March 31, 2012 Consolidated Balance Sheets as of Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3—Quantitative and Qualitative Disclosures About Market Risk Item 2—Unregistered Sales of Equity Securities and Use of Proceeds Revenues Health plan services premiums Government contracts Net investment income Administrative services fees and other income Northeast administrative services fees and other Total revenues Expenses Health plan services (excluding depreciation and amortization) Government contracts General and administrative Selling Depreciation and amortization Interest Northeast administrative services expenses Adjustment to loss on sale of Northeast health plan subsidiaries Asset impairment Early debt extinguishment charge Total expenses Income (loss) from operations before income taxes Income tax provision Net income (loss) Net income (loss) per share: Basic Diluted Weighted average shares outstanding: Basic Diluted STATEMENTS OF STOCKHOLDERS’ EQUITY ASSETS Current Assets: Cash and cash equivalents Investments-available-for-sale (amortized cost: 2011-$1,566,673, 2010-$1,653,502) Premiums receivable, net of allowance for doubtful accounts (2011-$3,408, 2010-$6,613) Amounts receivable under government contracts Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract Other receivables Deferred taxes Other assets Total current assets Property and equipment, net Goodwill Other intangible assets, net Deferred taxes Investments-available-for-sale-noncurrent (amortized cost: 2011-$0, 2010-$10,447) Other noncurrent assets Total Assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Reserves for claims and other settlements Health care and other costs payable under government contracts IBNR health care costs payable under TRICARE North contract Unearned premiums Borrowings under revolving credit facility Accounts payable and other liabilities Total current liabilities Senior notes payable Other noncurrent liabilities Total Liabilities Commitments and contingencies Stockholders’ Equity: Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding) Common stock ($0.001 par value, 350,000 shares authorized; issued 2011-146,707 shares; 2010-145,121 shares ) Additional paid-in capital Treasury common stock, at cost (2011-57,002 shares of common stock; 2010-50,474 shares of common stock) Retained earnings Accumulated other comprehensive income Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity thousands) CASH FLOWS Balance as of January 1, 2010 Comprehensive income: Net income Change in unrealized gain on investments, net of tax impact of $10,007 Defined benefit pension plans: Prior service cost and net loss Total comprehensive income Exercise of stock options and vesting of restricted stock units Share-based compensation expense Tax detriment related to equity compensation plans Repurchases of common stock Balance as of June 30, 2010 Balance as of January 1, 2011 Comprehensive (loss) income: Net loss Change in unrealized gain on investments, net of tax impact of $735 Defined benefit pension plans: Prior service cost and net loss Total comprehensive loss 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 June 30, 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Amortization and depreciation Adjustment to loss on sale of business Share-based compensation expense Deferred income taxes Excess tax benefit on share-based compensation Asset impairment charges Net realized (gain) loss on investments Other changes Changes in assets and liabilities, net of effects 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 (used in) provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments Maturities of investments Purchases of investments Sales of property and equipment Purchases of property and equipment Purchase price adjustment on sale of Northeast Health Plans (Purchases) sales of restricted investments and other Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases Excess tax benefit on share-based compensation Repurchases of common stock Borrowings under revolving credit facility Repayment of borrowings under financing arrangements Net decrease in checks outstanding, net of deposits Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of period SUPPLEMENTAL CASH FLOWS DISCLOSURE: Interest paid Income taxes paid 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 determined in accordance with the specific identification method and realized gains and losses are included in net investment income. recorded through other comprehensive income. During the three arrangements and fair value measurements, respectively. Furthermore, all of our Medicaid/Medi-Cal revenue is derived in California through our relationship with the State of California Department of Health Care Services (DHCS). As a result, DHCS is a significant customer of our Western Region Operations reportable segment. Investments: Unrealized (losses) gains on investments available-for-sale as of April 1 and January 1 Net change in unrealized gains on investments available-for-sale Reclassification of unrealized gains to earnings Unrealized gains on investments available for sale as of June 30 Defined benefit pension plans: Prior service cost and net loss amortization as of April 1 and January 1 Net change in prior service cost and net loss amortization Prior service cost and net loss amortization as of June 30 Accumulated other comprehensive income 2019 Balance as of June 30, 2011 and December 31, 2010 As of June 30, 2011: Provider networks Customer relationships and other As of December 31, 2010: Provider networks Customer relationships and other lives. Year 2011 2012 2013 2014 2015 our Medicare PDP business. Services. Our Western Region Operations reportable segment includes the operations of our commercial, Medicare and Medicaid health plans, our health and life insurance companies, and our behavioral health and pharmaceutical services subsidiaries. These operations are conducted primarily in California, Arizona, Oregon and Washington. As a result of the classification of our Medicare PDP business as discontinued operations, our Western Region Operations reportable segment excludes the operating results of our Medicare PDP business for the three months ended March 31, 2012 and 2011. Our Government Contracts reportable segment includes government-sponsored managed care and administrative services company. Three Months Ended June 30, 2011 Revenues from external sources Intersegment revenues Segment pretax income (loss) Three Months Ended June 30, 2010 Revenues from external sources Intersegment revenues Segment pretax income (loss) Six Months Ended June 30, 2011 Revenues from external sources Intersegment revenues Segment pretax income (loss) Six Months Ended June 30, 2010 Revenues from external sources Intersegment revenues Segment pretax income (loss) Commercial premium revenue Medicare premium revenue Medicaid premium revenue Total Western Region Operations health plan services premiums Total Northeast Operations health plan services premiums Total health plans services premiums Current: Asset-backed securities U.S. government and agencies Obligations of states and other political subdivisions Corporate debt securities Other securities Current: Asset-backed securities U.S. government and agencies Obligations of states and other political subdivisions Corporate debt securities Other securities Noncurrent: Obligations of states and other political subdivisions Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Asset-backed securities Other securities Total current investments available-for-sale realized gains and losses totaled Asset-backed securities U.S. government and agencies Obligations of states and other political subdivisions Corporate debt securities Other securities Asset-backed securities U.S. government and agencies Obligations of states and other political subdivisions Corporate debt securities Other securities Asset-backed securities U.S. government and agencies Obligations of states and other political subdivisions Corporate debt securities Other securities Obligations of states and other political subdivisions ending March 31, 2012, the Company will pay, at the Company’s option, either (a) the base rate (which is a rate per annum equal to the greatest of failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise; events in bankruptcy, insolvency or reorganization of our Company. bonds. As of June 30, 2011 Assets: Investments—available-for-sale Asset-backed debt securities: Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities U.S. government and agencies: U.S. Treasury securities U.S. Agency securities Obligations of states and other political subdivisions Corporate debt securities Other securities Total investments at fair value Embedded contractual derivative Total assets at fair value As of December 31, 2010 Assets: Investments—available-for-sale Asset-backed debt securities: Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities U.S. government and agencies: U.S. Treasury securities U.S. Agency securities Obligations of states and other political subdivisions Corporate debt securities Other securities Total assets at fair value Beginning balance on April 1 and January 1 Transfers into Level 3 Transfers out of Level 3 Total gains and losses Realized in net income Unrealized in accumulated other comprehensive income Purchases, sales, issuances and settlements Purchases/additions Sales Issuances Settlements Ending balance Change in unrealized gains (losses) included in net income related to assets still held value, they are recorded at their respective carrying values as of March 31, 2012. The following table presents information about As of June 30, 2010 Goodwill—Northeast Operations Beginning Northeast Operations’ goodwill balance on April 1 and January 1 Impairment related to Northeast Operations Ending Northeast Operations’ goodwill balance Monte Carlo simulation approach and the resulting value is discounted to the valuation date. We estimated our non-recurring Level 3 assets of discontinued operation held for sale, goodwill allocated to our Medicare PDP business, and goodwill for our Western Region reporting unit using the income approach based on discounted cash flows. On January 20, 2012, the district court issued an order dismissing the complaint on the grounds that the plaintiffs lacked standing to bring their action in federal court. On accordance with the Court of Appeals' opinion. Following the issuance of that opinion, we filed a request with the district court seeking to have the case transferred to the U.S. District Court for the Eastern District of California to be assigned to the same judge handling the other lawsuit in that court. That request was granted and the matter was ordered to be transferred on May 1, 2012. The court granted our motion as to claims, timely review of grievances and appeals, and timely and accurate payment of claims, any one of which may result in remediation of certain claims, contract termination, the loss of licensure or the right to participate in certain programs, and the assessment of regulatory fines or penalties, which could be substantial. From time to time, we receive subpoenas and other requests for information from, and are subject to investigations by, such regulatory agencies, as well as from state attorneys general. There also continues to be heightened review by regulatory authorities of, and increased litigation regarding, the health care industry’s business practices, including, without limitation, information privacy, premium rate increases, utilization management, appeal and grievance processing, rescission of insurance coverage and claims payment practices. regulatory matters to which we are or may be subject from time to time, including those described above in this Note two related litigation matters (the AmCareco litigation) related to claims asserted by three separate state receivers overseeing the liquidation of three health plans previously owned by one of our former subsidiaries that merged into Health Net, Inc. in January 2001. As Amounts due for contingent membership renewals Loans to health care providers total future minimum commitments under the agreement are approximately . 2012, we have classified be successful. We are a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Our mission is to help people be healthy, secure and comfortable. We provide and administer health benefits to approximately See Note 4 to our consolidated financial statements for more information regarding our reportable segments. As a result of the sale of our Medicare PDP business, the operating results related to our Medicare PDP business have been excluded from continuing operations results and are classified in this Quarterly Report on Form 10-Q as discontinued operations for the three months ended March 31, 2012 and 2011. Accordingly, the information included in this Quarterly Report Sale and the sale of our Medicare PDP business. 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 to Medicaid recipients, and revenue under Medicare risk contracts Revenues Health plan services premiums Government contracts Net investment income Administrative services fees and other income Northeast administrative services fees and other Total revenues Expenses Health plan services (excluding depreciation and amortization) Government contracts General and administrative Selling Depreciation and amortization Interest Northeast administrative services expenses Adjustment to loss on sale of Northeast health plan subsidiaries Asset impairment Early debt extinguishment charge Total expenses Income (loss) from operations before income taxes Income tax provision Net income (loss) Net income (loss) per share: Basic Diluted Reconciliation of Days Claims Payable: (1) Reserve for Claims and Other Settlements Less: Capitation, Provider and Other Claim Settlements and MAPD and stand-alone PDP Payables (2) Reserve for Claims and Other Settlements—Adjusted (3) Health Plan Services Cost Less: Capitation, Provider and Other Claim Settlements and MAPD and stand-alone PDP Costs (4) Health Plan Services Cost—Adjusted (5) Number of Days in Period = (1) / (3) * (5) Days Claims Payable—(using end of period reserve amount) = (2) / (4) * (5) Days Claims payable—Adjusted (using end of period reserve amount) Income tax expense Effective income tax rate California Large Group Small Group and Individual Commercial Risk ASO Total Commercial Medicare Advantage Medi-Cal/Medicaid Total California Arizona Large Group Small Group and Individual Commercial Risk Medicare Advantage 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 ASO Total Commercial Medicare Advantage Medi-Cal/Medicaid Medicare PDP (stand-alone) Health plan services premiums Investment income Gain on sale of investments Administrative services fees and other income Total revenues Health plan services General and administrative Selling Depreciation and amortization Interest Total expenses Income from operations before income taxes Income tax provision Net income Pretax margin Commercial premium yield Commercial premium PMPM (d) Commercial health care cost trend Commercial health care cost PMPM (d) Commercial MCR (e) Medicare Advantage MCR (e) Medicare PDP (stand-alone) MCR (e) Medicaid MCR (e) Health plan services MCR (a) G&A expense ratio (b) Selling costs ratio (c) operations. 15,000 enrollees and provide behavioral health services to military families under the DoD MFLC contract. Services under the MFLC contract began on April 1, 2007 and are contracted through July 25, 2012. On December 13, 2010, the Department of Defense issued a Request for Proposals for the follow-on MFLC contract. On May 8, 2012, we submitted our final proposal revision as requested by the Department of Defense. A contract award is anticipated in the third quarter of 2012. Government contracts revenues Government contracts costs Income from operations before income taxes Income tax provision Net income 2011: Health plan services premiums Investment income Administrative services fees and other income Northeast administrative services fees and other Total revenues Health plan services General and administrative Selling Depreciation and amortization Interest Northeast administrative services expenses Adjustment to loss on sale of Northeast health plan subsidiaries Asset impairment Total expenses Loss from operations before income taxes Income tax benefit Net loss Charges included in health plan services costs Charges included in government contract costs Charges included in G&A Early debt extinguishment charge and related interest rate swap termination Loss from operations before income taxes Income tax benefit Net loss 2011. corporate debt securities. 2011. Net cash (used in) provided by operating activities Ÿ $ maturities of available-for-sale securities, partially offset by Net cash provided by (used in) investing activities Net cash used in financing activities deposits). 2012 offset by share based compensation and related items. April 2011. Period January 1—January 31 February 1—February 28 March 1—March 31 April 1—April 30 May 1—May 31 June 1—June 30 March 31, 2012, we had outstanding letters of credit of $59.6 million, resulting in a maximum amount available for borrowing of $427.9 million. As of March 31, 2012, no amount had been drawn on any of these letters of credit. As of May 3, 2012, we had $112.5 million in borrowings outstanding under the revolving credit facility. 100% of the principal amount of the Senior Notes then outstanding to be redeemed; or the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points failure to pay interest for 30 days after the date payment is due and payable; provided that an extension of an interest payment period by us in accordance with the terms of the Senior Notes shall not constitute a failure to pay interest; 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 of 60 days after notice that performance was required; (A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50 million, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50 million, if that acceleration results from a default under the instrument events in bankruptcy, insolvency or reorganization of our Company.Washington, D.C.x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 June 30, 2011¨o Delaware 95-4288333 21650 Oxnard Street, Woodland Hills, CA 91367 (Address of principal executive offices) (Zip Code) ¨o No¨o Nox Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting companyx Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company ¨o Yes x NoAugustMay 3, 20112012 was 89,083,96783,287,000 (excluding 57,634,33165,337,236 shares held as treasury stock).HEALTH NET, INC. Page Part I—FINANCIAL INFORMATIONPart I—FINANCIAL INFORMATION Item 1—Financial Statements (Unaudited) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 June 30, 2011March 31, 2012 and December 31, 20104567285253Part II—OTHER INFORMATION Part II—OTHER INFORMATION54545454Item 4—Mine Safety Disclosures 5454Item 6—Exhibits Signatures 5556Item 1. Financial Statements Three Months Ended March 31, 2012 2011 Revenues Health plan services premiums $ 2,620,949 $ 2,449,087 Government contracts 181,362 875,127 Net investment income 22,304 23,835 Administrative services fees and other income 5,784 2,721 Divested operations and services revenue — 12,449 Total revenues 2,830,399 3,363,219 Expenses Health plan services (excluding depreciation and amortization) 2,343,659 2,117,286 Government contracts 162,310 822,152 General and administrative 237,276 404,500 Selling 61,561 60,565 Depreciation and amortization 7,430 8,468 Interest 8,628 7,620 Divested operations and services expenses 23,096 58,329 Adjustment to loss on sale of Northeast health plan subsidiaries — (34,854 ) Total expenses 2,843,960 3,444,066 Loss from continuing operations before income taxes (13,561 ) (80,847 ) Income tax (benefit) provision (5,427 ) 15,777 Loss from continuing operations (8,134 ) (96,624 ) Discontinued operations : Loss from discontinued operation, net of tax (18,452 ) (11,571 ) Net loss $ (26,586 ) $ (108,195 ) Net loss per share—basic: Loss from continuing operations $ (0.10 ) $ (1.04 ) Loss from discontinued operation, net of tax $ (0.22 ) $ (0.12 ) Net loss per share—basic $ (0.32 ) $ (1.16 ) Net loss per share—diluted: Loss from continuing operations $ (0.10 ) $ (1.04 ) Loss from discontinued operation, net of tax $ (0.22 ) $ (0.12 ) Net loss per share—diluted $ (0.32 ) $ (1.16 ) Weighted average shares outstanding: Basic 82,513 93,290 Diluted 82,513 93,290 Three months ended March 31, 2012 2011 Net loss $ (26,586 ) $ (108,195 ) Other comprehensive loss before tax: Unrealized gains (losses) on investments available-for-sale: Unrealized holding gains arising during the period 6,909 1,390 Less: Reclassification adjustments for gains included in earnings (12,958 ) (12,298 ) Unrealized losses on investments available-for-sale, net (6,049 ) (10,908 ) 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 1,038 157 Defined benefit pension plans, net 1,038 157 Other comprehensive loss, before tax (5,011 ) (10,751 ) Income tax expense (benefit) related to components of other comprehensive income 401 (4,086 ) Other comprehensive loss, net of tax (5,412 ) (6,665 ) Comprehensive loss $ (31,998 ) $ (114,860 ) (Unaudited) Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 $ 2,566,719 $ 2,507,318 $ 5,179,103 $ 5,034,825 171,015 851,939 1,046,142 1,661,398 25,091 16,567 48,926 36,489 2,084 1,837 4,805 10,693 11,021 59,301 23,470 109,661 2,775,930 3,436,962 6,302,446 6,853,066 2,231,278 2,163,191 4,513,612 4,374,447 130,828 811,386 952,980 1,583,288 219,029 237,378 645,390 484,474 57,571 56,574 118,262 115,405 8,953 8,466 17,781 17,129 8,238 8,761 15,858 18,645 37,825 71,951 90,080 153,829 (6,283 ) (8,171 ) (41,137 ) (8,171 ) 0 6,000 0 6,000 0 3,532 0 3,532 2,687,439 3,359,068 6,312,826 6,748,578 88,491 77,894 (10,380 ) 104,488 30,191 32,828 39,515 43,332 $ 58,300 $ 45,066 $ (49,895 ) $ 61,156 $ 0.64 $ 0.46 $ (0.54 ) $ 0.61 $ 0.63 $ 0.45 $ (0.54 ) $ 0.61 90,539 98,896 91,907 99,965 92,046 99,687 91,907 100,894 March 31, December 31, 2012 2011 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 391,032 $ 230,253 Investments-available-for-sale (amortized cost: 2012-$1,423,879, 2011-$1,528,091) 1,447,630 1,557,997 Premiums receivable, net of allowance for doubtful accounts (2012-$3,419, 2011-$3,318) 462,965 251,911 Amounts receivable under government contracts 234,120 234,740 Other receivables 165,533 225,004 Deferred taxes 100,639 46,659 Assets of discontinued operation held for sale 145,240 — Other assets 177,337 117,876 Total current assets 3,124,496 2,664,440 Property and equipment, net 152,524 145,302 Goodwill 565,886 605,886 Other intangible assets, net 19,842 20,699 Deferred taxes — 49,685 Investments-available-for-sale-noncurrent (amortized cost: 2012-$0, 2011-$2,450) — 2,147 Other noncurrent assets 114,330 119,510 Total Assets $ 3,977,078 $ 3,607,669 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Reserves for claims and other settlements $ 958,124 $ 912,126 Health care and other costs payable under government contracts 77,892 88,440 Unearned premiums 365,772 176,733 Liabilities of discontinued operation held for sale 41,823 — Accounts payable and other liabilities 355,743 240,281 Total current liabilities 1,799,354 1,417,580 Senior notes payable 398,941 398,890 Borrowings under revolving credit facility 112,500 112,500 Deferred taxes 7,272 — Other noncurrent liabilities 234,698 235,553 Total Liabilities 2,552,765 2,164,523 Commitments and contingencies Stockholders’ Equity: Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding) — — Common stock ($0.001 par value, 350,000 shares authorized; issued 2012-148,578 shares; 2011-146,804 shares ) 149 147 Additional paid-in capital 1,310,438 1,278,037 Treasury common stock, at cost (2012- 65,337 shares of common stock; 2011-64,847 shares of common stock) (2,042,367 ) (2,023,129 ) Retained earnings 2,144,873 2,171,459 Accumulated other comprehensive income 11,220 16,632 Total Stockholders’ Equity 1,424,313 1,443,146 Total Liabilities and Stockholders’ Equity $ 3,977,078 $ 3,607,669 BALANCE SHEETSthousands, except per share data) June 30, 2011 December 31, 2010 (Unaudited) $ 166,503 $ 350,138 1,576,132 1,663,218 348,567 298,892 334,868 266,456 52,373 284,247 93,868 136,323 16,990 45,769 232,636 182,252 2,821,937 3,227,295 122,713 123,137 605,886 605,886 22,413 24,217 41,886 50,648 0 8,756 120,535 91,754 $ 3,735,370 $ 4,131,693 $ 900,724 $ 942,024 94,219 113,865 52,373 284,247 160,613 158,493 185,000 0 229,735 402,024 1,622,664 1,900,653 398,788 398,685 223,962 137,939 2,245,414 2,437,277 0 0 147 145 1,265,061 1,221,301 (1,826,076 ) (1,626,856 ) 2,049,444 2,099,339 1,380 487 1,489,956 1,694,416 $ 3,735,370 $ 4,131,693 Balance as of January 1, 2011 145,121 $ 145 $ 1,221,301 (50,474 ) $ (1,626,856 ) $ 2,099,339 $ 487 $ 1,694,416 Net loss (108,195 ) (108,195 ) Other comprehensive loss (6,665 ) (6,665 ) Exercise of stock options and vesting of restricted stock units 1,429 2 22,952 22,954 Share-based compensation expense 9,428 9,428 Tax benefit related to equity compensation plans 1,565 1,565 Repurchases of common stock (4,257 ) (126,904 ) (126,904 ) Balance as of March 31, 2011 146,550 $ 147 $ 1,255,246 (54,731 ) $ (1,753,760 ) $ 1,991,144 $ (6,178 ) $ 1,486,599 Balance as of January 1, 2012 146,804 $ 147 $ 1,278,037 (64,847 ) $ (2,023,129 ) $ 2,171,459 $ 16,632 $ 1,443,146 Net loss (26,586 ) (26,586 ) Other comprehensive loss (5,412 ) (5,412 ) Exercise of stock options and vesting of restricted stock units 1,774 2 14,419 14,421 Share-based compensation expense 12,384 12,384 Tax benefit related to equity compensation plans 5,598 5,598 Repurchases of common stock (490 ) (19,238 ) (19,238 ) Balance as of March 31, 2012 148,578 $ 149 $ 1,310,438 (65,337 ) $ (2,042,367 ) $ 2,144,873 $ 11,220 $ 1,424,313 STOCKHOLDERS’ EQUITY Common Stock Additional
Paid-In
Capital Common Stock
Held in Treasury Retained
Earnings Accumulated
Other
Comprehensive
Income Total Shares Amount Shares Amount 144,175 $ 154 $ 1,190,203 (41,020 ) $ (1,389,722 ) $ 1,895,096 $ 52 $ 1,695,783 61,156 61,156 16,196 16,196 131 131 77,483 782 (9 ) 1,055 1,046 23,121 23,121 (5,249 ) (5,249 ) (6,514 ) (158,444 ) (158,444 ) 144,957 $ 145 $ 1,209,130 (47,534 ) $ (1,548,166 ) $ 1,956,252 $ 16,379 $ 1,633,740 145,121 $ 145 $ 1,221,301 (50,474 ) $ (1,626,856 ) $ 2,099,339 $ 487 $ 1,694,416 (49,895 ) (49,895 ) 701 701 192 192 (49,002 ) 1,586 2 26,979 26,981 15,295 15,295 1,486 1,486 (6,528 ) (199,220 ) (199,220 ) 146,707 $ 147 $ 1,265,061 (57,002 ) $ (1,826,076 ) $ 2,049,444 $ 1,380 $ 1,489,956 Three Months Ended March 31, 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (26,586 ) $ (108,195 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization and depreciation 7,430 8,468 Asset impairment charges — — Adjustment to loss on sale of business — (34,854 ) Share-based compensation expense 12,384 9,428 Deferred income taxes 2,977 19,135 Excess tax benefit on share-based compensation (5,896 ) (1,164 ) Net realized (gain) loss on investments (12,958 ) (12,298 ) Other changes 6,163 2,931 Changes in assets and liabilities, net of effects of acquisitions and dispositions: Premiums receivable and unearned premiums (87,970 ) (105,587 ) Other current assets, receivables and noncurrent assets (25,684 ) (26,664 ) Amounts receivable/payable under government contracts (14,725 ) (34,801 ) Reserves for claims and other settlements 84,457 (52,148 ) Accounts payable and other liabilities 64,575 138,477 Net cash provided by (used in) operating activities 4,167 (197,272 ) CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 650,832 398,470 Maturities of investments 38,958 74,407 Purchases of investments (551,285 ) (468,255 ) Sales of property and equipment — — Purchases of property and equipment (15,373 ) (10,305 ) Purchase price adjustment on sale of Northeast Health Plans — 41,036 Sales (purchases) of restricted investments and other 2,710 (13,764 ) Net cash provided by investing activities 125,842 21,589 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 14,415 7,990 Excess tax benefit on share-based compensation 5,896 1,164 Repurchases of common stock (19,238 ) (113,510 ) Borrowings under financing arrangements 100,000 — Repayment of borrowings under financing arrangements (100,000 ) — Net increase in checks outstanding, net of deposits — 24,894 Customer funds administered 29,697 47,304 Net cash provided by (used in) financing activities 30,770 (32,158 ) Net increase (decrease) in cash and cash equivalents 160,779 (207,841 ) Cash and cash equivalents, beginning of period 230,253 350,138 Cash and cash equivalents, end of period $ 391,032 $ 142,297 SUPPLEMENTAL CASH FLOWS DISCLOSURE: Interest paid $ 1,549 $ 1,215 Income taxes paid 1,825 824 CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)(Unaudited) Six Months
Ended June 30, 2011 2010 $ (49,895 ) $ 61,156 17,781 17,129 (41,137 ) (8,171 ) 15,295 23,121 36,806 3,378 (1,277 ) (473 ) 0 6,000 (26,951 ) (10,881 ) 6,781 (9,768 ) (47,555 ) (53,416 ) (22,892 ) 9,435 (88,058 ) (5,540 ) (41,300 ) (16,776 ) (53,398 ) 95,950 (295,800 ) 111,144 1,197,801 660,070 117,897 108,958 (1,210,617 ) (835,625 ) 0 19 (21,012 ) (9,009 ) 41,036 (8,415 ) (12,267 ) 4,464 112,838 (79,538 ) 11,796 1,046 1,277 473 (189,889 ) (173,494 ) 467,500 100,000 (282,500 ) (216,771 ) (8,857 ) 0 (673 ) (288,746 ) (183,635 ) (257,140 ) 350,138 682,803 $ 166,503 $ 425,663 $ 15,285 $ 14,620 27,809 49,279 See accompanying condensed notes to consolidated financial statements.HEALTH NET, INC.1. BASIS OF PRESENTATION1. BASIS OF PRESENTATION 20102011 (Form 10-K).Certain itemsin the operatingas Customer funds administered as a separate line item within cash flow section offlows from financing activities in the consolidated statements of cash flows for the sixthree months ended JuneMarch 31, 2012. Similarly, cash flows related to the catastrophic reinsurance subsidy, the low-income member cost sharing subsidy and the coverage gap discount under the Medicare prescription drug program, known as Part D, which are also accounted for under deposit accounting, are presented as Customer funds administered for the three months ended March 31, 2012 and 2011, respectively. Prior to the quarterly reporting period ended September 30, 2010 have2011, such cash flows related to the Medicare Part D program had been reclassifiedpresented as other current assets and other liabilities line items within cash flows from operating activities in the operatingconsolidated statements of cash flow section.flows. This reclassification had no impact on our operating cash flows, net earnings or balance sheets as previously reported.of $37.1 million as of June 30, 2011March 31, 2012 and $45.9 million as of December 31, 2010. These amounts were2011, respectively. Checks outstanding, net of deposits are classified as accounts payable and other liabilities in the consolidated balance sheets and the changes in these amounts have beenare reflected in the line item net decreaseincrease (decrease) in checks outstanding, net of deposits within the cash flows from financing activities in the consolidated statements of cash flows.InvestmentsThe Company analyzesWe analyze all debt investments that have unrealized losses for impairment consideration and assessesassess the intent to sell such securities. If such intent exists, impaired securities are considered other-than-temporarily impaired. Management also assesses if the Companywe may be required to sell the debt investments prior to the recovery of amortized cost, which may also trigger an impairment charge. If securities are considered other-than-temporarily impaired based on intent or ability, management assesseswe assess whether the amortized costs of the securities can be recovered. If management anticipates recovering an amount less than itsthe amortized cost of the securities, an impairment charge is calculated based on the expected discounted cash flows of the securities. Any deficit between the amortized cost and the expected cash flows is recorded through earnings as a charge. All other temporary impairment changes areand six months ended June 30, 2011March 31, 2012 and 2010, we did not recognize any2011, respectively, no losses were recognized from other-than-temporary impairments. See Note 4 to our consolidated financial statements for additional information regarding our investments.fixed ratefixed-rate borrowings was $414.0$428.0 million and $401.2$423.1 million as of June 30, 2011March 31, 2012 and December 31, 2010,2011, respectively. TheFor the periods ending March 31, 2012 and December 31, 2011, respectively, the fair value of our variable ratevariable-rate borrowings under our revolving credit facility was $185.0$112.5 million as. The fair value of June 30, 2011,our fixed-rate borrowings was determined using the quoted market price, which is a Level 1 input in the fair value hierarchy. The fair value of our variable-rate borrowings was estimated to equal to the carrying value because the interest rates paid on these borrowings were based on prevailing market rates. There were noSince the pricing inputs are other than quoted prices and fair value is determined using an income approach, our variable-rate borrowings outstanding under our revolving credit facilityare classified as of December 31, 2010.a Level 2 in the fair value hierarchy. See Note 6Notes 7 and 8 for additional information regarding our financing arrangements.(Government Contracts) with premiumsfees and feespremiums associated with this customer and, to a much lesser extent, state and local government contracts, accounting for 100%99% of our Government Contracts revenue. In addition, the federal government is a significant customer of our Western Region Operations reportable segment (Western Region Operations) as a result of our contractscontract with the Centers for Medicare & Medicaid Services (CMS) for coverage of Medicare-eligible individuals.Accumulatedare(loss) is as follows: Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in millions) $ (1.5 ) $ 3.5 $ 5.3 $ 1.0 17.0 16.3 18.2 23.3 (9.5 ) (2.6 ) (17.5 ) (7.1 ) 6.0 17.2 6.0 17.2 (4.7 ) (0.9 ) (4.8 ) (0.9 ) 0.1 0.1 0.2 0.1 (4.6 ) (0.8 ) (4.6 ) (0.8 ) $ 1.4 $ 16.4 $ 1.4 $ 16.4 Unrealized Gains (Losses) on investments available-for-sale Defined Benefit Pension Plans Accumulated Other Comprehensive Income (loss) (Dollars in millions) Balance as of January 1, 2011 $ 5.3 $ (4.8 ) $ 0.5 Other comprehensive (loss) income for the three months ended March 31, 2011 (6.8 ) 0.1 (6.7 ) Balance as of March 31, 2011 $ (1.5 ) $ (4.7 ) $ (6.2 ) Balance as of January 1, 2012 $ 29.8 $ (13.2 ) $ 16.6 Other comprehensive (loss) income for the three months ended March 31, 2012 (6.0 ) 0.6 (5.4 ) Balance as of March 31, 2012 $ 23.8 $ (12.6 ) $ 11.2 June 30,March 31, 2012 and March 31, 2011 1,507,000, 1,774,000 and 1,553,000 shares, respectively, of dilutive common stock equivalents were outstanding. For the six months ended June 30, 2011, 1,530,000 shares were excluded from the computation of loss per share due to their anti-dilutive effect. There were 791,000 and 929,000 shares of dilutive common stock equivalents outstanding for the three and six months ended June 30, 2010, respectively.Options, RSUs and PSUs to purchase an aggregate of 1,328,000 shares of common stock, during the three months ended June 30, 2011, and 2,712,000 and 2,700,000, during the three and six months ended June 30, 2010, respectively, were considered anti-dilutive and were not included in the computation of diluted earnings per share. OutstandingStock options2019.$300$300 million stock repurchase program (2010 stock repurchase program). We completed our 2010 stock repurchase program in April 2011.2011. In May 2011, our Board of Directors authorized a new stock repurchase program for the repurchase of up to $300$300 million of our outstanding common stock (2011 stock repurchase program). As of December 31, 2011, the remaining authorization under our 2011 stock repurchase program was $76.3 million. On March 8, 2012 our Board of Directors approved a $323.7 million increase to our 2011 stock repurchase program. The remaining authorization under our 2011 stock repurchase program as of June 30, 2011March 31, 2012 was $272.9 million.$400.0 million. See Note 56 for more information regarding our 2010 and 2011 stock repurchase programs. Western Region
Operations Total (Dollars in millions) $ 605.9 $ 605.9
Region
Operations (Dollars in millions) Balance as of December 31, 2011 $605.9 $605.9 Goodwill held for sale related to Medicare PDP business (40.0) (40.0) Balance as of March 31, 2012 $565.9 $565.9 Gross
Carrying
Amount Accumulated
Amortization Net
Balance Weighted
Average Life
(in years) (Dollars in millions) $ 40.5 $ (33.1 ) $ 7.4 19.4 29.5 (14.5 ) 15.0 11.1 $ 70.0 $ (47.6 ) $ 22.4 $ 40.5 $ (32.6 ) $ 7.9 19.4 29.5 (13.2 ) 16.3 11.1 $ 70.0 $ (45.8 ) $ 24.2
Carrying
Amount
Amortization
Balance
Average Life
(in years) (Dollars in millions) As of March 31, 2012: Provider networks $40.5 $(33.9) $6.6 19.4 Customer relationships and other 29.5 (16.3) 13.2 11.1 $70.0 $(50.2) $19.8 As of December 31, 2011: Provider networks $40.5 $(33.6) $6.9 19.4 Customer relationships and other 29.5 (15.7) 13.8 11.1 $70.0 $(49.3) $20.7 no impairment was identified. We also re-evaluated the useful lives of our other intangible assets andassets. No goodwill impairment was identified. We also determined that the estimated useful lives of our other intangible assets properly reflected the current estimated useful lives were properly reflected.During the three months ended June 30, 2010, we performed our annual impairment test and determined that the implied value of the Northeast Operations reporting unit’s goodwill was zero. As a result, we recorded an impairment charge of $6 million for the total carrying value of the Northeast Operations’ goodwill during the three months ended June 30, 2010.the current year and each of the next fourfive years ending December 31 is as follows (dollars in millions): Amount $ 3.5 3.4 3.4 2.8 2.6 2012 $ 3.4 2013 3.4 2014 2.8 2015 2.6 2016 2.0 whichthat may only be used for certain purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such funds in cash and cash equivalents or other investments. As of June 30, 2011March 31, 2012 and December 31, 2010,2011, the restricted cash and cash equivalents balances totaled $0.3$0.2 million and $0.4$5.3 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $25.7$25.7 million and $25.8$20.7 million as of June 30, 2011March 31, 2012 and December 31, 2010,2011, respectively, and are included in investments available-for-sale.Subsequent Accounting for the Northeast SaleOn December 11, 2009, we completed the sale (the Northeast Sale) of all of the outstanding shares of capital stock of our health plan subsidiaries that were domiciled in Connecticut, New Jersey, New YorkBermuda (Acquired Companies) that had conducted businesses in our Northeast Operations segment (see Note 3) to UnitedHealth Group Incorporated (United). The sale was made pursuant to a Stock Purchase Agreement (StockPurchase Agreement), dated as of July 20, 2009, byServicesamong the Company, Health Net of the Northeast, Inc., Oxford Health Plans, LLC (Buyer)services revenues and solely for the purposes of guaranteeing Buyer’s obligations thereunder, United. At the closing of the Northeast Sale, affiliates of United also acquired membership renewal rights for certain commercial health care business conducted by our subsidiary, Health Net Life Insurance Company (Health Net Life) in the states of Connecticut and New Jersey (the Transitioning HNL Members). We were required to continue to serve the members of the Acquired Companies under United Administrative Services Agreements we entered into with United and certain of its affiliates (the United Administrative Services Agreements) until all members are either transitioned to a legacy United entity or non-renewed, which occurred on July 1, 2011. As part of the Northeast Sale, we retained certain financial responsibilities for the profits and losses of the Acquired Companies, subject to specified adjustments, for the period beginning on the closing date and ending on the earlier of the second anniversary of the closing date and the date that the last United Administrative Services Agreement was terminated. Accordingly, subsequentexpenses include items related to the Northeast Sale, our Northeast Operations reportable segment (Northeast Operations) includes the operations of the businesses that provided administrative services pursuant to the United Administrative Services Agreements prior to the termination of the United Administrative Services Agreements on July 1, 2011, as well as the operations of Health Net Life in Connecticut and New Jersey prior to the renewal dates of the Transitioning HNL Members. Subsequent accounting for the Northeast Sale is reported as partrun-out of our Northeast Operations reportable segment (see Note 3).Underbusiness that was sold on December 11, 2009. Prior to the United Administrative Services Agreements, we provided claims processing, customer services, medical management, provider network access and other administrative services to United and certainfirst quarter of its affiliates. We recognized the revenue that we earned from providing2012, these administrative services in the period these services were provided, and we reported such revenue in the line item,items had been called Northeast administrative services fees and other income, inrevenues and expenses. Due to the sale of our consolidated statements of operations. Also included in Northeast administrative services fees and other income was the amortization of the value of services provided under the United Administrative Services Agreements. In connectionMedicare PDP business on April 1, 2012, starting with the Northeast Sale, the United Administrative Services Agreements were fair valued at $48 million and recorded as deferred revenue. The deferred revenue was amortized and recorded as Northeast administrative services fees and other income using a level of effort approach. During the three months ended June 30, 2011 and 2010, $0.5 million and $24.6 million, respectively, and during the six months ended June 30, 2011 and 2010, $2.7 million and $27.1 million, respectively, were amortized from deferred revenue and recorded as Northeast administrative services fees and other income.In addition, we were entitled to 50% of the profits or losses associated with the Acquired Companies’ Medicare business for the year ended December 31, 2010 (subject to a cap of $10 million of profit or loss), and in the first quarter of 2011, we received $7 million2012, divested operations and services revenues and expenses also include transition-related revenues and expenses related to the sale of our shareMedicare PDP business. We currently expect to provide Medicare PDP transition-related services to CVS Caremark through December 31, 2012, although certain transition-related services may continue through March 31, 2014. See Note 3 for additional information regarding the sale of our Medicare PDP business and the sale of our Northeast business, and see Note 4 for information regarding the change to our reportable segments as a result of the profit associated with the Acquired Companies’ Medicare business. The Medicare business was transferred to a United affiliate on January 1, 2011. As part of the Northeast Sale, we also retained certain financial responsibilities for the Acquired Companies, subject to specified adjustments for the period beginning on the closing date of the transaction and ending on the date that the last United Administrative Services Agreement was terminated. Accordingly, the Northeast administrative services fees and other income included a quarterly net payment (QNP) paid to United in accordance with the terms of the Stock Purchase Agreement. The QNP is a defined term in the Stock Purchase Agreement and represented the net profit or loss from the wind-down of the Acquired Companies, as adjusted in accordance with the Stock Purchase Agreement. We reported expenses we incurred in providing these administrative services as a separate line item, Northeast administrative services expenses, in our consolidated statements of operations.Under the Stock Purchase Agreement, United is required to pay us additional consideration for the value of the Transitioning HNL Members and the members of the Acquired Companies that transitioned to other United products based upon a formula set forth in the Stock Purchase Agreement to the extent such amounts exceed the initial minimum payment of $60 million that United made to us at closing (referred to as contingent membership renewals). This membership transition was completed on July 1, 2011. In connection with contingent membership renewals, we recorded as an adjustment to the loss on sale of the Northeast health plan subsidiaries$6.3 million and $41.1 million in the three and six months ended June 30, 2011, respectively, and $8.2 million in the three and six months ended June 30, 2010. As of June 30, 2011, $41.3 million was due from United in connection with contingent membership renewals.With the termination of the United Administrative Services Agreements on July 1, 2011, we have estimated and recorded the final QNP of $19.7 million in the second quarter of 2011. This estimated amount is subject to review by United, and the final QNP after such a review may be materially different than the amount recorded. At this time, we expect to complete the QNP review process with United by December 31, 2011. Upon the termination of the United Administrative Services Agreements, we entered into Claims Servicing Agreements with United and certain of its affiliates pursuant to which we will continue to adjudicate run out claims and perform limited other administrative services. The Claims Servicing Agreements will be in effect until the last run out claim under the applicable Claims Servicing Agreement has been adjudicated.new Managed Care Support Contract (T-3)T-3 contract for the TRICARE North Region. The T-3 contract was awarded to us on May 13, 2010. We were the managed care contractor for the United States Department of Defense’sDefense's (DoD) previous TRICARE contract in the North Region, which ended on March 31, 2011.government’sgovernment's initial award of the T-3 contract. Accordingly, option period 2 commenced on April 1, 2011, and if2011. On March 22, 2012, the DoD exercised option period 3, which commenced on April 1, 2012. If all remaining option periods are exercised, the T-3 contract would conclude on March 31, 2015.provideprovided assistance in the transition into the T-3 contract, and will provide assistance in any transition out of the T-3 contract. These services are structured similar toas cost reimbursement arrangements for health care costs plus administrative services only (ASO) arrangements with fees receivedearned in the form of cost plus fixed price, andprices, fixed unit price,prices, and contingent fees and payments based on various incentives and penalties.Westraight linestraight-line basis over the option period, when the fees become fixed and determinable.As of June 30, 2011, revenue in the amount of $52.5 million related to the transition-in activities has been recognized as an upfront fee, and amortized over the four-year customer relationship period on a straight-line basis. We have also deferred $43.8 million of costs related to the transition-in activities as of June 30, 2011. Thesehad deferred transition-in costs of $43.8 million, which began amortizing on April 1, 2011 on a straight-line basis, with theand we had related deferred revenuerevenues of $52.5 million, which are being amortized over the customer relationship period. Fulfillment costs associated with the T-3 contract are expensed as incurred.theour Government Contracts reportable segment.$421.6$620.9 million for the three and six months ended June 30, 2011.Recently Issued Accounting PronouncementsMarch 31, 2012In June.Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05,Comprehensive Income (Topic 220)final methodology also includes, among other things, a fee-for-service adjuster, which would limit our payment liability to an error rate in excess of CMS' own fee-for-service error rate. CMS' final methodology is complex and we continue to evaluate its potential impact on us, but potential payment adjustments could have a material adverse effect on our results of operations and financial condition.3. SALE OF MEDICARE PDP BUSINESS AND NORTHEAST BUSINESS Presentationour subsidiary Health Net Life Insurance Company (HNL) sold substantially all of Comprehensive Income. The amendments in this update affect all entities that report itemsthe assets, properties and rights of other comprehensive income (OCI). Under the new guidance, the entities will no longer be allowed to present OCIHNL used primarily or exclusively in the Medicare PDP business to CVS Caremark and CVS Caremark assumed certain related liabilities and obligations of HNL as set forth in the related Asset Purchase Agreement. At the closing of the sale, CVS Caremark paid to us $169.9 million (PDP Purchase Price) in cash, representing $400 multiplied by 424,820, the number of individuals enrolled as members of a PDP plan of HNL as of the closing date. We expect to recognize a gain from the sale.stockholders’ equity.operations for the three months ended March 31, 2012 and 2011. Our revenues related to the Medicare PDP business were $191.8 million and $163.3 million, for the three months ended March 31, 2012 and 2011, respectively. These revenues were excluded from our continuing operating results and included in loss from discontinued operation. Our Medicare PDP business had a pretax loss of $(28.8) million and $(18.0) million for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012 and 2011, we had approximately 424,000 and 401,000 Medicare PDP members, respectively.entitiesfollowing table presents the major classes of assets and liabilities included in these amounts (dollars in millions): Premiums receivable, net $ 67.6 Reinsurance and other receivables 35.4 Other current assets 2.2 Goodwill allocated to Medicare PDP business 40.0 Assets of discontinued operation held for sale $ 145.2 Reserves for claims and other settlements $ 38.5 Unearned premiums 1.6 Accounts payable and other liabilities 1.7 Liabilities of discontinued operation held for sale $ 41.8 report componentsprovide run-out support services under claims servicing agreements with United, which will be in effect until the last run out claim under the applicable claims servicing agreement has been adjudicated. All revenues and expenses related to the Northeast Sale, including those relating to the administrative services and/or claims servicing agreements and any revenues and expenses related to the run-out, are reported as part of comprehensive income in eitherDivested operations and services revenue and expenses. During the three months ended March 31, 2012 and 2011, we recorded no adjustment to the loss on sale of Northeast health plan subsidiaries and a continuous statement$34.9 million reduction to the loss on sale of comprehensive income or two separate but consecutive statements. Under either method, entities must display adjustments for items that are reclassified from OCI to net income in both net income and OCI. Reclassification adjustments between OCI and net income have to be presented separately onNortheast health plan subsidiaries, respectively.faceexecution of the financial statements. The amendments in this update do not change the items that must be reported in OCI or when an item of OCI must be reclassifiedAsset Purchase Agreement to net income. Also, this ASU does not change the current option for entities to present components of OCI gross or net of the effect of income taxes as long as such tax effects are presentedsell our Medicare PDP business in the statement in which OCI is presented, or disclosedfirst quarter of 2012, we reviewed our reportable segments. As a result of this review, beginning in the notes tofirst quarter of 2012, our Divested Operations and Services reportable segment, formerly called the financial statements. This ASU does not affect how earnings per share is calculated or presented. The amendments"Northeast Operations" reportable segment also includes the transition-related expenses of our Medicare PDP business that was sold on April 1, 2012. Accordingly, all services provided in this update should be applied retrospectivelyconnection with divested businesses are now reported as part of our Divested Operations and will become effective for fiscal years,Services reportable segment.interim periods within those years, beginning after December 15, 2011. We do not expect the adoption of ASU No. 2011-05 to have a material effect on our financial condition or results of operations.In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value MeasurementDivested Operations and Disclosure Requirements in U. S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (IFRSs). Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The FASB does not intend for these amendments to result in a change of application for many of the requirements in ASC 820,Fair Value Measurements and Disclosures. There are new disclosures requirements in this update including a disclosure of quantitative information about the unobservable inputs used for all Level 3 value measurements, a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, and a description of the company’s valuation processes. There are also additional disclosure requirements such as disclosure of any transfers between Levels 1 and 2 (not just significant transfers), information about when the current use of a non-financial asset measured at fair value differs from its highest and best use, and the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes to financial statements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. We do not expect the adoption of ASU No. 2011-04 to have a material impact on our financial condition or results of operations.In July 2011, the FASB issued ASU No. 2011-06,Other Expenses (Topic 720), Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Task Force).This update affects reporting entities that are subject to the fee imposed on health insurers mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the Acts). The Acts impose an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. This fee is not taxdeductible and allocated to the individual health insurers based on the ratio of the amount of net premiums to the amount of health insurance for any U.S. health risk. This ASU addresses the recognition and classification of the entity’s share of this imposed fee. The liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The amendments in this update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. We will evaluate the impact of this update on our consolidated financial statements.3. SEGMENT INFORMATIONplanscontracts through the TRICARE program, the Department of Defense Military and Family Life Consultant program (MFLC) and other health care-related government contracts. For the three and six months ended June 30,March 31, 2011, our NortheastDivested Operations and Servicesits affiliates pursuantServices reportable segment also includes the transition-related expenses of our Medicare PDP business that was sold on April 1, 2012. Prior period segment information has been conformed to this current presentation in this Quarterly Report on Form 10-Q. See Note 3 for more information regarding the United Administrative Services Agreements prior to their termination on July 1, 2011sale of our Medicare PDP business and the operations of Health Net Life in Connecticut and New Jersey prior to the renewal dates of the Transitioning HNL Members. Beginning July 1, 2011, our Northeast Operations reportable segment will include the operationsSale.businessesreportable segments are reviewed on a monthly basis by our chief operating decision maker (CODM). We continuously monitor our reportable segments to ensure that are adjudicating run out claims and providing limited other administrative services to United and its affiliates pursuant to the Claims Servicing Agreements.As a result of the Northeast Sale, we operate the Northeast business in a manner that is different than the rest ofthey reflect how our health plans. For additional information on the Northeast Sale, the United Administrative Services Agreements and the Claims Servicing Agreements, see Note 2. The rest ofCODM manages our health plans are operated as continuing core health plans. in the summary of significant accounting policies in Note 2 to the consolidated financial statements included in our Form 10-K, except that intersegment transactions are not eliminated.segment (for example, see Note 8 for the charge included in Corporate/Other in the six months ended June 30, 2011 related to the decision rendered by the Louisiana Supreme Court in the AmCareco litigation).segment. Accordingly, these costs are not included in the performance evaluation of the reportable segments by our chief operating decision maker.CODM. In addition, certain charges, including but not limited to those related to our operations strategy and corporate overhead cost reduction efforts, as well as asset impairments, are reported as part of Corporate/Other. Western Region
Operations Government
Contracts Northeast
Operations Corporate/
Other/
Eliminations Total (Dollars in millions) $ 2,593.6 $ 171.0 $ 11.3 $ 0 $ 2,775.9 3.0 0 0 (3.0 ) 0 $ 72.5 $ 40.2 $ (21.0 ) $ (3.2 ) $ 88.5 $ 2,507.9 $ 851.9 $ 82.6 $ (5.4 ) $ 3,437.0 13.0 0 0 (13.0 ) 0 $ 58.1 $ 41.5 $ (9.4 ) $ (12.3 ) 77.9 $ 5,230.4 $ 1,046.1 $ 25.9 $ 0 $ 6,302.4 5.9 0 0 (5.9 ) 0 $ 109.0 $ 98.0 $ (25.9 ) $ (191.5 ) $ (10.4 ) $ 5,038.6 $ 1,661.4 $ 158.5 $ (5.4 ) $ 6,853.1 25.1 0 0 (25.1 ) 0 $ 98.8 $ 79.5 $ (47.0 ) $ (26.8 ) $ 104.5
Operations Government
Contracts
Operations and Services
Eliminations Total (Dollars in millions) Three months ended March 31, 2012 Revenues from external sources $ 2,649.0 $ 181.4 $ — $ — $ 2,830.4 Intersegment revenues 2.9 — — (2.9 ) — Segment pretax (loss) income (8.8 ) 22.0 (23.2 ) (3.6 ) (13.6 ) Three months ended March 31, 2011 Revenues from external sources $ 2,473.6 $ 875.1 $ 14.5 $ — $ 3,363.2 Intersegment revenues 2.9 — — (2.9 ) — Segment pretax income (loss) 60.6 57.8 (11.0 ) (188.2 ) (80.8 ) Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in millions) $ 1,481.4 $ 1,411.0 $ 2,971.1 $ 2,823.2 734.4 770.7 1,526.5 1,557.6 350.6 302.6 679.2 605.8 2,566.4 2,484.3 5,176.8 4,986.6 0.3 23.0 2.3 48.2 $ 2,566.7 $ 2,507.3 $ 5,179.1 $ 5,034.8 4. Three Months Ended March 31, 2012 2011 (Dollars in millions) Commercial premium revenue $ 1,453.2 $ 1,489.7 Medicare premium revenue 715.0 628.8 Medicaid premium revenue 452.7 328.6 Total Western Region Operations health plan services premiums 2,620.9 2,447.1 Total Divested Operations and Services health plan services premiums — 2.0 Total health plan services premiums $ 2,620.9 $ 2,449.1 There were available-for-sale-noncurrent as of June 30, 2011.March 31, 2012. As of December 31, 2010,2011, we classified $8.8$2.1 million as investments available-for-sale-noncurrent because we did not intend to sell and we believed it wouldmay take longer than a year for such impaired securities to recover. All available-for-sale-noncurrentThis classification does not affect the marketability or the valuation of the investments, were sold in the three months ended June 30,which are reflected at their market value as of December 31, 2011.June 30, 2011March 31, 2012 and December 31, 2010,2011, the amortized cost, gross unrealized holding gains and losses, and fair value of our current investments available-for-sale and our investments available-for-sale-noncurrent, after giving effect to other-than-temporary impairments were as follows: June 30, 2011 Amortized
Cost Gross
Unrealized
Holding
Gains Gross
Unrealized
Holding
Losses Carrying
Value (Dollars in millions) $ 667.7 $ 4.5 $ (1.3 ) $ 670.9 88.3 0.2 0.0 88.5 479.0 5.9 (1.1 ) 483.8 331.6 2.2 (1.0 ) 332.8 0.0 0.1 0.0 0.1 $ 1,566.6 $ 12.9 $ (3.4 ) $ 1,576.1 December 31, 2010 Amortized
Cost Gross
Unrealized
Holding
Gains Gross
Unrealized
Holding
Losses Carrying
Value (Dollars in millions) $ 642.3 $ 8.1 $ (2.2 ) $ 648.2 103.6 0.1 (0.4 ) 103.3 533.2 2.1 (8.1 ) 527.2 374.5 11.8 (1.8 ) 384.5 0.0 0.0 0.0 0.0 $ 1,653.6 $ 22.1 $ (12.5 ) $ 1,663.2 $ 10.5 $ 0.0 $ (1.7 ) $ 8.8 March 31, 2012 (Dollars in millions) Current: Asset-backed securities $ 575.4 $ 9.8 $ (0.3 ) $ 584.9 U.S. government and agencies 25.5 — — 25.5 Obligations of states and other political subdivisions 441.4 13.9 (1.4 ) 453.9 Corporate debt securities 381.6 4.2 (2.5 ) 383.3 $ 1,423.9 $ 27.9 $ (4.2 ) $ 1,447.6 December 31, 2011 (Dollars in millions) Current: Asset-backed securities $ 611.9 $ 10.6 $ (0.2 ) $ 622.3 U.S. government and agencies 32.5 — — 32.5 Obligations of states and other political subdivisions 498.7 19.5 (0.1 ) 518.1 Corporate debt securities 385.0 4.3 (4.2 ) 385.1 $ 1,528.1 $ 34.4 $ (4.5 ) $ 1,558.0 Noncurrent: Corporate debt securities $ 2.4 $ — $ (0.3 ) $ 2.1 June 30, 2011,March 31, 2012, the contractual maturities of our current investments available-for-sale were as follows: Amortized
Cost Estimated
Fair Value (Dollars in millions) $ 45.5 $ 45.9 502.3 506.2 256.7 258.2 94.4 94.8 667.7 670.9 0.0 0.1 $ 1,566.6 $ 1,576.1 Current: (Dollars in millions) Due in one year or less $ 29.9 $ 29.9 Due after one year through five years 196.0 199.9 Due after five years through ten years 374.5 383.1 Due after ten years 248.1 249.8 Asset-backed securities 575.4 584.9 Total current investments available-for-sale $ 1,423.9 $ 1,447.6 and six months ended June 30, 2011March 31, 2012 were $799.3$650.8 million and $1,197.8 million, respectively.. Gross realized gains and losses totaled $16.3$13.4 million and $1.7$0.4 million, respectively, for the three months ended June 30, 2011, and $29.3 million and $2.4 million, respectively, for the six months ended June 30, 2011.March 31, 2012. Proceeds from sales of investments available-for-sale during the three and six months ended June 30, 2010March 31, 2011 were $215.9$398.5 million and $660.1 million, respectively.. Gross$4.1$0.1$0.7 million, respectively, for the three months ended June 30, 2010, and $12.5 million and $1.6 million, respectively, for the six months ended June 30, 2010.March 31, 2011.table showstables show our current investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position at June 30, 2011: Less than 12 Months 12 Months or More Total Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses (Dollars in millions) $ 246.6 $ (1.3 ) $ 0.0 $ 0.0 $ 246.6 $ (1.3 ) 4.0 0.0 0.0 0.0 4.0 0.0 93.9 (1.1 ) 0.3 0.0 94.2 (1.1 ) 129.0 (1.0 ) 0.0 0.0 129.0 (1.0 ) 0.0 0.0 0.0 0.0 0.0 0.0 $ 473.5 $ (3.4 ) $ 0.3 $ 0.0 $ 473.8 $ (3.4 ) The following table shows the number of individual securities included in our current investments that have been in a continuous loss position at June 30, 2011: Less than
12 Months 12 Months
or More Total 54 0 54 1 0 1 50 1 51 75 0 75 0 0 0 180 1 181 The following table shows our current investments’ fair valuesthrough gross unrealized losses for individual securities that have been in a continuous loss position at December 31, 2010: Less than 12 Months 12 Months or More Total Fair Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses (Dollars in millions) $ 188.2 $ (2.2 ) $ 0.2 $ 0.0 $ 188.4 $ (2.2 ) 65.1 (0.4 ) 0.0 0.0 65.1 (0.4 ) 372.7 (8.0 ) 1.8 (0.1 ) 374.5 (8.1 ) 97.9 (1.8 ) 0.0 0.0 97.9 (1.8 ) 0.0 0.0 0.0 0.0 0.0 0.0 $ 723.9 $ (12.4 ) $ 2.0 $ (0.1 ) $ 725.9 $ (12.5 ) The following table shows our noncurrent investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position at December 31, 2010: Less than 12 Months 12 Months or More Total Fair Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses (Dollars in millions) $ 0.0 $ 0.0 $ 8.8 $ (1.7 ) $ 8.8 $ (1.7 ) The above referenced2011. These investments are interest-yielding debt securities of varying maturities. We have determined that the unrealized loss position for these securities is primarily due to market volatility. Generally, in a rising interest rate environment, the estimated fair value of fixed income securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of fixed income securities would be expected to increase. These securities may also be negatively impacted by illiquidity in the market.5.The following table shows our current investments' fair values and gross unrealized losses for individual securities in a continuous loss position as of March 31, 2012: Less than 12 Months 12 Months or More Total (Dollars in millions) Asset-backed securities $ 67.2 $ (0.3 ) $ — $ — $ 67.2 $ (0.3 ) U.S. government and agencies 22.6 — — — 22.6 — Obligations of states and other political subdivisions 99.2 (1.4 ) — — 99.2 (1.4 ) Corporate debt securities 153.0 (2.5 ) — — 153.0 (2.5 ) $ 342 $ (4.2 ) $ — $ — $ 342.0 $ (4.2 ) Total Asset-backed securities 26 — 26 U.S. government and agencies 3 — 3 Obligations of states and other political subdivisions 28 — 28 Corporate debt securities 82 — 82 139 — 139 Less than 12 Months 12 Months or More Total Fair Value (Dollars in millions) Asset-backed securities $ 30.5 $ (0.2 ) $ 1.1 $ — $ 31.6 $ (0.2 ) U.S. government and agencies — — — — — — Obligations of states and other political subdivisions 7.5 — 3.0 (0.1 ) 10.5 (0.1 ) Corporate debt securities 149.3 (4.1 ) 1.4 (0.1 ) 150.7 (4.2 ) $ 187.3 $ (4.3 ) $ 5.5 $ (0.2 ) $ 192.8 $ (4.5 ) Less than 12 Months 12 Months or More Total Fair Value (Dollars in millions) Corporate debt securities $ 2.1 $ (0.3 ) $ — $ — $ 2.1 $ (0.3 ) $300$300 million of our common stock could be repurchased. We completed our 2010 stock repurchase program in April 2011.2011. During the three and six months ended June 30,March 31, 2011, we repurchased 1.43.5 million shares and 4.9 million shares, respectively, of our common stock for aggregate consideration of approximately $45.2$104.6 million and $149.8 million, respectively, under our 2010 stock repurchase program. As of June 30,December 31, 2011, we had repurchased an aggregate of 10.8 million shares of our common stock under our 2010 stock repurchase program since its inception at an average price of $27.80$27.80 per share for aggregate consideration of $300 million.$300 million.4,2, 2011, our Board of Directors authorized our 2011 stock repurchase program pursuant to which a total of $300$300 million of our outstanding common stock could be repurchased. As of December 31, 2011, the remaining authorization under our 2011 stock repurchase program was $76.3 million. On March 8, 2012 our Board of Directors approved a $323.7 million increase to our 2011 stock repurchase program. Subject to the approval of our Board approval,of Directors, we may repurchase our common stock under our 2011 stock repurchase program from time to time in privately negotiated transactions, through accelerated stock repurchase programs or open market transactions, including pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. The timing of any repurchases and the actual number of stock repurchases will depend on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under the Company’s debt obligations, and other market and economic conditions. Our 2011 stock repurchase program may be suspended or discontinued at any time.June 30, 2011,March 31, 2012, we repurchased 870,000did not repurchase any shares of our common stock for aggregate consideration of approximately $27.1 million under our 2011 stock repurchase program. The remaining authorization under our 2011 stock repurchase program as of June 30, 2011March 31, 2012 was $272.9 million. We used net free cash available, including cash at the parent company, Health Net, Inc., to fund the share repurchases.6.$400.0 million.Termination of Amortizing Financing FacilityOctober 2011On May 26, 2010, we terminated our five-year non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender that, we entered into on December 19, 2007 by exercising our option to calla $600 million unsecured revolving credit facility due in October 2016, which includes a $400 million sublimit for the facility. Inissuance of standby letters of credit and a $50 million sublimit for swing line loans (which sublimits may be increased in connection with the call, we recorded a $3.5 million pretax early debt extinguishment chargeany increase in the credit facility described below). In addition, we have the ability from time to time to increase the credit facility by up to an additional $200 million in the aggregate, subject to the receipt of additional commitments. As of March 31, 2012, $112.5 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $427.9 million (see "—Letters of Credit" below).ended June 30, 2010.$400$400 million in aggregate principal amount of 6.375% Senior Notes due 2017 (Senior Notes). The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of 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 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of June 30, 2011, March 31, 2012, no default or event of default had occurred under the indenture governing the Senior Notes.360-day360-day year consisting of twelve 30-day30-day months) at the applicable treasury rate plus 30 basis points$50$50 million, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50$50 million, if that acceleration results from a default under the instrument giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; or$398.8$398.9 million as of June 30, 2011March 31, 2012 and $398.7$398.9 million as of and December 31, 2010,2011, respectively.Revolving Credit FacilityWe have a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. As of June 30, 2011, $185.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $654.8 million (see “—Letters of Credit” below). The revolving credit facility matures on June 25, 2012. Accordingly, the balance outstanding of $185.0 million as of June 30, 2011 is classified as a current liability.Amounts outstanding under our revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the revolving credit facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.Letters of CreditWe can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2011 and December 31, 2010, we had outstanding letters of credit of $60.2 million and $249.1 million, respectively, resulting in a maximum amount available for borrowing under the revolving credit facility of $654.8 million and $650.9 million, respectively. During the three months ended June 30, 2011, approximately $88.1 million in outstanding letters of credit were released in connection with our satisfaction of the entirety of the AmCareco litigation judgment (see Note 8 for more information on the AmCareco litigation ruling). As of June 30, 2011 and December 31, 2010, no amounts had been drawn on any of these letters of credit.7.whichthat are based on an income approach. Examples include, but are not limited to, multidimensional relational model, option adjusted spread model, and various matrices. Specific pricing inputs include quoted prices for similar securities in both active and non-active markets, other observable inputs such as interest rates, yield curve 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, auction rate securities and interest rate swap assets.whichthat have experienced failed auctions at one time or are experiencing failed auctions and thus have minimal liquidity. These bonds have frequent reset of coupon rates and have extended to the legal final maturity. The coupons are based on a margin plus a LIBOR rate and continue to pay above market rates. As with most variable or floating rate securities, we believe that based on a market approach, the fair values of these securities are equal to their par values due to the short time periods between coupon resets and based on each issuer’s credit worthiness. Also included in the Level 3 category is aan embedded contractual derivative held by the Company estimated at fair value. Significant inputs used in the derivative valuation model include the estimated growth in Health Net health care expenditures and the discount rate to estimate the present value of the cash flows.estimated growth in national health care expenditures. The growth in these expenditures was modeled using a Monte Carlo simulation approach.June 30, 2011March 31, 2012 and December 31, 2010,2011, and indicate the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (dollars in millions): Level 1 Level 2-
current Level 2-
noncurrent Level 3 Total $ 0 $ 526.8 $ 0 $ 0 $ 526.8 0 87.0 0 0 87.0 0 57.1 0 0 57.1 25.7 0 0 0 25.7 0 62.8 0 0 62.8 0 473.9 0 9.9 483.8 0 332.8 0 0 332.8 0.1 0 0 0 0.1 $ 25.8 $ 1,540.4 $ 0 $ 9.9 $ 1,576.1 0 0 0 0.8 0.8 $ 25.8 $ 1,540.4 $ 0 $ 10.7 $ 1,576.9 $ 0 $ 527.6 $ 0 $ 0 $ 527.6 0 80.4 0 0 80.4 0 40.2 0 0 40.2 25.7 0 0 0 25.7 0 77.6 0 0 77.6 0 517.3 8.8 9.9 536.0 0 384.5 0 0 384.5 0 0 0 0 0 $ 25.7 $ 1,627.6 $ 8.8 $ 9.9 $ 1,672.0
current
noncurrent As of March 31, 2012 Assets: Cash and cash equivalents $ 391.0 — — — $ 391.0 Investments—available-for-sale Asset-backed debt securities: Residential mortgage-backed securities $ — $ 380.7 $ — $ — $ 380.7 Commercial mortgage-backed securities — 183.7 — — 183.7 Other asset-backed securities — 20.5 — — 20.5 U.S. government and agencies: U.S. Treasury securities 25.5 — — — 25.5 U.S. Agency securities — — — — — Obligations of states and other political subdivisions — 453.7 — 0.2 453.9 Corporate debt securities — 383.3 — — 383.3 Total investments at fair value $ 25.5 $ 1,421.9 $ — $ 0.2 $ 1,447.6 Embedded contractual derivative — — — 16.0 16.0 Total assets at fair value $ 416.5 $ 1,421.9 $ — $ 16.2 $ 1,854.6
current
noncurrent As of December 31, 2011 Assets: Cash and cash equivalents $ 230.3 $ — $ — $ — $ 230.3 Investments—available-for-sale Asset-backed debt securities: Residential mortgage-backed securities $ — $ 495.3 $ — $ — $ 495.3 Commercial mortgage-backed securities — 94.4 — — 94.4 Other asset-backed securities — 32.6 — — 32.6 U.S. government and agencies: U.S. Treasury securities 25.5 — — — 25.5 U.S. Agency securities — 7.0 — — 7.0 Obligations of states and other political subdivisions — 517.9 — 0.2 518.1 Corporate debt securities — 385.1 2.1 — 387.2 Total investments at fair value $ 25.5 $ 1,532.3 $ 2.1 $ 0.2 $ 1,560.1 Embedded contractual derivative — — — 5.3 5.3 Total assets at fair value $ 255.8 $ 1,532.3 $ 2.1 $ 5.5 $ 1,795.7 and six months ended June 30, 2011March 31, 2012 and 2010.2011. In determining when transfers between levels are recognized, our accounting policy is to recognize the transfers based on the actual date of the event or change in circumstances that caused the transfer.and six months ended June 30, 2011March 31, 2012 and 20102011 were as follows (dollars in millions): Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 $ 9.9 $ 10.0 $ 9.9 $ 10.0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.8 0 0.8 0 0 0 0 0 0 0 0 0 0 0 0 0 10.7 $ 10.0 10.7 $ 10.0 $ 0 $ 0 $ 0 $ 0 We had no financial 2012 2011 Available-For-Sale Investments Embedded Contractual Derivative Total Available-For-Sale Investments Total Opening balance $ 0.2 $ 5.3 $ 5.5 $ 9.9 $ 9.9 Transfers into Level 3 — — — — — Transfers out of Level 3 — — — — — Total gains or losses for the period Realized in net income — 10.7 10.7 — — Unrealized in accumulated other comprehensive income — — — — — Purchases, issues, sales and settlements Purchases/additions — — — — — Issues — — — — — Sales — — — — — Settlements — — — — — Closing balance $ 0.2 $ 16.0 $ 16.2 $ 9.9 $ 9.9 Change in unrealized gains (losses) included in net income for assets held at the end of the reporting period $ — $ — $ — $ — $ — that wereapproximate fair valued on a non-recurring basis during the three and six months ended June 30, 2011.financialour assets measured at fair value on a non-recurring basis duringand liabilities classified as held for sale as of March 31, 2012 and the three and six months ended June 30, 2010 and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair valuevalues (dollars in millions): Level 1 Level 2 Level 3 Total Loss $ 0 $ 0 $ 0 $ (6.0 ) Premiums receivable, net $ — $ 67.6 $ — $ 67.6 Reinsurance and other receivables — 35.4 — 35.4 Goodwill allocated to Medicare PDP business — — 40.0 40.0 Other current assets — 2.2 — 2.2 Total assets of discontinued operation held for sale $ — $ 105.2 $ 40.0 $ 145.2 Reserves for claims and other settlements $ — $ 38.5 $ — $ 38.5 Unearned premiums — 1.6 — 1.6 Accounts payable and other liabilities — 1.7 — 1.7 Total liabilities of discontinued operation held for sale $ — $ 41.8 $ — $ 41.8 changes in the balances offollowing table presents quantitative information about Level 3 financial assets that are fair valued on a non-recurring basis for the three and six months ended June 30, 2010 were as followsFair Value Measurements (dollars in millions): Three Months Ended
June 30, 2010 Six Months Ended
June 30, 2010 $ 6.0 $ 6.0 (6.0 ) (6.0 ) $ 0 $ 0 See Note 2 Valuation Technique(s) Unobservable Input Range (Weighted Average) Embedded contractual derivative $ 16.0 Monte Carlo Simulation Approach Health Net Health Care Expenditures -6.6 % — 1.2% (-2.4%) National Health Care Expenditures 0.1 % — 7% (3.5%) Goodwill - Western Region reporting unit $ 565.9 Income Approach Discount Rate 10 % — 10% (10%) Goodwill allocated to Medicare PDP business $ 40.0 Income Approach Discount Rate 10 % — 10% (10%) discussion onreview of the goodwill valuationinputs, validating that they are reasonable and observable in the marketplace, if applicable. For our embedded contractual derivative, we use internal historical and projected health care expenditure data and the impairmentnational health care expenditures as reflected in the National External Trend Standards, which is published by CMS, to estimate the unobservable inputs. The growth rates in each of these health care expenditures are modeled using the Northeast Operations’ goodwill.8. LEGAL PROCEEDINGSthreefour related litigation matters pending in California state and federal courts relating to information security issues. On January 21, 2011, International Business Machines Corp. (IBM), which handles our data center operations, notified us that it could not locate several hard disk drives that had been 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 to the individuals whose information is on the drives. To help protect the personal information of affected individuals, we offered them two years of free credit monitoring services, in addition to identity theft insurance and fraud resolution and restoration of credit files services, if needed.twothree remaining actions are currently pending in the Superior Court of California, County of San Francisco (San Francisco County Superior Court), the Superior Court of California, County of Sacramento (Sacramento County Superior Court) and the U.S. District Court for the Central District of California. The consolidated amended complaint in the federal action pending in the Eastern District of California iswas filed on behalf of a putative class of over 800,000 of our current or former members who received the written notification, and also namesseekssought to state claims for violation of the California Confidentiality of Medical Information Act and the California Customer Records Act, and seekssought statutory damages of up to $1,000$1,000 for each class member, as well as injunctive and declaratory relief, attorneys’ fees and other relief. We have not yetOn August 29, 2011, we filed a responsemotion to dismiss the consolidated complaint.Riversidethe Superior Court of California, County Superior Courtof Riverside and is brought on behalf of a putative nationwide class of all former and current members affected by this incident, and seeks to state similar claims against us, , as well as a claim for invasion of privacy. We removed this case to the Central District of California on August 1, 2011. We have not yet2011. On August 26, 2011, the plaintiff filed a responsemotion to remand the case to state court. That motion was granted on September 30, 2011. On October 10, 2011, we filed an application for leave to appeal the remand order to the complaintUnited States Court of Appeals for the Ninth Circuit. On January 30, 2012, the Court of Appeals granted the motion for leave to appeal and ordered the parties to submit briefs. On March 20, 2012, the Court of Appeals issued an opinion reversing the district court's ruling and instructing the district court to review the motion to remand in this action.theCalifornia's Unfair Competition Law, and seeks similar relief. We have moved to compel arbitration of the two named plaintiffs’ claims.Office of the Attorney General, the Connecticut Attorney General, the Connecticut Department of Insurance, and the Office of Civil Rights of the U.S. Department of Health and Human Services.Litigation Related to the Sale of BusinessesWe were a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of which related to claims asserted by three separate state receivers overseeing the liquidation of three health plans in Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001. In 1999, FHC sold its interest in these plans to AmCareco, Inc. (AmCareco). We retained a minority interest in the three plans after the sale. Thereafter, the three plans became known as AmCare of Louisiana (AmCare-LA), AmCare of Oklahoma (AmCare-OK) and AmCare of Texas (AmCare-TX). In 2002, three years after the sale of the plans to AmCareco, each of the AmCare plans was placed under state oversight and ultimately into receivership. The receivers for each of the AmCare plans filed suit against us, contending that we bore responsibility for the plans failing and ultimately being placed into receivership.On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million in punitive damages. The court later reduced the compensatory and punitive damages awards to $36.7 million and $45.5 million, respectively, and entered judgments against us in those amounts.The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on July 8, 2005. On November 4, 2005, the court issued separate judgments on those claims and awarded $9.5 million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK, respectively. We appealed these judgments, and on December 30, 2008, the court of appeal issued its judgment on each of the appeals. It reversed in their entirety the trial court’s judgments in favor of the AmCare-TX and AmCare-OK receivers, and entered judgment in our favor against those receivers, finding that the receivers’ claims failed as a matter of law. The court of appeal also reversed the trial court judgment in favor of the AmCare-LA receiver, with the exception of a single breach of contract claim, on which it entered judgment in favor of the AmCare-LA receiver in the amount of $2 million.Each of the receivers ultimately filed applications for a writ with the Louisiana Supreme Court, which were granted in 2009. On April 1, 2011, the Louisiana Supreme Court reinstated the original jury verdict in favor of the AmCare-TX receiver and affirmed the trial court’s judgment notwithstanding the verdict reducing the jury’s compensatory damages award. The Louisiana Supreme Court reversed the trial court’s judgment notwithstanding the verdict reducing the jury’s award of punitive damages to the AmCare-TX receiver. The Louisiana Supreme Court also reinstated the trial court’s judgments in favor of the AmCare-OK and AmCare-LA receivers. We filed a request for rehearing with the Louisiana Supreme Court, which was denied on April 29, 2011. On May 6, 2011, we filed a motion to stay enforcement on the portion of the judgment relating to the punitive damage award with the Louisiana Supreme Court, which was denied. We subsequently sought a stay of enforcement of the punitive damages award from the United States Supreme Court, which was also denied. As a result of the Louisiana Supreme Court’s decision, we recorded in general and administrative expenses a pretax charge of $177.2 million, or $157.9 million after tax, in the first quarter of 2011. During the quarter ended June 30, 2011, we fully satisfied the entirety of the judgment rendered by the Louisiana Supreme Court, paying a total of $181.3 million to the three receivers, inclusive of all accrued interest and court costs. Our net income per diluted share for the six months ended June 30, 2011 decreased by $1.72 due to the charges related to this judgment.the Health Insurance Portability and Accountability Act of 1996, or HIPAA, rules relating to pre-authorization penalties, payment of out-of-network89 under the heading Litigation“Litigation and Investigations Related to Unaccounted-for Server Drives,” depending, in part, upon our financial condition, results of operations, cash flow or liquidity in such period, and our reputation may be adversely affected. Except for the regulatory and legal proceedings discussed in this Note 89 under the heading “Litigation and Investigations Related to Unaccounted-for Server Drives,” management believes that the ultimate outcome of any of the regulatory and legal proceedings whichthat are currently pending against us should not have a material adverse effect on our financial condition, results of operations, cash flow and liquidity.8,9, to determine if settlement of such matters would be in the best interests of the Company and its stockholders. The costs associated with any settlement of the various legal proceedings and8,9, 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 and could have a material adverse effect on our financial condition, results of operations, cash flow and/or liquidity and may affect our reputation.9. CREDIT QUALITY OF FINANCING RECEIVABLESWe were previously a defendant in of June 30, 2011 and December 31, 2010, our financing receivables consisted of the following (amounts in millions): June 30,
2011 December 31,
2010 $ 41.3 $ 33.8 7.9 13.6 Amounts due for contingent membership renewals arose from the Northeast Sale (see Note 2). United is required to pay us additional consideration for the value of the Transitioning HNL Members and the members of the Acquired Companies that transitioned to other United products based on a formula set forth in the Stock Purchase Agreement to the extent such amounts exceeded the initial minimum payment of $60 million that United made to us at closing. This membership transition was completed on July 1, 2011. The receivable amount accrued as of December 31, 2010 was received in March 2011. The receivable amount as of June 30, 2011 is due in September 2011. Loans to health care providers are made from time to time to provide funding to certain health care providers and are generally due within twelve months from the time of the loan.These financing receivables are considered past due if the required principal payments have not been received as of the date such payments were due. We do not accrue interest on these financing receivables, and interest income is recognized only to the extent any such cash payments are received. We had no past due financing receivables as of June 30, 2011 and December 31, 2010. Financing receivables are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due in accordance with the original contractual terms of the agreement, including scheduled principal payments. Impairment is evaluated in total for smaller-balance receivablesresult of a similar nature and on an individual receivable basis for other larger receivables. Ifjudgment in April 2011 by the Louisiana Supreme Court, we recorded a receivable is impaired, a specific valuation allowance is established. Impaired receivables, or portions thereof, are charged off when deemed uncollectible. We had no impaired receivables aspretax charge of June 30, 2011 and December 31, 2010.As part of the on-going monitoring of the credit quality of our financing receivables, we track and monitor certain credit quality indicators such as the counterparties’ credit rating and financial condition, including their capital strength, amount of leverage, and stability of earnings and growth. The counterparty for the amounts due for contingent membership renewals is investment grade and$177.2 million in strong financial condition. We believe that the counterparties for the loans to health care providers are of strong financial condition.The allowance for possible bad debt is a reserve established through a bad debt provision charged to general and administrative expense which represents our best estimate of probable losses that have been incurred within the existing receivables. The allowance, in our judgment, is necessary to reserve for estimated bad debt and risks inherent in the receivables. Our allowancethree months ended March 31, 2011.bad debt methodology is based on historical loss experience by typethe Central District of creditCalifornia issued a series of injunctions barring the DHCS from implementing the rate reductions as to various classes of providers. Therefore, due to the uncertainty regarding theinternal risk assessment, with adjustments for current events and conditions.print services from a third party. The allowance for bad debt was not material as of June 30, 2011 and December 31, 2010.10. INCOME TAXES$19.8 million10. INCOME TAXES 34.1%40.0% and 42.1%(19.5)% for the three months ended June 30,March 31, 2012 and 2011, respectively. During the three months ended March 31, 2011, a judgment was rendered in the AmCareco litigation (see Note 9) that resulted in deferred tax assets of $51.1 million. Realization of these deferred tax assets is uncertain and 2010, respectively, and (380.7)% and 41.5%therefore, a valuation allowance for the six months ended June 30, 2011 and 2010, respectively.full amount was established. The significant change in the effective income tax rate from 20102011 to 2012 is primarily thea result of the decision renderedabsence of such litigation effects in 2011 by2012.Louisiana Supreme Court insale our Medicare PDP business to CVS Caremark. In connection with the AmCareco litigation (see Note 8). The decision resulted in deferred tax assetssale, we classified the operating results of $51.1 million for which realization is uncertainthe Medicare PDP business as discontinued operation, and as such, a valuation allowanceaccordingly, reclassified our results of operations for the full amount was established asthree months ended March 31, 2011. As of March 31, 2011.EVENTEVENTSIn November 2010, CMS imposed sanctions againstApril 1, 2012, we completed the sale of our Medicare PDP business to CVS Caremark. At the closing of the sale, CVS Caremark paid us suspending$169.9 million in cash, subject to certain post-closing adjustments. Following the marketingsale, we continue to and enrollment of new members into allprovide prescription drug benefits as part of our Medicare Advantage and stand-alone Prescription Drug Plan (PDP) products. These sanctions relatedplan offerings. We currently expect to our compliance withprovide Medicare PDP transition-related services to CVS Caremark through December 31, 2012, although certain Medicare rules and regulations. On August 1, 2011, CMS lifted its marketing and enrollment sanctions against us. We have resumed marketingtransition-related services may continue through March 31, 2014. See Note 3 for additional information regarding the sale of our Medicare AdvantagePDP business.stand-alone PDP productsSan Diego County. Dual eligibles are persons that are eligible for both Medicare and Medi-Cal benefits. The stated purpose of the pilot program is to provide a more efficient health care delivery system and improved coordination of care to dual eligibles than that which is currently provided to these individuals separately through the Medicare and Medi-Cal programs. Our participation in the demonstration pilot would require us to enter into a three way agreement with the DHCS and CMS, under which, among other things, we would receive prospective blended capitated payments in an amount to be determined to provide coverage for dual eligibles. Our participation in the dual eligibles pilot program is subject to the satisfaction of a number of objectives and conditions. If we are enrolling beneficiaries with effective dates beginning September 1, 2011. We willable to participate in the upcoming annual enrollment period, which begins October 15, 2011 for January 1, 2012 enrollment. CMS continuesprogram, there can be no assurance that the business opportunity will prove to prohibit our stand-alone PDP products from receiving auto-assignment of low income subsidy (LIS) eligible Medicare beneficiaries under CMS’ LIS auto-assignment process. However, LIS members can make their own choice to enroll in our products during the upcoming annual enrollment period, or in the month they become eligible for PDP coverage.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. as amended (“Exchange Act”), and Section 27A of the Securities Act of 1933 as amended, regarding our business, financial condition and results of operations. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. These forward-looking statements involve a number of risks and uncertainties. All statements other than statements of historical information provided or incorporated by reference herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate” and “intend”“estimate,” “intend,” “feels,” “will,” “projects” and other similar expressions are intended to identify forward-looking statements. Managed health care companies operate in a highly competitive, constantly changing environment that is significantly influenced by, among other things, aggressive marketing and pricing practices of competitors and regulatory oversight. Factors that could cause our actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, the factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K as updated by our quarterly reportand this Quarterly Report on Form 10-Q, for the quarter ended March 31, 2011, and the risks discussed in our other filings from time to time with the SEC.incorrect.wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many of the factors discussed in our filings with the SEC may impact future results. These factors should be considered in conjunction with any discussion of operations or results by us or our representatives, including any forward-looking discussion, as well as commentsinformation contained in press releases, presentations to securities analysts or investors or other communications by us or our representatives. You should not place undue reliance on any forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date thereof.thereof and are subject to changes in circumstances and a number of risks and uncertainties. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that arise after the date of this report.OVERVIEWGeneral6.05.6 million individuals across the country through group, individual, Medicare, Advantage, stand-alone Prescription Drug Plan (“PDP”) products, Medicaid, U.S. Department of Defense (“Department of Defense” or “DoD”), including TRICARE, and Veterans Affairs programs. Our behavioral health services subsidiary, Managed Health Network, Inc., provides mentalbehavioral health, benefitssubstance abuse and employee assistance programs to approximately 5.04.9 million individuals, in all 50 states, including our own health plan members. Our subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.NortheastDivested Operations and Services, each of which is described below.offor our commercial, Medicare and Medicaid health plans, our health and life insurance companies, and our behavioral health and pharmaceutical services subsidiaries. We haveAs of March 31, 2012, we had approximately 2.92.6 million medical members (including PDP members) in our Western Region Operations reportable segment.The T-3 contract was awarded to us on May 13, 2010. Under the T-3 contract for the TRICARE North Region, we provide administrative services to approximately 3.13.0 million Military Health System (“MHS”) eligible beneficiaries. See Note 2 to our consolidated financial statements under the heading “T-3 TRICARE Contract” for additional information on the T-3 contract. We also provide behavioral health services to military families under the Department of Defense Military and Family Life CounselingConsultant (“MFLC”) contract, which is included in our Government Contracts segment.(active duty personnel and TRICARE/Medicare dual eligible beneficiaries), including 1.8 million TRICARE eligible beneficiaries for whom we provided health care and administrative services and 1.3 million other MHS eligible beneficiaries for whom we provided ASO.Foradministrative services only ("ASO").threefirst quarter of 2012. As a result of our review of the reportable segments, all services provided in connection with divested businesses, including those relating to the sale of our Medicare PDP business and six months ended June 30, 2011,the Northeast Sale, were reported as part of our NortheastDivested Operations and Services reportable segment beginning in the first quarter of 2012.pursuant tounder administrative services and claims servicing agreements in connection with the United Administrative Services Agreements prior to their termination on July 1, 2011 andNortheast Sale. Beginning in the operationsfirst quarter of Health Net Life in Connecticut and New Jersey prior to2012, this segment also includes the renewal dates of the Transitioning HNL Members. Beginning July 1, 2011, our Northeast Operations reportable segment will include the operationstransition-related expenses of our businesses that are adjudicating run out claimsdivested Medicare PDP business. See Notes 2, 3 and providing limited other administrative services to United and its affiliates pursuant to the Claims Servicing Agreements. For additional information on the Transitioning HNL Members, the United Administrative Services Agreements and the Claims Servicing Agreements, see Note 24 to our consolidated financial statements under the heading “Subsequent Accounting for additional information regarding our reportable segments, the Northeast Sale.” including Medicare Part D, to provide care to enrolled Medicare recipients. Medicare revenue can also include amounts for risk factor adjustments and additional premiums that we charge in some places to members who purchase our Medicare risk plans. The amount of premiums we earn in a given period is driven by the rates we charge and enrollment levels. Administrative services fees and other income primarily include revenue for administrative services such as claims processing, customer service, medical management, provider network access and other administrative services. Health plan services expense includes medical and related costs for health services provided to our members, including physician services, hospital and related professional services, outpatient care, and pharmacy benefit costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care cost per visit, and the utilization rates represent the volume of health care consumption by our members.primarily consist of external broker commission expenses and generally vary with premium volume.similar toas cost reimbursement arrangements for health care costs plus administrative services only arrangements with fees receivedearned in the form of cost plus fixed price, andprices, fixed unit price,prices, and contingent fees and payments based on various incentives and penalties. We recognize revenue related to administrative services on a straight linestraight-line basis over the option period, when the fees become fixed and determinable. 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 are not the primary obligor for health care services and accordingly, we do not include health care costs and related reimbursements in our consolidated statement of operations. The T-3 contract also includes various performance-based incentives and penalties. For each of the incentives or penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at each interim date and are legally entitled to in the event of a contract termination. See Note 2 to our consolidated financial statements under the heading “T-3 TRICARE Contract” for additional information on our T-3 contract. Three Months Ended March 31, 2012 2011 (Dollars in thousands, except per share data) Revenues Health plan services premiums $ 2,620,949 $ 2,449,087 Government contracts 181,362 875,127 Net investment income 22,304 23,835 Administrative services fees and other income 5,784 2,721 Divested operations and services revenue — 12,449 Total revenues 2,830,399 3,363,219 Expenses Health plan services (excluding depreciation and amortization) 2,343,659 2,117,286 Government contracts 162,310 822,152 General and administrative 237,276 404,500 Selling 61,561 60,565 Depreciation and amortization 7,430 8,468 Interest 8,628 7,620 Divested operations and services expenses 23,096 58,329 Adjustment to loss on sale of Northeast health plan subsidiaries — (34,854 ) Total expenses 2,843,960 3,444,066 Loss from continuing operations before income taxes (13,561 ) (80,847 ) Income tax (benefit) provision (5,427 ) 15,777 Loss from continuing operations (8,134 ) (96,624 ) Discontinued operations: Loss from discontinued operation, net of tax (18,452 ) (11,571 ) Net loss $ (26,586 ) $ (108,195 ) Net loss per share—basic: Loss from continuing operations $ (0.10 ) $ (1.04 ) Loss from discontinued operation, net of tax $ (0.22 ) $ (0.12 ) Net loss per share—basic $ (0.32 ) $ (1.16 ) Net loss per share—diluted: Loss from continuing operations $ (0.10 ) $ (1.04 ) Loss from discontinued operation, net of tax $ (0.22 ) $ (0.12 ) Net loss per share—diluted: $ (0.32 ) $ (1.16 ) Three Months Ended March 31, 2012 2011 (Dollars in millions) Reconciliation of Days Claims Payable: (1) Reserve for Claims and Other Settlements* $ 958.1 $ 889.9 Less: Reserve for Claims and Other Settlements Held for Sale on Discontinued Operations — (34.5 ) Reserve for Claims and Other Settlements excluding Held for Sale on Discontinued Operations $ 958.1 $ 855.4 Less: Capitation, Provider and Other Claim Settlements and MAPD Payables (85.6 ) (78.6 ) (2) Reserve for Claims and Other Settlements—Adjusted $ 872.5 $ 776.8 (3) Health Plan Services Cost $ 2,343.7 $ 2,117.3 Less: Capitation, Provider and Other Claim Settlements and MAPD Costs (846.5 ) (768.4 ) (4) Health Plan Services Cost—Adjusted $ 1,497.2 $ 1,348.9 (5) Number of Days in Period 91 90 (1) / (3) * (5) Days Claims Payable—(using end of period reserve amount) 37.2 37.8 (2) / (4) * (5) Days Claims Payable—Adjusted (using end of period reserve amount) 53.0 51.8 Three Months Ended March 31, 2012 2011 (Dollars in millions) Income tax (benefit) expense from continuing operations $(5.4) $15.8 Effective income tax rate from continuing operations 40.0% (19.5)% Income tax benefit from discontinued operations $(10.3) $(6.5) Effective income tax rate from discontinued operations 35.8% 35.8% March 31, 2012 March 31, 2011 California Large Group 754 836 (82 ) (9.8 )% Small Group and Individual 302 338 (36 ) (10.7 )% Commercial Risk 1,056 1,174 (118 ) (10.1 )% Medicare Advantage 139 127 12 9.4 % Medi-Cal/Medicaid 1,034 941 93 9.9 % Total California 2,229 2,242 (13 ) (0.6 )% Arizona Large Group 82 74 8 10.8 % Small Group and Individual 62 50 12 24.0 % Commercial Risk 144 124 20 16.1 % Medicare Advantage 43 42 1 2.4 % Total Arizona 187 166 21 12.7 % Oregon (including Washington) Large Group 35 49 (14 ) (28.6 )% Small Group and Individual 55 41 14 34.1 % Commercial Risk 90 90 — — % Medicare Advantage 44 40 4 10.0 % Total Oregon (including Washington) 134 130 4 3.1 % Total Health Plan Enrollment Large Group 871 959 (88 ) (9.2 )% Small Group and Individual 419 429 (10 ) (2.3 )% Commercial Risk 1,290 1,388 (98 ) (7.1 )% Medicare Advantage 226 209 17 8.1 % Medi-Cal/Medicaid 1,034 941 93 9.9 % 2,550 2,538 12 0.5 % Three Months Ended March 31, 2012 2011 (Dollars in thousands, except PMPM data) Health plan services premiums $ 2,620,949 $ 2,447,083 Net investment income 22,304 23,774 Administrative services fees and other income 5,784 2,721 Total revenues 2,649,037 2,473,578 Health plan services 2,349,377 2,116,388 General and administrative 230,804 220,095 Selling 61,561 60,461 Depreciation and amortization 7,429 8,462 Interest 8,628 7,620 Total expenses 2,657,799 2,413,026 (Loss) income from continuing operations before income taxes (8,762 ) 60,552 Income tax (benefit) provision (3,685 ) 22,103 (Loss) income from continuing operations $ (5,077 ) $ 38,449 Pretax margin (0.3 )% 2.4 % Commercial premium yield 5.3 % 5.7 % Commercial premium PMPM (d) $ 374.58 $ 355.61 Commercial health care cost trend 12.3 % 5.0 % Commercial health care cost PMPM (d) $ 342.29 $ 304.86 Commercial MCR (e) 91.4 % 85.7 % Medicare Advantage MCR (e) 87.9 % 89.0 % Medicaid MCR (e) 86.7 % 85.0 % Health plan services MCR (a) 89.6 % 86.5 % G&A expense ratio (b) 8.8 % 9.0 % Selling costs ratio (c) 2.3 % 2.5 % (a) Medical Care Ratio ("MCR") is calculated as health plan services cost divided by health plan services premiums revenue. (b) The G&A expense ratio is computed as general and administrative expenses divided by the sum of health plan services premiums and administrative 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 (e) MCR is calculated as commercial, Medicare Advantage or Medicaid health care cost divided by commercial, Medicare Advantage or Medicaid premiums, as applicable. ourthe T-3 contract.Under our previous TRICARE contract for the North Region, which concluded on March 31, 2011, Government Contracts revenue was made up of two major components: health care and administrative services. The health care component included revenue recorded for health care costs for the provision of services to our members, including paid claims and estimated incurred but not reported claims (“IBNR”) expenses for which we were at risk, and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care. The administrative services component encompassed fees 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 with the government. Government Contracts revenue and expenses included the impact from underruns and overruns relative to our target cost under the applicable contracts.We measure our Northeast Operations segment profitability based on pretax income. The pretax income is calculated as Northeast Operations segment total revenues, including Northeast administrative services fees, less Northeast segment total expenses, including Northeast administrative services expenses. Under the United Administrative Services Agreements, which terminated on July 1, 2011, we provided claims processing, customer services, medical management, provider network access and other administrative services to United and certain of its affiliates. Administrative services fees were recognized as revenue in the period services are provided. Upon the termination of the United Administrative Services Agreements, we entered into Claims Servicing Agreements with United and certain of its affiliates pursuant to which we will continue to adjudicate run out claims and perform limited other administrative services. For additional information on the United Administrative Services Agreements and the Claims Servicing Agreements, see Note 2 to our consolidated financial statements under the heading “Subsequent Accounting for the Northeast Sale.” See “—Results of Operations—Northeast Operations Reportable Segment Results” for a calculation of our pretax income.Health Care Reform LegislationDuring the first quarter of 2010, the President signed into law both the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), which is causing and will continue to cause significant changes to the U.S. health care system and alter the dynamics of the health care insurance industry. The provisions of the new legislation include, among others, imposing significant new taxes and fees on health insurers, including an excise tax on high premium insurance policies, stipulating a minimum medical loss ratio (as defined by the National Association of Insurance Commissioners (“NAIC”) and adopted by the Secretary of the U.S. Department of Health and Human Services (“HHS”)), new annual fees on companies in our industry which may not be deductible for income tax purposes, limiting Medicare Advantage payment rates, mandated additional benefits, elimination of medical underwriting for medical insurance coverage decisions, or “guaranteed issue,” increased restrictions on rescinding coverage, prohibitions on some annual and all lifetime limits on amounts paid on behalf of or to our members, requirements that limit the ability of health plans to vary premiums based on assessments of underlying risk, limitations on the amount of compensation paid to health insurance executives that is tax deductible, additional regulations governing premium rate increase requests, requirements that individuals obtain coverage and the creation of government controlled “exchanges” where individuals and small business groups may purchase health coverage.Some provisions of the health care reform legislation became effective in 2010, including those that increase the restrictions on rescinding coverage, those that bar health insurance companies from placing lifetime limits on “essential benefits,” which are only partially defined, those that prohibit annual limits below specified caps for essential benefits for some benefit plans and those that require health plans to cover certain out-of-network services with no additional co-pay to their enrollees. Some provisions that significantly increase federal regulation of the handling of appeals and grievances were to become effective in 2010, but enforcement of some of the provisions was postponed until July 1, 2011 and a subset of those again until January 1, 2012. Some of the potentially more significant changes, including the annual fees on health insurance companies, the excise tax on high premium insurance policies, the guaranteed issue requirements, the requirement that individuals obtain coverage, and the creation of exchanges, as described above, do not become effective until 2014 or later. Implementation of other provisions generally varies from as early as enactment or six months from the date of enactment to as late as 2018. In advance of the September 2010 federal implementation date, we voluntarily provided the option of continuing coverage for adult dependents up to age 26 who are currently enrolled on their parents’ health care policies. In addition, we reaffirmed our existing policy against rescinding members without approval from an external third-party reviewer, which has been in effect since 2007.Various aspects of the health care reform legislation could have an adverse impact on our revenues enrollment and premium growth in certain products and market segments and the cost of operating our business. For example, the new legislation will lower the rates of Medicare payments we receive, may make it more difficult for us to attract and retain members, increase the amount of certain taxes and fees we pay, impose a sales tax on medical device manufacturers and increase the amount of fees pharmaceutical manufacturers pay (both of which in turn could increaseour medical costs), require rebates related to minimum medical loss ratios and require premium rate review. We could also face additional competition as competitors seize on opportunities to expand their business asnew legislation, though there remains considerable uncertainty about the impactaward of these changes on the health insurance market as a whole and what actions our competitors could take. The response of other companies to the ACA and related adjustments to their offerings, if any, could cause meaningful disruption in the local health care markets. For example, companies could modify their product features or benefits, change their pricing, adjust their mix of business or even exit segments of the market. Companies could also seek to adjust their operating costs to support reduced premiums by making changes to their distribution arrangements or decreasing spending on non-medical product features and services. Because of the magnitude, scope and complexity of the new legislation, we also need to dedicate substantial resources and incur material expenses to implement the new legislation, including implementing the current and future regulations that will provide guidance and clarification on important parts of the legislation. Any delay or failure by us to execute our operational and strategic initiatives with respect to health care reform or otherwise appropriately react to the new legislation and implementing regulations could result in operational disruptions, disputes with our providers or members, regulatory issues, damage to our existing or potential member relationships or other adverse consequences. Moreover, there are numerous steps required to implement this new legislation, with clarifying regulations and other guidance expected over several years.New guidance on certain other provisions of the federal reform legislation has been issued (for example, guidance relating to guaranteed issuance of coverage to children under age 19, coverage for preventive health services without cost-sharing, lifetime and annual limits, rescissions and patient protections and most recently on rate review of unreasonable rates), but we are still awaiting further final guidance on a number of key topics such as essential benefits, the application of the health insurer fee, and federal criteria for participation in state-based exchanges (Notices of Proposed Rulemaking were issued by HHS on July 15, 2011 regarding the establishment of exchanges and standards for states related to reinsurance, risk corridors and risk adjustment) among others. On April 7, 2011, HHS released proposed new rules under the ACA on Accountable Care Organizations (“ACOs”) and the Medicare Shared Savings Program. These new rules are intended to create incentives for health care providers to work together to treat an individual across different care settings. The impact of these new rules on the healthcare market and the role to be played by health plans in the creation and operation of ACOs remains to be determined. Though the federal government has issued interim final regulations, there remains considerable uncertainty around the ultimate requirements of the legislation, as the interim final regulations are sometimes unclear or incomplete, and are subject to further change. The federal government has also issued additional forms of “guidance” that may not be consistent with the interim final regulations. As a result, many of the impacts of health care reform will not be known for certain until the ultimate requirements of the legislation have been definitively determined.In addition to new federal regulations, various health insurance reform proposals are also emerging at the state level. Many of the states in which we operate are already implementing parts of the federal health care reform and many states have added new requirements that exceed the federal health care reform requirements, such as prior approval of rates. Some states have passed legislation or are considering proposals to establish an insurance exchange within the state to comply with provisions of the health care reform legislation that become effective in 2014. For example, California recently passed legislation establishing a state-based insurance exchange and authorizing an oversight board to negotiate the price of plans sold on the insurance exchange. This could increase the pressure on us to contain our premium prices and thereby could negatively impact our revenues and profitability. This legislation also could increase the competition we face from companies that have lower health care or administrative costs than we do and therefore can price their premiums at lower levels than we can. California is the first state to adopt such a structure for a state-based insurance exchange in response to the ACA. If other states in which we operate adopt a similar format for their exchanges, that could further increase the competition that we face and the pressure on us to contain our premiums. At least some states and possibly the federal government may condition health carrier participation in an exchange on a number of factors, which could mean that some carriers would be excluded from participation. In addition, legislation under consideration in California (“SB 703”) would create a Basic Health Plan (“BHP”), which is authorized, but not required by the ACA, and would be administered by the Managed Risk Medical Insurance Board. If this legislation is enacted in its current form, individuals with incomes between 133% and 200% of the federal poverty limit would be required to enroll in the BHP and wouldreceive a premium subsidy from the federal government. Federal law prohibits states with a BHP from allowing these individuals to enroll in the state exchanges, so the number of individuals eligible for the exchange would be reduced by the number of individuals receiving coverage in the BHP. We are evaluating the potential impact of a BHP in California on us should SB 703 be signed into law. Even in cases where state action is limited to implementing federal reforms, new or amended state laws will be required in many cases. States also may disagree in their interpretations of the federal statute and regulations, and state “guidance” that is issued could be unclear or untimely. The interaction of new federal regulations and the implementation efforts of the various states in which we do business will create substantial uncertainty for us and other health insurance companies about the requirements under which we must operate.Adding to the uncertainty, there also have been Congressional and legal challenges to federal health care reform that, if ultimately successful, could result in changes to the existing legislation or the repeal of ACA in its entirety. In early 2011, a majority of the U.S. House of Representatives voted in favor of repealing the federal health care reform legislation. A similar proposal was voted on by the U.S. Senate, but failed by a vote of 47 to 51. Most of the bills proposed to repeal or replace certain provisions of ACA do not have bipartisan and bicameral support, and are not expected to be signed into law by the current President. However, earlier this year the President signed legislation that repeals the ACA provision which would have required businesses to file 1099 tax forms for purchases over $600. The President also signed legislation to eliminate $2.2 billion of the $6 billion in start-up funding that the ACA provided to support the launch of health insurance cooperatives, and Congress may also withhold the funding necessary to implement the ACA. In addition, some recent U.S. District Court cases have found that all or part of ACA is unconstitutional. For example, in December 2010, the U.S. District Court for the Eastern District of Virginia ruled that ACA’s mandate that U.S. citizens purchase health insurance, or the individual mandate, is unconstitutional. In January 2011, the U.S. District Court for the Northern District of Florida found the individual mandate provision unconstitutional and declared the entire statute to be invalid. On the other hand, other U.S. District Courts have upheld the law. On June 29, 2011, the Sixth Circuit Court of Appeals upheld the constitutionality of the individual mandate provision. It is expected that the constitutionality of the individual mandate and ACA itself will be ultimately decided by the U.S. Supreme Court. Additionally, in California, the ongoing state budget deficits continue to threaten funding for the current Medicaid program and Children’s Health Insurance Program, and the future expansion of these programs authorized by federal health care reform is uncertain.Due to the unsettled nature of these reforms and the numerous steps required to implement them, we cannot predict how future regulations and laws, including state laws, implementing the new legislation will impact our business. As a result, although we continue to evaluate the impacts of the new legislation, it could have a material adverse effect on our business, financial condition and results of operations.In addition, federal and state governmental authorities also are considering additional legislation and regulations that could negatively impact us. Among other potential new laws and regulations, state regulators are considering new requirements that would restrict our ability to implement changes to our premium rates. On May 19, 2011, HHS issued a final rule providing that HHS will perform rate reviews for states that are determined by HHS not to have an “effective review process”, in place for proposed premium rate increases. Anzona is one of the states determined by HHS not to have “effective review processes” currently in place. These changes could, among other things, lower the amount of premium increases we receive or extend the amount of time that it takes for us to obtain regulatory approval to implement increases in our premium rates. In addition, state regulators could impose standards that are more stringent than those required under the ACA. For example, earlier this year, the California Department of Insurance passed emergency regulations requiring immediate compliance with the ACA minimum medical loss ratio requirements. Also, many states may continue to consider legislation to extend coverage to the uninsured through Medicaid expansions, mandate minimum medical loss ratios, implement rate reforms and enact benefit mandates that go beyond essential benefits. We cannot predict whether additional legislation or regulations will be enacted at the federal and state levels, and if they are, what provisions they will contain or what effect they will have on us. As a result, additional federal and state legislation and regulations could have a material adverse effect on our business, cash flows, financial condition and results of operations.Recent DevelopmentsIn November 2010, CMS imposed sanctions against us suspending the marketing to and enrollment of new members into all of our Medicare Advantage and stand-alone Prescription Drug Plan (“PDP”) products. These sanctions related to our compliance with certain Medicare rules and regulations. On August 1, 2011, CMS lifted its marketing and enrollment sanctions against us. We have resumed marketing of our Medicare Advantage and stand-alone PDP products and are enrolling beneficiaries with effective dates beginning September 1, 2011. We will participate in the upcoming annual enrollment period, which begins October 15, 2011 for January 1, 2012 enrollment. CMS continues to prohibit our stand-alone PDP products from receiving auto-assignment of low income subsidy (LIS) eligible Medicare beneficiaries under CMS’ LIS auto-assignment process. However, LIS members can make their own choice to enroll in our products during the upcoming annual enrollment period, or in the month they become eligible for PDP coverage.RESULTS OF OPERATIONSConsolidated ResultsThe table below and the discussion that follows summarize our results of operations for the three and six months ended June 30, 2011 and 2010. Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in thousands, except per share data) $ 2,566,719 $ 2,507,318 $ 5,179,103 $ 5,034,825 171,015 851,939 1,046,142 1,661,398 25,091 16,567 48,926 36,489 2,084 1,837 4,805 10,693 11,021 59,301 23,470 109,661 2,775,930 3,436,962 6,302,446 6,853,066 2,231,278 2,163,191 4,513,612 4,374,447 130,828 811,386 952,980 1,583,288 219,029 237,378 645,390 484,474 57,571 56,574 118,262 115,405 8,953 8,466 17,781 17,129 8,238 8,761 15,858 18,645 37,825 71,951 90,080 153,829 (6,283 ) (8,171 ) (41,137 ) (8,171 ) 0 6,000 0 6,000 0 3,532 0 3,532 2,687,439 3,359,068 6,312,826 6,748,578 88,491 77,894 (10,380 ) 104,488 30,191 32,828 39,515 �� 43,332 $ 58,300 $ 45,066 $ (49,895 ) $ 61,156 $ 0.64 $ 0.46 $ (0.54 ) $ 0.61 $ 0.63 $ 0.45 $ (0.54 ) $ 0.61 For the three and six months ended June 30, 2011, we reported net income of $58.3 million or $0.63 per diluted share and a net loss of $(49.9) million or $(0.54) per share, respectively, as compared to net income of $45.1 million or $0.45 per diluted share and $61.2 million or $0.61 per diluted share, respectively, for the same periods in 2010. Pretax margins were 3.2 percent and (0.2) percent for the three and six months ended June 30, 2011, respectively, compared to 2.3 percent and 1.5 percent for the same periods in 2010, respectively.Our total revenues decreased 19.2 percent in the three months ended June 30, 2011 to $2.8 billion from $3.4 billion in the same period in 2010 and decreased 8.0 percent in the six months ended June 30, 2011 to $6.3 billion from $6.9 billion in the same period in 2010. Health plan services premium revenues increased by approximately 2.4 percent to $2.6 billion and by approximately 2.9 percent to $5.2 billion in the three and six months ended June 30, 2011, respectively, compared with $2.5 billion and $5.0 billion in the three and six months ended June 30, 2010, respectively. Health plan services expenses were $2.2 billion in the three months ended June 30, 2011 and 2010. Health plan services expenses increased from $4.4 billion in the six months ended June 30, 2010 to $4.5 billion in the six months ended June 30, 2011. Investment income increased to $25.1 million and $48.9 million in the three and six months ended June 30, 2011, respectively, compared with $16.6 million and $36.5 million in the three and six months ended June 30, 2010, respectively.Our Government Contracts revenues decreased by approximately 79.9 percent in the three months ended June 30, 2011 to $171.0 million from $851.9 million in the same period of 2010, and by approximately 37.0 percent in the six months ended June 30, 2011 to $1,046.1 million from $1,661.4 million in the same period of 2010. The decline in our Government contracts revenue is due to our new T-3 contract for the TRICARE North Region that commenced on April 1, 2011. For additional information on our T-3 contract, see “—Government Contracts Reportable Segment.”Our operating results for the six months ended June 30, 2011 were impacted by a $181 million pretax, or $158 million after-tax, charge incurred as a result of the Louisiana Supreme Court’s decision rendered on April 1, 2011 in connection with the AmCareco litigation. See Note 8 to our consolidated financial statements for additional information regarding the AmCareco litigation and the Louisiana Supreme Court’s decision. These charges were recorded as part of our G&A expenses. In addition, our operating results for the three and six months ended June 30, 2011 were impacted by a $6.3 million and $41.1 million, respectively, favorable adjustment to loss on sale of Northeast health plan subsidiaries, partially offset by pretax costs of $2.4 million and $13.4 million, respectively, related to our cost management initiatives.Our operating results for the three and six months ended June 30, 2010 were impacted by $33.9 million and $48.4 million, respectively, in pretax costs related to our operations strategy, other cost management initiatives and early debt extinguishment and termination of a related interest rate swap, reduced by a $21.6 million benefit from a litigation reserve true-up in the three and six months ended June 30, 2010. See “—Corporate/Other” for further discussion on these charges.Days Claims PayableDays claims payable (“DCP”) for the second quarter of 2011 was 36.7 days compared with 39.3 days in the second quarter of 2010. On an adjusted basis (adjusting to exclude capitation, provider and other claim settlements and Medicare Advantage-Prescription Drug (“MAPD”) and stand-alone PDP payables/costs), DCP in the second quarter of 2011 was 52.0 days compared with 53.6 days in the second quarter of 2010. Set forth below is a reconciliation of adjusted DCP, a non-GAAP financial measure, to the comparable GAAP financial measure, DCP.DCP is calculated by dividing the amount of reserve for claims and other settlements (“Claims Reserve”) by health plan services cost (“Health Plan Costs”) during the quarter and multiplying that amount by the number of days in the quarter. The following table presents an adjusted DCP metric which subtracts capitation, provider and other claim settlements and MAPD and stand-alone PDP payables/costs from the Claims Reserve and Health Plan Costs. Management believes that adjusted DCP provides useful information to investors because theadjusted DCP calculation excludes from both Claims Reserve and Health Plan Costs amounts related to health care costs for which no or minimal reserves are maintained. Therefore, management believes that adjusted DCP may present a more accurate reflection of DCP calculated from claims-based reserves than does GAAP DCP, which includes such costs. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future. Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Three Months Ended
June 30, 2011 2010 (Dollars in millions) $ 900.7 $ 934.9 (121.0 ) (155.6 ) $ 779.7 $ 779.3 $ 2,231.3 $ 2,163.2 (867.8 ) (839.0 ) $ 1,363.5 $ 1,324.2 91 91 36.7 39.3 52.0 53.6 Income Tax ProvisionOur income tax expense and the effective income tax rate for the three and six months ended June 30, 2011 and 2010 are as follows: Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in millions) $ 30.2 $ 32.8 $ 39.5 $ 43.3 34.1 % 42.1 % (380.7 %) 41.5 % The effective income tax rate differs from the statutory federal tax rate of 35% for the three and six months ended June 30, 2011 and June 30, 2010 due to state income taxes and tax-exempt investment income. In addition, during the six months ended June 30, 2011, the effective income tax rate was impacted by the effect of a valuation allowance against deferred tax assets established as a result of the decision rendered in 2011 by the Louisiana Supreme Court in the AmCareco litigation (see Note 8 to our consolidated financial statements). Also, during the three and six months ended June 30, 2010, the effective income tax rate included an adjustment for the impairment of non-deductible goodwill that did not recur in the same periods in 2011.Western Region Operations Reportable SegmentOur Western Region Operations segment includes the operations of our commercial, Medicare and Medicaid health plans, the operations of our health and life insurance companies primarily in California, Arizona, Oregon and Washington and our behavioral health and pharmaceutical services subsidiaries in several states including Arizona, California and Oregon.Western Region Operations Segment Membership (in thousands) June 30,
2011 June 30,
2010 Increase/
(Decrease) %
Change 834 836 (2 ) (0.2 )% 328 355 (27 ) (7.6 )% 1,162 1,191 (29 ) (2.4 )% 0 5 (5 ) (100.0 )% 1,162 1,196 (34 ) (2.8 )% 125 132 (7 ) (5.3 )% 963 877 86 9.8 % 2,250 2,205 45 2.0 % 75 53 22 41.5 % 56 39 17 43.6 % 131 92 39 42.4 % 41 49 (8 ) (16.3 )% 172 141 31 22.0 % 49 52 (3 ) (5.8 )% 42 47 (5 ) (10.6 )% 91 99 (8 ) (8.1 )% 39 38 1 2.6 % 130 137 (7 ) (5.1 )% 958 941 17 1.8 % 426 441 (15 ) (3.4 )% 1,384 1,382 2 0.1 % 0 5 (5 ) (100.0 )% 1,384 1,387 (3 ) (0.2 )% 205 219 (14 ) (6.4 )% 963 877 86 9.8 % 389 434 (45 ) (10.4 )% 2,941 2,917 24 0.8 % Total Western Region Operations enrollment at June 30, 2011 was approximately 2.9 million members, an increase of 0.8 percent compared with enrollment at June 30, 2010. Total enrollment in our California health plans increased by 2.0 percent to approximately 2.3 million members from June 30, 2010 to June 30, 2011.Western Region Operations commercial enrollment was flat at approximately 1.4 million members as of June 30, 2010 and 2011. Enrollment in our large group segment increased by 1.8 percent or 17,000 members to 958,000 members at June 30, 2011. Enrollment in our small group and individual segment in the Western Region Operations decreased by 3.4 percent, from 441,000 members at June 30, 2010 to 426,000 members at June 30, 2011, consistent with the overall weak employment levels Membership in an tailored network products increased by 48.2 percent, or 137,000 members, from June 30, 2010 to June 30, 2011. As of June 30, 2011, tailored network products accounted for 31 percent of our Western Region Operations commercial enrollment compared with 21 percent at June 30, 2010. For additional information on our tailored network products, see Part I, Item 1. Business—Segment Information—Western Region Operations Segment—Managed Health Care Operations of the Form 10-K.Enrollment in our Medicare Advantage plans in the Western Region Operations at June 30, 2011 was 205,000 members, a decrease of 6.4 percent compared with June 30, 2010. The decline in Medicare Advantage membership was due to a loss of 8,000 members in Arizona and 7,000 members in California, partially offset by a gain of 1,000 members in Oregon. Membership in our stand-alone Medicare PDP products was 389,000 at June 30, 2011, a 10.4 percent decrease compared with June 30, 2010. This decline in Medicare membership was primarily driven by sanctions imposed against us by CMS.In November 2010, CMS imposed sanctions against us suspending the marketing to and enrollment of new members into all of our Medicare Advantage and stand-alone PDP products. These sanctions related to our compliance with certain Medicare rules and regulations. On August 1, 2011, CMS lifted the sanctions, and we resumed marketing our Medicare Advantage and stand-alone PDP products and enrolling beneficiaries with effective dates on or after September 1, 2011. While we could not enroll new members into these products until CMS lifted these sanctions, the enrollment status of our existing members, including Medicare Advantage and stand-alone PDP members, was not impacted by the sanctions. During the period of the sanctions, we continued to provide benefits to and serve our existing Medicare Advantage and stand-alone PDP members. Our stand-alone PDP products are offered in 49 states and the District of Columbia.We participate in the state Medicaid program in California, where the program is known as Medi-Cal. Medi-Cal enrollment increased by 86,000 members or 9.8 percent to 963,000 members as of June 30, 2011 compared with June 30, 2010. We attribute the increase in Medicaid enrollment to an increase in the Medicaid-eligible population due to continuing high unemployment and depressed economic conditions.Our subsidiary, Health Net of California, Inc. (“HN California”), participates in the Children’s Health Insurance Program (“CHIP”), which, in California, is known as the Healthy Families program. Commencing with the 2011-12 Healthy Families benefit year that starts October 1, 2011, HN California will no longer be offering the Healthy Families EPO product. As a result, approximately 1,500 Healthy Families EPO members will transition to other carriers in the counties we serve with this product. In addition, the HN California will no longer be offering the Healthy Families HMO in Marin County, California, resulting in approximately 580 members being transitioned to other carriers.Western Region Operations Segment ResultsThe following table summarizes the operating results for our Western Region Operations segment for the three and six months ended June 30, 2011 and June 30, 2010: Three Months Ended June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in thousands, except PMPM data) $ 2,566,393 $ 2,484,282 $ 5,176,773 $ 4,986,640 10,428 12,296 21,904 25,019 14,653 4,028 26,951 10,882 2,084 7,275 4,805 16,107 2,593,558 2,507,881 5,230,433 5,038,648 2,231,738 2,164,164 4,513,174 4,354,057 214,779 212,699 456,735 436,576 57,503 55,750 118,090 113,475 8,947 8,448 17,769 17,069 8,053 8,761 15,673 18,645 2,521,020 2,449,822 5,121,441 4,939,822 72,538 58,059 108,992 98,826 26,870 21,967 40,346 37,346 $ 45,668 $ 36,092 $ 68,646 $ 61,480 2.8 % 2.3 % 2.1 % 2.0 % 4.7 % 9.3 % 5.2 % 8.8 % $ 356.51 $ 340.38 $ 356.06 $ 338.40 4.0 % 9.1 % 4.5 % 8.7 % $ 305.63 $ 293.81 $ 305.24 $ 292.13 85.7 % 86.3 % 85.7 % 86.3 % 90.9 % 88.5 % 90.0 % 88.3 % 87.4 % 85.9 % 95.2 % 91.8 % 85.2 % 88.5 % 85.1 % 87.7 % 87.0 % 87.1 % 87.2 % 87.3 % 8.4 % 8.5 % 8.8 % 8.7 % 2.2 % 2.2 % 2.3 % 2.3 % (a)MCR is calculated as health plan services cost divided by health plan services premiums revenue.(b)The G&A expense ratio is computed as G&A expenses divided by the sum of health plan services premiums and administrative services fees and other income.(c)The selling costs ratio is computed as selling expenses divided by health plan services premiums revenue.(d)PMPM is calculated based on commercial at-risk member months and excludes ASO member months.(e)MCR is calculated as commercial, Medicare Advantage, Medicare PDP (stand-alone) or Medicaid health care cost divided by commercial, Medicare Advantage, Medicare PDP (stand-alone) or Medicaid premiums, as applicable.RevenuesTotal revenues in the Western Region Operations increased 3.4 percent to $2.6 billion for the three months ended June 30, 2011 and increased 3.8 percent to $5.2 billion for the six months ended June 30, 2011, compared to the same periods in 2010. Health plan services premiums in the Western Region Operations increased 3.3 percent to $2.6 billion for the three months ended June 30, 2011 and increased 3.8 percent to $5.2 billion for the six months ended June 30, 2011, compared to the same periods in 2010.Investment income in the Western Region Operations increased to $25.1 million for the three months ended June 30, 2011 from $16.3 million for the same period in 2010 due to an increase in realized gains. Investment income in the Western Region Operations increased to $48.9 million for the six months ended June 30, 2011 from $35.9 million for the same period in 2010 due to an increase in realized gains.Health Plan Services ExpensesHealth plan services expenses in the Western Region Operations were $2.2 billion and $4.5 billion for the three and six months ended June 30, 2011, respectively, compared to $2.2 billion and $4.4 billion for the three and six months ended June 30, 2010, respectively.Commercial Premium Yield and Health Care Cost TrendsIn the Western Region Operations, commercial premium yields per member per month (“PMPM”) increased by 4.7 percent to approximately $357 during the three months ended June 30, 2011 compared to an increase of 9.3 percent to approximately $340 during the same period of 2010, and increased by 5.2 percent to approximately $356 during the six months ended June 30, 2011 compared to an increase of 8.8 percent to approximately $338 for the same period of 2010.Commercial health care costs PMPM in the Western Region Operations increased by 4.0 percent to approximately $306 during the three months ended June 30, 2011 compared to an increase of 9.1 percent to approximately $294 during the same period of 2010, and increased by 4.5 percent to approximately $305 during the six months ended June 30, 2011 compared to an increase of 8.7 percent to approximately $292 during the same period of 2010.Medical Care RatiosThe health plan services MCR in the Western Region Operations was 87.0 percent and 87.2 percent for the three and six months ended June 30, 2011, respectively, compared with 87.1 and 87.3 percent for the three and six months ended June 30, 2010, respectively.The Western Region Operations commercial MCR was 85.7 percent for the three and six months ended June 30, 2011, compared with 86.3 percent for the three and six months ended June 30, 2010.The Medicare Advantage MCR in the Western Region Operations was 90.9 percent and 90.0 percent for the three and six months ended June 30, 2011, respectively, compared with 88.5 percent and 88.3 percent for the three and six months ended June 30, 2010, respectively. The Medicare PDP (stand-alone) MCR was 87.4 percent and 95.2 percent for the three and six months ended June 30, 2011, respectively, compared with 85.9 percent and 91.8 percent for the same periods in 2010. These increases are due to the adverse effect of limited new member growth.The Medicaid MCR was 85.2 percent and 85.1 percent for the three and six months ended June 30, 2011, respectively, compared with 88.5 percent and 87.7 percent for the three and six months ended June 30, 2010, respectively. These decreases are due to an increase in the premium yield outpacing the increase in the health care cost trend.G&A, Selling and Interest ExpensesG&A expense in the Western Region Operations was $214.8 million and $456.7 million for the three and six months ended June 30, 2011, respectively, compared with $212.7 million and $436.6 million for the three andsix months ended June 30, 2010, respectively. The G&A expense ratio decreased 10 basis points from 8.5 percent for the three months ended June 30, 2010 to 8.4 percent for the three months ended June 30, 2011. The G&A expense ratio increased 10 basis points from 8.7 percent for the six months ended June 30, 2010 to 8.8 percent for the six months ended June 30, 2011.Selling expense in our Western Region Operations was $57.5 million and $118.1 million for the three and six months ended June 30, 2011, respectively, compared with $55.8 million and $113.5 million for the three and six months ended June 30, 2010, respectively. The selling costs ratio was 2.2 percent and 2.3 percent for the three and six months ended June 30, 2011, respectively, compared with 2.2 percent and 2.3 percent for the three and six months ended June 30, 2010, respectively.Interest expense was $8.1 million and $15.7 million for the three and six months ended June 30, 2011, respectively, compared with $8.8 million and $18.6 million for the three and six months ended June 30, 2010, respectively. The decline is due to the retirement of our amortizing financing facility in May 2010 (see “—Liquidity and Capital Resources—Capital Structure—Termination of Amortizing Financing Facility” for additional information), offset by higher borrowings under our revolving credit facility.Government Contracts Reportable SegmentOn April 1, 2011, we began delivery of administrative services under our T-3 contract for the TRICARE North Region. The T-3 contract was awarded to us on May 13, 2010. Under the T-3 contract for the TRICARE NorthSouth Region, we provide administrative services to approximately 3.1 million MHS eligible beneficiaries (active duty personnel and TRICARE/Medicare dual eligible beneficiaries) as of June 30, 2011.Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services including: provider network management, referral management, medical management, disease management, enrollment, customer service, clinical support service, and claims processing. We also provide assistance in the transition into and out of the T-3 contract. These services are structured similar to administrative services only arrangements with fees received in the form of cost plus fixed price and fixed unit price, and contingent fees and payments based on various incentives and penalties. We recognize revenue related to administrative services on a straight line basis over the option period, when the fees become fixed 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 primary obligor for health care services and accordingly, we do not include health care costs and related reimbursements in our consolidated statement of operations. The contract also includes various performance-based incentives and penalties. For each of the incentives or penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at each interim date and are legally entitled to in the event of a contract termination.In addition, responsibility for the delivery of services for the Fort Campbell area of Kentucky and Tennessee has beenwas realigned from the TRICARE North Region to the TRICARE South Region, asRegion. This realignment was expected and, as a result, of the recent T-3 contract award for the TRICARE South Region. Consequently, effective April 1, 2012 we will no longer beare responsible for servicing the approximately 105,000120,000 eligible beneficiaries in the Fort Campbell area under our T-3 contract. See Note 2We do not believe the impact of this realignment will be material to our consolidated financial statements under the heading “T-3 TRICARE Contract” for additional information on the T-3 contract.Under our previous TRICARE contract for the North Region, we provided health care services to approximately 3.1 million eligible beneficiaries in the MHS asresults of June 30, 2010. Included in the 3.1 million eligible beneficiaries as of June 30, 2010 were 1.8 million TRICARE eligible beneficiaries for whom we provided health care and administrative services and 1.3 million other MHS eligible beneficiaries for whom we provided administrative services only. As of June 30, 2010, there were approximately 1.5 million TRICARE eligible beneficiaries enrolled in TRICARE Prime under our North Region contract. Our TRICARE North Region contract ended on March 31, 2011.eightseven states covering approximately 20,000 enrollees.and six months ended June 30, 2011March 31, 2012 and 2010: Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in thousands) $ 171,015 $ 851,939 $ 1,046,142 $ 1,661,398 130,802 810,466 948,101 1,581,902 40,213 41,473 98,041 79,496 16,341 17,042 39,730 32,545 $ 23,872 $ 24,431 $ 58,311 $ 46,951 Three Months Ended March 31, 2012 2011 (Dollars in thousands) Government contracts revenues $ 181,362 $ 875,127 Government contracts costs 159,323 817,299 Income from continuing operations before income taxes 22,039 57,828 Income tax provision 8,776 23,389 Income from continuing operations $ 13,263 $ 34,439 $680.9$693.8 million, or 79.979.3 percent, for the three months ended June 30, 2011 and by $615.3 million, or 37.0 percent, for the six months ended June 30, 2011March 31, 2012 as compared to the same periodsperiod in 2010.2011. Government contracts costs decreased by $679.7$658.0 million or 83.980.5 percent for the three months ended June 30, 2011 and by $633.8 million, or 40.1 percent for the six months ended June 30, 2011March 31, 2012 as compared to the same periodsperiod in 2010.2011. These declines were primarily due to the impact of theoperations.Northeastoperations as a result of moving from a risk-based contract to a cost reimbursement plus fixed fee contract.the Northeastour Divested Operations segment for the three and six months ended June 30, 2011 and 2010: Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in thousands) $ 326 $ 23,036 $ 2,330 $ 48,185 10 243 71 588 0 22 0 46 11,021 59,301 23,470 109,661 11,357 82,602 25,871 158,480 (160 ) 20,660 738 42,023 689 687 1,717 9,844 68 824 172 1,930 6 18 12 60 185 0 185 0 37,825 71,951 90,080 153,829 (6,283 ) (8,171 ) (41,137 ) (8,171 ) 0 6,000 0 6,000 32,330 91,969 51,767 205,515 (20,973 ) (9,367 ) (25,896 ) (47,035 ) (11,239 ) (1,343 ) (15,237 ) (16,336 ) $ (9,734 ) $ (8,024 ) $ (10,659 ) $ (30,699 ) The Northeast OperationsServices reportable segment had approximately $11.4 million and $82.6 million in total revenues in the three months ended June 30, 2011 and 2010, respectively, which represent less than 1 percent and approximately 2 percent of our total revenues for the three months ended June 30, 2011March 31, 2012 and 2010, respectively. The Northeast Operations segment had approximately $25.9 million and $158.5 million2011. Three Months Ended March 31, 2012 2011 (Dollars in thousands) Health plan services premiums $ — $ 2,004 Net investment income — 61 Divested operations and services revenue — 12,449 Total revenues — 14,514 Health plan services 126 898 General and administrative 5 1,028 Selling 0 104 Depreciation and amortization 1 6 Divested operations and services expenses 23,096 58,329 Adjustment to loss on sale of Northeast health plan subsidiaries — (34,854) Total expenses 23,228 25,511 Loss from operations before income taxes (23,228) (10,997) Income tax benefit (8,846) (6,172) Net loss $ (14,382 ) $ (4,825 ) total revenuesJanuary 2012 to sell our Medicare PDP business, we reviewed our reportable segments in the six months ended June 30, 2011 and 2010, respectively, which represent less than 1 percent and approximately 2 percentfirst quarter of 2012. For additional information on the sale of our total revenuesMedicare PDP business, see Note 3 to our consolidated financial statements. As a result of our review of the reportable segments, all services provided in connection with divested businesses, including the Northeast Sale and the sale of our Medicare PDP business, are now reported as part of the Divested Operations and Services reportable segment. See Note 4 to our consolidated financial statements for the six months ended June 30, 2011 and 2010, respectively. The Northeast Operations segment had a pretax loss of $(21.0) million and $(25.9) million for the three and six months ended June 30, 2011, respectively, compared to a pretax loss of $(9.4) million and $(47.0) million for the three and six months ended June 30, 2010, respectively. more information regarding our reportable segments.and six months ended June 30,March 31, 2011 were impacted by a $6.3$34.9 million and $41.1 million, respectively, favorable adjustment to loss on sale of our Northeast health plan subsidiaries. Our operating results for the three and six months ended June 30, 2010 were impacted by a $6.0 million goodwill impairment reduced by an $8.2 million adjustment to loss on sale of our Northeast health plan subsidiaries. See Note 23 to our consolidated financial statements for additional information regarding the adjustment to loss on sale of our Northeast health plan subsidiaries.Northeast Operationsfollowing table summarizes the Corporate/Other segment had $0.3 million and $23.0 million of health plan services premiums for the three months ended June 30, 2011March 31, 2012 and 2010, respectively, and $(0.2) million and $20.7 million of health plan services costs for the three months ended June 30, 2011 and 2010, respectively. The Northeast Operations segment had $2.3 million and $48.2 million of health plan services premiums for the six months ended June 30, 2011 and 2010, respectively, and $0.7 million and $42.0 million of health plan services costs for the six months ended June 30, 2011 and 2010, respectively. The revenues and expenses associated with providing services under the United Administrative Services Agreements were $11.0 million and $37.8 million for the three months ended June 30, 2011, respectively, and $59.3 million and $72.0 million for the same period in 2010, and $23.5 million and $90.1 million for the six months ended June 30, 2011, respectively, and $109.7 million and $153.8 million for the same period in 2010, and they are shown separately in the accompanying consolidated statements of operations. The United Administrative Services Agreements terminated effective July 1, 2011, and at that time we entered into Claims Servicing Agreements pursuant to which we will adjudicate run out claims and provide limited other administrative services to United and its affiliates.The decreases in the revenues and expenses in the Northeast Operations segment in 2011 from 2010 reflect the ongoing run-out and wind-down of the Acquired Companies. For additional information on the United Administrative Services Agreements, the Claims Servicing Agreements and the ongoing run out and wind-down of the Acquired Companies, see Note 2 to the consolidated financial statements.Corporate/Other Three Months Ended
June 30, Six Months Ended
June 30, 2011 2010 2011 2010 (Dollars in thousands) $ (300 ) $ (21,633 ) $ (300 ) $ (21,633 ) 26 920 4,879 1,386 3,561 23,992 186,938 38,054 0 8,992 0 8,992 (3,287 ) (12,271 ) (191,517 ) (26,799 ) (1,781 ) (4,838 ) (25,324 ) (10,223 ) $ (1,506 ) $ (7,433 ) $ (166,193 ) $ (16,576 ) Three Months Ended March 31, 2012 2011 (Dollars in thousands) Costs included in health plan services costs $ (5,844 ) $ — Costs included in government contract costs 2,987 4,853 Costs included in G&A 6,467 183,377 Loss from continuing operations before income taxes (3,610 ) (188,230 ) Income tax benefit (1,672 ) (23,543 ) Net loss from continuing operations $ (1,938 ) $ (164,687 ) June 30, 2011March 31, 2012 were impacted primarily by $2.7$9.5 million in pretax costs related to our G&A cost management initiativesreduction efforts and $0.9$0.7 million in additional interest related to the decision rendered in the AmCarecopretax litigation reserve true-ups, partially reduced by a $0.3$6.5 million benefit frominsurance reimbursement related to a litigation reserve true-up.prior class action settlement. Our operating results for the sixthree months ended June 30,March 31, 2011 were impacted by a $181$177.2 million pretax charge related to the decision renderedjudgment in the AmCareco litigation and $13.7$11.0 million in pretax costs related to our cost management initiatives. See Note 89 to our consolidated financial statements for moreadditional information regarding the decision rendered in the AmCareco litigation.Our operating results for the three and six months ended June 30, 2010 were impacted by $33.9 million and $48.4 million, respectively, in pretax costs related to our operations strategy, other cost management initiatives and early debt extinguishment and related interest rate swap termination, reduced by a $21.6 million benefit from a litigation reserve true-up. including our revolving credit facility which matures on June 25, 2012, or otherwise access capital markets for liquidity needs, which could adversely affect our business, financial condition and results of operations. Furthermore, if our customer base experiences cash flow problems and other financial difficulties, it could, in turn, adversely impact membership in our plans. For example, our customers may modify, 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 or 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 receivable that are owed to us. Further, our customers or potential customers may force us to compete more vigorously on factors such as price and service to retain or obtain their business. A significant decline in membership in our plans and the inability of current and/or potential customers to pay their premiums as a result of unfavorable conditions may adversely affect our business, including our revenues, profitability and cash flow.June 30, 2011,March 31, 2012, the fair value of theour investment securities available-for-sale was $1.6 billion.$1.4 billion, all in current investments. We hold high-quality fixed income securities primarily comprised of corporate bonds, mortgage-backed bonds and municipal bonds. We evaluate and determine the classification of our investments based on management’s intent. We also closely monitor the fair values of our investment holdings and regularly evaluate them for other-than-temporary impairments. securities while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining an expected total return on invested funds.“AA-“A+” and “Aa3”“A1” as rated by S&P and/or Moody’s, respectively. At this time, there is no indication of default on interest and/or principal payments under our holdings. We have the ability and current intent to hold to recovery all securities with an unrealized loss position. OurAs of March 31, 2012, our investment portfolio includes $670.9$584.9 million, or 42.6%40.4% of our portfolio holdings, of mortgage-backed and asset-backed securities. The majority of our mortgage-backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our entire asset-backed securities is AA+/Aa1. However, any failure by Fannie Mae or Freddie Mac to honor the obligations under the securities they have issued or guaranteed could cause a significant decline in the value or cash flow of our mortgage-backed securities. Our investment portfolio also includes $483.8included $453.9 million, or 30.7%31.4% of our portfolio holdings of obligations of state and other political subdivisions. Our investment portfolio also includes $9.9subdivisions and $383.3 million, or less than 1%26.5% of our portfolio holdings of auction rate securities (“ARS”). These ARS have long-term nominal maturities for which the interest rates are reset through a dutch auction process every 7, 28 or 35 days. At June 30, 2011, these ARS had at one point or are continuing to experience “failed” auctions. These securities are entirely municipal issues and rates are set at the maximum allowable rate as stipulated in the applicable bond indentures. We continue to receive income on all ARS. If all or any portion of the ARS continue to experience failed auctions, it could take an extended amount of time for us to realize our investments’ recorded value.$3.4$4.2 million as of June 30, 2011,March 31, 2012, and $14.1$4.8 million as of December 31, 2010.2011. Included in the gross unrealized losses as of June 30, 2011March 31, 2012 and December 31, 20102011 are $0 and $1.7$0.3 million, respectively, related to noncurrent investments available-for-sale. We believe that these impairments are temporary and we do not intend to sell these investments. It is not likely that we will be required to sell any security in an unrealized loss position before recovery of its amortized cost basis. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be recorded in future periods. No impairment was recognized during either the three and six months ended June 30, 2011March 31, 2012 or 2010.and for acquisitions and other strategic transactions.transactions and for business expansion opportunities, such as the state of California's dual eligible pilot program. We may elect to raise additional funds for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. Based on the composition and quality of our investment portfolio, our expected ability to liquidate our investment portfolio as needed, and our expected operating and financing cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment. However, continued turbulence in U.S. and international markets and certain costs associated with the implementation of health care reform legislation could adversely affect our liquidity.$181.5$250.6 million as of June 30, 2011March 31, 2012 and $121.0$198.5 million as of December 31, 2010.2011. The receivable from the Department of Health ServicesDHCS related to our California Medicaid business was $71.4$217.0 million as of June 30, 2011March 31, 2012 and $112.3$87.4 million as of December 31, 2010.2011. Our receivable from the DoD relating to our current and prior contracts for the TRICARE contract for the North Region was $334.9were $234.1 million and $234.7 million as of June 30, 2011March 31, 2012 and $266.5 million as of December 31, 2010.2011, respectively. The timing of collection of such receivables is impacted by government audit and negotiation, as well as the budget process, and can extend for periods beyond a year.During the six months ended June 30, 2011, we paid $181 million related to the AmCareco litigation ruling with borrowings from our revolving credit facility. For additional information regarding charges, see “–Results of Operations” above. provided by operating activities for the sixthree months ended June 30, 2011March 31, 2012 compared to the same period in 20102011 is as follows: June 30,
2011 June 30,
2010 Change
2011 over 2010 (Dollars in millions) $ (295.8 ) $ 111.1 $ (406.9 ) March 31, March 31, Change 2012 2011 2012 over 2011 (Dollars in millions) Net cash provided by (used in) operating activities $4.2 $(197.3) $201.5 decreaseincrease of $406.9$201.5 million in operating cash flow is primarily due to the following:181196 million from prepayment by CMS for April 2012 Medicare premiums that we received in payments related to the decision rendered in the AmCareco litigation,$70 million in quarterly net payments to United in accordance with the terms of the Stock Purchase Agreement,A $68Ÿ $102 million decrease in collections of MedicareMedicaid premiums also due to timing,$43 million paid in connection with our transition under the T-3 contractInvesting ActivitiesTRICARE North Region,three months ended March 31, 2012 compared to the same period in 2011 is as follows: March 31, March 31, Change 2012 2011 2012 over 2011 (Dollars in millions) Net cash provided by investing activities $125.8 $21.6 $104.2 $24a $41.0 million decrease in severance payments$26cash received from United for additional consideration related to the Northeast Sale and a $5.0 million collectedincrease in T-3 contract transition fees.InvestingFinancing Activitiesinvestingfinancing activities for the sixthree months ended June 30, 2011March 31, 2012 compared to the same period in 20102011 is as follows: June 30,
2011 June 30,
2010 Change
2011 over 2010 (Dollars in millions) $ 112.8 $ (79.5 ) $ 192.3 March 31, March 31, Change 2012 2011 2012 over 2011 (Dollars in millions) Net cash provided by (used in) financing activities $30.8 $(32.2) $63.0 investingfinancing activities increased by $63.0 millionduring the sixthree months ended June 30, 2011 primarily due to a $154.9 million increase in net sales of investments in available-for-sale securities and a $49.5 million increase in cash received related to the Northeast Sale.Financing ActivitiesOur net cash flow used in financing activities for the six months ended June 30, 2011March 31, 2012 as compared to the same period in 2010 is as follows: June 30,
2011 June 30,
2010 Change
2011 over 2010 (Dollars in millions) $ (0.7 ) $ (288.7 ) $ 288.0 Net cash used in financing activities decreased during the six months ended June 30, 2011 by $288.0 millionprimarily due to a net$94.3 million decrease in share repurchases and a $6.4 million increase in revolving credit facility borrowingsproceeds from the exercise of $185.0 millionstock options and the payment of $116.8 million in connection with the termination of our amortizing financing facility during the six months ended June 30, 2010,employee stock purchases, partially offset by a $16.4$17.6 million increasedecrease in stock repurchases.See “—Capital Structure” below for additional information regarding our share repurchases, our revolving credit facilitycustomer funds administered and the terminationa $24.9 million change in checks outstanding (net of our amortizing financing facility.28.226.4 percent as of June 30, 2011March 31, 2012 compared with 19.026.2 percent as of December 31, 2010.2011. This increase was driven by a decrease in equity resulting from a net loss during the resultfirst quarter of increased borrowings under our revolving credit facility to fund the judgment in the Amcareco litigation.$300$300 million of our common stock could be repurchased. We completed our 2010 stock repurchase program in April 2011. During the three and six months ended June 30,March 31, 2011, we repurchased 1.43.5 million shares and 4.9 million shares, respectively, of our common stock for aggregate consideration of approximately $45.2$104.6 million and $149.8 million, respectively, under our 2010 stock repurchase program. As of June 30, 2011, we had repurchased an aggregate of 10.8 million shares of our common stock underWe completed our 2010 stock repurchase program since its inception in March 2010 at an average price of $27.80 per share for aggregate consideration of $300.0 million.4,2, 2011, our Board of Directors authorized our 2011 stock repurchase program pursuant to which a total of $300$300 million of our outstanding common stock could be repurchased. As of December 31, 2011, the remaining authorization under the 2011 stock repurchase program was $76.3 million. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our 2011 stock repurchase program. During the three months ended June 30, 2011,March 31, 2012, we repurchased 870,000did not repurchase any shares of our common stock for aggregate consideration of approximately $27.1 million under our 2011 stock repurchase program. The remaining authorization under our 2011 stock repurchase program as of June 30, 2011March 31, 2012 was $272.9 million. We used net free cash available, including cash at the parent company, Health Net, Inc., to fund the share repurchases.$400.0 million. For additional information on our 2010 stock repurchase program and 2011 stock repurchase program,programs, see Note 5 of6 to our consolidated financial statements.the Company’sour 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 and local tax withholding and/or exercise price obligations, as applicable, arising from the exercise of stock options. For certain other equity awards, the Company haswe have the right to withhold shares to satisfy any tax obligations for employees that may be required to be withheld or paid in connection with such equity award, including any tax obligation arising on the vesting date. These repurchases were not part of either of our stock repurchase programs.June 30, 2011: Total Number
of Shares
Purchased (a) Average
Price Paid
per Share Total
Price Paid Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs (b), (c) Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Programs (b), (c) 1,211,977 (d) $ 28.31 $ 34,315,821 1,211,720 $ 115,497,448 1,330,412 (d) 29.95 39,847,861 587,890 $ 97,853,713 1,714,865 (d) 30.73 52,705,924 1,713,100 $ 45,203,916 1,401,031 32.26 45,203,895 1,401,031 $ 0 210,000 31.41 6,595,827 210,000 $ 293,404,173 660,083 (d) 31.05 20,493,637 660,000 $ 272,913,180 6,528,368 (d) 30.51 $ 199,162,965 5,783,741 Period January 1—January 31 — $ — $ — — $ 76,341,683 February 1—February 29 488,964 (c) 39.28 19,205,186 — $ 76,341,683 March 1—March 31 857 (c) 38.59 33,072 — $ 400,000,000 489,821 (c) $ 39.28 $ 19,238,258 — (a) During the sixthree months ended June 30, 2011,March 31, 2012, we did not repurchase any shares of our common stock outside our publicly announced stock repurchase program,programs, except shares withheld in connection with our various stock option and long-term incentive plans.(b)On March 18, 2010, our Board of Directors authorized our 2010 stock repurchase program, pursuant to which a total of $300 million of our common stock could be repurchased. The 2010 stock repurchase program was completed in April 2011.(c)(b)On May 4,2, 2011, our Board of Directors authorized our 2011 stock repurchase program, pursuant to which a total of $300 million of our common stock can be repurchased. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our 2011 stock repurchase program. Our 2011 stock repurchase program does not have an expiration date. Accordingly, duringDuring the sixthree months ended June 30, 2011,March 31, 2012, we did not have any repurchase program that expired, or was terminated, other than our 2010 stock repurchase program, and we did not terminate any repurchase program prior to its expiration date.(d)Includes(c) Represents shares withheld by the Company to satisfy tax withholding and/or exercise price obligations arising from the vesting and/or exercise of RSUs,restricted stock units, stock options and other equity awards.Termination of Amortizing FinancingRevolving Credit Facility.On May 26, 2010, we terminated our five-year non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender thatIn October 2011, we entered into on December 19, 2007 by exercising our option to calla $600 million unsecured revolving credit facility due in October 2016, which includes a $400 million sublimit for the facility. We paid a totalissuance of $116.8 million to retire the facility, which included the outstanding balancestandby letters of $113.8 millioncredit and a $3.0$50 million call premium.sublimit for swing line loans (which sublimits may be increased in connection with any increase in the credit facility described below). In addition, we have the ability from time to time to increase the credit facility by up to an additional $200 million in the aggregate, subject to the receipt of additional commitments. We used a combinationutilized proceeds of a $100the initial borrowing on the closing date of this credit facility to refinance our obligations under our previous revolving credit facility. As of March 31, 2012, $112.5 million draw on was outstanding under our revolving credit facility and operating cashthe maximum amount available for borrowing under the revolving credit facility was $427.9 million (see "—Letters of Credit" below).amortizing financingrevolving credit facility.June 30, 2011,March 31, 2012, we were in compliance with all of the covenants under the indenture governing the Senior Notes.giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; orRevolving Credit Facility. We have a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. 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 to time to increase the facility by up to an additional $250 million in the aggregate, subject to the receipt of additional commitments. The revolving credit facility matures on June 25, 2012. Accordingly, the balance outstanding of $185 million as of June 30, 2011 is classified as a current liability.Amounts outstanding under the revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.As of June 30, 2011, we were in compliance with all covenants under our revolving credit facility.We had $185.0 million in outstanding borrowings under the revolving credit facility as of June 30, 2011, and no amounts were outstanding under the revolving credit facility as of December 31, 2010. We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2011 and December 31, 2010, respectively, we had outstanding an aggregate of $60.2 million and $249.1 million in letters of credit. The reduction of approximately $88.1 million in outstanding letters of credit during the quarter ended June 30, 2011 is due to the release of certain letters of credit that had been issued in connection with the AmCareco litigation (see Note 8 to our consolidated financial statements for more information on the AmCareco litigation). As a result, the maximum amount available for borrowing under the revolving credit facility was $654.8 million as of June 30, 2011, and no amount had been drawn on the letters of credit. As of August 3, 2011, we had $245.0 million in borrowings outstanding under our revolving credit facility.
2012. Draw on revolving credit facility (1) Interest on revolving credit facility (1) 10-K. our letters of credit. Completion Factor (a) Health Plan Services in Medical Cost Trend (b) Health Plan Services in 2011.June 30, 2011,March 31, 2012, all of our active health plans and insurance subsidiaries met their respective regulatory requirements relating to maintenance of minimum capital standards, surplus requirements and adequate reserves for claims in all material respects.capital and surplus or net worth. The minimum statutory capital and surplus or 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”) or tangible net equity (“TNE”) requirements. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level (“ACL”), which represents the minimum amount of net worth believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as 200% of the ACL, or the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. Because our regulated subsidiaries are also subject to their state regulators’ overall oversight authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of the RBC requirement, even though RBC has been adopted in their states of domicile. Historically, weWe generally managedmanage our aggregate regulated subsidiary capital above 300%at approximately 400% of ACL, although RBC standards are not yet applicable to all of our regulated subsidiaries. At June 30, 2011, our aggregate regulated subsidiary capital was approximately 400% of ACL. of our California subsidiaries must comply with TNE requirements. Under these Knox-Keene TNE requirements, actual net worth less unsecured receivables and intangible assets must be more than the greater of (i)i) a fixed minimum amount, (ii)ii) a minimum amount based on premiums or (iii)iii) a minimum amount based on health care expenditures, excluding capitated amounts. In addition, certain of our California subsidiaries have made certain undertakings to the Department of Managed Health Care to restrict dividends and loans to affiliates, to the extent that the payment of such would reduce such entities’entities' TNE below 130% of the minimum requirement, or reduce the cash-to-claims ratio below 1:1. At June 30, 2011,March 31, 2012, all of the subsidiaries subject to the TNEsixthree months ended June 30, 2011,March 31, 2012, we made no such capital contributions. In addition, we made no capital contributions to any of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations thereafter through AugustMay 3, 2011.20102011 in our Form 10-K and identified additional significant contractual obligations in our Form 10-Q for10-K. In the quarter ended March 31, 2011.2012, we entered into a five-year agreement for mailing and print services. The total future minimum commitments under the agreement are approximately $19.8 million. See Note 9 to our consolidated financial statements for additional information regarding this agreement. During the three months ended June 30, 2011,March 31, 2012, except for the aforementioned long term purchase obligation, there were no significant changes to our contractual obligations as previously disclosed in our Form 10-K and Form 10-Q, except as follows: July 1, 2011
to December 31,
2011 2012 2013 2014 2015 Thereafter Total (Dollars in Millions) $ 0 $ 185.0 $ 0 $ 0 $ 0 $ 0 $ 185.0 1.1 1.6 0 0 0 0 2.7 (1)See “Liquidity and Capital Resources—Capital Structure—Revolving Credit Facility.”June 30, 2011,March 31, 2012, we did not have anyhad no off-balance sheet arrangements as defined under Regulation S-K Item 303(a)(4) and the instructions thereto. See Note 7 to our consolidated financial statements for a discussion of Regulation S-K.June 30, 2011March 31, 2012 is discussed below. There were no other significant changes to the critical accounting estimates as disclosed in our Form 10-K.
Percentage-point
Increase (Decrease)
in Factor
(Decrease) Increase
Reserves for Claims2% $ (47.6) (49.4) million1% $ (24.3) (25.2) million(1)% $ 25.2 26.2 million(2)% $ 51.4 53.5 million
Percentage-point
Increase (Decrease)
in Factor
Increase (Decrease)
Reserves for Claims2% $ 24.3 25.5 million1% $ 12.1 12.8 million(1)% $ (12.1) (12.8) million(2)% $ (24.3) (25.5) million(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an increase in the completion factor percent results in a decrease in the remaining estimated reserves for claims. (b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the most recent three months. Item 3.Quantitative and Qualitative Disclosures About Market Risk.that changes in an issuer’s credit rating or credit perception that may affect the value of financial instruments. We believe that no material changes to any of these risks have occurred since December 31, 2010.Item 4.Controls and Procedures.sixthree months ended June 30, 2011March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Item 1. Legal Proceedings. 89 to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.Item 1A.Risk FactorsIn addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors of the Form 10-K, as updated by our quarterly report on Form 10-Q for the quarter ended March 31, 2011, which could materially affect our business, financial condition, results of operations or future results. The risks described in the Form 10-K, as updated by our quarterly report on Form 10-Q for the quarter ended March 31, 2011, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, cash flows, financial condition and/or results of operations. During the quarter ended June 30, 2011, there were no material changes to the risk factors disclosed in our Form 10-K, as updated by our quarterly report on Form 10-Q for the quarter ended March 31, 2011.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. March 18, 2010,May 2, 2011, our Board of Directors authorized our 20102011 stock repurchase program pursuant to which a total of $300 million of our outstanding common stock could be repurchased. Our 2010As of December 31, 2011, the remaining authorization under the 2011 stock repurchase program was completed in April 2011.$76.3 million. On May 4, 2011,March 8, 2012, our Board of Directors authorizedapproved a $323.7 million increase to our 2011 stock repurchase program forprogram. Including the additional $323.7 million in newly authorized repurchase of up to $300 million of our outstanding common stock. Theauthority, the remaining authorization under our 2011 stock repurchase program as of June 30, 2011March 31, 2012 was $272.9 million.$400.0 million.2010 and 2011 stock repurchase programsprogram and tabular disclosure of the information required under this Item 2 is contained in Note 56 to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q and in Part I— “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure—Share Repurchases.”Item 3. Defaults Upon Senior Securities. Item 4. [Removed and Reserved.]Mine Safety Disclosures.Item 5. Other Information. Item 6.ExhibitsExhibitNumberDescription 3.1Seventh Amended and Restated Certificate of Incorporation of Health Net, Inc., a copy of which is filed herewith. 31.1 †10.1 Amendment No. 1 to Asset Purchase Agreement, dated as of March 31, 2012, by and between Health Net Life Insurance Company and Pennsylvania Life Insurance Company. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith. **101 The following materials from Health Net, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011,March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Statements of Operations for the Three and Six Months Ended June 30,March 31, 2012 and 2011, (2) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2010, (2)2011, (3) Consolidated Balance Sheets as of June 30, 2011March 31, 2012 and December 31, 2010, (3)2011, (4) Consolidated Statements of Stockholders’ Equity for the SixThree Months Ended June 30,March 31, 2012 and 2011, and 2010, (4)(5) Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2012 and 2011 and 2010 and (5)(6) Condensed Notes to Consolidated Financial Statements.** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files referenced in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.† Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission. Date: May 9, 2012 By: /s/ JOSEPH C. CAPEZZA HEALTH NET, INC.(REGISTRANT)Joseph C. Capezza Date: August 8, 2011 By:/s/ JOSEPH C. CAPEZZA Joseph C. CapezzaExecutive Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Accounting OfficerEXHIBIT INDEXFinancial Officer) ExhibitNumber DescriptionDate: May 9, 2012 By: /s/ MARIE MONTGOMERY 3.1 Seventh AmendedMarie Montgomery Senior Vice President and Restated Certificate of Incorporation of Health Net, Inc., a copy of which is filed herewith.Corporate Controller (Principal Accounting Officer) 31.1 †10.1 Amendment No. 1 to Asset Purchase Agreement, dated as of March 31, 2012, by and between Health Net Life Insurance Company and Pennsylvania Life Insurance Company. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith. **101 The following materials from Health Net, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011,March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Statements of Operations for the Three and Six Months Ended June 30,March 31, 2012 and 2011, (2) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2010, (2)2011, (3) Consolidated Balance Sheets as of June 30, 2011March 31, 2012 and December 31, 2010, (3)2011, (4) Consolidated Statements of Stockholders’ Equity for the SixThree Months Ended June 30,March 31, 2012 and 2011, and 2010, (4)(5) Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2012 and 2011 and 2010 and (5)(6) Condensed Notes to Consolidated Financial Statements.** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files referenced in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.† Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.