate to federal, state and local government health care coverage or counseling programs, such as Medicare, Medicaid, TRICARE and MFLC. Nearly all of the revenues in our Government Contracts...

  • Page 36
    ... information on our TRICARE operations, see "Item 1. Business-Segment Information- Government Contracts Segment-TRICARE." In addition, the reimbursement rates we receive from federal and state governments relating to our government-funded health care coverage programs may be subject to change...

  • Page 37
    ... higher than expected health care costs we reported in 2012. In addition, as part of the CCI, we will be required to expand our current Medi-Cal offerings to provide LTSS benefits to all our existing MediCal members, including SPDs and those who do not participate in the duals demonstration portion...

  • Page 38
    ... Medicare Advantage contracts. We utilize claims submissions, medical records and other medical data as provided by health care providers as the basis for payment requests that we submit to CMS under the risk adjustment model for our Medicare Advantage contracts. CMS may conduct risk adjustment data...

  • Page 39
    ... or financial condition. See "-Medicare programs represent a significant portion of our business and are subject to risk" for additional information about our Medicare programs and the associated risks. We contract with independent third party vendors and service providers who provide services to...

  • Page 40
    ... our business, financial condition and results of operations. Violations of, or noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms by third party vendors and service providers could increase our exposure to liability to our members, providers or...

  • Page 41
    .... We contract with hospitals, provider groups and other providers as a means to provide access to health care services for our members, to manage health care costs and utilization and to monitor the quality of care being delivered. In any particular market, providers could refuse to contract with us...

  • Page 42
    ... frequency and cost of member utilization of professional services, and in some cases, institutional services. Provider groups that enter into capitation fee arrangements generally contract with primary care physicians, specialists and other secondary providers to provide services. In addition, we...

  • Page 43
    ... medical costs and health care related expenditures could continue to adversely affect state and federal budgets, including California's, resulting in reduced or delayed reimbursements or payments in our federal and state government-funded health care coverage programs, including Medicare and Medi...

  • Page 44
    ... we participate or other changes to these programs could have a material adverse effect on our business, financial condition or results of operations" for additional information regarding proposals to reduce California's Medi-Cal provider reimbursement rates and other state and federal budgetary...

  • Page 45
    ... health insurer fee and the reinsurance, risk adjustment and risk corridors programs. Among other things, we will need to define and implement new billing and payment capabilities and support new requests from third parties and government agencies for data collection and reporting. These additional...

  • Page 46
    ... to certain individuals. We reported the loss to authorities and notified affected individuals. This matter is under review by various regulatory authorities. We are currently party to various putative class action lawsuits brought in federal and state courts on behalf of individuals who claim to be...

  • Page 47
    ... rating organizations are increasingly important factors in establishing the competitive position of insurance companies and managed care companies. We believe our claims paying ability and financial strength ratings also are important factors in marketing our products to certain of our customers...

  • Page 48
    ...to income may be necessary. This impairment testing requires us to make assumptions and judgments regarding estimated fair value including assumptions and estimates related to future earnings and membership levels based on current and future plans and initiatives, long-term strategies and our annual...

  • Page 49
    ..., public communications regarding managed care, legislative or regulatory actions, litigation or threatened litigation, health care cost trends, proposed premium increases, pricing trends, competition, earnings, proposed changes in government programs, receivable collections or membership reports of...

  • Page 50
    ... which are beyond our control. In addition, the uncertainties associated with federal and state health care reform, challenging economic conditions and our potential participation in new government programs or the provision of new services and/or benefits to new populations, among other things, may...

  • Page 51
    ... lead to, among other things, increased utilization of health care services and the associated increased health care costs due to increased in-patient and out-patient hospital costs, disruption of information and payment systems and the cost of any anti-viral medication used to treat affected people...

  • Page 52
    ... systems related to employee compliance with internal policies, including data security; provider fraud that is not prevented or detected and impacts our medical costs or those of self-insured customers; failure to protect our proprietary information; and failure of our corporate governance policies...

  • Page 53
    ... Health and Human Services and state departments of insurance, with respect to our compliance with a wide variety of rules and regulations applicable to our business, including, without limitation, HIPAA, rules relating to pre-authorization penalties, payment of out-of-network claims, timely review...

  • Page 54
    ...practices, including, without limitation, information privacy, premium rate increases, utilization management, appeal and grievance processing, rescission of insurance coverage and claims payment practices. In addition, in the ordinary course of our business operations, we are party to various other...

  • Page 55
    ...5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The following table sets forth the high and low sales prices of the Company's common stock, par value $.001 per share, on The New York Stock Exchange ("NYSE") since January 2011. High Low...

  • Page 56
    ... additional information on our stock repurchase programs, see Note 9 to our consolidated financial statements. Under our various stock option and long-term incentive plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state...

  • Page 57
    ...59 $88.83 All historical performance data reflects the performance of each company's stock only and does not include the historical performance data of acquired companies. The preceding graph and related information are being furnished solely to accompany this Annual Report on Form 10-K pursuant to...

  • Page 58
    ...and the consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2012 REVENUES: Health plan services premiums (1) ...Government contracts ...Net investment income ...Administrative services fees and other income (1). Divested...

  • Page 59
    ... $175.1 million for costs related to our operations strategy, legal and regulatory fees primarily associated with our rescission practices, estimated costs related to the settlement agreement for a large class action lawsuit, and other-thantemporary impairments of investments. (3) No cash dividends...

  • Page 60
    ... Arizona, California and Oregon. We have approximately 2.6 million medical members in our Western Region Operations reportable segment. On April 1, 2012, we completed the sale of our Medicare stand-alone prescription drug plan business ("Medicare PDP business") to Pennsylvania Life Insurance Company...

  • Page 61
    .... The TRICARE North Region members are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the terms of the T-3 contract, we...

  • Page 62
    ... and services, or otherwise adjusting their operating costs and reducing general and administrative expenses. In addition, the ACA requires the establishment of state-based or federally facilitated "exchanges" where individuals and small groups may purchase health coverage. California, Oregon and...

  • Page 63
    ... in the exchanges if the review determines that the insurer has demonstrated a pattern or practice of excessive or unjustified premium rate increases. The ACA may also make it more difficult for us to attract and retain members, and will increase the amount of certain taxes and fees we pay, the...

  • Page 64
    ...in California to require prior approval for individual and small group rates by the CDOI has qualified for the 2014 ballot. In addition, oversight boards associated with the state-based exchanges in California, Oregon and Washington will negotiate the price of coverage sold on these exchanges. These...

  • Page 65
    ... into a settlement agreement ("Agreement") with the State of California's Department of Health Care Services ("DHCS") to settle historical rate disputes with respect to our participation in the state Medicaid program in California ("Medi-Cal"), for rate years prior to the 2011-2012 rate year. As...

  • Page 66
    ... of a medical management contract and $1.3 million in litigation-related expenses net of an insurance reimbursement. For additional information on our cost management initiatives, see "Item 1A. Risk Factors-If we are unable to manage our general and administrative expenses, our business, financial...

  • Page 67
    ... December 31, 2012, 2011 and 2010. Year Ended December 31, 2012 2011 2010 (Dollars in thousands, except per share data) Revenues Health plan services premiums ...$ 10,459,098 689,121 Government contracts ...82,434 Net investment income...17,968 Administrative services fees and other income...40,471...

  • Page 68
    ... North Region, which was a risk-based contract, to the new T-3 contract, which is a cost reimbursement plus fixed fee contract. For additional information on our T-3 contract, see "-Government Contracts Reportable Segment" and Note 2 to our consolidated financial statements. Health plan services...

  • Page 69
    ...the number of days in the year. In this Annual Report on Form 10-K, the following table presents an adjusted DCP metric that subtracts capitation, provider and other claims settlements and Medicare Advantage Prescription Drug ("MAPD") payables/costs from the Claims Reserve and Health Plan Costs. For...

  • Page 70
    ...Provider and Other Claim Settlements and MAPD Costs ...(4) Health Plan Services Cost-Adjusted...(5) Number of Days in Period ...(1) / (3) * (5) Days Claims Payable-GAAP (using end of period reserve amount) ...(2) / (4) * (5) Days Claims payable-Adjusted (using end of period reserve amount) ...Income...

  • Page 71
    ... of $18.0 million net against the gain on sale of discontinued operation. See Note 3 to our consolidated financial statements for additional information regarding the sale of our Medicare PDP business. An effective tax rate was only applicable to the year ended December 31, 2012 because that is the...

  • Page 72
    ...Total Arizona...Oregon (including Washington) Large Group ...Small Group and Individual ...Commercial Risk...Medicare Advantage...Total Oregon (including Washington) ...Total Health Plan Enrollment Large Group ...Small Group and Individual ...Commercial Risk...Medicare Advantage...Medi-Cal/Medicaid...

  • Page 73
    ... For additional information on our tailored network products, see "Item 1. Business-Segment Information-Western Region Operations Segment-Managed Health Care Operations." Enrollment in our Medicare Advantage plans in the Western Region Operations at December 31, 2012 was 234,000 members, an increase...

  • Page 74
    ... medical, behavioral health, long-term institutional, and home- and community-based services for dual eligibles through a single health plan, and will require that all MediCal beneficiaries in participating counties join a Medi-Cal managed care health plan to receive their Medi-Cal benefits...

  • Page 75
    ...in Los Angeles County and/or San Diego County, this business opportunity may prove to be unsuccessful for a number of reasons." State-Sponsored Health Plans Rate Settlement Agreement On November 2, 2012, our wholly owned subsidiaries, Health Net of California, Inc. and Health Net Community Solutions...

  • Page 76
    ... programs contracts early. We believe that the use of the Account will help promote greater financial stability and predictability in our state health care programs business during the Term. The Agreement also provides that the parties will cooperate in good faith to develop an alternative rate...

  • Page 77
    ... services fees and other income. (c) The selling costs ratio is computed as selling expenses divided by health plan services premiums revenue. (d) Per member per month ("PMPM") is calculated based on commercial at-risk member months and excludes ASO member months. (e) Commercial, Medicare Advantage...

  • Page 78
    ... related to a new billing format required by HIPAA coupled with an unanticipated flattening of commercial trends and higher commercial large group claims trend. In addition, health plan services expenses increased due to increases in our Medi-Cal and Medicare Advantage enrollment. Commercial Premium...

  • Page 79
    .... These decreasing health care cost trends seen in 2011 as compared to the trends seen in 2010 are primarily due to a higher percentage of members enrolled in our tailored network products and lower utilization trends. Medical Care Ratios The health plan services MCR in our Western Region Operations...

  • Page 80
    ...and determinable. The T-3 members are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the terms of the T-3 contract, we are not the...

  • Page 81
    ... new T-3 contract for the TRICARE North Region, under which health care costs and related reimbursements are excluded from our consolidated statement of operations as a result of moving from a risk-based contract to a cost reimbursement plus fixed fee contract. Year Ended December 31, 2011 Compared...

  • Page 82
    ... financial statements for more information regarding the change to our reportable segments as a result of the sale of our Medicare PDP business. In connection with the sale of our Medicare PDP business, we provided Medicare PDP transition-related services to CVS Caremark through December 31, 2012...

  • Page 83
    ... 2011 2010 (Dollars in thousands) Costs included in health plan services costs ...$ Costs included in government contract costs...Costs included in G&A...Early debt extinguishment and related interest rate swap termination ...Loss from continuing operations before income taxes ...Income tax benefit...

  • Page 84
    ... delay or cancel plans to purchase our products, may reduce the number of individuals to whom they provide coverage, or may make changes in the mix of products purchased from us. In addition, if our customers experience financial issues, they may not be able to pay, or may delay payment of, accounts...

  • Page 85
    ...as of December 31, 2011. The receivable from DHCS related to our California Medicaid business was $174.0 million as of December 31, 2012 and $87.4 million as of December 31, 2011. Our receivable from the DoD relating to our current and prior contracts for the TRICARE North Region were $228.3 million...

  • Page 86
    ... deposit accounting and are comprised of health care cost payments and reimbursements for the T-3 contract, catastrophic reinsurance subsidy, lowincome member cost sharing subsidy and the coverage gap discount under the Medicare Part D program. See Note 2 to our consolidated financial statements for...

  • Page 87
    ...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 88
    ... on balances established by statute, a percentage of annualized premium revenue, a percentage of annualized health care costs, or risk-based capital ("RBC") or tangible net equity ("TNE") requirements. The RBC requirements are based on guidelines established by the National Association of Insurance...

  • Page 89
    ... 31, 2012. We have entered into long-term agreements to receive services related to disease management, case management, wellness, pharmacy benefit management, pharmacy claims processing services and health quality/risk scoring enhancement services with external third-party service providers. The...

  • Page 90
    ... financial statements, which are included elsewhere in this Annual Report on Form 10-K. Health Plan Services Health plan services premium revenues generally include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit...

  • Page 91
    ... including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Western Region Operations reporting segment. Because reserves for claims include various actuarially developed estimates, our actual health care services expenses may be more...

  • Page 92
    ... in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment patterns, changes in technology that provide faster access to claims data or change the...

  • Page 93
    ... value of employer group contracts, provider networks and customer relationships, which are all subject to amortization. On April 1, 2012, we completed the sale of our Medicare PDP business. Our Medicare PDP business was previously reported as part of our Western Region Operations reporting unit. As...

  • Page 94
    ... test. See Note 3 to our consolidated financial statements for additional information regarding the sale of our Medicare PDP business and Note 7 to our consolidated financial statements for additional goodwill fair value measurement information. We perform our annual impairment test on our recorded...

  • Page 95
    ...our consolidated financial statements), all of our investment securities are designated as "available-for-sale" assets. As such, they are reflected at their estimated fair value, with the difference between cost and estimated fair value reflected in accumulated other comprehensive income, net of tax...

  • Page 96
    ... and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures...

  • Page 97
    ... financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting as of December 31, 2012, which is included herein. Changes in Internal Control Over Financial Reporting There have not been any changes in the Company...

  • Page 98
    ... 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, 2012, based on criteria...

  • Page 99
    Item 9B. Other Information. None. 97

  • Page 100
    ... 31, 2012. Such information is incorporated herein by reference and made a part hereof. 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...

  • Page 101
    ... reference and filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedule The financial statement schedule listed on the accompanying Index to Consolidated Financial Statements set forth on page F-1 and covered by the Report of Independent Registered Public Accounting Firm are...

  • Page 102
    ... has duly caused this report to be signed on its behalf by the undersigned thereunto 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...

  • Page 103
    ... statements and financial statement schedule 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, 2012...

  • Page 104
    ...PUBLIC ACCOUNTING 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, 2012 and 2011, and the related consolidated statements...

  • Page 105
    ... per share data) Year Ended December 31, 2012 2011 2010 Revenues Health plan services premiums...$ Government contracts...Net investment income ...Administrative services fees and other income ...Divested operations and services revenue ...Total revenues ...Expenses Health plan services (excluding...

  • Page 106
    ...gains on investments available-for-sale, net ...Defined benefit pension plans: Prior service cost arising during the period...Net loss arising during the period...Less: Amortization of prior service cost and net loss included in net periodic pension cost...Defined benefit pension plans, net ...Other...

  • Page 107
    HEALTH NET, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data) December 31, 2012 2011 ASSETS Current Assets: Cash and cash equivalents ...$ 340,110 Investments-available-for-sale (amortized cost: 2012-$1,753,931, 20111,812,512 $1,528,091) ...Premiums receivable, net of ...

  • Page 108
    ...of January 1, 2011 ...Net income...Other comprehensive income ...Exercise of stock options and vesting of restricted stock units ...Share-based compensation expense...Tax benefit related to equity compensation plans...Repurchases of common stock ...Balance as of January 1, 2012 ...Net income...Other...

  • Page 109
    ......24 - 19 (73,101) (64,260) (34,791) Purchases of property and equipment...Net cash received from sale of business...248,238 - - Purchase price adjustment on sale of Northeast Health Plans...- 162,101 76,126 (10,656) Sales (purchases) of restricted investments and other...5,466 22,522 (12,558) (200...

  • Page 110
    ...group, individual, Medicare, Medicaid ("Medi-Cal" in California), the United States Department of Defense ("Department of Defense" or "DoD"), including TRICARE, and Veterans Affairs programs. Our subsidiaries also offer managed health care products related to behavioral health and prescription drugs...

  • Page 111
    ... of long-lived assets and investments, and income taxes. Health Plan Services Revenue Recognition Health plan services premium revenues generally include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for...

  • Page 112
    ... Company and the medical groups share in the variance between actual costs and predetermined goals. Additionally, we contract with certain hospitals to provide hospital care to enrolled members on a capitated basis. Our HMOs also contract with hospitals, physicians and other providers of health care...

  • Page 113
    ... in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment patterns, changes in technology that provide faster access to claims data or change the...

  • Page 114
    ... the government contracts reportable segment. The TRICARE members are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the terms of...

  • Page 115
    ... CONSOLIDATED FINANCIAL STATEMENTS-(Continued) received for all other services provided to both the government customer and to beneficiaries, including services such as medical management, claims processing, enrollment, customer services and other services unique to the managed care support contract...

  • Page 116
    ... payments on a monthly basis, and they represent a cost reimbursement that is finalized and settled after the end of the year. The low-income member cost sharing subsidy is accounted for as deposit accounting. Coverage Gap Discount-The Medicare Coverage Gap Discount is a program that began in 2011...

  • Page 117
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) CMS Risk Share-Premiums from CMS are subject to risk corridor provisions which compare costs targeted in our annual bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard...

  • Page 118
    ...compensation cost that has been charged against income under our various long-term incentive plans was $28.9 million, $27.6 million and $33.1 million during the years ended December 31, 2012, 2011 and 2010, respectively. The total income tax benefit recognized in the income statement for share-based...

  • Page 119
    ... in our net income due to changes in variable interest rates. We recognized a pretax loss of $0.2 million in the three months ended June 30, 2010 in connection with the termination and settlement of the 2009 Swap, which is included in our administrative services fees and other income for that...

  • Page 120
    ... the acquisitions over the tangible and intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets primarily consist of the value of employer group contracts, provider networks and customer relationships, which are all subject to amortization. We perform our annual...

  • Page 121
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The carrying amount of goodwill by reporting unit is as follows: Western Region Operations Total Balance as of December 31, 2010...$ Balance as of December 31, 2011...Goodwill allocated to Medicare PDP business sold ...Balance...

  • Page 122
    ... employer group premiums within each of our plans accounted for 17%, 18% and 17% of our health plan services premium revenues for the years ended December 31, 2012, 2011 and 2010, respectively. The federal government is the primary customer of our Government Contracts reportable segment representing...

  • Page 123
    ... all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income (loss), net unrealized appreciation (depreciation) after tax on investments available-for-sale and prior service cost and net loss related to our defined benefit pension plan (see...

  • Page 124
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Our accumulated other comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010 is as follows: Unrealized Gains (Losses) on investments available-for-sale Accumulated Other Comprehensive Income (loss) ...

  • Page 125
    ... to provide prescription drug benefits as part of our Medicare Advantage plan offerings. In addition, we provided Medicare PDP transition-related services to CVS Caremark in connection with the transaction prior to December 31, 2012, and certain transition-related services are being provided in...

  • Page 126
    .... Note 4-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 of investments sold is...

  • Page 127
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2011 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Carrying Value (Dollars in millions) Current: Asset-backed securities ...U.S. government and agencies ...Obligations of states and other ...

  • Page 128
    ... shows the number of our individual securities-current that have been in a continuous loss position at December 31, 2012: Less than 12 Months 12 Months or More Total Asset-backed securities...U.S. government and agencies...Obligations of states and other political subdivisions ...Corporate debt...

  • Page 129
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table shows our noncurrent investments' fair values and gross unrealized losses for individual securities that have been in a continuous loss position through December 31, 2011: Less than 12 Months Fair Value ...

  • Page 130
    ... 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 131
    ... volatilities, default rates, and inputs that are derived principally from or corroborated by other observable market data. Investments that are generally included in this category include asset-backed securities, corporate bonds and loans, and state and municipal bonds. Level 3-Pricing inputs are...

  • Page 132
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that ...

  • Page 133
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Level 1 Level 2current Level 2noncurrent Level 3 Total As of December 31, 2011 Assets: Cash and cash equivalents ...$ Investments-available-for-sale Asset-backed debt securities: Residential mortgage-backed securities ...$...

  • Page 134
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The changes in the balances of Level 3 financial assets for the years ended December 31, 2012 and 2011 were as follows (dollars in millions): Year Ended December 31, 2012 AvailableFor-Sale Investments Embedded Contractual ...

  • Page 135
    ... out of Level 3 ...Total gains or losses for the period: Loss realized in net income...Unrealized in accumulated other comprehensive income...Purchases, issues, sales and settlements: Purchases...Issues ...Sales ...Settlements ...Closing balance ...$ We had no financial liabilities fair valued on...

  • Page 136
    ... December 31, 2012 were as follows (dollars in millions): Deferred revenue related to transitionrelated services provided in connection with Medicare PDP business sale Goodwill allocated to Medicare PDP business sold Lease impairment obligation Beginning balance...Additions: Goodwill allocated...

  • Page 137
    ... the year ended December 31, 2012 the compensation cost that has been charged against income under our various stock option and long-term incentive plans ("the Plans") was $28.9 million. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $11...

  • Page 138
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Stock options and other equity awards, including but not limited to restricted stock, restricted stock units ("RSUs") and performance share units ("PSUs") have been granted to certain employees, officers and non-employee ...

  • Page 139
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) A summary of option activity under our various plans as of December 31, 2012, and changes during the year then ended is presented below: Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Number...

  • Page 140
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) A summary of RSU and PSU activity under our various plans as of December 31, 2012, and changes during the year then ended is presented below: Number of Restricted Stock Units and Performance Share Units Weighted Average Grant-...

  • Page 141
    ... 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 142
    ... management and highly compensated employees are eligible to defer a certain portion of their regular compensation and bonuses (the "Employee Plan"). In addition, we have a voluntary deferred compensation plan pursuant to which the non-employee members of the Health Net, Inc. Board of Directors...

  • Page 143
    ... life insurance plans that provide postretirement medical and life insurance benefits to directors, key executives, employees and dependents who meet certain eligibility requirements. The Health Net of California Retiree Medical and Life Benefits Plan is non-contributory for employees retired prior...

  • Page 144
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Amounts recognized in our consolidated balance sheet as of December 31 consist of: Pension Benefits 2012 2011 Other Benefits 2012 2011 (Dollars in millions) Noncurrent assets ...$ Current liabilities...Noncurrent liabilities...

  • Page 145
    ... the amounts 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, 2012: 1-Percentage Point Increase 1-Percentage Point Decrease (Dollars in millions) Effect on total of service and...

  • Page 146
    HEALTH NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Pension Benefits Other Benefits (Dollars in millions) 2013...$ 2014...2015...2016...2017...Years 2018-2022...Note 11-Income Taxes Continuing Operations 1.6 1.6 1.6 2.8 2.8 15.1 $ 0.9 1.0 1.1 1.1 1.1 6.8 Significant ...

  • Page 147
    ... a total federal and state income tax benefit of $60.6 million for 2009 plus additional tax benefits of $6.8 million and $4.4 million for 2011 and 2010, respectively. The 2011 and 2010 adjustments in tax benefits arose due to a change in our estimate of contingent sale price components. During 2012...

  • Page 148
    ... on our consolidated balance sheet and results of operations. In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to the closure of state statutes of limitations for assessment and examination settlements regarding the Northeast Sale (see Note...

  • Page 149
    ...-Keene Health Care Service Plan Act of 1975, as amended, our California health plans are regulated by the California Department of Managed Health Care ("DMHC") and must comply with certain minimum capital or tangible net equity requirements. Our non-California health plans as well as our insurance...

  • Page 150
    ... used in our data center located in Rancho Cordova, California. We have since determined that personal information of approximately two million former and current Health Net members, employees and health care providers is on the drives. Commencing on March 14, 2011, we provided written notification...

  • Page 151
    ... Health and Human Services and state departments of insurance, with respect to our compliance with a wide variety of rules and regulations applicable to our business, including, without limitation, HIPAA, rules relating to pre-authorization penalties, payment of out-of-network claims, timely review...

  • Page 152
    ... agreements to purchase various services, which may contain certain termination provisions and have remaining terms in excess of one year as of December 31, 2012. We have entered into long-term agreements to receive services related to disease management, case management, wellness, pharmacy benefit...

  • Page 153
    ... 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, 2012, future minimum commitments for operating leases and long-term purchase...

  • Page 154
    ... Medicare PDP business for the years ended December 31, 2012, 2011 and 2010. Our Government Contracts reportable segment includes government-sponsored managed care and administrative services contracts through the TRICARE program, the Department of Defense MFLC program and certain other health care...

  • Page 155
    ...segment data for the three years ended December 31, 2012, 2011 and 2010. 2012 Western Region Operations Government Contracts Divested Operations and Services (Dollars in millions) Corporate/ Other/ Eliminations Total Revenues from external sources...$ Intersegment revenues ...Net investment income...

  • Page 156
    ... FINANCIAL STATEMENTS-(Continued) 2010 Western Region Operations Government Contracts Divested Operations and Services Corporate/ Other/ Eliminations Total (Dollars in millions) Revenues from external sources...$ Intersegment revenues ...Net investment income ...Administrative services fees...

  • Page 157
    ... and higher commercial large group claims trend. See Note 2 under the heading "Health Plan Services Health Care Cost" for more information. (d) Includes claims payable, provider dispute reserve, and other claims-related liabilities. (e) Includes accrued capitation, shared risk settlements, and other...

  • Page 158
    ... following interim financial information presents the 2012 and 2011 results of operations on a quarterly basis: 2012 March 31 June 30 September 30 December 31 (Dollars in millions, except per share data) Total revenues...Health plan services costs...Government contracts costs...(Loss) income from...

  • Page 159
    ...(5) (6) 2011 March 31 June 30 September 30 December 31 (Dollars in millions, except per share data) Total revenues...Health plan services costs...Government contracts costs...(Loss) income from continuing operations before income taxes ...(Loss) income on discontinued operation, net of tax ...Net...

  • Page 160
    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, 2012 2011 2010 REVENUES: Net investment income...$ Other income (loss) ...Administrative service fees ......

  • Page 161
    SUPPLEMENTAL SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED BALANCE SHEETS (Amounts in thousands) December 31, 2012 December 31, 2011 ASSETS Current Assets: Cash and cash equivalents ...$ Other assets...Due from subsidiaries ...Total ...

  • Page 162
    ... FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) HEALTH NET, INC. CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2012 2011 2010 NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES...$ CASH FLOWS FROM INVESTING ACTIVITIES: Sales on investments ...Sales...

  • Page 163
    ... 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 164
    ... Plans, LLC and UnitedHealth Group Incorporated (filed as Exhibit 2.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-12718) and incorporated herein by reference). Asset Purchase Agreement, dated as of January 6, 2012, between Health Net Life Insurance...

  • Page 165
    ... herein by reference). Form of Nonqualified Stock Option Agreement utilized for eligible employees of Health Net, Inc. under the 2006 Long-Term Incentive Plan, as amended (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-12718) and...

  • Page 166
    ...Form of Performance Share Award Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-12718) and incorporated herein by reference). Form of Nonqualified Stock Option Agreement...

  • Page 167
    ....44 to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-12718) and incorporated herein by reference). Form of Restricted Stock Unit Agreement utilized for non-employee directors of Health Net, Inc. under the 2006 Long-Term Incentive Plan (filed as Exhibit 10...

  • Page 168
    ...Executive Officer Incentive Plan (filed as Appendix A to the Company's Definitive Proxy Statement filed with the SEC on April 8, 2009 (File No. 1-12718) and incorporated herein by reference). Health Net, Inc. Management Incentive Plan (filed as Exhibit 10.40 to the Company's Annual Report on Form 10...

  • Page 169
    ...., Health Net Insurance of New York, Inc., FOHP, Inc., Health Net of New Jersey, Inc. and Health Net Services (Bermuda) Ltd. (filed as Exhibit 10.107 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-12718) and incorporated herein by reference). Statement...

  • Page 170
    ... ended December 31, 2012, December 31, 2011 and December 31, 2010, and (6) Notes to Consolidated Financial Statements. _____ * Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to...

  • Page 171
    ... 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 a material fact necessary to make the statements made, in light of the circumstances...

  • Page 172
    ... 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 173
    ... Annual Report of Health Net, Inc. (the "Company") on Form 10-K for the year ending December 31, 2012 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...