Health Net 10Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

____________________

FORM 10-Q

____________________

(Mark One)


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-12718

____________________

HEALTH NET, INC.

(Exact name of registrant as specified in its charter)

____________________



Delaware	95-4288333
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
21650 Oxnard Street, Woodland Hills, CA	91367
(Address of principal executive offices)	(Zip Code)

(818) 676-6000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

____________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



x	Large accelerated filer	o	Accelerated filer	o	Non-accelerated filer	o	Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

The number of shares outstanding of the registrant’s Common Stock as of July 23, 2013 was 79,398,166 (excluding 70,655,140 shares held as treasury stock).

HEALTH NET, INC.

INDEX TO FORM 10-Q




	Page
Part I—FINANCIAL INFORMATION
Item 1—Financial Statements (Unaudited)	3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012	3
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012	4
Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012	5
Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2013 and 2012	6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	7
Condensed Notes to Consolidated Financial Statements	8
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3—Quantitative and Qualitative Disclosures About Market Risk	59
Item 4—Controls and Procedures	59
Part II—OTHER INFORMATION
Item 1—Legal Proceedings	60
Item 1A—Risk Factors	60
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3—Defaults Upon Senior Securities	60
Item 4—Mine Safety Disclosures	60
Item 5—Other Information	60
Item 6—Exhibits	61
Signatures	62

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)



	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Revenues
Health plan services premiums	$	2,578,874	$	2,618,927	$	5,210,943	$	5,239,876
Government contracts	139,942		176,248		274,454		357,610
Net investment income	17,143		24,697		46,694		47,001
Administrative services fees and other income	2,472		8,662		3,377		14,446
Divested operations and services revenue	—		12,805		—		12,805
Total revenues	2,738,431		2,841,339		5,535,468		5,671,738
Expenses
Health plan services (excluding depreciation and amortization)	2,191,918		2,358,455		4,460,654		4,702,114
Government contracts	127,400		153,406		252,875		315,716
General and administrative	291,437		228,756		536,672		466,032
Selling	57,769		58,390		116,330		119,951
Depreciation and amortization	9,514		7,385		18,953		14,815
Interest	8,365		8,246		16,653		16,874
Divested operations and services expenses	—		19,290		—		42,386
Total expenses	2,686,403		2,833,928		5,402,137		5,677,888
Income (loss) from continuing operations before income taxes	52,028		7,411		133,331		(6,150		)
Income tax provision (benefit)	18,545		2,241		49,798		(3,186		)
Income (loss) from continuing operations	33,483		5,170		83,533		(2,964		)
Discontinued operations:
Loss from discontinued operation, net of tax	—		—		—		(18,452		)
Gain on sale of discontinued operation, net of tax	—		119,440		—		119,440
Income on discontinued operation, net of tax	—		119,440		—		100,988
Net income	$	33,483	$	124,610	$	83,533	$	98,024

Net income per share—basic:
Income (loss) from continuing operations	$	0.42	$	0.06	$	1.05	$	(0.04	)
Income on discontinued operation, net of tax	$	—	$	1.44	$	—	$	1.22
Net income per share—basic	$	0.42	$	1.50	$	1.05	$	1.18

Net income per share—diluted:
Income (loss) from continuing operations	$	0.42	$	0.06	$	1.04	$	(0.04	)
Income on discontinued operation, net of tax	$	—	$	1.42	$	—	$	1.20
Net income per share—diluted	$	0.42	$	1.48	$	1.04	$	1.16

Weighted average shares outstanding:
Basic	79,367		83,255		79,438		82,882
Diluted	80,085		84,037		80,287		84,160

See accompanying condensed notes to consolidated financial statements.

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)



	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net income	$	33,483		$	124,610		$	83,533		$	98,024
Other comprehensive (loss) income before tax:
Unrealized (losses) gains on investments available-for-sale:
Unrealized holding (losses) gains arising during the period	(65,763		)	20,663			(74,853		)	27,572
Less: Reclassification adjustments for gains included in earnings	(5,647		)	(12,431		)	(22,936		)	(25,389		)
Unrealized (losses) gains on investments available-for-sale, net	(71,410		)	8,232			(97,789		)	2,183
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	643			1,038			1,286			2,076
Defined benefit pension plans, net	643			1,038			1,286			2,076
Other comprehensive (loss) income before tax	(70,767		)	9,270			(96,503		)	4,259
Income tax (benefit) expense related to components of other comprehensive income	(24,882		)	12,814			(33,910		)	13,215
Other comprehensive loss, net of tax	(45,885		)	(3,544		)	(62,593		)	(8,956		)
Comprehensive (loss) income	$	(12,402	)	$	121,066		$	20,940		$	89,068

See accompanying condensed notes to consolidated financial statements.

HEALTH NET, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

(Unaudited)



	June 30,			December 31,
	2013			2012
ASSETS
Current Assets:
Cash and cash equivalents	$	279,618		$	340,110
Investments-available-for-sale (amortized cost: 2013-$1,669,326, 2012-$1,753,931)	1,632,466			1,812,512
Premiums receivable, net of allowance for doubtful accounts (2013-$1,405, 2012-$668)	579,206			373,269
Amounts receivable under government contracts	205,168			228,316
Other receivables	52,283			113,875
Deferred taxes	80,382			51,086
Other assets	119,015			130,796
Total current assets	2,948,138			3,049,964
Property and equipment, net	190,394			183,793
Goodwill	565,886			565,886
Other intangible assets, net	15,556			17,271
Deferred taxes	5,503			13,583
Investments-available-for-sale-noncurrent (amortized cost: 2013-$20,679, 2012-$0)	18,332			—
Other noncurrent assets	137,644			103,893
Total Assets	$	3,881,453		$	3,934,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Reserves for claims and other settlements	$	1,013,086		$	1,037,973
Health care and other costs payable under government contracts	76,231			75,649
Unearned premiums	124,205			151,048
Accounts payable and other liabilities	392,647			373,426
Total current liabilities	1,606,169			1,638,096
Senior notes payable	399,197			399,095
Borrowings under revolving credit facility	125,000			100,000
Other noncurrent liabilities	226,863			240,169
Total Liabilities	2,357,229			2,377,360
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 2013-150,052 shares; 2012-148,727 shares )	150			149
Additional paid-in capital	1,360,749			1,329,000
Treasury common stock, at cost (2013-70,655 shares of common stock; 2012-67,426 shares of common stock)	(2,178,121		)	(2,092,625		)
Retained earnings	2,377,055			2,293,522
Accumulated other comprehensive income	(35,609		)	26,984
Total Stockholders’ Equity	1,524,224			1,557,030
Total Liabilities and Stockholders’ Equity	$	3,881,453		$	3,934,390

See accompanying condensed notes to consolidated financial statements.

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)



	Common Stock			Additional Paid-In Capital			Common Stock Held in Treasury					Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount					Shares		Amount
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 income												98,024					98,024
Other comprehensive loss														(8,956		)	(8,956		)
Exercise of stock options and vesting of restricted stock units	1,877	2		16,587													16,589
Share-based compensation expense				18,067													18,067
Tax benefit related to equity compensation plans				5,313													5,313
Repurchases of common stock							(1,051	)	(33,143		)						(33,143		)
Balance as of June 30, 2012	148,681	$	149	$	1,318,004		(65,898	)	$	(2,056,272	)	$	2,269,483	$	7,676		$	1,539,040
Balance as of January 1, 2013	148,727	$	149	$	1,329,000		(67,426	)	$	(2,092,625	)	$	2,293,522	$	26,984		$	1,557,030
Net income												83,533					83,533
Other comprehensive loss														(62,593		)	(62,593		)
Exercise of stock options and vesting of restricted stock units	1,325	1		16,204													16,205
Share-based compensation expense				16,877													16,877
Tax detriment related to equity compensation plans				(1,332		)											(1,332		)
Repurchases of common stock							(3,229	)	(85,496		)						(85,496		)
Balance as of June 30, 2013	150,052	$	150	$	1,360,749		(70,655	)	$	(2,178,121	)	$	2,377,055	$	(35,609	)	$	1,524,224

See accompanying condensed notes to consolidated financial statements.

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Six months ended June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	83,533		$	98,024
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation	18,953			14,815
Gain on sale of discontinued operation	—			(119,440		)
Share-based compensation expense	16,877			18,067
Deferred income taxes	12,748			9,453
Excess tax benefit on share-based compensation	(430		)	(6,059		)
Net realized (gain) loss on investments	(22,936		)	(25,389		)
Other changes	15,524			7,047
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Premiums receivable and unearned premiums	(232,780		)	27,172
Other current assets, receivables and noncurrent assets	27,481			(52,356		)
Amounts receivable/payable under government contracts	29,051			(20,754		)
Reserves for claims and other settlements	(24,887		)	136,826
Accounts payable and other liabilities	(57,604		)	36,527
Net cash (used in) provided by operating activities	(134,470		)	123,933
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments	573,406			1,015,252
Maturities of investments	51,414			69,100
Purchases of investments	(559,442		)	(1,010,613		)
Purchases of property and equipment	(26,765		)	(37,660		)
Net cash received from sale of business	—			248,238
(Purchases) sales of restricted investments and other	(2,589		)	6,895
Net cash provided by investing activities	36,024			291,212
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases	8,173			16,589
Excess tax benefit on share-based compensation	430			6,059
Repurchases of common stock	(77,464		)	(28,794		)
Borrowings under financing arrangements	323,000			100,000
Repayment of borrowings under financing arrangements	(298,000		)	(122,500		)
Net increase (decrease) in checks outstanding, net of deposits	75,552			—
Customer funds administered	6,263			16,392
Net cash provided by (used in) financing activities	37,954			(12,254		)
Net (decrease) increase in cash and cash equivalents	(60,492		)	402,891
Cash and cash equivalents, beginning of period	340,110			230,253
Cash and cash equivalents, end of period	$	279,618		$	633,144
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid	$	15,499		$	15,626
Income taxes paid	34,006			2,431

See accompanying condensed notes to consolidated financial statements.

HEALTH NET, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	BASIS OF PRESENTATION

Health Net, Inc. prepared the accompanying unaudited consolidated financial statements following the rules and regulations of the Securities and Exchange Commission ("SEC") for interim reporting. In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Company,” “Health Net,” “we,” “us,” and “our” refer to Health Net, Inc. and its subsidiaries. As permitted under those rules and regulations, certain notes or other financial information that are normally required by accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted if they substantially duplicate the disclosures contained in the annual audited financial statements. The accompanying unaudited consolidated financial statements should be read together with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 ("Form 10-K").

We are responsible for the accompanying unaudited consolidated financial statements. These consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results in accordance with GAAP. In accordance with GAAP, we make certain estimates and assumptions that affect the reported amounts. Actual results could differ from those estimates and assumptions. In addition, revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for the full year.

On April 1, 2012, we completed the sale of the business operations of our Medicare stand-alone Prescription Drug Plan business ("Medicare PDP business") to Pennsylvania Life Insurance Company, a subsidiary of CVS Caremark Corporation ("CVS Caremark"). As a result of the sale, the operating results of our Medicare PDP business have been classified as discontinued operations in our consolidated statements of operations for the six months ended June 30, 2012. See Note 3 for more information on the sale of our Medicare PDP business.

2. SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with maturity of three months or less when purchased. We had checks outstanding, net of deposits, of $99.4 million as of June 30, 2013 and $23.8 million as of December 31, 2012. Checks outstanding, net of deposits are classified as accounts payable and other liabilities in the consolidated balance sheets and the changes are reflected in the line item net increase (decrease) in checks outstanding, net of deposits within the cash flows from financing activities in the consolidated statements of cash flows.

Investments

Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method and realized gains and losses are included in net investment income. We analyze all debt investments that have unrealized losses for impairment consideration and assess the intent to sell such securities. If such intent exists, impaired securities are considered other-than-temporarily impaired. Management also assesses if we 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, we assess whether the amortized costs of the securities can be recovered. If management anticipates recovering an amount less than the 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 are recorded through other comprehensive income. During the three and six months ended June 30, 2013 and 2012, respectively, no losses were recognized from other-than-temporary impairments.

Fair Value of Financial Instruments

The estimated fair value amounts of cash equivalents, investments available-for-sale, premiums and other receivables, notes receivable and notes payable have been determined by using available market information and appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the short

maturity of those instruments. Fair values for debt and equity securities are generally based upon quoted market prices. Where quoted market prices were not readily available, fair values were estimated using valuation methodologies based on available and observable market information. Such valuation methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The carrying value of premiums and other receivables, long-term notes receivable and nonmarketable securities approximates the fair value of such financial instruments. The fair value of notes payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt with the same remaining maturities. The fair value of our fixed-rate borrowings was $421.9 million and $424.0 million as of June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, the fair value of our variable-rate borrowings under our revolving credit facility was $125.0 million and $100.0 million, respectively. The fair value of 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 the carrying value because the interest rates paid on these borrowings were based on prevailing market rates. Since the pricing inputs are other than quoted prices and fair value is determined using an income approach, our variable-rate borrowings are classified as a Level 2 in the fair value hierarchy. See Notes 7 and 8 for additional information regarding our financing arrangements and fair value measurements, respectively.

Health Plan Services Health Care Cost

The cost of health care services is recognized in the period in which services are provided and includes an estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to primary care physicians, specialists, hospitals and outpatient care facilities, and the costs associated with managing the extent of such care.

Our health care cost can also include from time to time remediation of certain claims as a result of periodic reviews by various regulatory agencies. We estimate the amount of the provision for health care service costs incurred but not yet reported ("IBNR") in accordance with GAAP and using standard actuarial developmental methodologies based upon historical data including the period between the date services are rendered and the date claims are received and paid, denied claim activity, expected medical cost inflation, seasonality patterns and changes in membership, among other things.

Our IBNR best estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. This provision for adverse deviation is intended to capture the potential adverse development from known environmental factors such as our entry into new geographical markets, changes in our geographic or product mix, the introduction of new customer populations, variation in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment patterns, changes in technology that provide faster access to claims data or change the speed of adjudication and settlement of claims, variability in claim inventory levels, non-standard claim development, and/or exceptional situations that require judgmental adjustments in setting the reserves for claims.

We consistently apply our IBNR estimation methodology from period to period. Our IBNR best estimate is made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are included in the current period. As additional information becomes known to us, we adjust our assumptions accordingly to change our estimate of IBNR. Therefore, if moderately adverse conditions do not occur, evidenced by more complete claims information in the following period, then our prior period estimates will be revised downward, resulting in favorable development. However, any favorable prior period reserve development would increase current period net income only to the extent that the current period provision for adverse deviation is less than the benefit recognized from the prior period favorable development. If moderately adverse conditions occur and are more acute than we estimated, then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease current period net income. For the three and six months ended June 30, 2013, there were no material reserve developments related to prior years. For the three and six months ended June 30, 2012, health care costs were impacted by approximately $7.9 million and $32.9 million, respectively, attributable to the revision of the previous estimate of incurred claims for prior years as a result of adverse prior year development. We believe this unfavorable reserve development for the three and six months ended June 30, 2012 was primarily due to significant delays in claims submissions for the fourth quarter of 2011 arising from issues related to a new billing format required by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") coupled with an unanticipated flattening of commercial trends.

The majority of the IBNR reserve balance held at each quarter-end is associated with the most recent months' incurred services because these are the services for which the fewest claims have been paid. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months' incurred services. Revised estimates for prior periods are determined in each quarter based on the most recent updates of paid claims for prior periods. Estimates for service costs incurred but not yet reported are subject to the impact of changes in the regulatory environment, economic conditions, changes in claims trends, and numerous other factors. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts estimated.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments and premiums receivable. All cash equivalents and investments are managed within established guidelines, which provide us diversity among issuers. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising our customer base. The federal government is the primary customer of our Government Contracts reportable segment with fees and premiums associated with this customer accounting for approximately 95% of our Government Contracts revenue. In addition, the federal government is a significant customer of our Western Region Operations reportable segment as a result of our contract with Centers for Medicare & Medicaid Services ("CMS") for coverage of Medicare-eligible individuals. Furthermore, all of our Medicaid revenue is currently derived from our participation in the state Medicaid program in California ("Medi-Cal") 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.

Comprehensive Income

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

Our accumulated other comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012 is as follows:



	Unrealized Gains (Losses) on investments available-for-sale			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (loss)
Three Months Ended June 30:				(Dollars in millions)
Balance as of April 1, 2012	$	23.8		$	(12.6	)	$	11.2
Other comprehensive income before reclassifications	3.9			—			3.9
Amounts reclassified from accumulated other comprehensive income	(8.1		)	0.7			(7.4		)
Other comprehensive (loss) income for the three months ended June 30, 2012	(4.2		)	0.7			(3.5		)
Balance as of June 30, 2012	$	19.6		$	(11.9	)	$	7.7

Balance as of April 1, 2013	$	20.9		$	(10.6	)	$	10.3
Other comprehensive loss before reclassifications	(42.6		)	—			(42.6		)
Amounts reclassified from accumulated other comprehensive income	(3.7		)	0.4			(3.3		)
Other comprehensive (loss) income for the three months ended June 30, 2013	(46.3		)	0.4			(45.9		)
Balance as of June 30, 2013	$	(25.4	)	$	(10.2	)	$	(35.6	)
Six Months Ended June 30:
Balance as of January 1, 2012	$	29.8		$	(13.2	)	$	16.6
Other comprehensive income before reclassifications	6.3			—			6.3
Amounts reclassified from accumulated other comprehensive income	(16.5		)	1.3			(15.2		)
Other comprehensive (loss) income for the six months ended June 30, 2012	(10.2		)	1.3			(8.9		)
Balance as of June 30, 2012	$	19.6		$	(11.9	)	$	7.7

Balance as of January 1, 2013	$	38.0		$	(11.0	)	$	27.0
Other comprehensive loss before reclassifications	(48.5		)	—			(48.5		)
Amounts reclassified from accumulated other comprehensive income	(14.9		)	0.8			(14.1		)
Other comprehensive (loss) income for the six months ended June 30, 2013	(63.4		)	0.8			(62.6		)
Balance as of June 30, 2013	$	(25.4	)	$	(10.2	)	$	(35.6	)

The following table shows reclassifications out of accumulated other comprehensive income and the affected line items in the consolidated statements of operations for the three and six months ended June 30, 2013 and 2012:



	Three months ended June 30,						Six months ended June 30,						Affected line item in the Consolidated Statements of Operations
	2013			2012			2013			2012
	(Dollars in millions)
Unrealized gains on investments available-for-sale	$	5.7		$	12.4		$	23.0		$	25.4		Net investment income
	5.7			12.4			23.0			25.4			Total before tax
	2.0			4.3			8.1			8.9			Tax expense
	3.7			8.1			14.9			16.5			Net of tax
Amortization of defined benefit pension items:
Prior-service cost	—			(0.1		)	—			(0.1		)	(a)
Actuarial gains (losses)	(0.7		)	(1.0		)	(1.3		)	(2.0		)	(a)
	(0.7		)	(1.1		)	(1.3		)	(2.1		)	Total before tax
	(0.3		)	(0.4		)	(0.5		)	(0.8		)	Tax benefit
	(0.4		)	(0.7		)	(0.8		)	(1.3		)	Net of tax

Total reclassifications for the period	$	3.3		$	7.4		$	14.1		$	15.2		Net of tax

_________


(a)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings per share is based upon the weighted average shares of common stock and dilutive common stock equivalents (this reflects the potential dilution that could occur if stock options were exercised and restricted stock units ("RSUs") and performance share units ("PSUs") were vested) outstanding during the periods presented.

The inclusion or exclusion of common stock equivalents arising from stock options, RSUs and PSUs in the computation of diluted earnings per share is determined using the treasury stock method. For the three and six months ended June 30, 2013, respectively, 718,000 shares and 849,000 shares of dilutive common stock equivalents were outstanding and were included in the computation of diluted earnings per share. For the three and six months ended June 30, 2012, respectively, 782,000 shares and 1,278,000 shares of dilutive common stock equivalents were outstanding and were included in the computation of diluted earnings per share.

For the three and six months ended June 30, 2013, respectively, an aggregate of 1,075,000 shares and 1,630,000 shares of common stock equivalents were considered anti-dilutive and were not included in the computation of diluted earnings per share. For the three and six months ended June 30, 2012, respectively, an aggregate of 1,744,000 shares and 868,000 shares of common stock equivalents were considered anti-dilutive and were not included in the computation of diluted earnings per share. Stock options expire at various times through April 2019.

In May 2011, our Board of Directors authorized a stock repurchase program for the repurchase of up to $300 million of our outstanding common stock (our "stock repurchase program"). On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program. As of December 31, 2012, the remaining authorization under our stock repurchase program was $350.0 million. The remaining authorization under our stock

repurchase program as of June 30, 2013 was $280.0 million. See Note 6 for more information regarding our stock repurchase program.

Goodwill and Other Intangible Assets

We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2013 for our Western Region Operations reporting unit and also re-evaluated the useful lives of our other intangible assets. 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.

The carrying amount of goodwill by reporting unit is as follows:



	Western Region Operations		Total
	(Dollars in millions)
Balance as of December 31, 2012	$	565.9	$	565.9
Balance as of June 30, 2013	$	565.9	$	565.9

Due to the many variables inherent in the estimation of a business’s fair value and the relative size of recorded goodwill, changes in assumptions may have a material effect on the results of our impairment test. The discounted cash flows and market participant valuations (and the resulting fair value estimates of the Western Region Operations reporting unit) are sensitive to changes in assumptions including, among others, certain valuation and market assumptions, the Company’s ability to adequately incorporate into its premium rates the future costs of premium-based assessments imposed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "ACA"), and assumptions related to the achievement of certain administrative cost reductions and the profitable implementation of California's Coordinated Care Initiative, which includes the dual eligibles demonstration. Changes to any of these assumptions could cause the fair value of our Western Region Operations reporting unit to be below its carrying value. As of June 30, 2013 and June 30, 2012, the ratio of the fair value of our Western Region Operations reporting unit to its carrying value was approximately 149% and 115%, respectively.

The intangible assets that continue to be subject to amortization using the straight-line method over their estimated lives are as follows:



	Gross Carrying Amount		Accumulated Amortization			Net Balance		Weighted Average Life (in years)
	(Dollars in millions)
As of June 30, 2013:
Provider networks	$	40.5	$	(35.1	)	$	5.4	19.4
Customer relationships and other	29.5		(19.3		)	10.2		11.1
	$	70.0	$	(54.4	)	$	15.6

As of December 31, 2012:
Provider networks	$	40.5	$	(34.6	)	$	5.9	19.4
Customer relationships and other	29.5		(18.1		)	11.4		11.1
	$	70.0	$	(52.7	)	$	17.3

Estimated annual pretax amortization expense for other intangible assets for each of the next five years ending December 31 is as follows (dollars in millions):



Year	Amount
2013	$	3.4
2014	2.8
2015	2.6
2016	2.0
2017	2.0

Restricted Assets

We and our consolidated subsidiaries are required to set aside certain funds that 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, 2013 and December 31, 2012 the restricted cash and cash equivalents balances totaled $1.7 million and $0.8 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $26.4 million and $25.5 million as of June 30, 2013 and December 31, 2012, respectively, and are included in investments available-for-sale.

Divested Operations and Services

Divested operations and services revenues and expenses include any revenues and expenses related to the run-out of our business that was sold in connection with the Northeast Sale (as defined below) on December 11, 2009, including items related to our performance under related administrative services and/or claims servicing agreements, and transition-related revenues and expenses related to the sale of our Medicare PDP business on April 1, 2012. The "Northeast Sale" refers to the sale of all of the outstanding shares of capital stock of our health plan subsidiaries that were domiciled and/or had conducted businesses in Connecticut, New Jersey, New York and Bermuda to an affiliate of UnitedHealth Group Incorporated ("United"), and includes the acquisition by United of membership renewal rights for certain commercial health care business conducted by our subsidiary, Health Net Life Insurance Company ("HNL") in the states of Connecticut and New Jersey. As of December 31, 2012, we had substantially completed the administration and run-out of our divested businesses. See Note 3 for additional information regarding the sale of our Medicare PDP business.

Medicaid/Medi-Cal Rate Adjustment

Our revenue from the Medi-Cal program, including seniors and persons with disabilities ("SPD") programs, and other state-sponsored health programs are subject to certain retroactive rate adjustments based on expected and actual health care cost. For the three months ended June 30, 2013 we had no premium revenues recognized as a result of retroactive rate adjustments. For the six months ended June 30, 2013 we recognized $42 million of premium revenues as a result of retroactive rate adjustments related to 2011 and 2012 for our SPD and non-SPD members. Retroactive rate adjustments related to 2010 and 2011 for our SPD and non-SPD members were not material for the three and six months ended June 30, 2012. As of June 30, 2013, the amount of receivable outstanding related to these retroactive rate adjustments was not material.

Medi-Cal Rate Reduction

In October 2011, CMS approved certain elements of California's 2011-2012 budget proposals to reduce Medi-Cal provider reimbursement rates as authorized by California Assembly Bill 97 (“AB 97”). The elements approved by CMS include a 10 percent reduction in reimbursement rates for a number of providers. DHCS preliminarily indicated that the Medi-Cal managed care rate reductions could be effective retroactive to July 1, 2011. However, a series of preliminary injunctions arising from various legal challenges have prevented the implementation of AB 97, and no such reductions have been made as of June 30, 2013.

In December 2012, the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) issued a decision that reversed the preliminary injunctions against the implementation of AB 97. The Ninth Circuit subsequently denied a motion by the plaintiffs for an en banc hearing and a petition to stay implementation of AB 97 pending appeal to the U.S. Supreme Court. Consequently, as of June 30, 2013, there was no legal bar to the implementation of AB 97. As a result, the reimbursement rate reductions authorized by AB 97 are reflected in California's 2013-2014 budget proposal, which was recently passed by the legislature and signed into law by Governor Brown. The State has not formally determined the effective date for the implementation of AB 97, and the plaintiffs in the AB 97 legal actions

may still file a petition to the U.S. Supreme Court to review the Ninth Circuit's ruling. In any case, even if the reductions are implemented as currently authorized, they would be applied to Medi-Cal managed care plans only on a prospective basis, and the impact of such reductions could be limited since they would need to be reconciled with minimum payment rates for primary care physicians dictated by the ACA for 2013 and 2014. Due to these uncertainties, we cannot reasonably estimate the range of reductions in premiums and/or related health care cost recoveries, if any, that may result in connection with AB 97.

Medicaid Premium Taxes

On June 27, 2013, the State of California reinstated premium taxes retroactive to July 1, 2012 for plans participating in Medi-Cal. As a result of this reinstatement, we recorded $35.7 million of premium taxes, of which $25.4 million is attributable to periods prior to the second quarter of 2013, as general and administrative expense for the three and six months ended June 30, 2013. In addition, the State of California increased Medicaid premium revenues in an amount equal to the increase in the premium taxes. As a result, we recorded $35.7 million of premium revenue for the three and six months ended June 30, 2013.

CMS Risk Factor Adjustments

We have an arrangement with CMS that relates to certain of our Medicare products and pursuant to which periodic changes in our risk factor adjustment scores for certain diagnostic codes result in changes to our health plan services premium revenues. We recognize such changes when the amounts become determinable and the collectability is reasonably assured. Because the recorded revenue is based on our best estimate at the time, the actual payment we receive from CMS for risk adjustment reimbursement settlements may be materially different than the amounts we have initially recognized on our financial statements. The change in our estimate for the risk adjustment revenue in each of the three and six months ended June 30, 2013 and 2012 was not significant.

Recently Issued Accounting Pronouncement

On July 18, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in ASU No. 2013-11 are not expected to have an impact on our consolidated financial statements.


3.	SALE OF MEDICARE PDP BUSINESS

On April 1, 2012, our subsidiary HNL sold substantially all of the assets, properties and rights of HNL used primarily or exclusively in our Medicare PDP business to CVS Caremark for a total purchase price of $248.2 million. In the three months ended June 30, 2012 we recognized a $132.8 million pretax gain on the sale of our Medicare PDP business, $119.4 million net of tax, and this after tax gain is reported as gain on sale of discontinued operation, net of tax.

Our revenues related to our Medicare PDP business were $0 and $191.8 million for the three and six months ended June 30, 2012, respectively. These revenues were excluded from our continuing operating results and included in loss from discontinued operation. Our Medicare PDP business had a pretax income (loss) of $0 and $(28.8) million for the three and six months ended June 30, 2012, respectively. As of June 30, 2012 and June 30, 2013, we had no Medicare stand-alone prescription drug plan members. We had no revenues and no pretax income related to the Medicare PDP business for each of the three and six months ended June 30, 2013.

4. SEGMENT INFORMATION

We operate within three reportable segments, Western Region Operations, Government Contracts and Divested Operations and 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 and six months ended June 30, 2012. Our Government Contracts reportable segment includes government-sponsored managed care and administrative services contracts through the TRICARE program, the Department of Defense sponsored Military and Family Life Counseling, formerly Military and Family Life Consultant, program, and certain other health care-related government contracts. Our Divested Operations and Services reportable segment includes the operations of our businesses that provided administrative services to United in connection with the Northeast Sale and transition-related revenues and expenses related to the Medicare PDP business that was sold on April 1, 2012. As of December 31, 2012, we had substantially completed the administration and run-out of our divested businesses.

The financial results of our reportable segments are reviewed on a monthly basis by our chief operating decision maker ("CODM"). We continuously monitor our reportable segments to ensure that they reflect how our CODM manages our company.

We evaluate performance and allocate resources based on segment pretax income. Our assets are managed centrally and viewed by our CODM on a consolidated basis; therefore, they are not allocated to our segments and our segments are not evaluated for performance based on assets. The accounting policies of our reportable segments are the same as those described in Note 2 to the consolidated financial statements included in our Form 10-K, except that intersegment transactions are not eliminated.

We also have a Corporate/Other segment that is not a business operating segment. It is added to our reportable segments to provide a reconciliation to our consolidated results. The Corporate/Other segment includes costs that are excluded from the calculation of segment pretax income because they are not managed within the segments and are not directly identified with a particular operating segment. Accordingly, these costs are not included in the performance evaluation of our reportable segments by our CODM. In addition, certain charges, including but not limited to those related to our continuing efforts to address scale issues, as well as asset impairments, are reported as part of Corporate/Other.

Our segment information for the three and six months ended June 30, 2013 and 2012 is as follows:



	Western Region Operations			Government Contracts		Divested Operations and Services			Corporate/Other/ Eliminations			Total
	(Dollars in millions)
Three months ended June 30, 2013
Revenues from external sources	$	2,598.5		$	139.9	$	—		$	—		$	2,738.4
Intersegment revenues	2.8			—		—			(2.8		)	—
Segment pretax income (loss)	46.8			18.1		—			(12.9		)	52.0
Three months ended June 30, 2012
Revenues from external sources	$	2,652.3		$	176.2	$	12.8		$	—		$	2,841.3
Intersegment revenues	2.7			—		—			(2.7		)	—
Segment pretax income (loss)	1.2			23.5		(6.5		)	(10.8		)	7.4
Six months ended June 30, 2013
Revenues from external sources	$	5,261.0		$	274.5	$	—		$	—		$	5,535.5
Intersegment revenues	5.7			—		—			(5.7		)	—
Segment pretax income (loss)	119.1			27.1		—			(12.9		)	133.3
Six months ended June 30, 2012
Revenues from external sources	$	5,301.3		$	357.6	$	12.8		$	—		$	5,671.7
Intersegment revenues	5.6			—		—			(5.6		)	—
Segment pretax income (loss)	(7.6		)	45.5		(29.7		)	(14.4		)	(6.2		)

Our health plan services premium revenue by line of business is as follows:



	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
	(Dollars in millions)
Commercial premium revenue	$	1,298.6	$	1,436.5	$	2,624.0	$	2,889.7
Medicare premium revenue	688.6		691.4		1,395.0		1,406.5
Medicaid premium revenue	591.7		491.0		1,191.9		943.7
Total health plan services premiums	$	2,578.9	$	2,618.9	$	5,210.9	$	5,239.9

5. INVESTMENTS

During the three and six months ended June 30, 2013 and 2012, we recognized no losses from other-than-temporary impairments of our cash equivalents and available-for-sale investments.

We classified $18.3 million as investments available-for-sale-noncurrent as of June 30, 2013 because we did not intend to sell and we believed it may take longer than a year for such impaired securities to recover. This classification does not affect the marketability or the valuation of the investments, which are reflected at their market value as of June 30, 2013. We had no investments available-for-sale-noncurrent as of December 31, 2012.

As of June 30, 2013 and December 31, 2012, 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, 2013
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Current:
Asset-backed securities	$	412.3	$	3.8	$	(7.6	)	$	408.5
U.S. government and agencies	26.4		—		—			26.4
Obligations of states and other political subdivisions	791.9		6.3		(30.6		)	767.6
Corporate debt securities	438.7		2.5		(11.2		)	430.0
	$	1,669.3	$	12.6	$	(49.4	)	$	1,632.5
Noncurrent:
Asset-backed securities	$	1.2	$	—	$	(0.1	)	$	1.1
Obligations of states and other political subdivisions	14.2		—		(1.6		)	12.6
Corporate debt securities	5.3		—		(0.7		)	4.6
	$	20.7	$	—	$	(2.4	)	$	18.3



	December 31, 2012
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Current:
Asset-backed securities	$	499.7	$	19.6	$	(0.2	)	$	519.1
U.S. government and agencies	25.9		—		—			25.9
Obligations of states and other political subdivisions	819.9		24.2		(2.0		)	842.1
Corporate debt securities	408.4		17.5		(0.5		)	425.4
	$	1,753.9	$	61.3	$	(2.7	)	$	1,812.5

As of June 30, 2013, the contractual maturities of our current investments available-for-sale and our investments available-for-sale-noncurrent were as follows:



	Amortized Cost		Estimated Fair Value
Current:	(Dollars in millions)
Due in one year or less	$	41.9	$	42.1
Due after one year through five years	262.6		263.8
Due after five years through ten years	466.6		456.6
Due after ten years	485.9		461.5
Asset-backed securities	412.3		408.5
Total current investments available-for-sale	$	1,669.3	$	1,632.5

	Amortized Cost		Estimated Fair Value
Noncurrent:	(Dollars in millions)
Due after one year through five years	$	1.0	$	0.8
Due after five years through ten years	0.8		0.7
Due after ten years	17.7		15.7
Asset-backed securities	1.2		1.1
Total noncurrent investments available-for-sale	$	20.7	$	18.3

Proceeds from sales of investments available-for-sale during the three and six months ended June 30, 2013 were $218.6 million and $573.4 million, respectively. Gross realized gains and losses totaled $7.0 million and $1.4 million, respectively, for the three months ended June 30, 2013, and $24.5 million and $1.6 million, respectively, for the six months ended June 30, 2013. Proceeds from sales of investments available-for-sale during the three and six months ended June 30, 2012 were $364.4 million and $1,015.3 million, respectively. Gross realized gains and losses totaled $12.5 million and $0, respectively, for the three months ended June 30, 2012, and $25.8 million and $0.4 million, respectively, for the six months ended June 30, 2012.

The following tables show our investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through June 30, 2013 and December 31, 2012. 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.

The following table shows our current investments' fair values and gross unrealized losses for individual securities that have been in a continuous loss position through June 30, 2013:



	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed securities	$	254.4	$	(7.5	)	$	0.4	$	—		$	254.8	$	(7.5	)
U.S. government and agencies	3.2		—			—		—			3.2		—
Obligations of states and other political subdivisions	578.9		(30.6		)	0.2		—			579.1		(30.6		)
Corporate debt securities	283.1		(11.2		)	1.3		(0.1		)	284.4		(11.3		)
	$	1,119.6	$	(49.3	)	$	1.9	$	(0.1	)	$	1,121.5	$	(49.4	)

The following table shows our noncurrent investments' fair values and gross unrealized losses for individual securities that have been in a continuous loss position through June 30, 2013:



	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed securities	$	1.1	$	(0.1	)	$	—	$	—		$	1.1	$	(0.1	)
Obligations of states and other political subdivisions	12.6		(1.6		)	—		—			12.6		(1.6		)
Corporate debt securities	3.8		(0.6		)	0.8		(0.1		)	4.6		(0.7		)
	$	17.5	$	(2.3	)	$	0.8	$	(0.1	)	$	18.3	$	(2.4	)

The following table shows the number of our individual securities-current that have been in a continuous loss position through June 30, 2013:



	Less than 12 Months	12 Months or More	Total
Asset-backed securities	108	2	110
U.S. government and agencies	1	—	1
Obligations of states and other political subdivisions	257	1	258
Corporate debt securities	235	1	236
	601	4	605

The following table shows the number of our individual securities-noncurrent that have been in a continuous loss position through June 30, 2013:



	Less than 12 Months	12 Months or More	Total
Asset-backed securities	2	—	2
Obligations of states and other political subdivisions	8	—	8
Corporate debt securities	5	1	6
	15	1	16

The following table shows our current investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through December 31, 2012:



	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed securities	$	54.9	$	(0.2	)	$	0.1	$	—	$	55.0	$	(0.2	)
U.S. government and agencies	10.1		—			—		—		10.1		—
Obligations of states and other political subdivisions	192.1		(2.0		)	0.2		—		192.3		(2.0		)
Corporate debt securities	45.9		(0.5		)	—		—		45.9		(0.5		)
	$	303.0	$	(2.7	)	$	0.3	$	—	$	303.3	$	(2.7	)

6. STOCK REPURCHASE PROGRAM

On May 2, 2011, our Board of Directors authorized our stock repurchase program pursuant to which a total of $300.0 million of our outstanding common stock could be repurchased. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program.

Subject to the approval of our Board of Directors, we may repurchase our common stock under our 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 shares of stock repurchased 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 stock repurchase program may be suspended or discontinued at any time.

During the three and six months ended June 30, 2012, we repurchased approximately 562,000 shares of our common stock for aggregate consideration of $13.9 million under our stock repurchase program. As of December 31, 2012, the remaining authorization under our stock repurchase program was $350.0 million. During the three months ended June 30, 2013, we made no share repurchases and during the six months ended June 30, 2013, we repurchased approximately 2.7 million shares of our common stock for aggregate consideration of $70.0 million under our stock repurchase program. The remaining authorization under our stock repurchase program as of June 30, 2013 was $280.0 million.

7. FINANCING ARRANGEMENTS

Revolving Credit Facility

In October 2011, we entered into a $600 million unsecured revolving credit facility due in October 2016, which includes a $400 million sublimit for the issuance of standby letters of credit and a $50 million 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. As of June 30, 2013, $125.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $416.3 million (see "—Letters of Credit" below).

Amounts outstanding under our revolving credit facility bear interest, at the Company’s option, at either (a) the base rate (which is a rate per annum equal to the greatest of (i) the federal funds rate plus one-half of one percent, (ii) Bank of America, N.A.’s “prime rate” and (iii) the Eurodollar Rate (as such term is defined in the credit facility) for a one-month interest period plus one percent) plus an applicable margin ranging from 45 to 105 basis points or (b) the Eurodollar Rate plus an applicable margin ranging from 145 to 205 basis points. The applicable margins are based on our consolidated leverage ratio, as specified in the credit facility, and are subject to adjustment following the Company’s delivery of a compliance certificate for each fiscal quarter.

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 that 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 be in compliance at the end of each fiscal quarter with a specified consolidated leverage ratio and consolidated fixed charge coverage ratio. As of June 30, 2013, we were in compliance with all covenants under 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 the Company 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 credit facility) in a manner that could reasonably be expected to result in a material adverse effect; certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries that are not stayed within 60 days; 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 Credit

Pursuant to the terms of our revolving credit facility, we can obtain letters of credit in an aggregate amount of $400 million and the maximum amount available for borrowing is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2013 and December 31, 2012, we had outstanding letters of credit of $58.7 million and $59.4 million, respectively, resulting in a maximum amount available for borrowing of $416.3 million and $440.6

million, respectively. As of June 30, 2013 and December 31, 2012, no amounts had been drawn on any of these letters of credit.

Senior Notes

In 2007 we issued $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, 2013, no default or event of default had occurred under the indenture governing the Senior Notes.

The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:


•	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

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

Each of the following will be an Event of Default under the indenture governing the Senior Notes:


•	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 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


•	events in bankruptcy, insolvency or reorganization of our Company.

Our Senior Notes payable balances were $399.2 million as of June 30, 2013 and $399.1 million as of December 31, 2012.

8. FAIR VALUE MEASUREMENTS

We record certain assets and liabilities at fair value in the consolidated balance sheets and categorize them based upon the level of judgment associated with the inputs used to measure their fair value and the level of market price observability. We also estimate fair value when the volume and level of activity for the asset or liability have significantly decreased or in those circumstances that indicate when a transaction is not orderly.

Investments measured and reported at fair value using Level inputs are classified and disclosed in one of the following categories:

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. The types of investments included in Level 1 include U.S. Treasury securities and listed equities. We do not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models and/or other valuation methodologies that 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.

Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation using assumptions that market participants would use, including assumptions for risk. Level 3 includes an embedded contractual derivative asset and liability 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 estimated growth in national health care expenditures. The growth in these expenditures was modeled using a Monte Carlo simulation approach.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The following tables present information about our assets and liabilities measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012, 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		Level 2- noncurrent		Level 3		Total
As of June 30, 2013:
Assets:
Cash and cash equivalents	$	279.6	$	—	$	—	$	—	$	279.6
Investments—available-for-sale
Asset-backed debt securities:
Residential mortgage-backed securities	$	—	$	229.0	$	—	$	—	$	229.0
Commercial mortgage-backed securities	—		153.6		1.1		—		154.7
Other asset-backed securities	—		25.9		—		—		25.9
U.S. government and agencies:
U.S. Treasury securities	26.4		—		—		—		26.4
U.S. Agency securities	—		—		—		—		—
Obligations of states and other political subdivisions	—		767.6		12.6		—		780.2
Corporate debt securities	—		430.0		4.6		—		434.6
Total investments at fair value	$	26.4	$	1,606.1	$	18.3	$	—	$	1,650.8
Embedded contractual derivative	—		—		—		10.8		10.8
Total assets at fair value	$	306.0	$	1,606.1	$	18.3	$	10.8	$	1,941.2



	Level 3
As of June 30, 2013:
Liability:
Embedded contractual derivative	$	4.8
Total liability at fair value	$	4.8



	Level 1		Level 2		Level 2- noncurrent		Level 3		Total
As of December 31, 2012:
Assets:
Cash and cash equivalents	$	340.1	$	—	$	—	$	—	$	340.1
Investments—available-for-sale
Asset-backed debt securities:
Residential mortgage-backed securities	$	—	$	272.4	$	—	$	—	$	272.4
Commercial mortgage-backed securities	—		223.1		—		—		223.1
Other asset-backed securities	—		23.6		—		—		23.6
U.S. government and agencies:
U.S. Treasury securities	25.9		—		—		—		25.9
U.S. Agency securities	—		—		—		—		—
Obligations of states and other political subdivisions	—		841.9		—		0.2		842.1
Corporate debt securities	—		425.4		—		—		425.4
Total investments at fair value	$	25.9	$	1,786.4	$	—	$	0.2	$	1,812.5
Embedded contractual derivative	—		—		—		11.2		11.2
Total assets at fair value	$	366.0	$	1,786.4	$	—	$	11.4	$	2,163.8



	Level 3
As of December 31, 2012:
Liability:
Embedded contractual derivative	$	3.2
Total liability at fair value	$	3.2

We had no transfers between Levels 1 and 2 of financial assets or liabilities that are fair valued on a recurring basis during the three and six months ended June 30, 2013 and 2012. 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.

The changes in the balances of Level 3 financial assets for the three months ended June 30, 2013 and 2012 were as follows (dollars in millions):



	Three months ended June 30,
	2013								2012
	Available-For-Sale Investments		Embedded Contractual Derivative			Total			Available-For-Sale Investments		Embedded Contractual Derivative			Total
Opening balance	$	—	$	10.9		$	10.9		$	0.2	$	16.0		$	16.2
Transfers into Level 3	—		—			—			—		—			—
Transfers out of Level 3	—		—			—			—		—			—
Total gains or losses for the period:
Realized in net income	—		(0.1		)	(0.1		)	—		(1.0		)	(1.0		)
Unrealized in accumulated other comprehensive income	—		—			—			—		—			—
Purchases, issues, sales and settlements:
Purchases/additions	—		—			—			—		—			—
Issues	—		—			—			—		—			—
Sales	—		—			—			—		—			—
Settlements			—			—			—		—			—
Closing balance	$	—	$	10.8		$	10.8		$	0.2	$	15.0		$	15.2
Change in unrealized gains (losses) included in net income for assets held at the end of the reporting period	$	—	$	—		$	—		$	—	$	—		$	—

The changes in the balances of Level 3 financial assets for the six months ended June 30, 2013 and 2012 were as follows (dollars in millions):



	Six months ended June 30,
	2013									2012
	Available-For-Sale Investments			Embedded Contractual Derivative			Total			Available-For-Sale Investments		Embedded Contractual Derivative		Total
Opening balance	$	0.2		$	11.2		$	11.4		$	0.2	$	5.3	$	5.5
Transfers into Level 3	—			—			—			—		—		—
Transfers out of Level 3	—			—			—			—		—		—
Total gains or losses for the period:
Realized in net income	—			(0.4		)	(0.4		)	—		9.7		9.7
Unrealized in accumulated other comprehensive income	—			—			—			—		—		—
Purchases, issues, sales and settlements:
Purchases/additions	—			—			—			—		—		—
Issues	—			—			—			—		—		—
Sales	(0.2		)	—			(0.2		)	—		—		—
Settlements	—			—			—			—		—		—
Closing balance	$	—		$	10.8		$	10.8		$	0.2	$	15.0	$	15.2
Change in unrealized gains (losses) included in net income for assets held at the end of the reporting period	$	—		$	—		$	—		$	—	$	—	$	—

The changes in the balance of the Level 3 financial liability for the three and six months ended June, 2013 were as follows (dollars in millions):



	Three months ended June 30, 2013		Six months ended June 30, 2013
	Embedded Contractual Derivative
Opening balance, July 1 and January 1	$	4.2	$	3.2
Transfers into Level 3	—		—
Transfers out of Level 3	—		—
Total gains or losses for the period:
Loss realized in net income	0.6		1.6
Unrealized in accumulated other comprehensive income	—		—
Purchases, issues, sales and settlements:
Purchases	—		—
Issues	—		—
Sales	—		—
Settlements	—		—
Closing balance	$	4.8	$	4.8

We had no financial liabilities fair valued on a recurring basis during the three and six months ended June 30, 2012.

The following table presents information about financial assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (dollars in millions):



As of December 31, 2012	Level 1		Level 2		Level 3		Total
Lease impairment obligation	$	—	$	—	$	7.4	$	7.4

We had no assets or liabilities fair valued on a non-recurring basis during the three and six months ended June 30, 2013.

The following tables present quantitative information about Level 3 Fair Value Measurements as of June 30, 2013 and December 31, 2012 (dollars in millions):



	Fair Value as of June 30, 2013		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Embedded contractual derivative asset	$	10.8	Monte Carlo Simulation Approach	Health Net Health Care Expenditures	-0.2	%	—	-0.2%	-(0.2%)
Embedded contractual derivative asset	$	10.8	Monte Carlo Simulation Approach	National Health Care Expenditures	3.7	%	—	3.7%	(3.7%)
Embedded contractual derivative liability			Monte Carlo Simulation Approach	Health Net Health Care Expenditures	-6.6	%	—	11.0%	(3.7%)
Embedded contractual derivative liability	$	4.8	Monte Carlo Simulation Approach	National Health Care Expenditures	-3.98	%	—	8.38%	(2.7%)
Goodwill - Western Region reporting unit	$	565.9
Goodwill - Western Region reporting unit	$	565.9	Income Approach	Discount Rate	10.0	%	—	10.0%	(10.0%)



	Fair Value as of December 31, 2012		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Embedded contractual derivative asset	$	11.2	Monte Carlo Simulation Approach	Health Net Health Care Expenditures	-1.7	%	—	0.8%	-(0.4%)
Embedded contractual derivative asset	$	11.2	Monte Carlo Simulation Approach	National Health Care Expenditures	3.7	%	—	3.7%	(3.7%)
Embedded contractual derivative liability			Monte Carlo Simulation Approach	Health Net Health Care Expenditures	-0.3	%	—	10.1%	(4.9%)
Embedded contractual derivative liability	$	3.2	Monte Carlo Simulation Approach	National Health Care Expenditures	-0.1	%	—	7.3%	(3.3%)
Goodwill - Western Region reporting unit	$	565.9
Goodwill - Western Region reporting unit	$	565.9	Income Approach	Discount Rate	9	%	—	9%	(9%)
Lease impairment obligation	$	7.4	Income Approach	Discount Rate	3.26	%	—	3.26%	(3.26%)

Valuation policies and procedures are managed by our finance group, which regularly monitors fair value measurements. Fair value measurements, including those categorized within Level 3, are prepared and reviewed on a quarterly basis and any third-party valuations are reviewed for reasonableness and compliance with the Fair Value Measurement Topic of the Accounting Standards Codification. Specifically, we compare prices received from our pricing service to prices reported by the custodian or third-party investment advisors and we perform a review of the inputs, validating that they are reasonable and observable in the marketplace, if applicable. For our embedded contractual derivative asset and liability, we use internal historical and projected health care expenditure data and the national 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 Monte Carlo simulation approach and the resulting value is discounted to the valuation date. We estimated our non-recurring Level 3 asset and liability, goodwill for our Western Region Operations reporting unit, and the lease impairment obligation, using the income approach based on discounted cash flows.

The significant unobservable inputs used in the fair value measurement of our embedded contractual derivative are the estimated growth in Health Net health care expenditures and the estimated growth in national health care expenditures. Significant increases (decreases) in the estimated growth in Health Net health care expenditures or decreases (increases) in the estimated growth in national health expenditures would result in a significantly lower (higher) fair value measurement.

9. LEGAL PROCEEDINGS

Overview

We record reserves and accrue costs for certain legal proceedings and regulatory matters to the extent that we determine an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect our best estimate of the probable loss for such matters, our recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to that they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings, each with a wide range of potential outcomes; or result in a change of business practices. Further, there may be various levels of judicial review available to the Company in connection with any such proceeding in the event damages are awarded or a fine or penalty is assessed. As of the date of this report, amounts accrued for legal proceedings and regulatory matters were not material. However, it is possible that in a particular quarter or annual period our financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by

an ultimate unfavorable resolution of or development in legal and/or regulatory proceedings, including those described below in this Note 9 under the heading “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 9 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 that are currently pending against us should not have a material adverse effect on our financial condition, results of operations, cash flow and liquidity.

Litigation and Investigations Related to Unaccounted-for Server Drives

We are a defendant in three 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.

On March 18, 2011, a putative class action relating to this incident was filed against us in the U.S. District Court for the Central District of California (the "Central District of California"), and similar actions were later filed against us in other federal and state courts in California. A number of those actions were transferred to and consolidated in the U.S. District Court for the Eastern District of California (the "Eastern District of California"), and the two remaining actions are currently pending in the Superior Court of California, County of San Francisco ("San Francisco County Superior Court") and the Superior Court of California, County of Sacramento ("Sacramento County Superior Court"). The consolidated amended complaint in the federal action pending in the Eastern District of California was filed on behalf of a putative class of over 800,000 of our current or former members who received the written notification, and also named IBM as a defendant. It sought to state claims for violation of the California Confidentiality of Medical Information Act and the California Customer Records Act, and sought statutory damages of up to $1,000 for each class member, as well as injunctive and declaratory relief, attorneys’ fees and other relief. On August 29, 2011, we filed a motion to dismiss the consolidated complaint. On January 20, 2012, the district court issued an order dismissing the consolidated complaint on the grounds that the plaintiffs lacked standing to bring their action in federal court. On April 20, 2012, an amended complaint with a new plaintiff was filed against us, but no longer asserted claims against IBM. The amended complaint asserted the same causes of action and sought the same relief as the earlier complaint. On June 18, 2012, we filed a motion to dismiss the amended complaint, which is currently pending.

The San Francisco County Superior Court proceeding was instituted on March 28, 2011 and is brought on behalf of a putative class of California residents who received the written notification, and seeks to state similar claims against us, as well as claims for violation of California's Unfair Competition Law, and seeks similar relief. We moved to compel arbitration of the two named plaintiffs’ claims. The court granted our motion as to one of the named plaintiffs and denied it as to the other. We have appealed the latter ruling, but subsequently dismissed the appeal. Thereafter, the plaintiff as to whom our motion to compel arbitration was granted filed a petition for a writ of mandate with the California Court of Appeal seeking review of that ruling. On July 9, 2012, the Court of Appeal issued a peremptory writ of mandate directing the Superior Court to vacate its order granting the motion to compel arbitration and to enter an order denying the motion to compel.

The Sacramento County Superior Court proceeding was instituted on April 3, 2012 and is brought on behalf of a putative class of California members whose information was contained on the unaccounted for drives. The action contains the same claims and seeks the same relief as the case pending in the Eastern District of California. On June 18, 2012, we filed a demurrer seeking dismissal of this complaint, which is currently pending.

In July 2013, we entered into a settlement agreement (the “Settlement Agreement”) with the plaintiffs in the three putative class actions described above. We expect that counsel for the named plaintiffs will file a motion for preliminary approval of the Settlement Agreement with the Sacramento County Superior Court. If the Court grants preliminary approval, it will set a date for a final approval hearing, and notice will be sent to all settlement class members advising them of the Settlement Agreement and their right to object to or opt out of the Settlement Agreement. In the event the Settlement Agreement receives final approval, each of the three putative class actions described above will be dismissed with prejudice, and all class members who do not opt out will release all claims they may have related to or arising from the unaccounted-for server drives. Under the terms of the Settlement Agreement, which would cover all individuals whose personal information was identified as being on the unaccounted-for server drives, class members who did not

previously accept our offer of the credit monitoring and related services described above would be eligible to receive such credit monitoring and related services for a period of two years at no cost to them. Class members who previously accepted our original offer would be eligible to receive one additional year of such services. In addition, under the Settlement Agreement, class members would be eligible to receive reimbursement for certain unreimbursed losses arising from identity theft during a specified time period, up to a cap of $50,000 per class member, and $2 million in the aggregate. The Settlement Agreement also provides that we will continue our ongoing activities to enhance our information security measures, including the encryption of data at rest on our servers and storage area networks. We will also be responsible for the payment of any award of fees and expenses to plaintiffs' counsel for each of the three class actions described above as determined by the Sacramento County Superior Court. Finally, we will be responsible for the costs of administering the Settlement Agreement. In the event that the Sacramento County Superior Court does not grant final approval of the Settlement Agreement, and the parties are unable to negotiate a revised settlement agreement that is finally approved by the Court, the pending litigation described above will continue. In the event the Settlement Agreement described above receives final approval, we do not believe that the terms of the Settlement Agreement would have a material impact on our consolidated financial statements.

We have also been informed that a number of regulatory agencies are investigating the incident, including the California Department of Managed Health Care ("DMHC"), the California Department of Insurance, the California Attorney General, the Massachusetts Office of Consumer Affairs and Business Regulation and the Office of Civil Rights of the U.S. Department of Health and Human Services.

Miscellaneous Proceedings

In the ordinary course of our business operations, we are subject to periodic reviews, investigations and audits by various federal and state regulatory agencies, including, without limitation, CMS, DMHC, the Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance, with respect to our compliance with a wide variety of rules and regulations applicable to our business, including, without limitation, HIPAA, rules relating to pre-authorization penalties, payment of out-of-network claims, timely review 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.

In addition, in the ordinary course of our business operations, we are party to various other legal proceedings, including, without limitation, litigation arising out of our general business activities, such as contract disputes, employment litigation, wage and hour claims, including, without limitation, cases involving allegations of misclassification of employees and/or failure to pay for off-the-clock work, real estate and intellectual property claims, claims brought by members or providers seeking coverage or additional reimbursement for services allegedly rendered to our members, but which allegedly were denied, underpaid, not timely paid or not paid, and claims arising out of the acquisition or divestiture of various business units or other assets. We are also subject to claims relating to the performance of contractual obligations to providers, members, employer groups and others, including the alleged failure to properly pay claims and challenges to the manner in which we process claims, and claims alleging that we have engaged in unfair business practices. In addition, we are subject to claims relating to information security incidents and breaches, reinsurance agreements, rescission of coverage and other types of insurance coverage obligations and claims relating to the insurance industry in general. We are, and may be in the future, subject to class action lawsuits brought against various managed care organizations and other class action lawsuits.

We intend to vigorously defend ourselves against the miscellaneous legal and regulatory proceedings to which we are currently a party; however, these proceedings are subject to many uncertainties. In some of the cases pending against us, substantial non-economic or punitive damages are being sought.

Potential Settlements

We regularly evaluate legal proceedings and regulatory matters pending against us, including those described above in this Note 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 and regulatory matters to which we are or may be subject from time to time, including those described above in this Note 9, could be substantial and, in certain cases, could result in a significant earnings charge or impact on our cash flow 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.

10. STATE-SPONSORED HEALTH PLANS RATE SETTLEMENT AGREEMENT

On November 2, 2012, our wholly owned subsidiaries, Health Net of California, Inc. and Health Net Community Solutions, Inc., entered into a settlement agreement (the "Agreement") with DHCS to settle historical rate disputes with respect to our participation in the Medi-Cal program, for rate years prior to the 2011–2012 rate year. As part of the Agreement, DHCS has agreed, among other things, to (1) an extension of all of our Medi-Cal managed care contracts existing as of the date of the Agreement for an additional five years from their then existing expiration dates; (2) a settlement account applicable to all of our state-sponsored health care programs, including Medi-Cal, Healthy Families, SPDs, our proposed participation in the dual eligibles demonstration portion of the California Coordinated Care Initiative that is expected to begin in 2014 and any potential future Medicaid expansion under federal health care reform (our “state-sponsored health care programs”), as discussed in more detail below; and (3) compensate us should DHCS terminate any of our state-sponsored health care programs contracts early.

Effective January 1, 2013, the settlement account (the "Account") was established with an initial balance of zero. The balance in the Account is adjusted annually to reflect a calendar year deficit or surplus following DHCS' review of our adjustment amount. A deficit or surplus will result to the extent our actual pretax margin (as defined in the Agreement) on our state-sponsored health care programs is below or above a predetermined pretax margin target. The amount of any deficit or surplus is calculated as described in the Agreement. Cash settlement of the Account will occur on December 31, 2019, except that under certain circumstances the DHCS may extend the final settlement for up to three additional one-year periods (as may be extended, the "Term"). In addition, the DHCS will make an interim partial settlement payment to us if it terminates any of our state-sponsored health care programs contracts early. Upon expiration of the Term, if the Account is in a surplus position, then no monies are owed to either party. If the Account is in a deficit position, then DHCS shall pay the amount of the deficit to us. In no event, however, shall the amount paid by DHCS to us under the Agreement exceed $264 million or be less than an alternative minimum amount as defined in the Agreement.

As of June 30, 2013, we had calculated and recorded a deficit of $35.4 million reflecting our estimated adjustment to the Account based on our actual pretax margin for the six months ended June 30, 2013. This deficit amount is net of a discount of $2.7 million and represents the fair value determined on the basis of the discounted present value technique. That measure is based on significant Level 3 inputs that are not observable in the market, including our actual pretax margin. Key assumptions include a discount rate of 1.135%. This amount is reported as part of health plan services premiums and the deficit balance, a receivable, is included in other noncurrent assets.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENTS

The following discussion and other portions of this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 27A of the Securities Act of 1933 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,” “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 for the year ended December 31, 2012 ("Form 10-K") and the risks discussed in this Quarterly Report on Form 10-Q and our other filings from time to time with the Securities and Exchange Commission ("SEC").

Any or all forward-looking statements in this Quarterly Report on Form 10-Q and in any other public filings or statements we make may turn out to be 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 information 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 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 such statement was made.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, together with the consolidated financial statements included elsewhere in this report, should be read in their entirety since they contain detailed information that is important to understanding Health Net, Inc. and its subsidiaries’ results of operations and financial condition.

OVERVIEW

General

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 5.4 million individuals across the country through group, individual, Medicare, Medicaid, U.S. Department of Defense (“Department of Defense” or “DoD”), including TRICARE, and Veterans Affairs programs. Through our subsidiaries, we also offer behavioral health, substance abuse and employee assistance programs, managed health care products related to prescription drugs, managed health care product coordination for multi-region employers, and administrative services for medical groups and self-funded benefits programs.

How We Report Our Results

We operate within three reportable segments, Western Region Operations, Government Contracts and Divested Operations and Services, each of which is described below. See Note 4 to our consolidated financial statements for more information regarding our reportable segments.

Our health plan services are provided under our Western Region Operations reportable segment, which includes the operations primarily conducted in California, Arizona, Oregon and Washington for our commercial, Medicare and Medicaid health plans, our health and life insurance companies, our pharmaceutical services subsidiary and certain operations of our behavioral health subsidiaries in several states including Arizona, California and Oregon. As of

June 30, 2013, we had approximately 2.5 million medical members in our Western Region Operations reportable segment. On April 1, 2012, we completed the sale of our Medicare stand-alone prescription drug plan business ("Medicare PDP business") to Pennsylvania Life Insurance Company, a subsidiary of CVS Caremark Corporation ("CVS Caremark"). As a result, 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 six months ended June 30, 2012. For additional information regarding the sale of our Medicare PDP business, see Note 3 to our consolidated financial statements.

Our Government Contracts segment includes our government-sponsored managed care contract with the DoD under the TRICARE program in the North Region and other health care related government contracts. Under the Managed Care Support Contract for the TRICARE North Region ("T-3 contract"), we provide administrative services to approximately 2.9 million Military Health System (“MHS”) eligible beneficiaries. In addition, we also provide behavioral health services to military families under the Department of Defense sponsored Military and Family Life Counseling, formerly Military and Family Life Consultant (“MFLC”) contract, which is also included in our Government Contracts segment. For additional information on our T-3 and MFLC contracts, see "— Results of Operations—Government Contracts Reportable Segment."

Our Divested Operations and Services reportable segment includes the operations of our businesses that provide administrative and run-out support services to an affiliate of UnitedHealth Group Incorporated ("United") and its affiliates under claims servicing agreements in connection with the Northeast Sale (as defined below), as well as the transition-related revenues and expenses of our divested Medicare PDP business. The "Northeast Sale" refers to the sale of all of the outstanding shares of capital stock of our health plan subsidiaries that were domiciled and/or had conducted businesses in Connecticut, New Jersey, New York and Bermuda to United, and includes the acquisition by United of membership renewal rights for certain commercial health care business conducted by our subsidiary, Health Net Life Insurance Company in the states of Connecticut and New Jersey. As of December 31, 2012, we had substantially completed the administration and run-out of our divested businesses. See Notes 2, 3 and 4 to our consolidated financial statements for additional information regarding our reportable segments and the sale of our Medicare PDP business.

How We Measure Our Profitability

Our profitability depends in large part on our ability to, among other things, effectively price our health care products; manage health care and pharmacy costs; contract with health care providers; attract and retain members; and manage our general and administrative (“G&A”) and selling expenses. In addition, factors such as state and federal health care reform legislation and regulation, competition and general economic conditions affect our operations and profitability. The effect of escalating health care costs, as well as any changes in our ability to negotiate competitive rates with our providers, may impose further risks to our ability to profitably underwrite our business. Each of these factors may have a material impact on our business, financial condition or results of operations.

We measure our Western Region Operations reportable segment profitability based on medical care ratio (“MCR”) and pretax income. The MCR is calculated as health plan services expense divided by health plan services premiums. The pretax income is calculated as health plan services premiums and administrative services fees and other income less health plan services expense and G&A and other net expenses. See “—Results of Operations—Western Region Operations Reportable Segment—Western Region Operations Segment Results” for a calculation of MCR and pretax income.

Health plan services premiums generally include health maintenance organization (“HMO”), point of service (“POS”) and preferred provider organization (“PPO”) premiums from employer groups and individuals and from 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 to provide care to enrolled Medicare recipients. Medicare revenues 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 includes revenue for administrative services such as claims processing, customer service, medical management, provider network access and other administrative services. Health plan services expense generally 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.

G&A expenses include those costs related to employees and benefits, consulting and professional fees, marketing, business expansion initiatives, premium taxes and assessments, occupancy costs and litigation and

regulatory-related costs. Such costs are driven by membership levels, introduction of new products or provision of new services, system consolidations, outsourcing activities and compliance requirements for changing regulations, among other things. These expenses also include expenses associated with corporate shared services and other costs to reflect the fact that such expenses are incurred primarily to support health plan services. Selling expenses consist of external broker commission expenses and generally vary with premium volume.

We measure our Government Contracts segment profitability based on pretax income, which is calculated as Government Contracts revenue less Government Contracts cost. See “—Results of Operations—Government Contracts Reportable Segment—Government Contracts Segment Results” for a calculation of the government contracts pretax income.

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. These services are structured as cost reimbursement arrangements for health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, 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 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 statements 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.

We measure our Divested Operations and Services segment profitability based on pretax income. This pretax income is calculated as Divested Operations and Services segment total revenues less Divested Operations and Services segment total expenses. See “—Results of Operations—Divested Operations and Services Reportable Segment Results” for a calculation of our Divested Operations and Services pretax income.

Health Care Reform Legislation and Implementation

During the first quarter of 2010, President Obama 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. As further described below, the breadth and scope of these changes present us with a number of strategic and operational challenges.

The ACA includes provisions, which, among other things will impose a significant non-deductible tax (technically taking the form of a “fee”) on health insurers, effective for calendar years beginning after December 31, 2013. This “health insurer fee” will be assessed at a total of $8 billion in 2014, will increase thereafter and will be allocated pro rata amongst industry participants based on net premiums written, subject to certain exceptions. Payment of the health insurer fee will not be due until 2014; however, it has started to impact us since our premium rates are set a year in advance, and the tax amounts for 2014 depend on net premiums written in 2013. Additionally, proposed regulations relating to the health insurer fee have not been finalized by the Internal Revenue Service (“IRS”), making related payment procedures, timing and financial reporting requirements uncertain. If we are not able to incorporate the costs of our pro rata portion of the health insurer fee when we set our premium rates, or if we are unable to otherwise adjust our business to address this additional new cost, our financial condition and results of operations may be materially adversely affected. Furthermore, because the health insurer fee will be payable in a single lump sum based on prior year premiums, we may experience significant volatility in our cash flow relative to our results of operations in a given period. In addition, some of our competitors may have greater economies of scale, which, among other things, may lead to lower expense ratios and higher profit margins than we have. Since the health insurer fee is not tax deductible and is based on premiums earned, rather than profits, it will generally represent a higher percentage of our profits, and therefore could impact us to a greater degree than these larger competitors. Moreover, some of our competitors, including, among others, government entities, certain non-profit insurers and self-funded plans, may not be required to pay the health insurer fee or may be required to pay only one-half the rate we will be required to pay, which may have an adverse effect on our ability to compete effectively. We may not be able to match our competitors' ability to support reduced premiums by virtue of any full or partial exemptions from the fees and taxes imposed by the ACA, or by making changes to their distribution arrangements, decreasing spending on non-medical product features and services, or otherwise adjusting their operating costs and reducing general and administrative expenses.

In addition, the ACA requires the establishment of state-based or federally facilitated “exchanges” where individuals and small groups may purchase health coverage. California, Oregon and Washington, among others, have passed legislation that will implement their respective exchanges in 2014, and these exchanges have received conditional approval by the U.S. Department of Health and Human Services (“HHS”). Arizona has announced that it will rely on a federally facilitated exchange. Participation in these and other exchanges in the states in which we operate may be conditioned on the approval of the applicable state or federal government regulator, which could result in the exclusion of some carriers from the exchanges. In some cases, certain factors to be considered for inclusion on the exchanges have not yet been finalized or may be subject to change. In addition, states and the federal government are continuing to finalize regulations and guidance related to the actual operation of the exchanges, including, without limitation, with respect to state and federal rate review for plans offered on the exchanges, enforcement of exchange standards in both federal and state exchanges, procedures for agent, broker and “assister” participation in the exchanges, procedures surrounding federal subsidies for premiums and cost-sharing reductions, the operation of reinsurance, risk corridors and risk adjustment mechanisms and the rules and regulations that apply to insurers that continue to offer coverage to individuals and small group employers outside the exchanges. We have been selected to participate as “Qualified Health Plans” in state-run exchanges in California and Oregon and the federally facilitated exchange in Arizona, pending final regulatory approvals. The developing regulatory structure for the exchanges will shape the marketplace for individual and small group health plans both within and outside the exchanges, and these changes are requiring and will continue to require us to modify our strategies and operations in response. For example, the exchanges are introducing direct-to-consumer distribution channels that are requiring us to adjust our product offerings through, among other things, a more standardized benefit design with price-focused differentiation. We are also adjusting our marketing and sales practices to adapt to these changes, including developing new tools and strategies to navigate new distribution channels opened by the exchanges. In response to these changes in the health care market over time, our competitors could modify their product features or benefits, change their pricing relative to others in the market and adjust their mix of business within or outside the exchanges, or, as some of our larger competitors have done, exit segments of the market. New competitors seeking to gain a foothold in the changing market may also introduce product offerings or pricing that we may not be able to match, which may adversely affect our ability to compete effectively. If we fail to effectively adapt our business strategy and operations to these evolving markets, including with respect to shifts in consumer interface, product offerings and the competitive landscape, our financial condition and results of operations may be adversely affected.

The ACA also contains risk adjustment provisions applicable to the individual and small group markets that take effect in 2014, and will alter the economics of health care coverage both within and outside the exchanges. These risk adjustment provisions will effectively transfer funds from health plans with relatively lower risk enrollees to plans with relatively higher risk enrollees to help protect against adverse selection. The individual and small group markets represent a significant portion of our commercial business and the relevant amounts transferred may be substantial. Adapting to these risk adjustment provisions has required us, among other things, to modify our operational and strategic initiatives to focus on and manage different populations of potential members than we have in the past. In addition, the risk adjustment mechanism relies primarily on encounter data to define a health plan's average actuarial risk. The process of collecting this data presents disadvantages to more heavily capitated health plans such as ours because providers receiving fixed fees from health insurers may not have the same incentive to provide accurate and complete encounter data with respect to services rendered when compared to providers under fee for service arrangements. This incentive problem may be particularly acute for health plans operating under the delegated HMO model, which is prevalent in our California health plans. Under this model, third party intermediaries assume responsibility for certain utilization management and care coordination responsibilities, including the collection of encounter data. In addition to these permanent risk adjustment provisions, the ACA has implemented temporary reinsurance and risk corridor programs, which seek to ease the transition into the exchanges by helping to stabilize rates and protect against rate uncertainty in the initial years of the exchanges. If we are not able to successfully design and implement operational and strategic initiatives to effectively adapt to these changes in certain of our markets, our financial condition, cash flows and results of operations may be materially adversely affected.

Other provisions of the ACA include, among other things:


•	providing funds to expand Medicaid eligibility to all individuals with incomes up to 133 percent of the federal poverty level, commonly referred to as “Medicaid expansion” (as discussed below, this provision was made optional for states under the Supreme Court's ruling on the ACA);


•	imposing an excise tax on high premium insurance policies;


•	requiring premium rate reviews in certain market segments;


•	stipulating a minimum medical loss ratio (as adopted by the Secretary of HHS);


•	limiting Medicare Advantage payment rates;


•	increasing mandated “essential health benefits” in some market segments;


•	specifying certain actuarial value and cost-sharing requirements;


•	eliminating medical underwriting for medical insurance coverage decisions, or “guaranteed issue”;


•	increasing restrictions on rescinding coverage;


•	prohibiting some annual and all lifetime limits on amounts paid on behalf of or to our members;


•	limiting the ability of health plans to vary premiums based on assessments of underlying risk;


•	limiting the tax-deductible amount of compensation paid to health insurance executives;


•	requiring that most individuals obtain health care coverage or pay a penalty, commonly referred to as the “individual mandate”;


•	imposing a sales tax on medical device manufacturers; and


•	increasing fees on pharmaceutical manufacturers.

The schedule for implementation of the provisions of the ACA generally varies from as early as enactment to as late as 2018. In addition to the health insurer fee, the establishment of the exchanges and the risk adjustment provisions described above, some other potentially significant provisions of the ACA will not become effective until 2014 or later, including, but not limited to, the excise tax on high premium insurance policies, increased taxes on medical device manufacturers, increased fees on pharmaceutical manufacturers, the guaranteed issue requirement and the individual mandate. However, some of these provisions will have an earlier impact on our operations, including in connection with the setting of our premium rates as discussed above.

Various aspects of the ACA will transform the operating and regulatory landscape in the markets in which we operate, and could have an adverse impact on the cost of operating our business, and our revenues, enrollment and premium growth in certain products and market segments. For example, among other things, the ACA requires premium rate review in certain market segments and requires that premium rebates be paid to policyholders in the event certain specified minimum medical loss ratios are not met. We were not required to pay a material amount in rebates with respect to our 2012 business, however, we cannot be certain that we will not be required to pay material amounts in rebates in the future. In addition, as part of the rate review process, certain insurers may be excluded from participating in the exchanges if the review determines that the insurer has demonstrated a pattern or practice of excessive or unjustified premium rate increases. The ACA may also make it more difficult for us to attract and retain members, and will increase the amount of certain taxes and fees we pay, the latter of which is expected to increase our effective tax rate in future periods. As noted above with respect to the health insurer fee, we are unable to estimate the amount of these fees and taxes or the increase in our effective tax rate because material information and guidance regarding the calculations of these fees and taxes has not been finalized. The sales tax on medical device manufacturers and increase in the amount of fees pharmaceutical manufacturers pay imposed by the ACA, could, in turn, also increase our medical costs. Further, regulators in California and Oregon have opined that health insurers may not increase individual family plan and small group employer premiums in 2013 to cover increased costs associated with the health insurer fee payable in 2014. It is not yet clear how state regulators will respond to rate filings in other market segments that include requests to increase premiums to cover increased costs resulting from the health insurer fee or any other portion of the ACA, particularly in light of recent heightened regulatory scrutiny of premium rates. In the event regulators take further positions preventing or delaying health insurers from increasing premiums to reflect ACA-related costs, similar to the above referenced examples, or if consumers forego coverage as a result of such premium increases, our financial condition, results of operations and cash flows may be adversely affected.

We also face additional competition as new competitors enter the marketplace and existing competitors seize on opportunities to expand their business as a result of the ACA, including as discussed above with respect to the exchanges. For example, among other things, ACA provisions related to accountable care organizations, or “ACOs”, which are intended to create incentives for health care participants to work together to treat an individual across different care settings, may create opportunities for provider organizations to compete with us by assuming care management and other administrative responsibilities as part of a more integrated delivery system. However, there remains considerable uncertainty about the impact of the ACA on the health insurance market as a whole and what actions our competitors or potential competitors will take in response to the legislation.

There are numerous steps required to implement the ACA, and clarifying regulations and other guidance are expected over several years. Significant guidance and regulations on certain provisions of the ACA have been issued, including proposed and final rules, but we are still awaiting further final regulations or guidance on a number of key provisions. These provisions include certain aspects of the calculation of the health insurer fee as noted above and the limitation on deductibility of executive compensation, among others. Final regulations relating to the Medicare Shared Savings program reflecting the use of ACOs have been issued, but as noted above, the impact of these new regulations on the health care market and the role to be played by health plans in the operation of ACOs remains to be determined. Moreover, though the federal government has issued final regulations on a number of provisions, including, for

example, with respect to the exchanges, the risk adjustment, risk corridor and reinsurance programs and market reforms such as guaranteed availability, ratings reform and essential health benefits, there remains uncertainty around a number of important issues, as the final regulations are sometimes unclear or incomplete, and are subject to further change. As a result, many of the impacts of health care reform will not be known for certain until the ultimate requirements of the ACA have been definitively determined. In addition to ongoing regulatory questions, many of the operational components of health care reform are still being developed, including, as referenced above, how market participants ultimately interact and adapt to the new requirements within and outside state-run exchanges. Because of the magnitude, scope and complexity of the ACA, over time we also need to dedicate substantial resources and incur material expenses to implement the legislation.

In addition, certain legal and legislative challenges to the ACA remain despite the U.S. Supreme Court's June 2012 decision in NFIB v. Sebelius and the November 2012 presidential and congressional elections. In Sebelius, the Supreme Court upheld the ACA's individual mandate as valid under Congress' taxing power. The Sebelius decision also permits states to opt out of the elements of the ACA that require expansion of Medicaid coverage in January 2014 without losing their existing federal Medicaid funding. Currently, Arizona and California, plan to extend coverage to the uninsured through Medicaid expansions; however, the recently signed law in Arizona authorizing the expansion may be subject to litigation or referendum, which may not be resolved until 2014.

Notwithstanding Sebelius, other legal challenges to the ACA have been threatened or are still pending at lower court levels, which could result in portions of the ACA being struck down. These threatened and pending challenges include disputing the IRS's official position that premium tax credits are available to low-income individuals who purchase insurance through federally facilitated exchanges. A successful challenge in this area could significantly affect the affordability of insurance to low-income individuals in states that do not administer their own exchanges, such as Arizona. Finally, though legislative repeal of the ACA in its entirety is unlikely following the 2012 presidential and congressional elections, Congress has proposed certain legislative initiatives that may affect certain provisions of the ACA, such as with respect to certain subsidies available to low-income individuals and the individual mandate, and may attempt to amend or withhold the funding necessary to implement the ACA. Additionally, federal regulators have delayed implementation of certain ACA requirements, including the requirement that large employers provide coverage to full-time employees or pay a penalty and the requirement that federal and state small business health option program exchanges be able to facilitate employee choice among multiple health plans, due to operational concerns impacting both employers and health insurance issuers. Any such amendment or withholding of ACA funding by Congress, extended delays in the issuance of clarifying regulations and other guidance, delays in implementation, or other lingering uncertainty regarding the ACA could cause us to incur additional costs of compliance or require us to significantly modify or adjust certain of the operational and strategic initiatives we have already established. Such modifications may result in the loss of some or all of the substantial resources that have been and will be invested in the ACA implementation, and could have a material adverse effect on our business and the trading price of our common stock.

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 ACA and many states have added new requirements that are more exacting than the ACA's requirements. States may also mandate minimum medical loss ratios, implement rate reforms and enact benefit mandates that go beyond provisions included in the ACA. For example, while proposed California legislation requiring prior approval of premium rates by the California Department of Insurance (the “CDI”) did not pass, an initiative measure in California to require prior approval for individual and small group rates by the CDI has qualified for the 2014 ballot. In addition, oversight boards associated with the state-based exchanges in California will negotiate the price of coverage sold on these exchanges. These kinds of state regulations and legislation could limit or delay our ability to increase premiums even where actuarially supported and thereby could adversely impact our revenues and profitability. This 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.

Further, the interaction of new federal regulations and the implementation efforts of the various states in which we do business will continue to create substantial uncertainty for us and other health insurance companies about the requirements under which we must operate. Even in cases where state action is limited to implementing federal reforms, new or amended state laws will be required in many cases, and we will be required to operate under and comply with the various laws of each of the states in which we operate. States may disagree in their interpretations of the federal statute and regulations, and state “guidance” that is issued could be unclear or untimely. In the case of the ACA exchanges, we will be required to operate under and comply with the regulatory authority of the federal government in addition to the regimes of each of the states that establish and administer their own exchanges. If we do not successfully

implement the various state law requirements of the ACA, including with respect to the exchanges, our financial condition and results of operations may be adversely affected.

In addition, we and other health insurance companies face uncertainty and execution risk due to the multiple, complex ACA implementations that are required in abbreviated time frames in new markets. Additionally, in many cases, our operational and strategic initiatives must be implemented in evolving regulatory environments and without the benefit of established market data. In addition, the lack of operating experience in these new marketplaces for insurers and in certain cases, providers and consumers, increases the likelihood of a dynamic marketplace that may require us to adjust our operating and strategic initiatives over time, and there is no assurance that insurers, including us, will be able to do so successfully. Our execution risk encapsulates, among other things, our simultaneous participation in the exchanges, Medicaid expansion and California’s Coordinated Care Initiative (“CCI”), as further described under the heading “–California Coordinated Care Initiative” below. These initiatives will require us to effectively incorporate new and expanded populations and, among other things, will require us to effectively and efficiently restructure our provider network to meet the ACA’s dynamic environment. 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 legislation, implementing regulations, actions of our competitors and the changing marketplace could result in operational disruptions, disputes with our providers or members, increased exposure to litigation, regulatory issues, damage to our existing or potential member relationships or other adverse consequences.

Due to the complexity of the ACA, including the continuing modification and interpretation of the ACA rules and the operational risks involved with simultaneous implementation of multiple initiatives in new markets without established market data, we cannot predict the ultimate impact on our business of future regulations and laws, including state laws, implementing the ACA. Depending in part on its ultimate requirements, the ACA could have a material adverse effect on our business, financial condition, cash flows and results of operations.

Recent Developments

On May 23, 2013, we were selected to participate in the Covered California individual health insurance exchange. Covered California is expected to begin enrolling beneficiaries on October 1, 2013, and benefits are expected to become effective January 1, 2014.

RESULTS OF OPERATIONS

Consolidated Results

The table below and the discussion that follows summarize our results of operations for the three and six months ended June 30, 2013 and 2012.



	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
	(Dollars in thousands, except per share data)
Revenues
Health plan services premiums	$	2,578,874	$	2,618,927	$	5,210,943	$	5,239,876
Government contracts	139,942		176,248		274,454		357,610
Net investment income	17,143		24,697		46,694		47,001
Administrative services fees and other income	2,472		8,662		3,377		14,446
Divested operations and services revenue	—		12,805		—		12,805
Total revenues	2,738,431		2,841,339		5,535,468		5,671,738
Expenses
Health plan services (excluding depreciation and amortization)	2,191,918		2,358,455		4,460,654		4,702,114
Government contracts	127,400		153,406		252,875		315,716
General and administrative	291,437		228,756		536,672		466,032
Selling	57,769		58,390		116,330		119,951
Depreciation and amortization	9,514		7,385		18,953		14,815
Interest	8,365		8,246		16,653		16,874
Divested operations and services expenses	—		19,290		—		42,386
Total expenses	2,686,403		2,833,928		5,402,137		5,677,888
Income (loss) from continuing operations before income taxes	52,028		7,411		133,331		(6,150		)
Income tax provision (benefit)	18,545		2,241		49,798		(3,186		)
Income (loss) from continuing operations	33,483		5,170		83,533		(2,964		)
Discontinued operations:
Loss from discontinued operation, net of tax	—		—		—		(18,452		)
Gain on sale of discontinued operation, net of tax	—		119,440		—		119,440
Income on discontinued operation, net of tax	—		119,440		—		100,988
Net income	$	33,483	$	124,610	$	83,533	$	98,024
Net income per share—basic:
Income (loss) from continuing operations	$	0.42	$	0.06	$	1.05	$	(0.04	)
Income on discontinued operation, net of tax	$	—	$	1.44	$	—	$	1.22
Net income per share—basic	$	0.42	$	1.50	$	1.05	$	1.18
Net income per share—diluted:
Income (loss) from continuing operations	$	0.42	$	0.06	$	1.04	$	(0.04	)
Income on discontinued operation, net of tax	$	—	$	1.42	$	—	$	1.20
Net income per share—diluted	$	0.42	$	1.48	$	1.04	$	1.16

On April 1, 2012, we completed the sale of our Medicare PDP business to CVS Caremark. See Note 3 to our consolidated financial statements for more information. As a result of the sale, our results of operations for the six months ended June 30, 2012, included loss from discontinued operation of $(18.5) million related to our Medicare PDP business. Additionally, as a result of this sale, we recorded a gain on sale of discontinued operation in the amount of $132.8 million pretax, or $119.4 million after-tax, for the three and six months ended June 30, 2012. As of June 30, 2013 and 2012, respectively, we had no Medicare stand-alone prescription drug plan members.

For the three and six months ended June 30, 2013, we reported net income of $33.5 million or $0.42 per diluted share and net income of $83.5 million or $1.04 per diluted share, respectively, as compared to net income of $124.6 million or $1.48 per diluted share and net income of $98.0 million or $1.16 per diluted share, respectively, for the same periods in 2012. For the three and six months ended June 30, 2013, we reported net income from continuing operations of $33.5 million and $83.5 million, respectively, as compared to net income from continuing operations of $5.2 million and a net loss from continuing operations of $(3.0) million, respectively, for the same periods in 2012. Pretax margins from continuing operations were 1.9 percent and 2.4 percent, respectively, for the three and six months ended June 30, 2013 compared to 0.3 percent and (0.1) percent for the same periods in 2012.

Our total revenues decreased approximately 3.6 percent for the three months ended June 30, 2013 to $2.7 billion from $2.8 billion for the same period in 2012 and decreased 2.4 percent for the six months ended June 30, 2013 to $5.5 billion from $5.7 billion in the same period in 2012.

Health plan services premium revenues decreased by 1.5 percent to approximately $2.6 billion for the three months ended June 30, 2013 compared to the same period in 2012, and decreased by 0.6 percent to approximately $5.2 billion for the six months ended June 30, 2013 compared to the same period in 2012. Health plan services expenses decreased by 7.1 percent to approximately $2.2 billion for the three months ended June 30, 2013 compared to the same period in 2012, and decreased by 5.1 percent to approximately $4.5 billion for the six months ended June 30, 2013 compared to the same period in 2012. Investment income decreased to $17.1 million and $46.7 million for the three and six months ended June 30, 2013, respectively, compared with $24.7 million and $47.0 million for the three and six months ended June 30, 2012, respectively.

Our Government Contracts revenues decreased by 20.6 percent for the three months ended June 30, 2013 to $139.9 million from $176.2 million in the same period in 2012 and decreased by 23.3 percent for the six months ended June 30, 2013 to $274.5 million from $357.6 million in the same period in 2012. Our Government Contracts costs decreased by 17.0 percent for the three months ended June 30, 2013 to $127.4 million from $153.4 million in the same period in 2012, and decreased by 19.9 percent for the six months ended June 30, 2013 to $252.9 million from $315.7 million in the same period in 2012. The declines in our Government Contracts revenues and costs for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 were primarily due to the terms and structure of the MFLC contract we entered into in August 2012, as compared to the prior MFLC contract, and lower incentives on the T-3 contract. For additional information about our T-3 and MFLC contracts, see "—Government Contracts Reportable Segment."

Our operating results for the three and six months ended June 30, 2012, respectively, were impacted by $7.9 million and $32.9 million of negative prior period reserve development. This negative prior period reserve development was recorded as part of health care costs. For the three and six months ended June 30, 2013, there were no material reserve developments related to prior years.

Days Claims Payable

Days claims payable ("DCP") for the second quarter of 2013 was 42.1 days compared with 39.0 days in the second quarter of 2012. Adjusted DCP, which we calculate in accordance with the paragraph below, for the second quarter of 2013 was 58.4 days compared with 54.3 days in the second quarter of 2012.

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. In this Quarterly Report on Form 10-Q, the following table presents an adjusted DCP metric that subtracts capitation, provider and other claim settlements and Medicare Advantage Prescription Drug ("MAPD") payables/costs from the Claims Reserve and Health Plan Costs. Management believes that adjusted DCP provides useful information to investors because the adjusted 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 than does GAAP DCP, which includes such amounts. 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,
	2013			2012
	(Dollars in millions)
Reconciliation of Days Claims Payable:
(1) Reserve for Claims and Other Settlements—GAAP	$	1,013.1		$	1,010.5
Less: Capitation, Provider and Other Claim Settlements and MAPD Payables	(143.1		)	(106.5		)
(2) Reserve for Claims and Other Settlements—Adjusted	$	870.0		$	904.0
(3) Health Plan Services Cost—GAAP	$	2,191.9		$	2,358.5
Less: Capitation, Provider and Other Claim Settlements and MAPD Costs	(836.9		)	(842.9		)
(4) Health Plan Services Cost—Adjusted	$	1,355.0		$	1,515.6
(5) Number of Days in Period	91			91
(1) / (3) * (5) Days Claims Payable—GAAP (using end of period reserve amount)	42.1			39.0
(2) / (4) * (5) Days Claims Payable—Adjusted (using end of period reserve amount)	58.4			54.3

Income Tax Provision

Our income tax expense (benefit) and the effective income tax rate for the three and six months ended June 30, 2013 and 2012 are as follows:



	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
	(Dollars in millions)
Continuing Operations:
Income tax expense (benefit) from continuing operations	$	18.5		$	2.2		$	49.8		$	(3.2	)
Effective income tax rate for continuing operations	35.6		%	30.2		%	37.3		%	51.8		%

Discontinued Operation:
Income tax expense (benefit) from discontinued operation ^{A, B}	—			—			—			$	(10.3	)
Effective income tax rate for discontinued operation ^{A, B}	—			—			—			35.8		%
Income tax expense from gain on sale of discontinued operation ^A	—			$	13.4		—			$	13.4
Effective income tax rate for gain on sale of discontinued operation ^A	—			10.1		%	—			10.1		%

________

A - For the three and six months ended June 30, 2013, we had no discontinued operation or sale of a discontinued operation; therefore, income tax expense from discontinued operation and gain on sale of discontinued operation and the corresponding effective income tax rates are not applicable.

B - For the three months ended June 30, 2012, there was no income tax provision from discontinued operation; therefore, effective income rate tax for discontinued operation is not applicable.

Continuing Operations

The effective income tax rate for continuing operations was 35.6% and 30.2% for the three months ended June 30, 2013 and 2012, respectively and 37.3% and 51.8% for the six months ended June 30, 2013 and 2012, respectively. The effective income tax rate differs from the statutory federal tax rate of 35% for the three and six months ended June 30,

2013 due to state income taxes, tax-exempt investment income, and non-deductible compensation.

The effective income tax rate for continuing operations differs from the statutory federal tax rate of 35% for the three and six months ended June 30, 2012 due primarily to state income taxes, tax-exempt investment income, non-deductible compensation, and the release of a valuation allowance against deferred tax assets for capital loss carryforwards.

Discontinued Operation

On April 1, 2012, we completed the sale of our Medicare PDP business to CVS Caremark. See Note 3 for additional information regarding the sale of our Medicare PDP business.

Also in connection with the sale of our Medicare PDP business, we classified the operating results of our Medicare PDP business as discontinued operation in 2012. We recorded tax benefits of $10.3 million against losses from discontinued operation for the six months ended June 30, 2012. We had no income or loss and no tax expense or benefit from discontinued operation for the three months ended June 30, 2012. We also recorded tax expense of $13.4 million net against gain on sale of discontinued operation for the three and six months ended June 30, 2012. With respect to discontinued operation, the effective income tax rate was slightly higher than the statutory federal rate of 35% for the six months ended June 30, 2012 as a result of state income taxes. The effective income tax rate on the gain on sale of discontinued operation varies from the statutory federal rate of 35% for the three and six months ended June 30, 2012 due to state income taxes and the release of a valuation allowance against deferred tax assets for capital loss carryforwards, which were utilized upon the gain on sale of the Medicare PDP business.

We had no income or loss and no tax expense or benefit for discontinued operation for the three and six months ended June 30, 2013.

Western Region Operations Reportable Segment

Our 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 pharmaceutical services subsidiary and certain operations of our behavioral health subsidiaries in several states including Arizona, California and Oregon. Our Western Region Operations segment excludes the operating results of our Medicare PDP business, which has been classified as discontinued operation for the three and six months ended June 30, 2012.

Western Region Operations Segment Membership (in thousands)



	June 30, 2013	June 30, 2012	Increase/ (Decrease)		% Change
California
Large Group	608	745	(137	)	(18.4	)%
Small Group and Individual	339	303	36		11.9	%
Commercial Risk	947	1,048	(101	)	(9.6	)%
Medicare Advantage	146	141	5		3.5	%
Medi-Cal/Medicaid	1,118	1,060	58		5.5	%
Total California	2,211	2,249	(38	)	(1.7	)%

Arizona
Large Group	64	84	(20	)	(23.8	)%
Small Group and Individual	56	61	(5	)	(8.2	)%
Commercial Risk	120	145	(25	)	(17.2	)%
Medicare Advantage	43	43	—		—	%
Total Arizona	163	188	(25	)	(13.3	)%

Northwest
Large Group	23	32	(9	)	(28.1	)%
Small Group and Individual	43	56	(13	)	(23.2	)%
Commercial Risk	66	88	(22	)	(25.0	)%
Medicare Advantage	47	44	3		6.8	%
Total Northwest	113	132	(19	)	(14.4	)%

Total Health Plan Enrollment
Large Group	695	861	(166	)	(19.3	)%
Small Group and Individual	438	420	18		4.3	%
Commercial Risk	1,133	1,281	(148	)	(11.6	)%
Medicare Advantage	236	228	8		3.5	%
Medi-Cal/Medicaid	1,118	1,060	58		5.5	%
	2,487	2,569	(82	)	(3.2	)%

Total Western Region Operations enrollment was approximately 2.5 million members at June 30, 2013, a decrease of 3.2 percent compared with enrollment at June 30, 2012. Total enrollment in our California health plans declined by 1.7 percent to approximately 2.2 million members from June 30, 2012 to June 30, 2013.

Western Region Operations commercial enrollment declined by 11.6 percent from approximately 1.3 million members at June 30, 2012 to approximately 1.1 million members at June 30, 2013, primarily due to increasingly competitive markets and our efforts to reposition our commercial book of business away from unprofitable full network large group accounts towards smaller accounts and tailored network products. Enrollment in our large group segment decreased by 19.3 percent, or 166,000 members, from 861,000 members at June 30, 2012 to 695,000 members at June 30, 2013. Enrollment in our small group and individual segment in our Western Region Operations segment increased by 4.3 percent, from 420,000 members at June 30, 2012 to 438,000 members at June 30, 2013. Membership in our tailored network products decreased by 6.1 percent, or 28,000 members, from June 30, 2012 to June 30, 2013. As

of June 30, 2013, membership in tailored network products accounted for 37.3 percent of our Western Region Operations commercial enrollment compared with 35.2 percent at June 30, 2012.

Enrollment in our Medicare Advantage plans in our Western Region Operations segment at June 30, 2013 was 236,000 members, an increase of 3.5 percent compared with 228,000 members at June 30, 2012. This increase was due to gains of 5,000 members in California and 3,000 members in the Northwest.

We participate in the state Medicaid program in California, where the program is known as Medi-Cal. Our Medicaid enrollment in California increased by 58,000 members or 5.5 percent to 1,118,000 members at June 30, 2013 compared with 1,060,000 members at June 30, 2012. The increase in our Medicaid membership includes the impact of our participation in California's seniors and persons with disabilities ("SPDs") program. On November 2, 2010, the Centers for Medicare & Medicaid Services ("CMS") approved California's Section 1115 Medicaid waiver proposal, which, among other things, authorized mandatory enrollment of certain Medi-Cal only SPDs in managed care programs to help achieve care coordination and better manage chronic conditions. The mandatory SPD enrollment period began in June 2011 in 16 California counties, including Los Angeles County. As of June 30, 2013, we had approximately 118,000 total SPD members.

We are the sole commercial plan contractor with the State of California Department of Health Care Services ("DHCS") to provide Medi-Cal services in Los Angeles County, California. As of June 30, 2013, 563,000 of our Medi-Cal members resided in Los Angeles County, representing approximately 51 percent of our Medi-Cal membership. As of June 30, 2013, 565,000 of our California state health program members resided in Los Angeles County, representing approximately 51 percent of our membership in all California state health programs. As part of our 2012 settlement agreement with DHCS, DHCS agreed, among other things, to the extension of all of our existing Medi-Cal managed care contracts, including our contract with DHCS to provide Medi-Cal services in Los Angeles County, for an additional five years from their then existing expiration dates. Accordingly, our Medi-Cal contract for Los Angeles County is scheduled to expire in April 2019.

California Coordinated Care Initiative

In 2012, the California legislature enacted the Coordinated Care Initiative, or “CCI.” The stated purpose of the CCI is to provide a more efficient health care delivery system and improved coordination of care to individuals that are fully eligible for Medicare and Medi-Cal benefits, or "dual eligibles," as well as to all Medi-Cal only beneficiaries who rely on long-term services and supports, or “LTSS,” which includes institutional long-term care and home and community-based services and other support services. Accordingly, in participating counties, the CCI will establish a voluntary three-year “dual eligibles demonstration” program to coordinate medical, behavioral health, long-term institutional, and home- and community-based services for dual eligibles through a single health plan, and will require that all Medi-Cal beneficiaries in participating counties join a Medi-Cal managed care health plan to receive their Medi-Cal benefits, including LTSS.

The DHCS has selected eight counties to participate in the CCI-Los Angeles, San Diego, Orange, San Bernardino, Riverside, Alameda, San Mateo and Santa Clara. Health plans selected to participate in the CCI in a given county will be required to provide a full range of benefits for medical services, including primary care and specialty physician, hospital and ancillary services, as well as behavioral health services and LTSS. On April 4, 2012, DHCS selected us to participate in the CCI for both Los Angeles County and San Diego County. We currently do not provide all of the benefits required for participation in the CCI, including, among others, custodial care in nursing homes and in-home supportive services. We will need to make arrangements to provide such benefits either directly or by subcontracting with other parties prior to the commencement of the CCI.

Dual eligibles are expected to receive advance notice regarding their enrollment options which varies by county. On March 27, 2013, CMS and DHCS signed an MOU that establishes the framework of the dual eligibles demonstration portion of the CCI. As currently proposed, the dual eligibles demonstration would continue for a three-year term beginning no sooner than January 2014 based on DHCS' current timetable, with initial enrollment occurring on a phased in basis based on birth date.

The DHCS has selected Health Net and the local initiative plan, L.A. Care Health Plan (“L.A. Care”), for the CCI in Los Angeles County. L.A. Care is a public agency that serves low-income persons in Los Angeles County through health coverage programs such as Medi-Cal. Dual eligibles in Los Angeles County will be able to choose between an “opt out” option or choose either L.A. Care or us for benefits under the dual eligibles demonstration. Dual eligibles who "opt out" will continue to receive Medi-Cal benefits through a managed care health plan under the CCI, but will receive separate fee-for-service Medicare benefits. If no selection is made, the dual eligibles would be passively enrolled and allocated to either L.A. Care or us. The methodology for this allocation process has yet to be determined. The initial

enrollment period in Los Angeles County will be phased in over 12 months. During the first three months, the dual eligibles will have the option to enroll in the program, with passive enrollment scheduled to begin in April 2014.

The DHCS has selected us and three other health plans for the CCI in San Diego County. Dual eligibles in San Diego County will be able to select to receive benefits from any one of these health plans, or elect an “opt out” option similar to the option in Los Angeles County. If no selection is made, the dual eligibles will be passively enrolled and allocated to one of the health plans. The methodology for this allocation process has yet to be determined. The initial enrollment period in San Diego County will be phased in over 12 months.

Participation in the dual eligibles demonstration 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. The CCI is subject to the approval of CMS. Prior to CMS' determination on whether to approve the CCI, various stakeholders have been given the opportunity to comment on the program, which may impact CMS' decision. In addition, on an ongoing basis we will likely be required to make certain filings with, and obtain approvals from, DMHC in connection with our proposed participation in the CCI. For example, on October 1, 2012, the DMHC approved certain modifications to the internal organizational structure of our subsidiaries related to our participation in the CCI.

Our participation in the CCI, and the dual eligibles demonstration in particular, represents a significant new business opportunity for us. However, we will not be able to participate in the CCI in either Los Angeles or San Diego County unless a number of objectives and conditions are met including, among others, our entry into a contract on satisfactory terms (including, without limitation, satisfactory rates) with the DHCS and CMS for the CCI and our execution of necessary modifications to our internal administrative and operations structure to meet the demands of the CCI. Certain of these conditions are outside of our control and there can be no assurances that we will be able to meet all of the objectives and conditions necessary for our participation in the CCI in Los Angeles County, San Diego County or both. In addition, the changes to our administrative and operations structure will include implementing delivery systems for benefits with which we have limited operating experience, including LTSS. We have incurred and expect that we will continue to incur significant incremental costs to prepare for the CCI. If we do not participate in the CCI in either county, this would result in the loss of some or all of the resources that have been and will be invested in this opportunity and could have a material adverse effect on our business and the trading price of our common stock.

In addition, if we participate in the CCI in either Los Angeles or San Diego County, there can be no assurance that this business opportunity will prove to be successful. The CCI is a model of providing health care that is new to regulatory authorities and health plans in the State of California. Our participation and success in the CCI will be subject to a number of risks inherent in untested health care initiatives. For example, there may be difficulties in the implementation of the dual eligibles demonstration that could detract from its acceptance by beneficiaries or increase our costs of participation in the dual eligibles demonstration. In addition, our participation in the CCI will require us to provide benefits with which we have limited operating experience, including but not limited to LTSS. Our failure to organize and deliver on this new model would negatively affect the operating and financial success of this business opportunity.

Some of the risks involved in our proposed participation in the CCI include that dual eligibles are generally among the most chronically ill individuals within each of Medicare and Medi-Cal, requiring a complex range of services from multiple providers. If we do not accurately predict the costs of providing benefits to dual eligibles or fail to obtain suitable rates under our agreement with CMS and DHCS, our participation in the CCI may prove to be unprofitable. In addition, we may not be able to effectively design and implement the necessary modifications to our internal administrative and operations structure to meet the demands of the CCI, which may negatively impact our profitability in the CCI and have an adverse effect on our financial condition and results of operations. For example, our profitability in the CCI will be dependent in part on our ability to successfully provide and administer LTSS benefits, either directly or by subcontracting with other parties. Because we have limited operating experience in providing and administering this benefit, particularly with respect to cost management, there is no assurance that we will be able to make such arrangements on favorable terms, which may adversely affect our results of operations. Our failure to successfully participate in the CCI could have a material adverse effect on our business, financial condition and/or results of operations.

State-Sponsored Health Plans Rate Settlement Agreement

the date of the Agreement for an additional five years from their then existing expiration dates; (2) a settlement account (the "Account") applicable to all of our state-sponsored health care programs, including Medi-Cal, Healthy Families, SPDs, our proposed participation in the dual eligibles demonstration portion of the CCI that is expected to begin in 2014 and any potential future Medicaid expansion under federal health care reform; and (3) compensate us should DHCS terminate any of our state-sponsored health care programs contracts early.

Effective January 1, 2013, the settlement account (the "Account") was established with an initial balance of zero, and will be settled in cash on December 31, 2019, except that under certain circumstances DHCS may extend the final settlement for up to three additional one-year periods (as may be extended, the “Term”).

During the Term, the deficit or surplus will be calculated annually and the resulting balance in the Account will be adjusted accordingly following DHCS' review of our adjustment amount. Cash settlement of the Account will occur upon expiration of the Term as provided in the Agreement, subject to certain provisions for interim partial settlement payments to us in the event that DHCS terminates any of our state-sponsored health care programs contracts early. Upon expiration of the Term, if the Account is in a surplus position, then no monies are owed to either party. If the Account is in a deficit position, then DHCS shall pay the amount of the deficit to us. In no event, however, shall the amount paid by DHCS to us under the Agreement exceed $264 million or be less than an alternative minimum amount. The alternative minimum amount is calculated as follows: (i) $264 million, minus (ii) any partial settlement payments previously made to us by DHCS, minus (iii) 50% of the pretax income on our state-sponsored health care programs business in excess of a 2.0% pretax margin for each calendar year of the Term. Under the Agreement, DHCS will make an interim partial settlement payment to us based on a pro rata portion of the alternative minimum amount if it terminates any of our state-sponsored health care programs contracts early. We believe that the use of the Account will help promote greater financial stability and predictability in our state health care programs business during the Term.

As of June 30, 2013, we had calculated and recorded a deficit of $35.4 million reflecting our estimated adjustment to the Account based on our actual pretax margin for the six months ended June 30, 2013. This amount is reported as part of health plan services premiums and the deficit balance, a receivable, is included in other noncurrent assets.

Western Region Operations Segment Results



	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
	(Dollars in thousands, except PMPM data)
Commercial premiums	$	1,298,569		$	1,436,447		$	2,623,983		$	2,889,653
Medicare premiums	688,579			691,396			1,394,977			1,406,447
Medicaid premiums	591,726			491,084			1,191,983			943,776
Health plan services premiums	2,578,874			2,618,927			5,210,943			5,239,876
Net investment income	17,143			24,697			46,694			47,001
Administrative services fees and other income	2,472			8,662			3,377			14,446
Total revenues	2,598,489			2,652,286			5,261,014			5,301,323
Health plan services	2,191,918			2,358,400			4,460,654			4,707,777
General and administrative	284,113			218,689			529,348			449,493
Selling	57,769			58,390			116,330			119,951
Depreciation and amortization	9,514			7,385			18,953			14,814
Interest	8,365			8,246			16,653			16,874
Total expenses	2,551,679			2,651,110			5,141,938			5,308,909
Income (loss) from continuing operations before income taxes	46,810			1,176			119,076			(7,586		)
Income tax provision (benefit)	16,023			(452		)	43,652			(4,137		)
Income (loss) from continuing operations	$	30,787		$	1,628		$	75,424		$	(3,449	)
Pretax margin	1.8		%	0.04		%	2.3		%	(0.1		)%
Commercial premium yield	2.0		%	4.6		%	2.4		%	5.0		%
Commercial premium PMPM (d)	$	380.30		$	372.91		$	382.81		$	373.75
Commercial health care cost trend	(2.3		)%	8.2		%	(2.8		)%	10.2		%
Commercial health care cost PMPM (d)	$	322.98		$	330.71		$	327.07		$	336.52
Commercial MCR (e)	84.9		%	88.7		%	85.4		%	90.0		%
Medicare Advantage MCR (e)	89.9		%	92.0		%	90.9		%	89.9		%
Medicaid MCR (e)	79.5		%	91.3		%	79.8		%	89.1		%
Health plan services MCR (a)	85.0		%	90.1		%	85.6		%	89.8		%
G&A expense ratio (b)	11.0		%	8.3		%	10.2		%	8.6		%
Selling costs ratio (c)	2.2		%	2.2		%	2.2		%	2.3		%

__________


(a)	Health plan services 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 revenue 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 administrative services only ("ASO") member months.


(e)	Commercial, Medicare Advantage and Medicaid MCR is calculated as commercial, Medicare Advantage or Medicaid health care cost divided by commercial, Medicare Advantage or Medicaid premiums, as applicable.

Revenues

Total revenues in our Western Region Operations segment decreased 2.0 percent to approximately $2.6 billion for the three months ended June 30, 2013 and decreased 0.8 percent to approximately $5.3 billion for the six months ended June 30, 2013, compared to the same periods in 2012. The decrease for the three months ended June 30, 2013 as compared to the same period in 2012 was primarily due to decreases in premium revenues and net investment income.

Health plan services premium revenues in our Western Region Operations segment decreased 1.5 percent to approximately $2.6 billion for the three months ended June 30, 2013 and decreased 0.6 percent to approximately $5.2 billion for the six months ended June 30, 2013 compared to the same periods in 2012 primarily due to decreases in commercial premium revenues, partially offset by increases in Medicaid premium revenues.

Our Medicaid premium revenue increased by $100.6 million in the three months ended June 30, 2013 as compared to the same period in 2012, including a $35.7 million increase as a result of reinstated premium taxes. On June 27, 2013, the State of California reinstated premium taxes retroactive to July 1, 2012 for plans participating in the state's Medicaid program. This reinstatement resulted in a higher premium tax expense of $35.7 million, of which approximately $25.4 million is attributable to periods prior to the second quarter of 2013. See Note 2 to our consolidated financial statements for additional information regarding these premium taxes.

Investment income in our Western Region Operations segment decreased to $17.1 million for the three months ended June 30, 2013 from $24.7 million for the same period in 2012 and decreased to $46.7 million for the six months ended June 30, 2013 from $47.0 million for the same period in 2012. These decreases were due to lower investment gains realized during the three and six months ended June 30, 2013 as compared to the same periods in 2012.

Health Plan Services Expenses

Health plan services expenses in our Western Region Operations segment were $2.2 billion and $4.5 billion for the three and six months ended June 30, 2013, respectively, compared to $2.4 billion and $4.7 billion for the three and six months ended June 30, 2012, respectively. Health plan services expenses in our Western Region Operations segment declined by 7.1 percent and 5.2 percent for the three and six months ended June 30, 2013 compared to the same periods in 2012 primarily due to decreases in commercial health plan services costs.

Commercial Premium Yields and Health Care Cost Trends

In our Western Region Operations segment, commercial premium PMPM increased by 2.0 percent to approximately $380 for the three months ended June 30, 2013 compared to an increase of 4.6 percent to approximately $373 for the same period of 2012. Commercial premium PMPM for the six months ended June 30, 2013 was approximately $383, a 2.4 percent increase over the commercial premium PMPM of approximately $374 for the same period of 2012.

Commercial health care costs PMPM for the three months ended June 30, 2013 in our Western Region Operations segment were approximately $323, a 2.3 percent decrease over the commercial health care costs PMPM of $331 for the same period of 2012. Commercial health care costs PMPM for the six months ended June 30, 2013 in our Western Region Operations segment were approximately $327, a 2.8 percent decrease over the commercial health care costs PMPM of $337 for the same period of 2012. We believe these decreases in the commercial health care costs PMPM for the three and six months ended June 30, 2013 were primarily due to the absence of adverse prior period development and our efforts to reposition our commercial book of business away from unprofitable full network large group accounts towards smaller accounts and tailored network products.

Medical Care Ratios

The health plan services MCR in our Western Region Operations segment was 85.0 percent and 85.6 percent for the three and six months ended June 30, 2013, respectively, compared with 90.1 percent and 89.8 percent for the three and six months ended June 30, 2012, respectively.

Commercial MCR in our Western Region Operations segment was 84.9 percent and 85.4 percent for the three and six months ended June 30, 2013, respectively, compared with 88.7 percent and 90.0 percent for the three and six months ended June 30, 2012, respectively. The improvement of 380 basis points in our commercial MCR for the three months ended June 30, 2013 and the improvement of 460 basis points in our commercial MCR for the six months ended June 30, 2013 were primarily due to the adverse prior period development included in commercial health care costs for the three and six months ended June 30, 2012 as well as the repositioning of our commercial business and lower health care cost trends.

The Medicare Advantage MCR in our Western Region Operations segment was 89.9 percent and 90.9 percent for the three and six months ended June 30, 2013, respectively, compared with 92.0 percent and 89.9 percent for the three and six months ended June 30, 2012, respectively. The Medicare Advantage MCR improved 210 basis points for the three months ended June 30, 2013 compared to the same period in 2012, primarily due to lower health care cost trends. The Medicare Advantage MCR deteriorated 100 basis points for the six months ended June 30, 2013 compared to the

same period in 2012, primarily due to lower premium yield from funding reductions implemented in connection with sequestration under the Budget Control Act of 2011 and Taxpayer Relief Act of 2012.

The Medicaid MCR in our Western Region Operations segment was 79.5 percent and 79.8 percent for the three and six months ended June 30, 2013, respectively, compared with 91.3 percent and 89.1 percent for the three and six months ended June 30, 2012, respectively. The improvement in the Medicaid MCR for the three months ended June 30, 2013 compared to the same period in 2012 was primarily due to moderating health care costs and higher premiums in our SPD membership and the reinstated Medicaid premium taxes that increased our Medicaid premium revenues. For additional information on the reinstated Medicaid premium taxes and the related impact on our operating results, see Note 2 to our consolidated financial statements. The improvement in the Medicaid MCR for the six months ended June 30, 2013 compared to the same period in 2012 was primarily due to $38 million in revenues net of percent of premium capitation from favorable retroactive rate adjustments related to prior periods that were recognized in the six months ended June 30, 2013 as well as the impact of the reinstated Medicaid premium taxes.

G&A, Selling and Interest Expenses

General and administrative expense in our Western Region Operations segment was $284.1 million and $529.3 million for the three and six months ended June 30, 2013, respectively, compared with $218.7 million and $449.5 million for the three and six months ended June 30, 2012, respectively. The G&A expense ratio was 11.0 percent and 10.2 percent for the three and six months ended June 30, 2013, respectively, compared to 8.3 percent and 8.6 percent for the three and six months ended June 30, 2012, respectively. Increases in our general and administrative expenses for both the three and six months ended June 30, 2013 are primarily due to the reinstated premium taxes related to our Medicaid business and costs related to the implementation of the CCI, including the dual eligibles demonstration, and the ACA, including the exchanges. We expect to continue to incur significant additional expenses for the remainder of 2013 and 2014 in connection with our implementation of the CCI, including the dual eligibles demonstration and the ACA, as well as new business initiatives, which include our expected plans to administer Medicaid benefits in Arizona's Maricopa County and provide HMO benefits to beneficiaries of the California Public Employees' Retirement System ("CalPERS") in six Southern California counties. We recorded the reinstated Medicaid premium taxes of $35.7 million, of which $25.4 million related to periods prior to the second quarter of 2013, in general and administrative expenses for the three and six months ended June 30, 2013. The Medicaid premium taxes are currently authorized by the State for three years starting July 1, 2013.

Selling expense in our Western Region Operations segment was $57.8 million and $116.3 million for the three and six months ended June 30, 2013, respectively, compared with $58.4 million and $120.0 million for the three and six months ended June 30, 2012, respectively. The selling costs ratio was 2.2 percent for each of the three and six months ended June 30, 2013, respectively, compared to 2.2 percent and 2.3 percent for the three and six months ended June 30, 2012, respectively.

Interest expense in our Western Region Operations segment was $8.4 million and $16.7 million for the three and six months ended June 30, 2013, respectively, compared with $8.2 million and $16.9 million for the three and six months ended June 30, 2012, respectively. The increase in interest expense for the three months ended June 30, 2013 compared to the same period in 2012 is primarily due to an increase in net borrowings on our revolving credit facility. The decrease in interest expense during the six months ended June 30, 2013 compared to the same period in 2012 is due to lower borrowings and lower interest rates during the first quarter of 2013.

Government Contracts Reportable Segment

On 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 North Region, we provide administrative services to approximately 2.9 million MHS eligible beneficiaries as of June 30, 2013. For a description of the T-3 contract, see "—Overview—How We Measure Our Profitability.”

In addition to the beneficiaries that we service under the T-3 contract, we administer contracts with the U.S. Department of Veterans Affairs to manage community-based outpatient clinics in six states covering approximately 10,400 enrollees and provide behavioral health services to military families under the Department of Defense sponsored MFLC program.

On August 15, 2012, our wholly owned subsidiary, MHN Government Services, entered into a new contract to provide counseling services to military service members and their families under the MFLC program with a five-year term that includes a 12-month base period and four 12-month option periods. MHN Government Services was the sole contractor under the previous MFLC contract, and is one of three contractors initially selected to participate in the MFLC program under the current MFLC contract. Revenues from the current and prior MFLC contracts were $24.2

million and $50.1 million for the three and six months ended June 30, 2013, respectively, compared to $59.1 million and $116.2 million for the three and six months ended June 30, 2012, respectively.

Government Contracts Segment Results

The following table summarizes the operating results for the Government Contracts segment for the three and six months ended June 30, 2013 and 2012:



	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
	(Dollars in thousands)
Government contracts revenues	$	139,942	$	176,248	$	274,454	$	357,610
Government contracts costs	121,826		152,705		247,301		312,028
Income from continuing operations before income taxes	18,116		23,543		27,153		45,582
Income tax provision	7,537		9,305		11,161		18,081
Income from continuing operations	$	10,579	$	14,238	$	15,992	$	27,501

Government Contracts revenues decreased by $36.3 million, or 20.6 percent, for the three months ended June 30, 2013 and decreased by $83.2 million, or 23.3 percent, for the six months ended June 30, 2013 as compared to the same periods in 2012. Government Contracts costs decreased by $30.9 million, or 20.2 percent, for the three months ended June 30, 2013 and decreased by $64.7 million, or 20.7 percent, for the six months ended June 30, 2013 as compared to the same periods in 2012. Declines in Government Contracts revenues for the three and six months ended June 30, 2013 were primarily due to lower incentives on the T-3 contract and the different terms and structure of the current MFLC contract as compared to the prior MFLC contract. Declines in Government Contracts costs for the three and six months ended June 30, 2013 were primarily due to the different terms and structure of the current MFLC contract as compared to the prior MFLC contract.

Divested Operations and Services Reportable Segment Results

The following table summarizes the operating results for our Divested Operations and Services reportable segment for the three and six months ended June 30, 2013 and 2012:



	Three months ended June 30,					Six months ended June 30,
	2013		2012			2013		2012
	(Dollars in thousands)
Divested operations and services revenue	$	—	$	12,805		$	—	$	12,805
Total revenues	—		12,805			—		12,805
Health plan services	—		14			—		140
General and administrative	—		(7)			—		(2)
Depreciation and amortization	—		—			—		1
Divested operations and services expenses	—		19,290			—		42,386
Total expenses	—		19,297			—		42,525
Loss from continuing operations before income taxes	—		(6,492)			—		(29,720)
Income tax benefit	—		(2,537)			—		(11,383)
Net loss from continuing operations	$	—	$	(3,955	)	$	—	$	(18,337	)

Our Divested Operations and Services reportable segment includes the operations of our businesses that provided administrative services to United in connection with the Northeast Sale and transition-related revenues and expenses of our Medicare PDP business that was sold on April 1, 2012. As of December 31, 2012, we had substantially completed the administration and run-out of our divested businesses. See Note 3 to our consolidated financial statements for additional information on the sale of our Medicare PDP business, and Note 4 for more information regarding our reportable segments.

Corporate/Other

The following table summarizes the Corporate/Other segment for the three and six months ended June 30, 2013 and 2012:



	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Costs included in health plan services costs	$	—		$	41		$	—		$	(5,803	)
Costs included in government contract costs	5,574			701			5,574			3,688
Costs included in G&A	7,324			10,074			7,324			16,541
Loss from continuing operations before income taxes	(12,898		)	(10,816		)	(12,898		)	(14,426		)
Income tax benefit	(5,015		)	(4,075		)	(5,015		)	(5,747		)
Net loss from continuing operations	$	(7,883	)	$	(6,741	)	$	(7,883	)	$	(8,679	)

Our Corporate/Other segment is not a business operating segment. It is added to our reportable segments to reconcile to our consolidated results. Our Corporate/Other segment includes costs that are excluded from the calculation of segment pretax income because they are not managed within our reportable segments.

Our results in our Corporate/Other segment for the three and six months ended June 30, 2013 were impacted by $12.9 million in pretax costs, primarily severance expenses related to continuing efforts to address scale issues. Our results in our Corporate/Other segment for the three months ended June 30, 2012 were impacted primarily by $10.8 million in pretax costs related to our G&A cost reduction efforts. Our operating results in our Corporate/Other segment for the six months ended June 30, 2012 were impacted primarily by $20.2 million in pretax costs related to our G&A cost reduction efforts and $0.7 million in pretax litigation reserve true-ups, partially reduced by a $6.5 million insurance reimbursement related to a prior litigation settlement.

LIQUIDITY AND CAPITAL RESOURCES

Market and Economic Conditions

The global economy is showing some signs of improvement but market conditions continue to be challenging with relatively high levels of unemployment, diminished business and consumer confidence, and volatility in both U.S. and international capital and credit markets. Market conditions could limit our ability to timely replace maturing liabilities, 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 of products purchased from us. In addition, if our customers experience financial issues, they may not be able to pay, or may delay payment of, accounts 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.

Cash and Investments

As of June 30, 2013, the fair value of our investment securities available-for-sale was $1.7 billion, which includes both current and noncurrent investments. Noncurrent investments were $18.3 million, or 1.1% of the total investments available-for-sale as of June 30, 2013. We hold high-quality fixed income securities primarily comprised of corporate bonds, mortgage-backed bonds, municipal bonds and bank loans. 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.

Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by investing in a diversified mix of high-quality fixed-income securities, which are largely investment grade, while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining an expected total return on invested funds.

Our investment holdings are currently primarily comprised of investment grade securities with an average rating of “A+” and “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. As of June 30, 2013, our investment portfolio includes $409.6 million, or 24.8% 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. As of June 30, 2013, our investment portfolio also included $780.2 million, or 47.3% of our portfolio holdings, of obligations of states and other political subdivisions and $434.6 million, or 26.3% of our portfolio holdings, of corporate debt securities.

We had gross unrealized losses of $51.8 million as of June 30, 2013, and $2.7 million as of December 31, 2012. Included in the gross unrealized losses as of June 30, 2013 was $2.4 million related to noncurrent investments available-for-sale. There were no noncurrent investments available-for-sale included in the gross unrealized losses as of December 31, 2012. 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 other-than-temporary impairments, which may be material, may be recorded in future periods. No impairment was recognized during the three and six months ended June 30, 2013 or 2012.

Liquidity

We believe that expected cash flow from operating activities, any existing cash reserves and other working capital and lines of credit are adequate to allow us to fund existing obligations, repurchase shares of our common stock, introduce new products and services, enter into new lines of business and continue to operate and develop health care-related businesses as we may determine to be appropriate at least for the next twelve months. We regularly evaluate cash requirements for current operations and commitments, for acquisitions and other strategic transactions, to address regulatory changes such as the ACA and for business expansion opportunities, such as the CCI, Medicaid expansion in California and the commencement of our Medicaid program in Arizona's Maricopa County. 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 and costs associated with our proposed participation in the CCI and the Medicaid program in Arizona, among other things, could adversely affect our liquidity.

Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from state and federal governments and agencies. Our receivable from CMS related to our Medicare business was $210.5 million as of June 30, 2013 and $129.9 million as of December 31, 2012. The receivable from DHCS related to our California Medicaid business was $280.7 million as of June 30, 2013 and $174.0 million as of December 31, 2012. Our receivable from the DoD relating to our current and prior contracts for the TRICARE North Region was $205.2 million and $228.3 million as of June 30, 2013 and December 31, 2012, respectively. The timing of collection of such receivables is impacted by government audit, among other things, and can extend for periods beyond a year.

Operating Cash Flows

Our net cash flow (used in) provided by operating activities for the six months ended June 30, 2013 compared to the same period in 2012 is as follows:



	June 30,			June 30,		Change Period over Period
	2013			2012		Change Period over Period
	(Dollars in millions)
Net cash (used in) provided by operating activities	$	(134.5	)	$	123.9	$	(258.4	)

The decrease of $258.4 million in operating cash flows is primarily related to Medicare prepayments received in June 2012.

Investing Activities

Our net cash flow provided by investing activities for the six months ended June 30, 2013 compared to the same period in 2012 is as follows:



	June 30,		June 30,		Change Period over Period
	2013		2012		Change Period over Period
	(Dollars in millions)
Net cash provided by investing activities	$	36.0	$	291.2	$	(255.2	)

Net cash provided by investing activities decreased by $255.2 million during the six months ended June 30, 2013 as compared to the same period in 2012. This decrease is primarily due to $248.2 million in cash received for the sale of our Medicare PDP business in the second quarter ended June 30, 2012.

Financing Activities

Our net cash flow provided by (used in) financing activities for the six months ended June 30, 2013 compared to the same period in 2012 is as follows:



	June 30,		June 30,			Change Period over Period
	2013		2012			Change Period over Period
	(Dollars in millions)
Net cash provided by (used in) financing activities	$	38.0	$	(12.3	)	$	50.3

Net cash provided by financing activities increased by $50.3 million during the six months ended June 30, 2013 as compared to the same period in 2012 primarily due to a $75.6 million increase in checks outstanding, net of deposits, and a $47.5 million increase in net borrowings on our revolving credit facility, partially offset by a $48.7 million increase in share repurchases, a $10.1 million decrease in cash from customer funds administered and an $8.4 million decrease in proceeds from the exercise of stock options and employee stock purchases.

Capital Structure

Our debt-to-total capital ratio was 25.6 percent as of June 30, 2013 compared with 24.3 percent as of December 31, 2012. This increase was primarily due to a $25 million increase in our revolving credit facility balance as of June 30, 2013 compared to December 31, 2012 and share repurchases made during the three months ended March 31, 2013. See "—Share Repurchases" below.

Share Repurchases. On May 2, 2011, our Board of Directors authorized a stock repurchase program pursuant to which a total of $300.0 million of our outstanding common stock could be repurchased (our "stock repurchase program"). On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program. During the three months ended June 30, 2013 we made no share repurchases and during the six months ended June 30, 2013 we repurchased approximately 2.7 million shares of our common stock for aggregate consideration of $70.0 million under our stock repurchase program. The remaining authorization under our stock repurchase program as of June 30, 2013 was $280.0 million. For additional information on our stock repurchase program, see Note 6 to our consolidated financial statements.

Under our various stock option and long-term incentive plans, in certain circumstances 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, we have the right to withhold shares to satisfy any tax obligations 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 our stock repurchase program.

The following table presents monthly information related to repurchases of our common stock, including shares withheld by the Company to satisfy tax withholdings and exercise price obligations, as of June 30, 2013:



Period	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)	Maximum Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Programs (b)
January 1—January 31	2,400,059	(c)	$	26.20	$	62,873,931	2,400,000	$	287,127,636
February 1—February 28	818,916	(c)	27.22		22,289,959		257,211	$	280,000,018
March 1—March 31	834	(c)	28.68		23,919		—	$	280,000,018
April 1—April 30	1,203	(c)	29.40		35,368		—	$	280,000,018
May 1—May 31	7,492	(c)	31.77		238,020		—	$	280,000,018
June 1—June 30	259	(c)	31.07		8,047		—	$	280,000,018
	3,228,763		$	26.47	$	85,469,244	2,657,211

________


(a)	During the six months ended June 30, 2013, we did not repurchase any shares of our common stock outside our stock repurchase program, except shares withheld in connection with our various stock option and long-term incentive plans.

(b)

On May 2, 2011, our Board of Directors authorized our stock repurchase program, pursuant to which a total of $300.0 million of our common stock could be repurchased. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program. Our stock repurchase program does not have an expiration date. During the six months ended June 30, 2013, we did not have any repurchase program expire, and we did not terminate any repurchase program prior to its expiration date.


(c)	Includes shares withheld by the Company to satisfy tax withholding and/or exercise price obligations arising from the vesting and/or exercise of restricted stock units, stock options and other equity awards.

Revolving Credit Facility. In October 2011, we entered into a $600 million unsecured revolving credit facility due in October 2016, which includes a $400 million sublimit for the issuance of standby letters of credit and a $50 million 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. As of June 30, 2013, $125.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $416.3 million (see "—Letters of Credit" below). As of July 23, 2013, we had $100.0 million in borrowings outstanding under the revolving credit facility.

make dividends. In addition, we are required to be in compliance at the end of each fiscal quarter with a specified consolidated leverage ratio and consolidated fixed charge coverage ratio.

As of June 30, 2013, we were in compliance with all covenants under our revolving credit facility.

Letters of Credit

Pursuant to the terms of our revolving credit facility, we can obtain letters of credit in an aggregate amount of $400 million and the maximum amount available for borrowing is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2013 and July 23, 2013, we had outstanding letters of credit of $58.7 million and $8.7 million, respectively, resulting in a maximum amount available for borrowing of $416.3 million as of June 30, 2013 and $491.3 million as of July 23, 2013. As of June 30, 2013 and July 23, 2013, no amount had been drawn on any of these letters of credit.

Senior Notes. We have issued $400 million in aggregate principal amount of 6.375% Senior Notes due 2017 (the “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, 2013, we were in compliance with all of the covenants under the indenture governing the Senior Notes.

The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:


•	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

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

Each of the following will be an Event of Default under the indenture governing the Senior Notes:


•	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;

•

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


•	events in bankruptcy, insolvency or reorganization of our Company.

Statutory Capital Requirements

Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable state laws and regulations, and must have adequate reserves for claims. Management believes that as of June 30, 2013, 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.

By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our regulated subsidiaries, are required to maintain minimum levels of statutory capital and surplus. The minimum statutory capital and surplus 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 capital and surplus 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 capital and surplus 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.

Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended (“Knox-Keene”), certain 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) a fixed minimum amount, (ii) a minimum amount based on premiums or (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 DMHC to restrict dividends and loans to affiliates, to the extent that the payment of such would reduce such entities' TNE below the minimum requirement or 130% of the minimum requirement, or reduce the cash-to-claims ratio below 1:1. At June 30, 2013, all of our subsidiaries subject to the TNE requirements and the undertakings to DMHC exceeded the minimum requirements.

As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations. During the six months ended June 30, 2013, we made $7.5 million in capital contributions to a subsidiary to meet regulatory requirements. Health Net, Inc. made no capital contributions to any of its subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations thereafter through July 23, 2013.

Legislation may be enacted in certain states in which our subsidiaries operate imposing substantially increased minimum capital and/or statutory deposit requirements for HMOs in such states. Such statutory deposits may only be drawn upon under limited circumstances relating to the protection of policyholders.

As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.

CONTRACTUAL OBLIGATIONS

Pursuant to Item 303(a)(5) of Regulation S-K, we identified our known contractual obligations as of December 31, 2012 in our Form 10-K. During the six months ended June 30, 2013, there were no significant changes to our contractual obligations as previously disclosed in our Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2013, we had 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 our letters of credit.

CRITICAL ACCOUNTING ESTIMATES

In our Form 10-K, we identified the critical accounting policies, which affect the more significant estimates and assumptions used in preparing our consolidated financial statements. Those policies include revenue recognition, health care costs, including IBNR amounts, reserves for contingent liabilities, amounts receivable or payable under government contracts, goodwill and other intangible assets, recoverability of long-lived assets and investments, and income taxes. We have not changed existing policies from those previously disclosed in our Form 10-K. Our critical accounting policy on estimating reserves for claims and other settlements and the quantification of the sensitivity of financial results to reasonably possible changes in the underlying assumptions used in such estimation as of June 30, 2013 is discussed below. There were no significant changes to the critical accounting estimates as disclosed in our Form 10-K.

Reserves for Claims and Other Settlements

Reserves for claims and other settlements include reserves for claims (IBNR claims and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Western Region Operations reporting segment. Because reserves for claims include various actuarially developed estimates, our actual health care services expenses may be more or less than our previously developed estimates.

We calculate our best estimate of the amount of our IBNR reserves in accordance with GAAP and using standard actuarial developmental methodologies. This method is also known as the chain-ladder or completion factor method. The developmental method estimates reserves for claims based upon the historical lag between the month when services are rendered and the month claims are paid while taking into consideration, among other things, expected medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key component of the developmental method is the completion factor, which is a measure of how complete the claims paid to date are relative to the estimate of the claims for services rendered for a given period. While the completion factors are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods since a large portion of health care claims are not submitted to us until several months after services have been rendered. Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member per month claims trends developed from the experience in preceding months. This method is applied consistently year over year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership, among other things.

An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns and medical cost trends. As such, the completion factors and the claims per member per month trend factor are the most significant factors used in estimating our reserves for claims. Since a large portion of the reserves for claims is attributed to the most recent months, the estimated reserves for claims are highly sensitive to these factors. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by these factors:



Completion Factor (a) Percentage-point Increase (Decrease) in Factor		Western Region Operations Health Plan Services (Decrease) Increase in Reserves for Claims
2%		$ (49.5) million
1%		$ (25.3) million
(1)%		$ 26.4 million
(2)%		$ 53.9 million



Medical Cost Trend (b) Percentage-point Increase (Decrease) in Factor		Western Region Operations Health Plan Services Increase (Decrease) in Reserves for Claims
2%		$ 24.3 million
1%		$ 12.2 million
(1)%		$ (12.2) million
(2)%		$ (24.3) 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 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.

developments related to prior years. For the three and six months ended June 30, 2012, health care cost was impacted by approximately $7.9 million and 32.9 million, respectively, attributable to the revision of the previous estimate of incurred claims for prior years as a result of adverse prior year development.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate and market risk primarily due to our investing and borrowing activities. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and/or market conditions and in equity prices. Interest rate risk is a consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed income investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, we are exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential 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, 2012.

For a more detailed discussion of our market risks relating to these activities, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our Annual Report on Form 10-K for the year ended December 31, 2012.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, based on the framework in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of such period.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.

A description of the legal proceedings to which the Company and its subsidiaries are a party is contained in Note 9 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 Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2012 (our "Form 10-K"), which could materially affect our business, financial condition, results of operations or future results. The risks described in our Form 10-K 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, 2013, there were no material changes to the risk factors disclosed in our Form 10-K.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

On May 2, 2011, our Board of Directors authorized a stock repurchase program pursuant to which a total of $300.0 million of our outstanding common stock could be repurchased (our "stock repurchase program"). On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program. Including the additional $323.7 million authorized repurchase authority, the remaining authorization under our stock repurchase program as of June 30, 2013 was $280.0 million.

Under the Company’s various stock option and long-term incentive plans, in certain circumstances 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 has 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 awards, including any tax obligation arising on the vesting date.

A description of our stock repurchase program and tabular disclosure of the information required under this Item 2 is contained in Note 6 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.

None.


Item 4.	Mine Safety Disclosures.

None.


Item 5.	Other Information.

None.


Item 6.	Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:



Exhibit Number	Description

10.1	Amendment No. 3 to the Health Net, Inc. 2006 Long-Term Incentive Plan, a copy of which is filed herewith.
10.2	Form of Performance Share Award Agreement utilized for eligible employees of Health Net, Inc., a copy of which is filed herewith.
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, 2013 formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012, (2) Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012, (3) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (4) Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2013 and 2012, (5) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 and (6) Condensed Notes to Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			HEALTH NET, INC. (REGISTRANT)
Date:	July 29, 2013	By:	/s/ JOSEPH C. CAPEZZA
			Joseph C. Capezza
			Executive Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)

Date:	July 29, 2013	By:	/s/ MARIE MONTGOMERY
			Marie Montgomery
			Senior Vice President and Corporate Controller (Principal Accounting Officer)

EXHIBIT INDEX



Exhibit Number	Description

10.1	Amendment No. 3 to the Health Net, Inc. 2006 Long-Term Incentive Plan, a copy of which is filed herewith.
10.2	Form of Performance Share Award Agreement utilized for eligible employees of Health Net, Inc., a copy of which is filed herewith.
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, 2013 formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012, (2) Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012, (3) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (4) Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2013 and 2012, (5) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 and (6) Condensed Notes to Consolidated Financial Statements.

Positive
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Legalese
Litigous
Readability	H.S. junior Avg

Health Net (HNT) Inactive 10-Q2013 Q2 Quarterly report

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