Health Net's Charges Cause Fourth Quarter 2004 Net Loss of $86 Millio

Health Net's Charges Cause Fourth Quarter 2004 Net Loss of $86 Million or $.77 Per Diluted Share

    Business Editors

    LOS ANGELES--(BUSINESS WIRE)--Feb. 8, 2005--Health Net, Inc. (NYSE:HNT):

--	Settlement of Provider Claims Issues, Prior Period Reserve Increases and Other Costs Result in $252 Million in Pretax Charges
--	Company Issues Guidance of Between $2.30 to $2.50 Earnings Per Diluted Share for 2005

    Health Net, Inc. (NYSE:HNT) today announced 2004 fourth quarter net loss per diluted share of $.77 compared with earnings of $.77 per diluted share in the fourth quarter of 2003 and earnings of $.64 per diluted share in the third quarter of 2004.
    Included in the results for the fourth quarter of 2004 is the full effect of a $252 million pretax charge comprised of the following:

    -- $169 million of expenses associated with provider settlements
    relating to claims processing and payment issues that have
    been or are being resolved;

    -- $65 million of expenses for prior period reserve developments;

    -- $18 million in asset impairment and restructuring charges and
    other expenses.

    A table outlining the allocation of the $252 million in fourth quarter 2004 pretax charges to the fourth quarter 2004 income statement line items is attached to this release.
    The provider settlement expenses, which reflect the majority of the charge, were recorded following a thorough review and management's decision in the fourth quarter of 2004 to settle a large number of provider claims in the company's California and Northeast health plans relating to claims issues from 2001 to 2004.
    "In completing our review, we decided to address issues that restrained our performance in 2004 and put them in the past. We believe that pursuing resolution of the provider matters, including the completion of contract revisions, will assure ongoing network stability. We believe that our higher reserve levels reflect a higher cost trend related to changed payment practices seen in 2004 than was previously expected. As a result of our ongoing pricing discipline, we believe Health Net will be in a better position to achieve consistent and predictable performance in 2005," said Jay Gellert, president and chief executive officer of Health Net.

    Revenues

    Health Net's total revenues increased 3.2 percent in the fourth quarter of 2004 to $2,867,593,000 from $2,779,632,000 in the fourth quarter of 2003. Health plan services revenue climbed 3.0 percent to $2,363,786,000 in the fourth quarter of 2004 compared to $2,295,217,000 in the fourth quarter of 2003.
    The gains in Health plan services revenue resulted from higher commercial and Medicare premium yields across the company's health plans. In the fourth quarter of 2004, the overall health plan revenue per member per month (PMPM), including commercial, Medicare and Medicaid enrollment, rose 9.0 percent compared to the same period in 2003. Commercial premium yields climbed 10.7 percent compared to the fourth quarter of 2003.
    "We continue to achieve our pricing goals," said Buddy Piszel, executive vice president and chief financial officer of Health Net. "The pricing we achieved in the second half of 2004 positions us well for 2005 when we expect to complete the repricing of the entire commercial book in the first half of this year."
    Commercial enrollment, including both at-risk and Administrative Services Only (ASO) membership, was down 3.3 percent in the fourth quarter of 2004 compared with the third quarter of 2004.
    "As expected, our disciplined pricing continues to result in lower commercial enrollment. In the fourth quarter of 2004, enrollment in California declined somewhat more than earlier expectations. The decline, however, was the result of our ongoing adherence to premium pricing that accurately reflects cost trends," Piszel added.
    Countering the overall enrollment trend, Oregon commercial enrollment increased by more than 5,400 members in the fourth quarter of 2004 over the third quarter of 2004, a 4.1 percent gain.
    In the fourth quarter of 2004, Health Net's Government contracts revenue rose 5.1 percent from the fourth quarter of 2003, reaching $487,823,000. This increase was due in part to the overlap of the new TRICARE North region contract being fully implemented and the continued provision of services under the old TRICARE Region 6 contract for one month in the fourth quarter of 2004.
    "We completed the transition from the last of the old TRICARE contracts on October 31, 2004, and now solely operate in the TRICARE North region. We are proud to be providing support for the families of our troops in these 23 states and the District of Columbia," Piszel noted.
    Other income decreased by $4,383,000 in the fourth quarter of 2004 compared with the fourth quarter of 2003, due to lower revenue resulting from the sale of the company's Employer Services division in the fourth quarter of 2003.

    Health Care Costs

    The health plan Medical Care Ratio (MCR) increased from 81.7 percent in the fourth quarter of 2003 to 94.0 percent in the fourth quarter of 2004. This rise in the health plan MCR reflects the impact of approximately $229 million, the portion of the fourth quarter charges attributable to health care costs.
    "When we look at health care costs without the charges, we believe overall commercial health care costs PMPM rose in line with industry cost trends year-over-year," Piszel commented.
    The Government contracts cost ratio improved by 90 basis points to 95.6 percent for the fourth quarter of 2004 compared to the fourth quarter of 2003. This improvement is due in part to bid price adjustment and change order activity in the fourth quarter of 2004 associated with the old TRICARE contracts.

    Administrative Expenses

    In the fourth quarter of 2004, total general, administrative and depreciation expenses increased by $1,404,000 to $246,096,000 compared to expenses of $244,692,000 in the fourth quarter of 2003. Compared to the third quarter of 2004, total general, administrative and depreciation expenses in the fourth quarter of 2004 increased by $28,422,000. The increase was driven by approximately $12 million of fourth quarter charges related to provider settlement legal costs and by higher consulting and open enrollment-related expenses.
    The $10,319,000 in asset impairment and restructuring charges in the fourth quarter of 2004 compare to asset impairment and restructuring charges of $16,409,000 in the fourth quarter of 2003. Impairment expenses associated with investments and fixed assets totaled $5,900,000 in the fourth quarter of 2004. The company also recorded $2,700,000 in the fourth quarter of 2004 related to severance and related benefits expenses. Lastly, the company recorded $1,700,000 for lease termination expenses associated with the exit of certain properties as part of the TRICARE contract transition.
    Health Net's selling expenses decreased by $2,884,000 to $56,137,000 in the fourth quarter of 2004 compared with $59,021,000 in the same period in 2003, consistent with the decline in Small Group and Individual enrollment in 2004. The selling costs ratio was 2.4 percent for the fourth quarter of 2004, compared with 2.6 percent in the same period last year.
    The company noted that its comprehensive systems consolidation project, known as Health Net One, continues to achieve key milestones. The company has decided to accelerate medical management system enhancements in 2005 and to defer the claims conversion in California and Oregon until 2006.
    "In order to ensure a full year of claims payment stability in California, we have decided to postpone until 2006 the conversion of the California and Oregon claims systems," Piszel explained.

    Balance Sheet Highlights

    Cash and investments as of December 31, 2004 were $1,782,102,000 compared with $1,705,872,000 as of September 30, 2004.
    The TRICARE receivable decreased by $18,168,000 from the end of the third quarter of 2004 to $118,167,000 as of December 31, 2004, consistent with expectations surrounding the contract transitions and seasonal patterns.
    Debt decreased by $3,990,000 from September 30, 2004 to $397,760,000 as of December 31, 2004, primarily due to the mark-to-market adjustment of the interest rate swap contracts the company uses to hedge against interest rate risk associated with the company's outstanding fixed rate senior notes.
    The company's debt-to-total capital ratio was 23.8 percent as of December 31, 2004 compared to 22.9 percent as of September 30, 2004. The increase of the ratio was a result of the net loss recorded in the fourth quarter of 2004, which reduced stockholders' equity.
    The provider settlement expenses and the expenses recorded for prior period reserve developments resulted in an increase of $179,057,000, or 18 percent, to the balance sheet account, "Reserves for claims and other settlements," compared with the amount recorded at September 30, 2004.
    Interest expense was $1,303,000 higher in the fourth quarter of 2004 compared to the third quarter of 2004. This was due to higher floating interest rates and additional interest expense incurred on the senior notes following the downgrade of the company's senior unsecured debt rating in September 2004.
    Days claims payable decreased to 44.7 days for the fourth quarter of 2004 compared with 46.2 days for the third quarter of 2004, and declined by 4.7 days compared to the fourth quarter of 2003, a direct result of the substantially higher level of paid claims in 2004 compared to 2003.

    Cash Flow

    Cash flow provided by operations in the fourth quarter of 2004 amounted to $2,597,000 compared to cash flow provided by operations of $179,986,000 in the fourth quarter of 2003. The company did not receive its December Medicare payment until January 2005. This caused cash flow to be lower by approximately $72 million in the fourth quarter of 2004.
    On September 13, 2004, the company announced that it would not repurchase shares of common stock under its share repurchase program through the end of 2004. The share repurchase program remains on hold. The company will continue to reevaluate its position on share repurchase as 2005 progresses.

    Medicare

    The company noted that it is engaged in a comprehensive review of its Medicare strategies to prepare for implementation of the Medicare Modernization Act of 2003 and its Part D Drug Benefit in January of next year.
    "We have a team examining all potential Medicare opportunities for Health Net. With more than 170,000 members, we have been and we intend to continue to be a major Medicare participant," Piszel added.

    Outlook

    Health Net believes its earnings per diluted share for the full year 2005 will be between $2.30 and $2.50. The company believes that its earnings per diluted share in the first quarter of 2005 will be between $.50 and $.55.
    "Our initial commercial pricing and enrollment results for 2005 are encouraging. We believe yields will increase by more than 11 percent for customers renewing in the first quarter. Enrollment is coming in somewhat better than we had planned," Piszel commented.
    "For the full year, we now believe that commercial enrollment will be down modestly overall; however, we expect to gain membership in several markets in the second half of the year," he added.

    Conference Call

    As previously announced, Health Net will discuss the company's fourth quarter and year-end 2004 results during a conference call with investors on Tuesday, February 8, 2005, at approximately 11:00 a.m. EST. To listen to the call, please dial 719-457-2658, code 5594984. A live webcast and replay of the conference call also will be available at www.healthnet.com. The conference call webcast is open to all interested parties. The replay of the conference call will be available following the call on Tuesday, February 8, 2005 through February 12, 2005, by dialing 719-457-0820, code 5594984. Anyone listening to the company's conference call will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2003, Quarterly Reports on Form 10-Q for the first, second and third quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively, and other reports filed by the company from time to time with the Securities and Exchange Commission.

    About Health Net

    Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company's HMO, POS, insured PPO and government contracts subsidiaries provide health benefits to approximately 6.5 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE programs. Health Net's subsidiaries also offer managed health care products related to behavioral health and prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.
    For more information on Health Net, Inc., please visit the company's Web site at www.healthnet.com.

    Cautionary Statements

    Certain matters discussed in this release contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve a number of risks and uncertainties. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements. These statements are based on management's analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "may," "should," "could," "estimate," "intend" and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, rising health care costs, negative prior period claims reserve developments, trends in medical care ratios, issues relating to provider contracts, operational issues, health care reform and general business conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors" section included within the company's most recent Annual Report on Form 10-K filed with the SEC and the risks discussed in the company's other periodic filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this release.

Health Net, Inc. Consolidated Statements of Operations (Amounts in thousands, except per share and ratio data)

Year Ended December 31, ----------------------- REVENUES: 2003 2004 ----------- ----------- Health plan services premiums $9,093,219 $9,560,244 Government contracts 1,865,773 2,021,871 Net investment income 59,332 58,147 Other income 46,378 6,131 ----------- ----------- Total revenues 11,064,702 11,646,393 ----------- -----------

EXPENSES: Health plan services 7,516,838 8,413,638 Government contracts 1,789,523 1,927,598 General and administrative 912,531 888,480 Selling 233,519 240,117 Depreciation 55,903 41,426 Amortization 2,774 2,862 Interest 39,135 33,133 ----------- ----------- 10,550,223 11,547,254 Asset impairments and restructuring charges 16,409 32,893 Gain on sale of businesses (18,901) (1,170) ----------- ----------- Total expenses 10,547,731 11,578,977 ----------- -----------

Income from continuing operations before income taxes 516,971 67,416 Income tax provision 193,891 24,812 ----------- -----------

Income from continuing operations 323,080 42,604

Discontinued operations: Loss on settlement from disposition, net of tax (89,050) - ----------- -----------

Net income $234,030 $42,604 =========== ===========

Basic earnings per share $2.02 $0.38

Diluted earnings per share $1.98 $0.38

Basic 115,999 111,859 Diluted 118,278 113,038

Ratios: Health plan services MCR 82.7% 88.0% Government contracts cost ratio 95.9% 95.3% Administrative ratio ((G&A+Dep)/(HP serv rev + Other income)) 10.6% 9.7% Selling costs ratio (Selling costs/HP serv rev) 2.6% 2.5% Days claims payable 49.8 47.7

Health Net, Inc. Consolidated Statements of Cash Flows (Amounts in thousands)

Year Ended December 31, ----------------------- 2003 2004 ----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES: Net income $234,030 $42,604 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization and depreciation 58,677 44,288 Gain on sale of businesses (18,901) (1,170) Asset impairments 16,409 5,916 Other changes 5,138 3,969 Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums 20,163 (29,718) Other assets 35,915 (86,499) Amounts receivable/payable under government contracts 23,596 (164,029) Reserves for claims and other settlements 2,737 143,012 Accounts payable and other liabilities 2,008 (13,285) ----------- ----------- Net cash provided by (used in) operating activities 379,772 (54,912) ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 294,976 282,524 Maturities of investments 572,245 274,250 Purchases of investments (977,266) (498,355) Purchases of property and equipment (54,915) (37,946) Cash received from the sale of businesses 90,316 11,112 Sales and purchases of restricted investments and other (30,878) (45,827) ----------- ----------- Net cash used in investing activities (105,522) (14,242) ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 42,330 19,091 Proceeds from the issuance of notes payable and other financing arrangements 5,680 - Repayment of debt and other noncurrent liabilities (5,864) - Repurchases of common stock (288,318) (88,706) ----------- ----------- Net cash used in financing activities (246,172) (69,615) ----------- -----------

Net increase (decrease) in cash and cash equivalents 28,078 (138,769) Cash and cash equivalents, beginning of period 832,793 860,871 ----------- ----------- Cash and cash equivalents, end of period $860,871 $722,102 =========== ===========

Health Net, Inc. Consolidated Statements of Operations (Amounts in thousands, except per share and ratio data)

Fourth Quarter First Quarter Second Quarter Ended Ended Ended December 31, March 31, June 30, REVENUES: 2003 2004 2004 --------------- -------------- -------------- Health plan services premiums $2,295,217 $2,404,355 $2,398,943 Government contracts 464,214 503,948 504,317 Net investment income 14,212 15,201 13,818 Other income 5,989 1,248 1,737 --------------- -------------- -------------- Total revenues 2,779,632 2,924,752 2,918,815 --------------- -------------- --------------

EXPENSES: Health plan services 1,876,274 2,107,087 2,062,277 Government contracts 448,162 480,905 478,927 General and administrative 231,814 231,485 214,244 Selling 59,021 63,577 59,993 Depreciation 12,878 9,983 10,424 Amortization 767 606 606 Interest 9,841 8,438 7,304 --------------- -------------- -------------- 2,638,757 2,902,081 2,833,775 Asset impairments and restructuring charges 16,409 (a) - 17,402 (d) (Gain) loss on sale of businesses (18,901) (b) (1,875)(c) - --------------- -------------- -------------- Total expenses 2,636,265 2,900,206 2,851,177 --------------- -------------- --------------

Income (loss) from continuing operations before income taxes 143,367 24,546 67,638 Income tax provision (benefit) 54,018 9,534 26,272 --------------- -------------- -------------- Net income (loss) $89,349 $15,012 $41,366 =============== ============== ==============

Basic earnings (loss) per share $0.79 $0.13 $0.37

Diluted earnings (loss) per share $0.77 $0.13 $0.36

Weighted average shares outstanding: Basic 113,515 112,600 112,574 Diluted 115,943 114,342 113,460

Ratios: Health plan services MCR 81.7% 87.6% 86.0% Government contracts cost ratio 96.5% 95.4% 95.0% Administrative ratio ((G&A+Dep)/(HP serv rev + Other income)) 10.6% 10.0% 9.4% Selling costs ratio (Selling costs/HP serv rev) 2.6% 2.6% 2.5% Days claims payable 49.4 45.2 46.6

Third Quarter Fourth Quarter Ended Ended September 30, December 31, REVENUES: 2004 2004 -------------- -------------- Health plan services premiums $2,393,160 $2,363,786 Government contracts 525,783 487,823 Net investment income 14,750 14,378 Other income 1,540 1,606 -------------- -------------- Total revenues 2,935,233 2,867,593 -------------- --------------

EXPENSES: Health plan services 2,022,870 2,221,404 Government contracts 501,628 466,138 General and administrative 207,187 235,564 Selling 60,410 56,137 Depreciation 10,487 10,532 Amortization 789 861 Interest 8,044 9,347 -------------- -------------- 2,811,415 2,999,983 Asset impairments and restructuring charges 5,172 (d) 10,319 (g) (Gain) loss on sale of businesses 400 (e) 305 (f) -------------- -------------- Total expenses 2,816,987 3,010,607 -------------- --------------

Income (loss) from continuing operations before income taxes 118,246 (143,014) Income tax provision (benefit) 46,391 (57,385) -------------- -------------- Net income (loss) $71,855 $(85,629) ============== ==============

Basic earnings (loss) per share $0.64 $(0.77)

Diluted earnings (loss) per share $0.64 $(0.77)

Weighted average shares outstanding: Basic 111,440 110,844 Diluted 112,397 110,844

Ratios: Health plan services MCR 84.5% 94.0% Government contracts cost ratio 95.4% 95.6% Administrative ratio ((G&A+Dep)/(HP serv rev + Other income)) 9.1% 10.4% Selling costs ratio (Selling costs/HP serv rev) 2.5% 2.4% Days claims payable 46.2 44.7

Health Net, Inc. Consolidated Balance Sheets (Amounts in thousands, except ratio data)

December 31, March 31, June 30, 2003 2004 2004 -------------- ------------ ----------- ASSETS Current Assets Cash and cash equivalents $860,871 $684,782 $467,565 Investments - available for sale 1,082,789 1,042,021 1,153,222 Premiums receivable, net 144,968 186,178 151,619 Amounts receivable under government contracts 90,928 121,037 128,960 Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract - - - Reinsurance and other receivables 105,074 94,469 93,920 Deferred taxes 43,008 40,827 40,652 Other assets 84,842 92,404 103,907 -------------- ------------ ----------- Total current assets 2,412,480 2,261,718 2,139,845 Property and equipment, net 190,900 186,700 186,570 Goodwill, net 729,506 723,595 723,595 Other intangible assets, net 19,918 19,313 21,505 Deferred taxes 44,769 41,409 41,868 Other noncurrent assets 151,703 214,894 282,258 -------------- ------------ ----------- Total Assets $3,549,276 $3,447,629 $3,395,641 ============== ============ ===========

LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $1,024,550 $1,069,247 $1,042,831 Health care and other costs payable under government contracts 256,009 233,331 216,816 IBNR health care costs payable under TRICARE North contract - - - Unearned premiums 178,115 95,614 85,894 Accounts payable and other liabilities 315,031 272,000 254,453 -------------- ------------ ----------- Total current liabilities 1,773,705 1,670,192 1,599,994 Senior notes payable 398,963 406,603 384,220 Other noncurrent liabilities 82,383 78,958 95,243 -------------- ------------ ----------- Total Liabilities 2,255,051 2,155,753 2,079,457 -------------- ------------ -----------

Stockholders' Equity Common stock and additional paid-in capital 789,392 794,602 798,432 Restricted common stock 5,885 6,027 5,855 Unearned compensation (3,995) (3,624) (3,121) Treasury common stock, at cost (549,102) (577,484) (580,634) Retained earnings 1,051,776 1,066,788 1,108,154 Accumulated other comprehensive income (loss) 269 5,567 (12,502) -------------- ------------ ----------- Total Stockholders' Equity 1,294,225 1,291,876 1,316,184 -------------- ------------ ----------- Total Liabilities and Stockholders' Equity $3,549,276 $3,447,629 $3,395,641 ============== ============ ===========

Debt-to-Total Capital Ratio 23.6% 23.9% 22.6%

September 30, December 31, 2004 2004 -------------- --------------- ASSETS Current Assets Cash and cash equivalents $622,903 $722,102 Investments - available for sale 1,082,969 1,060,000 Premiums receivable, net 118,201 118,521 Amounts receivable under government contracts 136,335 118,167 Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract 114,618 173,951 Reinsurance and other receivables 102,494 92,435 Deferred taxes 41,162 98,659 Other assets 99,578 97,163 -------------- --------------- Total current assets 2,318,260 2,480,998 Property and equipment, net 185,291 184,643 Goodwill, net 723,595 723,595 Other intangible assets, net 22,716 21,855 Deferred taxes 18,327 23,737 Other noncurrent assets 249,912 207,050 -------------- --------------- Total Assets $3,518,101 $3,641,878 ============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $990,240 $1,169,297 Health care and other costs payable under government contracts 201,494 119,219 IBNR health care costs payable under TRICARE North contract 114,618 173,951 Unearned premiums 78,832 128,450 Accounts payable and other liabilities 296,782 258,923 -------------- --------------- Total current liabilities 1,681,966 1,849,840 Senior notes payable 401,750 397,760 Other noncurrent liabilities 81,657 121,398 -------------- --------------- Total Liabilities 2,165,373 2,368,998 -------------- ---------------

Stockholders' Equity Common stock and additional paid-in capital 805,426 811,426 Restricted common stock 6,483 7,188 Unearned compensation (3,999) (4,110) Treasury common stock, at cost (632,926) (632,926) Retained earnings 1,180,009 1,094,380 Accumulated other comprehensive income (loss) (2,265) (3,078) -------------- --------------- Total Stockholders' Equity 1,352,728 1,272,880 -------------- --------------- Total Liabilities and Stockholders' Equity $3,518,101 $3,641,878 ============== ===============

Debt-to-Total Capital Ratio 22.9% 23.8%

Health Net, Inc. Consolidated Statements of Cash Flows (Amounts in thousands)

Fourth First Second Quarter Quarter Quarter Ended Ended Ended December 31, March 31, June 30, 2003 2004 2004 ------------ ---------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $89,349 $15,012 $41,366 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization and depreciation 13,645 10,589 11,030 (Gain) loss on sale of businesses (18,901) (1,875) - Asset impairments 16,409 - - Other changes 270 (898) 1,518 Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums 87,769 (130,211) 24,839 Other assets 27,944 4,718 515 Amounts receivable/payable under government contracts 43,603 (52,787) (24,438) Reserves for claims and other settlements 37,154 42,962 (26,416) Accounts payable and other liabilities (117,256) (42,085) (15,900) ------------ ---------- --------- Net cash provided by (used in) operating activities 179,986 (154,575) 12,514 ------------ ---------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 32,243 125,015 65,320 Maturities of investments 121,944 112,345 84,102 Purchases of investments (259,912) (186,289) (284,446) Purchases of property and equipment (12,435) (5,853) (10,045) Cash received (paid) from the sale of businesses 90,316 11,026 - Sales and purchases of restricted investments and other (4,685) (49,279) (84,552) ------------ ---------- --------- Net cash (used in) provided by investing activities (32,529) 6,965 (229,621) ------------ ---------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 12,798 4,785 3,040 Repurchases of common stock (26,761) (33,264) (3,150) ------------ ---------- --------- Net cash (used in) provided by financing activities (13,963) (28,479) (110) ------------ ---------- ---------

Net increase (decrease) in cash and cash equivalents 133,494 (176,089) (217,217) Cash and cash equivalents, beginning of period 727,377 860,871 684,782 ------------ ---------- --------- Cash and cash equivalents, end of period $860,871 $684,782 $467,565 ============ ========== =========

Third Quarter Fourth Quarter Ended Ended September 30, December 31, 2004 2004 -------------- --------------

CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $71,855 $(85,629) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization and depreciation 11,276 11,393 (Gain) loss on sale of businesses 400 305 Asset impairments - 5,916 Other changes 546 2,803 Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums 26,356 49,298 Other assets 5,140 (96,872) Amounts receivable/payable under government contracts (22,697) (64,107) Reserves for claims and other settlements (52,591) 179,057 Accounts payable and other liabilities 44,267 433 -------------- -------------- Net cash provided by (used in) operating activities 84,552 2,597 -------------- --------------

CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 79,438 12,751 Maturities of investments 30,632 47,171 Purchases of investments (22,774) (4,846) Purchases of property and equipment (9,178) (12,870) Cash received (paid) from the sale of businesses (400) 486 Sales and purchases of restricted investments and other 39,307 48,697 -------------- -------------- Net cash (used in) provided by investing activities 117,025 91,389 -------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 6,053 5,213 Repurchases of common stock (52,292) - -------------- -------------- Net cash (used in) provided by financing activities (46,239) 5,213 -------------- --------------

Net increase (decrease) in cash and cash equivalents 155,338 99,199 Cash and cash equivalents, beginning of period 467,565 622,903 -------------- -------------- Cash and cash equivalents, end of period $622,903 $722,102 ============== ==============

Health Net, Inc. Notes to Consolidated Statements of Operations

Notes:

(a) Pretax impairment charges for buildings held for sale of $2.6 million and our investment in a connectivity services company of $13.8 million.

(b) Pretax $18.9 million gain on the sales of our Employers Services, Dental and Vision subsidiaries.

(c) Pretax $1.9 million gain on the sales of our Subacute subsidiaries.

(d) Pretax severance and related benefit costs related to our workforce reduction announced in May 2004.

(e) Pretax $0.4 million additional loss on the sale of our Florida health plan resulting from the stock purchase and reinsurance settlement agreements dated September 30, 2004.

(f) Pretax $0.3 million additional loss on the sale of Denticare and Vision.

(g) Pretax $10.3 million asset impairments and restructuring charges due to the following:

$5.9 million asset impairment charge taken on certain investments and fixed assets

$2.7 million for severance and related benefit costs related to our workforce reduction announced in May 2004

$1.7 million for lease termination costs

HEALTH NET, INC. Medical Covered Lives at December 31, 2004 (in Thousands)

------------------ ------------------ ------------------ Commercial - Large Commercial - Small Commercial Risk Group(a) Group & Subtotal Individual -------------------------------------------------------- 12/04 09/04 12/03 12/04 09/04 12/03 12/04 09/04 12/03 ------------------ ------------------ ------------------

Arizona 74 74 67 55 55 52 129 129 119 California 1,101 1,130 1,148 459 489 523 1,560 1,619 1,671 Connecticut 192 194 208 41 43 46 233 238 254 New Jersey 98 109 141 111 123 154 210 232 294 New York 144 153 155 108 110 116 252 262 271 Oregon 105 100 93 33 33 27 138 133 120 Pennsylvania - - 4 - - - - - 4 ------------------ ------------------ ------------------ Total 1,714 1,760 1,816 808 853 917 2,523 2,613 2,733 ================== ================== ==================

Year over Year (6)% (12)% (8)% Sequential (3)% (5)% (3)% ------------------ ------------------ ------------------

------------------ ------------------ ASO Commercial Subtotal ------------------- ------------------ 12/04 09/04 12/03 12/04 09/04 12/03 ------------------ ------------------

Arizona - - - 129 129 119 California 3 3 2 1,564 1,622 1,673 Connecticut 51 51 57 284 289 311 New Jersey 18 18 19 228 250 313 New York 7 7 10 259 269 281 Oregon 1 1 - 139 134 120 Pennsylvania - - - - - 4 ------------------ ------------------ Total 81 80 88 2,603 2,693 2,821 ================== ==================

Year over Year (8)% (8)% Sequential 0% (3)% ------------------ ------------------

------------------ ------------------ ------------------ Medicare Risk Medicaid Health Plan Total ------------------ ------------------ ------------------ 12/04 09/04 12/03 12/04 09/04 12/03 12/04 09/04 12/03 ------------------ ------------------ ------------------

Arizona 35 36 36 - - - 164 164 156 California 95 97 99 696 695 702 2,355 2,414 2,475 Connecticut 27 27 27 94 95 98 405 411 436 New Jersey - - - 42 43 45 270 293 358 New York 6 6 6 - - - 265 275 287 Oregon 9 6 0 - - - 148 140 121 Pennsylvania - - - - - - - - 4 ------------------ ------------------ ------------------ Total 171 171 169 831 833 846 3,605 3,696 3,836 ================== ================== ==================

Year over Year 1% (2)% (6)% Sequential 0% (0)% (2)% ------------------ ------------------ ------------------

--------------------- 12/04 09/04 12/03 --------------------- TRICARE Previous TRICARE Contracts (b) - 642 1,491 North Contract (c) 2,929 2,929 - --------------------- Total TRICARE 2,929 3,571 1,491

(a) Commercial Large Group includes Medicare Supplement (b) Includes only TRICARE eligible for which we have health care risk (c) Includes TRICARE eligible for which we have health care risk, and those for which we provide Administrative Services Only (ASO), primarily active duty

Health Net, Inc.(a) Consolidated Statements of Operations (Amounts in thousands)

--------------------------------------- Impact of Selected Costs Recorded in Fourth Quarter the Fourth Quarter Ended December 31, Ended December 31, 2004 2004 ---------------------------------------

REVENUES Health plan services premiums $2,363,786 Government contracts 487,823 Investment income 14,378 Other income 1,606 ------------------ -------------------- Total revenues 2,867,593 - ------------------ --------------------

EXPENSES Health plan services 2,221,404 (229,400) Government contracts 466,138 General and administrative 235,564 (12,000) Selling 56,137 Depreciation 10,532 Amortization 861 Interest 9,347

Asset impairment and restructuring charges 10,319 (10,319) Net (gain) loss on sale of businesses and properties 305 (305) ------------------ -------------------- Total expenses 3,010,607 (252,024) ------------------ --------------------

Income before income taxes and cumulative effect of a change in accounting principle (143,014) 252,024 Income tax provision (57,385)

------------------ -------------------- Net income $(85,629) ================== ====================

Basic earnings (loss) per share $(0.77)

Diluted earnings (loss) per share $(0.77)

Weighted average shares outstanding Basic 110,844 Diluted Shares 110,844

(a) This table presents the company's consolidated operations for the fourth quarter of 2004 and the allocation of $252 million in pretax charges for the fourth quarter of 2004 to the Consolidated Statement of Operations.

--30--TM/la*

CONTACT: Health Net, Inc. David Olson, 818-676-6978 david.w.olson@healthnet.com or Michael Engelhard, 818-676-7620 michael.engelhard@healthnet.com www.healthnet.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: INSURANCE MEDICAL EARNINGS CONFERENCE CALLS SOURCE: Health Net, Inc.

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