10-K

QuickLinks -- Click here to rapidly navigate through this document

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001

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)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 676-6000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS	NAME OF EACH EXCHANGE ON WHICH REGISTERED
Class A Common Stock, $.001 par value	New York Stock Exchange, Inc.
Rights to Purchase Series A Junior Participating Preferred Stock	New York Stock Exchange, Inc.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        The aggregate market value of the voting stock held by non-affiliates of the registrant at March 14, 2002 was $3,169,809,868 (which represents 123,820,698 shares of Class A Common Stock held by such non-affiliates multiplied by $25.60, the closing sales price of such stock on the New York Stock Exchange on March 14, 2002).

        The number of shares outstanding of the registrant's Class A Common Stock as of March 14, 2002 was 123,961,739 (excluding 3,194,374 shares held as treasury stock).

DOCUMENTS INCORPORATED BY REFERENCE

        Part II of this Form 10-K incorporates by reference certain information from the registrant's Annual Report to Stockholders for the year ended December 31, 2001 ("Annual Report to Stockholders"). Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement for the 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2001.

PART I

ITEM 1. BUSINESS

        Health Net, Inc. (formerly named Foundation Health Systems, Inc., together with its subsidiaries, referred to hereinafter as the "Company", "we", "us" or "our") is an integrated managed care organization which administers the delivery of managed health care services. Our health maintenance organizations ("HMOs"), insured preferred provider organizations ("PPOs") and government contracts subsidiaries provide health benefits to approximately 5.5 million individuals in 15 states through group, individual, Medicare, Medicaid and TRICARE programs. Our subsidiaries also offer managed health care products related to behavioral health, dental, vision 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. We operate and conduct our HMO and other businesses through our subsidiaries.

        We currently operate within two segments, Health Plan Services and Government Contracts/Specialty Services.

        The Health Plan Services segment consists of health plan operations in Arizona, California, Oregon, Connecticut, New Jersey, New York and Pennsylvania and health and life insurance companies licensed to sell insurance in 35 states and the District of Columbia. During 2000 and most of 2001, the Health Plan Services segment consisted of two regional divisions: Western Division (Arizona, California and Oregon) and Eastern Division (Connecticut, Florida, New Jersey, New York and Pennsylvania). During the fourth quarter of 2001, we decided to no longer view our health plan operations through these two regional divisions and eliminated this divisional structure. In February 2001 we completed our withdrawal from health plan operations in Ohio, West Virginia and western Pennsylvania. In August 2001, we sold our Florida health plan, and as a result we no longer have health plan operations in that state.

        With approximately 4.1 million at-risk and administrative services only ("ASO") members in our Health Plan Services segment, we are one of the largest managed health care companies in the United States. Our HMOs market traditional HMO products to employer groups and Medicare and Medicaid products to employer groups and directly to individuals. Health care services that are provided to our commercial and individual members include primary and specialty physician care, hospital care, laboratory and radiology services, prescription drugs, dental and vision care, skilled nursing care, physical therapy and mental health services. Our HMO service networks include approximately 53,800 primary care physicians and 114,700 specialists.

        Our Government Contracts and Specialty Services segment consists of the Government Contracts Division and the Specialty Services Division. The Government Contracts Division oversees the provision of contractual services to federal government programs such as TRICARE. The Government Contracts Division receives revenues for administrative and management services and, under most of its contracts, also accepts financial responsibility for a portion of the government programs' health care costs. The Specialty Services Division oversees the provision of supplemental programs to enrollees in our HMOs, as well as to members whose basic medical coverage is provided by non-Health Net companies. These supplemental programs include vision coverage, dental coverage and managed behavioral health programs. The Specialty Services Division consists of both operations in which we assume underwriting risk in return for premium revenue, and operations in which we provide administrative services only, including certain of the behavioral health programs. The Specialty Services Division also provides certain bill review and third party administrative services as described elsewhere in this Annual Report.

        Data relating to revenues from external sources, segment profit (loss) and segment assets for each of our business segments for each of the last three fiscal years is incorporated herein by reference to

1

Note 15 in the Notes to Consolidated Financial Statements contained in our 2001 Annual Report to Stockholders.

        The Company was incorporated in 1990. Our current operations are the result of the April 1, 1997 merger transaction (the "FHS Combination") involving Health Systems International, Inc. ("HSI") and Foundation Health Corporation ("FHC"). Pursuant to the Agreement and Plan of Merger (the "Merger Agreement") that evidenced the FHS Combination, FH Acquisition Corp., a wholly-owned subsidiary of HSI, merged with and into FHC and FHC survived as a wholly-owned subsidiary of HSI, which changed its name to Foundation Health Systems, Inc. In November 2000, we changed our name from Foundation Health Systems, Inc. to Health Net, Inc.

        Prior to the FHS Combination, the Company was the successor to the business conducted by Health Net of California, Inc., now our HMO subsidiary in California, which became a subsidiary of the Company in 1992, and HMO and PPO networks operated by QualMed, Inc. ("QualMed"), which combined with the Company in 1994 to create HSI. FHC was incorporated in Delaware in 1984.

        Our executive offices are located at 21650 Oxnard Street, Woodland Hills, CA 91367. Except as the context otherwise requires, the term "Company", "we", "us" and "our" refers to Health Net, Inc. and its subsidiaries.

HEALTH PLAN SERVICES SEGMENT

        MANAGED HEALTH CARE OPERATIONS.    We offer a full spectrum of managed health care products. The Company's strategy is to offer to employers a wide range of managed health care products and services that provide quality care, encourage wellness and assist in containing health care costs. While a majority of our members are covered by conventional HMO products, we are continuing to expand our other product lines, thereby enabling us to offer flexibility to an employer and to tailor our products to an employer's particular needs.

        Our health plan subsidiaries offer members a comprehensive range of health care services, including ambulatory and outpatient physician care, hospital care, pharmacy services, eye care, behavioral health and ancillary diagnostic and therapeutic services. The integrated health care programs offered by our subsidiaries include products offered through both traditional Network Model HMOs (in which the HMOs contract with individual physicians, physician groups and independent or individual practice associations ("IPAs")) and IPA Model HMOs (in which the HMOs contract with one or more IPAs that in turn subcontract with individual physicians to provide HMO patient services). Our health plan subsidiaries offer quality care, cost containment and comprehensive coverage; a matrix package which allows employees to select their desired coverage from alternatives that have interchangeable outpatient and inpatient co-payment levels; point-of-service ("POS") programs which offer a multi-tier design that provides both conventional HMO and indemnity-like (in-network and out-of-network) tiers; a PPO-like tier which allows members to self-refer to the network physician of their choice; and a managed indemnity plan which is provided for employees who reside outside of their HMO service areas.

        The pricing of our products is designed to provide incentives to both employers and employees to select and enroll in the products with greater managed health care and cost containment elements. In general, our HMO subsidiaries provide comprehensive health care coverage for a fixed fee or premium that does not vary with the extent or frequency of medical services actually received by the member. PPO enrollees choose their medical care from among the various contracting providers or choose a non-contracting provider and are reimbursed on a traditional indemnity plan basis after reaching an annual deductible. POS enrollees choose, each time they receive care, from conventional HMO or indemnity-like (in-network and out-of-network) coverage, with payments and/or reimbursement depending on the coverage chosen. We assume both underwriting and administrative expense risk in return for the premium revenue we receive from our HMO, POS and PPO products. Our subsidiaries

2

have contractual relationships with health care providers for the delivery of health care to our enrollees.

        The following table contains information relating to our HMO and PPO members, POS members, Medicare members and Medicaid members as of December 31, 2001 (our Medicare and Medicaid businesses are discussed below under "Medicare" and "Medicaid Products"):

Commercial HMO and PPO Members	2,114,511	(a)
POS Members	870,051	(b)
Medicare Members (risk only)	215,813
Medicaid Members	787,584

(a)

Includes 37,222 members under our arrangement with The Guardian described elsewhere in this Annual Report.

(b)

Includes 267,258 members under our arrangement with The Guardian described elsewhere in this Annual Report and 292,854 POS members insured by our indemnity insurance operations described below.

        In addition, the following table sets forth certain information regarding our employer groups in the commercial managed care operations of our Health Plan Services segment as of December 31, 2001:

Number of Employer Groups	58,788
Largest Employer Group as % of enrollment	9.1	%
10 largest Employer Groups as % of enrollment	24.1	%

        During 2001, our Health Plan Services segment had health plan operations in Arizona, California, Oregon, Connecticut, Florida, New Jersey, New York and Pennsylvania.

        In Arizona, we believe that our commercial managed care operations rank us third largest as measured by total membership and fourth largest as measured by size of provider network. Our commercial membership in Arizona was 167,845 as of December 31, 2001, which represented a decrease of approximately 44% during 2001. This decrease is primarily due to membership losses in the large group market. The loss of the state of Arizona employer group accounted for 65,000 of the membership loss. Our Medicare membership in Arizona was 49,926 as of December 31, 2001, which represented a decrease of approximately 18% during 2001. We did not have any Medicaid members in Arizona as of December 31, 2001 and 2000.

        The California market is characterized by a concentrated population. We believe that Health Net of California, Inc., our California HMO, is the second largest HMO in California in terms of membership and in terms of size of provider network. Our commercial membership in California as of December 31, 2001 was 1,830,130, which represented an increase of approximately 13% during 2001. The increase in commercial membership was primarily due to enrollment increases within the small group market most notably as a result of the growth in the PPO product. Our Medicare membership in California as of December 31, 2001 was 119,204, which represented a decrease of approximately 3% during 2001. Our Medicaid membership in California as of December 31, 2001 was 651,411 members, which represented an increase of approximately 22% during 2001 primarily in Los Angeles County.

        We believe that our Oregon operations make us the ninth largest managed care provider in Oregon in terms of membership and the second largest HMO in Oregon in terms of size of provider network. Our commercial membership in Oregon was 75,447 as of December 31, 2001, which represented a decrease of approximately 18% during 2001. The decrease was due, in part, to our pricing discipline and focus on profitable accounts and our withdrawal from certain counties in central

3

and southern Oregon, and was partially offset by an increase in enrollment in POS products. We did not have any members in Medicare or Medicaid in Oregon as of December 31, 2001 and 2000.

        In Connecticut, New Jersey and New York, we market mid-size and large employer group commercial HMO, Medicare and Medicaid products directly. However, for small employer group business in Connecticut, New Jersey and New York, we offer both HMO and POS products together with The Guardian Life Insurance Company of America ("The Guardian") through a joint venture doing business as "Healthcare Solutions." Under the joint venture arrangement, we generally share the profits of Healthcare Solutions equally with The Guardian, subject to certain terms of the joint venture arrangement related to expenses. The Guardian is a mutual insurer (owned by its policy owners) which offers financial products and services, including individual life and disability income insurance, employee benefits, pensions and 401(k) products. The Guardian is headquartered in New York and has almost 2,400 financial representatives in over 100 general agencies.

        We believe our Connecticut operations make us the largest managed care provider in terms of membership and the second largest in terms of size of provider network in Connecticut. Our commercial membership in Connecticut was 332,183 as of December 31, 2001 (including 60,565 members under the Guardian arrangement), a decrease of approximately 8% since the end of 2000. Our Medicare membership in Connecticut was 33,188 as of December 31, 2001, which represented an increase of approximately 36% during 2001, and our Medicaid membership in Connecticut was 91,773 as of December 31, 2001, which represented an increase of approximately 14% during 2001.

        We believe our New Jersey operations make us the third largest managed care provider in terms of membership and the largest in terms of size of provider network in New Jersey. Our HMO membership in New Jersey was 272,017 as of December 31, 2001 (including 128,678 members under the Guardian arrangement), which represented an increase of approximately 32% during 2001. Our Medicaid membership in New Jersey was 44,400 as of December 31, 2001, which represented an increase of approximately 69% during 2001. We had no Medicare members in New Jersey as of December 31, 2001 and 2000.

        In New York, we had 262,124 commercial members as of December 31, 2001, which represented an increase of approximately 2% during 2001. Such membership included 115,237 members under The Guardian arrangement. We believe our New York HMO and PPO operations make us the fifth largest HMO managed care provider in terms of membership and the second largest in terms of size of provider network in New York. Our Medicare membership in New York was 5,935 as of December 31, 2001, which represented a decrease of 1% during 2001. We did not have any Medicaid members in New York as of December 31, 2001 and 2000.

        Our commercial membership in eastern Pennsylvania was 39,169 as of December 31, 2001, which represented a decrease of approximately 13% during 2001. Our Medicare membership in eastern Pennsylvania was 7,561 as of December 31, 2001, which represented a decrease of approximately 34% during 2001. This decrease in Medicare membership was due, in part, to our pricing discipline and our focus on profitable accounts. We did not have any Medicaid members in eastern Pennsylvania as of December 31, 2001 and 2000.

        During 2001, we completed our withdrawal from the Ohio, West Virginia and western Pennsylvania markets and no longer have any members in those markets. We notified and received approval from the applicable regulators to withdraw from these markets. We also provided notice of the withdrawals to members, employer groups, providers and brokers in compliance with applicable federal and state laws and regulations. We ceased having active membership in West Virginia as of December 31, 2000; in Western Pennsylvania as of December 31, 2000, for Medicare + Choice members and January 31, 2001, for commercial members; and in Ohio as of February 4, 2001.

4

        We sold our Florida health plan operations effective August 1, 2001. At the time of the sale, our commercial membership in Florida was 98,969, our Medicare membership in Florida was 42,831 and our Medicaid membership in Florida was 24,180. See "Divestitures and Other Investments" below for additional information on the sale of our Florida health plan.

        MEDICARE.    Our Medicare+ Choice plans had a combined membership of approximately 215,813 as of December 31, 2001, compared to 271,807 as of December 31, 2000. We offer our Medicare+ Choice products directly to individuals and to employer groups. To enroll in one of our Medicare+ Choice plans, covered persons must be eligible for Medicare. We provide or arrange health care services normally covered by Medicare, in conjunction with a broad range of preventive health care services. The federal Centers for Medicare and Medicaid Services ("CMS) (formerly the Health Care Financing Administration ("HCFA")) pays us a monthly amount for each enrolled member based, in part, upon the "Adjusted Average Per Capita Cost," as determined by CMS' analysis of fee-for-service costs related to beneficiary demographics. Depending on plan design and other factors, we may charge a monthly premium.

        Our California Medicare+ Choice product, Seniority Plus, operated by our California health plan, was licensed and certified to operate in 15 California counties as of December 31, 2001. Our other health plan subsidiaries are licensed and certified to offer Medicare+ Choice plans in one county in Pennsylvania, three counties in Connecticut, four counties in Arizona and five counties in New York. We withdrew from providing Medicare products in certain counties in 2001 due, in part, to the fact that government Medicare reimbursement payments in those counties had been increasing at a much lower level than costs of care.

        MEDICAID PRODUCTS.    As of December 31, 2001, we had an aggregate of approximately 787,584 Medicaid members compared to 666,337 as of December 31, 2000, principally in California. We also had Medicaid members and operations in Connecticut and New Jersey. To enroll in our Medicaid products, an individual must be eligible for Medicaid benefits under the appropriate state regulatory requirements. Our HMO products include, in addition to standard Medicaid coverage, certain additional services including dental and vision benefits. The applicable state agency pays our HMOs a monthly fee based on a percentage of fee-for-service costs for each Medicaid member enrolled.

        ADMINISTRATIVE SERVICES ONLY ("ASO") BUSINESS.    We also provide third-party administrative services to large employer groups in Arizona, Connecticut, New Jersey and New York. Under these arrangements, we provide claims processing, customer service, medical management and other administrative services without assuming the risk for medical costs. We are generally compensated for these services on a fixed per member per month basis. As of December 31, 2001, we serviced 78,311 members through our ASO business.

        INDEMNITY INSURANCE PRODUCTS.    We offer insured PPO, POS and indemnity products as "stand-alone" products and as part of multiple option products in various markets. These products are offered by our health and life insurance subsidiaries which are licensed to sell insurance in 35 states and the District of Columbia. Through these subsidiaries, we also offer HMO members auxiliary non-health products such as group life and accidental death and disability insurance.

5

        Our health and life insurance products are provided throughout most of our service areas. The following table contains membership information relating to our health and life insurance companies' insured PPO, POS, indemnity and group life products as of December 31, 2001:

Insured PPO Members	30,902
POS Members	292,854	(a)
Indemnity Members	146
Group Life Members	7,589

(a)

Includes 267,258 members under our arrangement with The Guardian described elsewhere in this Annual Report. (Please note that there were 37,222 Guardian HMO members in addition to the POS members included in the above table.)

        PHARMACY BENEFIT MANAGEMENT.    Pharmacy benefits are managed through a variety of clinical, technological and contractual tools. We seek to provide safe, effective medications that are affordable to our members. We outsource certain capital and labor intensive functions of pharmacy benefit management, such as claim processing. However, we continue to actively utilize all other pharmacy management tools available. Some of the tools used are as follows:

•

Pharmacy benefit design—we have designed and sell three-tier pharmacy products that allow consumer choice while encouraging member financial participation.



•

Clinical programs that improve safety, efficacy and member compliance with prescribed medical treatment.



•

Retail and manufacturer contracts that lower the net cost.



•

Technological tools that automate claim adjudication and payment.



•

Technology that plays a key role in preventing members from receiving drugs that may harmfully interact with other medications they are taking.

GOVERNMENT CONTRACTS AND SPECIALTY SERVICES SEGMENT

Government Contracts

        TRICARE.    Our wholly-owned subsidiary, Health Net Federal Services, Inc. ("Federal Services") (formerly known as Foundation Health Federal Services, Inc.), administers large, multi-year managed care federal contracts with the United States Department of Defense ("DoD").

        Federal Services currently administers health care contracts for DoD's TRICARE program covering approximately 1.5 million eligible individuals under TRICARE. Through TRICARE, Federal Services provides eligible beneficiaries with improved access to care, lower out-of-pocket expenses and fewer claims forms. Federal Services currently administers three TRICARE contracts for five regions:

•

Region 11, covering Washington, Oregon and part of Idaho



•

Region 6, covering Arkansas, Oklahoma, most of Texas, and most of Louisiana



•

Regions 9, 10 and 12, covering California, Hawaii, Alaska and part of Arizona

        During 2001, enrollment of TRICARE beneficiaries in the HMO option (called "TRICARE Prime") of the TRICARE program for the Region 11 contract increased by 34% to 187,340 while the total estimated number of eligible beneficiaries, based on DoD data, decreased by 2% to 237,329. During 2001, enrollment of TRICARE beneficiaries in TRICARE Prime for the Region 6 contract increased by 9% to 415,645 while the total estimated number of eligible beneficiaries, based on DoD data, increased by 1% to 617,718. During 2001, enrollment of TRICARE beneficiaries in TRICARE

6

Prime for the Regions 9, 10 and 12 contract decreased by 6% to 356,106 while the total estimated number of eligible beneficiaries, based on DoD data and excluding Alaska, increased by 1% to 612,523. DoD estimated numbers of eligible beneficiaries are subject to revision when actual numbers become available.

        Under the TRICARE contracts, Federal Services shares health care cost risk with DoD for both gains and losses. Federal Services subcontracts to affiliated and unrelated third parties for the administration and health care risk of parts of these contracts. If all option periods are exercised by DoD and no further extensions of the performance period are made, health care delivery ends on October 31, 2002 for the Region 6 contract, on March 31, 2003 for the Regions 9, 10 and 12 contract, and February 29, 2004 for the Region 11 contract. The DoD Authorization Act for government fiscal year 2001 authorized DoD to extend the term of the current TRICARE contracts for an additional two years. Federal Services and DoD have discussed the modifications to the contracts for the additional two-year extension. The additional two-year extension was added to the Region 11 contract and, if all option periods are exercised, the period of health care delivery would extend to February 29, 2004. If the additional two-year extension is added to the Region 6 contract and the Regions 9, 10 and 12 contract and all option periods are exercised, the period of health care delivery would extend to October 31, 2004 for the Region 6 contract and March 31, 2005 for the Regions 9, 10 and 12 contract. Federal Services also expects to compete for the rebid of those contracts.

        In December 2000, Federal Services and DoD agreed to a settlement of approximately $389 million for outstanding receivables related to Federal Services' three current contracts for DoD's TRICARE program and for the completed contract for the CHAMPUS (Civilian Health and Medical Program of the Uniformed Services) Reform Initiative. Approximately $60 million of the settlement amount was received in December 2000. Federal Services received the remainder of the settlement in January 2001. The settlement amounts were used, among other things, to pay vendors, providers and amounts owed back to the government, and were applied to the continuing operating needs of the three TRICARE contracts. The settlement agreement also provided for additional payments during 2001 and 2002 for costs that have not yet been incurred.

        TRICARE FOR LIFE.    TRICARE For Life ("TFL") was passed by Congress as part of the FY 2001 National Defense Authorization Act (P.L. 106-398) and became Public Law on October 30, 2000. The program was implemented by the DoD on October 1, 2001 restoring TRICARE coverage for all Medicare-eligible retired beneficiaries who are enrolled in Medicare Part B. TFL covers all uniformed services retirees, spouses, and other qualifying dependents and survivors (including certain former spouses) who are Medicare-eligible and enrolled in Medicare Part B, regardless of age. Eligible beneficiaries receive all Medicare-covered benefits plus all TRICARE covered benefits. For most beneficiaries, Medicare will be first payer for all Medicare-covered services and TRICARE will be the second payer. TRICARE will pay all Medicare co-pays and deductibles and cover most of the cost of certain care not covered by Medicare. TFL covers approximately 1.5 million beneficiaries, with approximately 500,000 of those beneficiaries within Federal Services' regions.

        VETERANS AFFAIRS.    During 2001, Federal Services administered 11 contracts with the U.S. Department of Veterans Affairs to manage community based outpatient clinics in six states. Federal Services also managed 55 contracts with the U.S. Department of Veterans Affairs, one subcontract for the U.S. Department of Veterans Affairs and one contract with the U.S. Marshals Service for claims re-pricing services.

Specialty Services

        We offer behavioral health, dental and vision products and services as well as managed care products related to bill review, administration and cost containment for hospitals, health plans and other entities.

7

        DENTAL AND VISION.    We acquired DentiCare of California, Inc. ("DentiCare") (which is in the process of changing its name to Health Net Dental, Inc.) in 1991. DentiCare provides dental care services under an HMO arrangement in California and Hawaii and performs dental administration services for an affiliate company in California. For the year ended December 31, 2001, DentiCare's total revenues were $49 million for services it provided for approximately 478,000 members, of which 72,600 members were beneficiaries under the Medicaid dental programs. DentiCare also participates in the Healthy Families program, under which it serves approximately 89,600 members.

        We provide at-risk vision care services and administrative services under various programs through our wholly owned subsidiary Foundation Health Vision Services, Inc. d.b.a. AVP Vision Plans ("AVP") (which is in the process of changing its name to Health Net Vision, Inc.). AVP operates in California and Arizona and shares a common administrative and information systems platform with DentiCare. For the year ended December 31, 2001, total revenues were $9 million. The total number of lives covered under these services reached approximately 505,000 members as of December 31, 2001. Of those covered lives, 380,400 members are enrolled in full-risk products and 124,600 lives were covered under administrative services contracts.

        Both DentiCare and AVP are licensed in California under the Knox-Keene Health Care Service Plan Act of 1975, as amended (the "Knox-Keene Act"), as Specialized Health Care Service Plans, and compete with other HMOs, traditional insurance companies, self-funded plans, PPOs and discounted fee-for-service plans. The two companies share a common strategy to maximize the value and quality of managed dental and vision care services while appropriately balancing financial risk assumption among providers, members, and other entities to achieve the effective and efficient use of available resources.

        BEHAVIORAL HEALTH.    We provide behavioral health services through a subsidiary, Managed Health Network, Inc., and subsidiaries of Managed Health Network, Inc. (collectively "MHN"). MHN holds a license in California under the Knox-Keene Act as a Specialized Health Care Service Plan. MHN offers behavioral health, substance abuse and employee assistance programs on an insured and self-funded basis to employers, governmental entities and other payors in various states.

        MHN provides managed behavioral health programs to employers, governmental agencies and public entitlement programs, such as TRICARE and Medicare. Employers participating in MHN's programs range in size from Fortune 100 companies to mid-sized companies with 200 employees. MHN's strategy is to extend its market share in the Fortune 500, health plan and TRICARE markets through a combination of direct, consultant/broker and affiliate sales. MHN intends to achieve additional market share through broadening its employer products, including using the Internet as a distribution channel, pursuing upcoming TRICARE procurement opportunities with Federal Services and continuing carve-out product sales, funded on either a risk or ASO, basis.

        MHN's products and services were being provided to over 10.4 million individuals as of December 31, 2001, with approximately 3.2 million individuals under risk-based programs, approximately 3.6 million individuals under self-funded programs and approximately 3.6 million individuals under employee assistance programs ("EAPs").

        For the year ended December 31, 2001, these products and services generated revenues of approximately $248 million, of which approximately $156 million derived from risk-based programs, including approximately $25 million derived from TRICARE, approximately $26 million derived from ASO programs and approximately $41 million derived from EAPs.

        MHN has approximately 1,200 full-time equivalent employees serving approximately 2,100 employer groups on a stand alone basis plus approximately 34,000 groups through other affiliates of ours, primarily in California and the Northeast.

8

        Headquartered in San Rafael, California, MHN has nationwide operations with full-service clinical intake offices in Los Angeles, New York, Dallas, Milwaukee, Las Vegas and Huntington Beach, California.

        WORKERS' COMPENSATION ADMINISTRATIVE SERVICES.    Our subsidiaries organized under Employer & Occupational Services Group, Inc. ("EOSG") provide a full range of workers' compensation administrative services to insurers, self-funded employers, third-party claims administrators and public agencies. These services include injury reporting and provider referral, automated bill review and PPO network access, field and telephonic case management, direction of care and practice management, claim/benefit administration, claim investigation and adjudication, litigation management and employer personnel services (which were discontinued in 2001). EOSG has regional offices in Arizona, California, Colorado, Connecticut, Illinois, Kansas, North Carolina, Oregon and Texas. During 2001, EOSG's Managed Care Services unit provided services on more than $1.1 billion of billed charges for medical care for covered beneficiaries of its customers. The unit processed over 1.9 million bills from providers and hospitals located in 50 states and handled nearly 37,000 intake calls resulting in the processing of over 23,000 injury reports and 4,400 medical care cases referred for case management services and/or utilization review services. EOSG's Claims Services unit handled more than 43,000 claims. For the year ended December 31, 2001, EOSG's Managed Care Services, Claims Services and Employment Services units generated revenues of approximately $46.2 million, $15.2 million and $3.2 million, respectively.

Business Transformation and Innovation Services

        Our Business Transformation and Innovation Services Division oversees all aspects of our information technology operations and business process redesign efforts, seeking to make our operational processes as efficient as possible through the use of enabling technology, such as the Internet. We believe that the Internet and related new technologies will fundamentally change managed care organizations. The Business Transformation and Innovation Services Division focuses on our strategic direction in light of the Internet and related technologies and pursues opportunities consistent with our strategic direction. Currently, the Division is developing collaborative approaches with business partners to transform their existing assets and expertise into new e-business opportunities. We believe that net-enabled connectivity among purchasers, consumers, managed care organizations, providers and other trading partners has increased in recent years, providing a basis for creating and capturing e-business opportunities. We are developing business concepts to take advantage of those market opportunities that provide value to consumers, purchasers of benefits and the providers of medical and health care services.

        INNOVATION SERVICES.    The Business Transformation and Innovation Services Division includes our New Ventures Group, which develops technological tools to stream-line health care processes, empower consumers and reduce administrative burdens for members, beneficiaries, physicians, hospitals and employers. In this connection, we have undertaken, among other things, the following initiatives:

        Questium.    Our subsidiary, Questium, Inc. ("Questium"), launched a health care consumer website, www.questium.com, that links health plan members directly with their personal health benefit information. The Questium website allows health plan members to customize their own web page and gain access to information and services such as customized health news and updates, and individual health coverage information, such as co-payment levels and out-of-pocket maximums. Certain health plan members are also able use the Questium website to refill mail order prescriptions online and view their individual medical histories from their health plan records. The Questium website also offers, among other things, access to general consumer information, such as a health encyclopedia, alternative

9

care and clinical trial information, and online health evaluation tools, such as a health risk calculator and weight-loss guide.

        Provider/Payor Connectivity.    Provider/payor connectivity solutions enable health care providers and health care payors, including delegated medical groups, to electronically exchange administrative, financial and clinical information. We began the MedUnite initiative in 1999 to develop a provider/payor connectivity solution. MedUnite has subsequently come to include six other nationally prominent health plans. MedUnite operates as a stand-alone enterprise in which we retain a minority ownership interest. MedUnite, which is designed to provide on-line internet provider connectivity services including eligibility information, referrals, authorizations, claims submission and payment, commenced pilot operations in California and on the East Coast in 2001. Through our subsidiary, Health Net of the Northeast, Inc. (formerly Physicians Health Services, Inc.), we also employ another provider/payor connectivity solution in the Northeast. This solution is supported by NaviMedix, Inc. ("NaviMedix") and currently provides Internet-based connectivity services to physicians in the tri-state area of Connecticut, New York and New Jersey. We hold a minority equity position in NaviMedix.

        Online Enrollment and Billing.    We continue to develop online enrollment and billing initiatives for our commercial health plan and TRICARE lines of business. These initiatives permit health plan members/beneficiaries to enroll in health coverage, pay applicable fees, and select a primary care physician using the Internet. Additionally, our member services and enrollment employees will perform enrollment and billing activities through the Internet using these innovative solutions. Both enrollment and billing initiatives commenced pilot operations in 2001.

        MANAGEMENT INFORMATION SYSTEMS.    Effective information technology systems are critical to our operations. Our information technology systems include several computer systems, each utilizing a combination of packaged and customized software and a network of online terminals. The information technology systems gather and store data on our members and physician and hospital providers. The systems contain all of our necessary membership and claims-processing capabilities as well as marketing and medical utilization programs. These systems provide us with an integrated system of billing, reporting, member services and claims processing, and the ability to examine member encounter information for the optimization of clinical outcomes. In this connection, as set forth above, we are in the process of developing and implementing online enrollment and billing solutions for our health plan and TRICARE operations, which we believe will simplify and expedite administrative functions.

PROVIDER RELATIONSHIPS AND RESPONSIBILITIES

        PHYSICIAN RELATIONSHIPS.    Under most of our HMO plans, each member upon enrollment selects a participating physician group ("PPG") or primary care physician from the HMO's provider panel. The primary care physicians and PPGs assume overall responsibility for the care of members. Medical care provided directly by such physicians includes the treatment of illnesses not requiring referral, as well as physical examinations, routine immunizations, maternity and child care, and other preventive health services. The primary care physicians and PPGs are responsible for making referrals (approved by the HMO's or PPG's medical director) to specialists and hospitals. Certain of our HMOs offer enrollees "open panels" under which members may access any physician in the network, or network physicians in certain specialties, without first consulting their primary care physician.

        The following table sets forth the number of primary care and specialist physicians contracted either directly with our HMOs or through our contracted PPGs as of December 31, 2001:

Primary Care Physicians	53,765
Specialist Physicians	114,652
Total	168,417

10

        PPG and physician contracts are generally for a period of at least one year and are automatically renewable unless terminated, with certain requirements for maintenance of good professional standing and compliance with our quality, utilization and administrative procedures. In California and Connecticut, PPGs generally receive a monthly "capitation" fee for every member assigned. The capitation fee represents payment in full for all medical and ancillary services specified in the provider agreements. In these capitation fee arrangements, in cases where the capitated PPG cannot provide the health care services needed, such PPGs generally contract with specialists and other ancillary service providers to furnish the requisite services under capitation agreements or negotiated fee schedules with specialists. Outside of California, many of our HMOs reimburse physicians according to a discounted fee-for-service schedule, although several have capitation arrangements with certain providers and provider groups in their market areas.

        For services provided under our PPO and POS products, we ordinarily reimburse physicians pursuant to discounted fee-for-service arrangements.

        HOSPITAL RELATIONSHIPS.    Our health plan subsidiaries arrange for hospital care primarily through contracts with selected hospitals in their service areas. These hospital contracts generally have multi-year terms and provide for payments on a variety of bases, including capitation, per diem rates, case rates and discounted fee-for-service schedules.

        Covered inpatient hospital care for our HMO members is comprehensive; it includes the services of physicians, nurses and other hospital personnel, room and board, intensive care, laboratory and x-ray services, diagnostic imaging and generally all other services normally provided by acute-care hospitals. HMO or PPG nurses and medical directors are actively involved in discharge planning and case management, which often involves the coordination of community support services, including visiting nurses, physical therapy, durable medical equipment and home intravenous therapy.

        COST CONTAINMENT.    In most HMO plan designs, the primary care physician or PPG is responsible for authorizing all needed medical care except for emergency medical services. We believe that this authorization process reduces inappropriate use of medical resources and achieves efficiencies in cases where reimbursement in based on risk-sharing arrangements.

        To limit possible abuse in utilization of hospital services in non-emergency situations, most of our health plans require that a member obtain certification for specified medical conditions prior to admission as an inpatient, and the inpatient admission is then subject to continuing review during the member's hospital stay. In addition to reviewing the appropriateness of hospital admissions and continued hospital stays, we play an active role in evaluating alternative means of providing care to members and encourage the use of outpatient care, when appropriate, to reduce the cost that would otherwise be associated with an inpatient admission.

        QUALITY ASSESSMENT.    Quality assessment is a continuing priority for us. Most of our health plans have a quality assessment plan administered by a committee composed of medical directors and primary care and specialist physicians. The committees' responsibilities include periodic review of medical records, development and implementation of standards of care based on current medical literature and community standards, and the collection of data relating to results of treatment. All of our health plans also have a subscriber grievance procedure and/or a member satisfaction program designed to respond promptly to member grievances. Elements of these subscriber grievance procedures and member satisfaction programs are incorporated both within the PPGs and within our health plans.

DIVESTITURES AND OTHER INVESTMENTS

        Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received

11

approximately $49 million, consisting of $23 million in cash and approximately $26 million in the form of a secured six-year note bearing interest at a rate of eight percent per annum. We also sold the corporate facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing interest at a rate of eight percent per annum. We estimated and recorded a $76.1 million pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001. Under the terms of the Florida sale agreement and certain reinsurance and indemnification obligations of the Company, there will be a series of true-up processes that will take place through 2002 that could result in additional loss or gain recognition which was not able to be estimated as of December 31, 2001.

        Throughout 2000 and 2001, we provided funding in the aggregate amount of approximately $10 million to MedUnite in exchange for preferred stock of MedUnite. We hold a minority ownership interest in MedUnite. During the first quarter of 2002, we provided approximately $2.2 million in additional funding to MedUnite. The funded amounts are included in other noncurrent assets. For additional information about MedUnite, see the discussion under "Government Contracts and Specialty Services segment—Business Transformation and Innovation Services—Innovation Services—Provider/Payor Connectivity" above.

        During 2000, we secured an exclusive e-business connectivity services agreement from the Connecticut State Medical Society IPA, Inc. (CSMS-IPA) for $15.0 million. CSMS-IPA is an association of medical doctors providing health care primarily in Connecticut. The amounts paid to CSMS-IPA for this agreement are included in other noncurrent assets. During 2001, we continued to develop this service capability.

        CERTAIN OTHER OPERATIONS.    We continue to evaluate the profitability realized or likely to be realized by our existing businesses and operations, and are reviewing from a strategic standpoint which of such businesses or operations, if any, should be divested.

ADDITIONAL INFORMATION CONCERNING OUR BUSINESS

        MARKETING AND SALES.    Marketing for group health plan business is a three-step process. We first market to potential employer groups and group insurance brokers. We then provide information directly to employees once the employer has selected our health coverage. Finally, we engage members and employers in marketing for member and group retention. Although we market our programs and services primarily through independent brokers, agents and consultants, we use our limited internal sales staff to serve certain large employer groups. Once selected by an employer, we solicit enrollees from the employee base directly. During "open enrollment" periods when employees are permitted to change health care programs, we use direct mail, work day and health fair presentations, telemarketing and outdoor print and radio advertisements to attract new enrollees. Our sales efforts are supported by our marketing division, which engages in product research and development, multicultural marketing, advertising and communications, and member education and retention programs.

        Premiums for each employer group are generally contracted on a yearly basis and are payable monthly. We consider numerous factors in setting our monthly premiums, including employer group needs and anticipated health care utilization rates as forecasted by our management based on the demographic composition of, and our prior experience in, our service areas. Premiums are also affected by applicable regulations that prohibit experience rating of group accounts (i.e., setting the premium for the group based on its past use of health care services) and by state regulations governing the manner in which premiums are structured.

        We believe that the importance of the ultimate health care consumer (or member) in the health care product purchasing process is likely to increase in the future, particularly in light of advances in technology and online resources. Accordingly, we intend to focus our marketing strategies on the

12

development of distinct brand identities and innovative product service offerings that will appeal to potential health plan members.

        COMPETITION.    HMOs operate in a highly competitive environment in an industry currently subject to significant changes from business consolidations, new strategic alliances, legislative reform and market pressures brought about by a better informed and better organized customer base. Our HMOs face substantial competition from for-profit and nonprofit HMOs, PPOs, self-funded plans (including self-insured employers and union trust funds), Blue Cross/Blue Shield plans, and traditional indemnity insurance carriers, some of which have substantially larger enrollments and greater financial resources than we do. We believe that the principal competitive features affecting our ability to retain and increase membership include the range and prices of benefit plans offered, provider network, quality of service, responsiveness to user demands, financial stability, comprehensiveness of coverage, diversity of product offerings, and market presence and reputation. The relative importance of each of these factors and the identity of our key competitors varies by market. We believe that we compete effectively with respect to all of these factors.

        We face competition from a variety of sources in the California health plan market. Kaiser Foundation Health Plan ("Kaiser") is the largest HMO in California and is a competitor of ours in the California HMO industry. In addition to Kaiser, our other HMO competitors include PacifiCare of California, California Care (Blue Cross of California) and Blue Shield of California. There are also a number of other types of competitors including self-directed plans, traditional indemnity insurance plans, and other managed care plans. Despite the concentration of membership in the large health plans, the competitive environment in the state is also impacted by small, regional-based HMOs, whose combined membership we believe constitutes approximately 20-25% of the market. In addition, we compete in California against a variety of PPOs.

        Our largest competitor in Arizona is Blue Cross/Blue Shield. Our Arizona HMO also competes with United Healthcare, CIGNA, PacifiCare and Aetna. Our Oregon HMO competes primarily against other HMOs including Kaiser, PacifiCare of Oregon, Providence, Blue Cross, Lifewise and Blue Shield Regions, and with various PPOs.

        Our HMO in Connecticut competes for business with commercial insurance carriers, Anthem Connecticut, Aetna/U.S. Healthcare, Connecticare and eight other HMOs. Our main competitors in Pennsylvania, New York and New Jersey are Aetna/U.S. Healthcare, Empire Blue Cross, Oxford Health Plans, United Healthcare, Horizon Blue Cross and Keystone Health Plan East.

        GOVERNMENT REGULATION.    We believe we are in compliance in all material respects with all current state and federal regulatory requirements applicable to the businesses being conducted by our subsidiaries. Certain of these requirements are discussed below.

        California HMO Regulations.    California HMOs such as Health Net of California, Inc. ("HN California") and certain of our specialty plans are subject to California state regulation, principally by the Department of Managed Health Care ("DMHC") under the Knox-Keene Act. Among the areas regulated by the Knox-Keene Act are: (i) adequacy of administrative operations, (ii) the scope of benefits required to be made available to members, (iii) manner in which premiums are structured, (iv) procedures for review of quality assurance, (v) enrollment requirements, (vi) composition of policy making bodies to assure that plan members have access to representation, (vii) procedures for resolving grievances, (viii) the interrelationship between HMOs and their health care providers, (ix) adequacy and accessibility of the network of health care providers, (x) provider contracts, and (xi) initial and continuing financial viability of the HMO and its risk-bearing providers. Any material modifications to the organization or operations of HN California are subject to prior review and approval by the DMHC. This approval process can be lengthy and there is no certainty of approval. Other significant changes require filing with the DMHC, which may then comment and require changes. In addition,

13

under the Knox-Keene Act, HN California and certain of our other subsidiaries must file periodic reports with, and are subject to periodic review and investigation by, the DMHC. Non-compliance with the Knox-Keene Act may result in an enforcement action, fines and penalties, and, in egregious cases, limitations on or revocation of the Knox-Keene license.

        Federal HMO Regulations.    Under the Federal Health Maintenance Organization Act of 1973 (the "HMO Act"), services to members must be provided substantially on a fixed, prepaid basis without regard to the actual degree of utilization of services. Premiums established by an HMO may vary from account to account through composite rate factors and special treatment of certain broad classes of members, and through prospective (but not retrospective) rating adjustments. Several of our HMOs are federally qualified in certain parts of their respective service areas under the HMO Act and are therefore subject to the requirements of such act to the extent federally qualified products are offered and sold.

        Additionally, there are a number of recently enacted federal laws that further regulate managed health care. Recent legislation includes the Balanced Budget Act of 1997 and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The purposes of HIPAA are to (i) limit pre-existing condition exclusions applicable to individuals changing jobs or moving to individual coverage, (ii) guarantee the availability of health insurance for employees in the small group market, (iii) prevent the exclusion of individuals from coverage under group plans based on health status and (iv) establish national standards for the electronic exchange of health information. In December, 2000, the Department of Health and Human Services ("DHHS") promulgated regulations under HIPAA related to the privacy and security of electronically transmitted protected health information ("PHI"). The new regulations require health plans, clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage and disclosure of PHI, (b) adopt rigorous internal procedures to protect PHI and (c) enter into specific written agreements with business associates to whom PHI is disclosed. The regulations also establish significant criminal penalties and civil sanctions for non-compliance. In addition, the regulations could expose us to additional liability for, among other things, violations of the regulations by our business associates. We believe that the costs required to comply with these regulations under HIPAA will be significant and could have a material adverse impact on our business or results of operations.

        Our Medicare contracts are subject to regulation by CMS. CMS has the right to audit HMOs operating under Medicare contracts to determine the quality of care being rendered and the degree of compliance with CMS' contracts and regulations. Our Medicaid business is also subject to regulation by CMS, as well as state agencies.

        Most employee benefit plans are regulated by the federal government under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Employment-based health coverage is such an employee benefit plan. ERISA is administered, in large part, by the U.S. Department of Labor ("DOL"). ERISA contains disclosure requirements for documents that define the benefits and coverage. It also contains a provision that causes federal law to preempt state law in the regulation and governance of certain benefit plans and employer groups, including the availability of legal remedies under state law. Recently, the DOL adopted regulations under ERISA which mandate certain claims and appeals processing requirements. These regulations become effective starting on July 1, 2002 and fully on January 1, 2003. They will require us to make certain adjustments in our claims systems, but we do not anticipate that the cost of the adjustments will be material from a financial point of view or that the changes will not be able to be made by the deadline date.

        Other HMO Regulations.    In each state in which our HMOs do business, our HMOs must meet numerous state licensing criteria and secure the approval of state licensing authorities before implementing certain operational changes, including the development of new product offerings and, in some states, the expansion of service areas. To remain licensed, each HMO must continue to comply

14

with state laws and regulations and may from time to time be required to change services, procedures or other aspects of its operations to comply with changes in applicable laws and regulations. In addition, HMOs must file periodic reports with, and their operations are subject to periodic examination by, state licensing authorities. HMOs are required by state law to meet certain minimum capital and deposit and/or reserve requirements in each state and may be restricted from paying dividends to their parent corporations under some circumstances. Several states have increased minimum capital requirements, in response to proposals by the National Association of Insurance Commissioners to institute risk-based capital requirements. Regulations in these and other states may be changed in the future to further increase capital requirements. Such increases could require us to contribute additional capital to our HMOs. Any adverse change in governmental regulation or in the regulatory climate in any state could materially impact the HMOs operating in that state. The HMO Act and state laws place various restrictions on the ability of HMOs to price their products freely. We must comply with applicable provisions of state insurance and similar laws, including regulations governing our ability to seek ownership interests in new HMOs, PPOs and insurance companies, or otherwise expand our geographic markets or diversify our product lines.

        Insurance Regulations.    State departments of insurance (the "DOIs") regulate our insurance and third-party administrator businesses under various provisions of state insurance codes and regulations. Our subsidiaries conducting these businesses are subject to various capital reserve and other financial, operating and disclosure requirements established by the DOIs and state laws. These subsidiaries must also file periodic reports regarding their regulated activities and are subject to periodic reviews of those activities by the DOIs. We must also obtain approval from, or file copies with, the DOIs for all of our group and individual insurance policies prior to issuing those policies.

        PENDING FEDERAL AND STATE LEGISLATION.    There are a number of legislative initiatives and proposed regulations currently pending at the federal and state levels which could increase regulation of the health care industry. These measures include a "patients' bill of rights" and certain other initiatives which, if enacted, could have significant adverse effects on our operations. See "Cautionary Statements—Federal and State Legislation" below. For example, one version of the proposed "patients' bill of rights" would allow an expansion of liability for health plans. We cannot predict the outcome of any of the pending legislative or regulatory proposals, nor the extent to which we may be affected by the enactment of any such legislation or regulation.

        ACCREDITATION.    We pursue accreditation for certain of our health plans from the National Committee for Quality Assurance ("NCQA") and the Joint Committee on Accreditation of Healthcare Organizations ("JCAHO"). NCQA and JCAHO are independent, non-profit organizations that review and accredit HMOs. HMOs that comply with review requirements and quality standards receive accreditation. Our HMO subsidiaries in California and Arizona have received NCQA accreditation. Certain of our other health plan subsidiaries are in the process of applying for NCQA or JCAHO accreditation. The utilization review activities of our subsidiary, EOS Managed Care Services, are accredited by Utilization Review Accreditation Commission also known as the "American Accreditation Healthcare Commission".

SERVICE MARKS

        We have filed for registration of and maintain several service marks, trademarks and tradenames that we use in our business, including marks and names incorporating the "Health Net" phrase. We utilize these and other marks and names in connection with the marketing and identification of products and services. We believe such marks and names are valuable and material to our marketing efforts.

15

EMPLOYEES

        We currently employ approximately 9,800 employees, excluding temporary employees. These employees perform a variety of functions, including provision of administrative services for employers, providers and members; negotiation of agreements with physician groups, hospitals, pharmacies and other health care providers; handling of claims for payment of hospital and other services; provision of data processing services. Our employees are not unionized and we have not experienced any work stoppage since our inception. We consider our relations with our employees to be very good.

OTHER INFORMATION/RECENT DEVELOPMENTS

        DEBT OFFERING.    On April 12, 2001, we completed our offering of $400 million aggregate principal amount of 8.375 percent Senior Notes due in April 2011. The net proceeds of $395.1 million from the Senior Notes were used to repay outstanding borrowings under our then-existing revolving credit facility. On October 4, 2001, we completed an exchange offer for the Senior Notes in which the outstanding Senior Notes were exchanged for an equal aggregate principal amount of new 8.375 percent Senior Notes due in 2011 that have been registered under the Securities Act of 1933, as amended.

        FLORIDA OPERATIONS.    Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received approximately $49 million, consisting of $23 million in cash and approximately $26 million in the form of a secured six-year note bearing interest at a rate of eight percent per annum. We also sold the corporate facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing interest at a rate of eight percent per annum. We estimated and recorded a $76.1 million pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001. Under the terms of the Florida sale agreement and certain reinsurance and indemnification obligations of the Company, there will be a series of true-up processes that will take place through 2002 that could result in additional loss or gain recognition which was not able to be estimated as of December 31, 2001.

        CREDIT AGREEMENTS.    We have two credit facilities with Bank of America, N.A., as administrative agent, each governed by a separate credit agreement dated as of June 28, 2001. The credit facilities, providing for an aggregate of $700 million in borrowings, consist of:

•

a $175 million 364-day revolving credit facility; and



•

a $525 million five-year revolving credit and competitive advance facility.

        We established the credit facilities to refinance our then-existing credit facility and to finance any lawful general corporate purposes, including acquisitions and working capital. The credit facilities allow us to borrow funds:

•

by obtaining committed loans from the group of lenders as a whole on a pro rata basis;



•

by obtaining under the five-year facility loans from individual lenders within the group by way of a bidding process;



•

by obtaining under the five-year facility swingline loans in an aggregate amount of up to $50 million that may be requested on an expedited basis; and



•

by obtaining under the five-year facility letters of credit in an aggregate amount of up to $200 million.

        Repayment.    The 364-day credit facility expires on June 27, 2002. We must repay all borrowings under the 364-day credit facility by June 27, 2004. The five-year credit facility expires in June 2006, and

16

we must repay all borrowings under the five-year credit facility by, June 28, 2006, unless the five-year credit facility is extended. The five-year credit facility may, at our request and subject to approval by lenders holding two-thirds of the aggregate amount of the commitments under the five-year credit facility, be extended for up to two twelve-month periods to the extent of the commitments made under the five-year credit facility by such approving lenders. Swingline loans under the five-year credit facility are subject to repayment within no more than seven days.

        Covenants.    The credit agreements contain negative covenants, including financial covenants, that impose restrictions on our operations. The financial covenants in the credit agreements provide that:

•

for any period of four consecutive fiscal quarters, the consolidated leverage ratio, which is the ratio of (i) our consolidated funded debt to (ii) our consolidated net income before interest, taxes, depreciation, amortization and other specified items (consolidated EBITDA), must not exceed 3 to 1;



•

for any period of four consecutive fiscal quarters, the consolidated fixed charge coverage ratio, which is the ratio of (i) our consolidated EBITDA plus consolidated rental expense minus consolidated capital expenditures to (ii) our consolidated scheduled debt payments, (defined as the sum of scheduled principal payments, interest expense and rent expense) must be at least 1.5 to 1; and



•

we must maintain our consolidated net worth at a level equal to at least $945 million (less the sum of a pretax charge associated with our sale of our Florida health plan and specified pretax charges relating to the write-off of goodwill) plus 50% of our consolidated net income and 100% of our net cash proceeds from equity issuances.

        The other covenants in the credit agreements include, among other things, limitations on incurrence of indebtedness by our subsidiaries and on our ability to

•

incur liens;



•

extend credit and make investments;



•

merge, consolidate, dispose of stock in subsidiaries, lease or otherwise dispose of assets and liquidate or dissolve;



•

engage in transactions with affiliates;



•

substantially alter the character or conduct of the business of Health Net, Inc. or any of its "significant subsidiaries" within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC;



•

make restricted payments, including dividends and other distributions on capital stock and redemptions of capital stock; and



•

become subject to other agreements or arrangements that restrict (i) the payment of dividends by any Health Net, Inc. subsidiary, (ii) the ability of Health Net, Inc. subsidiaries to make or repay loans or advances to us, (iii) the ability of any subsidiary of Health Net, Inc. to guarantee our indebtedness or (iv) the creation of any lien on our property.

        Interest and fees.    Committed loans under the credit facilities bear interest at a rate equal to either (1) the greater of the federal funds rate plus 0.5% and the applicable prime rate or (2) LIBOR plus a margin that depends on our senior unsecured credit rating. Loans obtained through the bidding process bear interest at a rate determined in the bidding process. Swingline loans under the five-year credit facility bear interest equal to, at our option, either a base rate plus a margin that depends on our senior unsecured credit rating or a rate quoted to us by the swingline lender. We pay fees on outstanding letters of credit and a facility fee, computed as a percentage of the lenders' commitments under the credit facilities, which varies from 0.130% to 0.320% per annum for the 364-day credit

17

facility and from 0.155% to 0.375% per annum for the five-year credit facility, depending on our senior unsecured credit rating.

        Events of Default.    The credit agreements provide for acceleration of repayment of indebtedness under the credit facilities upon the occurrence of customary events of default.

        SHAREHOLDER RIGHTS PLAN.    On May 20, 1996, our Board of Directors declared a dividend distribution of one right (a "Right") for each outstanding share our Class A Common Stock and Class B Common Stock (collectively, the "Common Stock"), to stockholders of record at the close of business on July 31, 1996 (the "Record Date"). Our Board of Directors also authorized the issuance of one Right for each share of Common Stock issued after the Record Date and prior to the earliest of the "Distribution Date" the Rights separate from the Common Stock under the circumstances described below and in accordance with the provisions of the Rights Agreement, as defined below, the redemption of the Rights and the expiration of the Rights, and in certain other circumstances. Rights will attach to all Common Stock certificates representing shares then outstanding and no separate Rights certificates will be distributed. Subject to certain exceptions contained in the Rights Agreement dated as of June 1, 1996 by and between us and Harris Trust and Savings Bank, as Rights Agent (as amended on October 1, 1996 and May 3, 2001, the "Rights Agreement"), the Rights will separate from the Common Stock following any person, together with its affiliates and associates (an "Acquiring Person"), becoming the beneficial owner of 15% or more of the outstanding Class A Common Stock, the commencement of a tender or exchange offer that would result in any person, together with its affiliates and associates, becoming the beneficial owner of 15% or more of the outstanding Class A Common Stock or the determination by the Board of Directors that a person, together with its affiliates and associates, has become the beneficial owner of 10% or more of the Class A Common Stock and that such person is an "Adverse Person," as defined in the Rights Agreement. The Rights Agreement provides that certain passive institutional investors that beneficially own less than 17.5% of the outstanding shares of our Class A Common Stock shall not be deemed to be Acquiring Persons.

        The Rights will first become exercisable on the Distribution Date and will expire on July 31, 2006, unless earlier redeemed by us as described below. Except as set forth below and subject to adjustment as provided in the Rights Agreement, each Right entitles its registered holder to purchase from us one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $170.00 per one-thousandth share.

        Subject to certain exceptions contained in the Rights Agreement, in the event that any person shall become an Acquiring Person or be declared to be an Adverse Person, then the Rights will "flip-in" and entitle each holder of a Right, other than any Acquiring Person or Adverse Person, to purchase, upon exercise at the then-current exercise price of such Right, that number of shares of Class A Common Stock having a market value of two time such exercise price.

        In addition, and subject to certain exceptions contained in the Rights Agreement, in the event that we are acquired in a merger or other business combination in which the Class A Common Stock does not remain outstanding or is changed or 50% of the assets or earning power of the Company is sold or otherwise transferred to any other person, the Rights will "flip-over" and entitle each holder of a Right, other than an Acquiring Person or an Adverse Person, to purchase, upon exercise at the then current exercise price of such Right, such number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times such exercise price.

        We may redeem the Rights until the earlier of 10 days following the date that any person becomes the beneficial owner of 15% or more of the outstanding Class A Common Stock and the date the Rights expire at a price of $.01 per Right.

        In May 2001, we appointed Computershare Investor Services, L.L.C. to serve as the Rights Agent under the Rights Agreement.

18

        The foregoing summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated by reference in Exhibits 4.2, 4.3 and 4.4 to this Annual Report.

        CHARTER AMENDMENT AND RESTATEMENT.    Effective May 7, 2001, the Company amended and restated its Certificate of Incorporation to eliminate the separation of its Board of Directors into three separate classes and to replace it with a Board of Directors that is elected on an annual basis, and to eliminate a section relating to the removal of directors that was no longer applicable given the class elimination. Such amendment and restatement was approved by the affirmative vote of over eighty percent (80%) of the outstanding shares of Class A Common Stock of the Company at its 2001 Annual Meeting of Stockholders. A copy of the complete Certificate of Incorporation as so amended and restated is included as an Exhibit to this Annual Report.

        CHANGE IN EXECUTIVE OFFICER:    Effective January 28, 2002, Steven P. Erwin resigned as Executive Vice President and Chief Financial Officer of the Company and Marvin P. Rich was appointed in his place as Executive Vice President, Finance and Operations.

        LEGISLATION.    In 2001, the United States Senate and House of Representatives passed separate bills, sometimes referred to as "patients' rights" or "patients' bill of rights" legislation, that seek, among other things, to hold health plans liable for claims regarding health care delivery and improper denial of care. This legislation would remove or limit federal preemption under the Employee Retirement Income Security Act of 1974 ("ERISA") that currently precludes most individuals from suing health plans for causes of action based upon state law and would enable plan members to challenge coverage and benefits decisions in state and federal courts. Although both bills provide for independent review of decisions regarding medical care, the bills differ on the circumstances and procedures under which lawsuits may be brought against managed care organizations and the scope of their liability. Congress will attempt to reconcile the two bills in a conference committee. If patients' bill of rights legislation is enacted into law we could be subject to significant additional litigation risk and regulatory compliance costs, which could be costly to us and could have a significant adverse effect on our results of operations. Although we could attempt to mitigate our ultimate exposure to litigation and regulatory compliance costs through, among other things, increases in premiums, there can be no assurance that we would be able to mitigate or cover the costs stemming from litigation arising under patients' bill of rights legislation or the other costs that we could incur in connection with complying with patients' bill of rights legislation.

        FOHP.    Effective July 30, 1999, a wholly-owned subsidiary of ours merged with and into FOHP, Inc., a then-majority owned subsidiary of ours, which, as a result of the merger, became a wholly-owned subsidiary of the Company. In connection with the merger, the former minority shareholders of FOHP were entitled to receive either $.25 per share or payment rights which entitle the holders to receive as much as $15.00 per payment right on or about July 1, 2001, provided certain hospital and other provider participation and other conditions are met. Also in connection with the merger, certain holders of payment rights will also be entitled to receive additional consideration of $2.25 per payment right ("Bonus Consideration") if our New Jersey health plan achieves certain annual returns on common equity and the participation conditions are met. In July and August 2001, based on the satisfaction of certain participation and other conditions by the former minority shareholders of FOHP, FOHP made aggregate payments of approximately $21.0 million to certain holders of payment rights. FOHP will make up to an additional $6.7 million in payments to additional holders of payment rights, subject to such holders submitting appropriate documentation. A determination on the satisfaction of the conditions for payment of the Bonus Consideration will be made in 2002.

        ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES.    As part of our effort to reduce ongoing selling, general and administrative expenses, during the third quarter of 2001, we initiated a formal plan to reduce operating and administrative expenses for all of our business units

19

(the "2001 Plan"). Under the 2001 Plan, we decided on enterprise-wide staff reductions and consolidations of certain administrative, financial and technology functions. We recorded pretax restructuring charges of $79.7 million in connection with the 2001 Plan during the third quarter ended September 30, 2001 (the "2001 Charge").

        The 2001 Charge included severance and benefits related costs of $43.3 million in connection with the enterprise-wide staff reductions. These reductions include the elimination of 1,517 positions throughout all of our functional groups, divisions and corporate offices within the Company.

        The 2001 Charge also included asset impairment charges of $27.9 million consisting entirely of non-cash write downs of equipment, building improvements and software application and development costs; charges of $5.1 million related to the termination of lease obligations and non-cancelable lease costs for excess office space resulting from streamlined operations and consolidation efforts; and charges of $3.4 million related to costs associated with consolidating certain information technology systems and functions and other activities which are expected to be completed in the first quarter of 2002. No changes to the 2001 Plan are expected.

        We plan on funding the expected future cash outlays with cash flows from operations. We expect the 2001 Plan to be substantially completed by September 30, 2002. As of December 31, 2001, 916 of the 1,517 positions have been eliminated. It is anticipated that elimination of the remaining 601 positions will be completed by September 30, 2002.

        FHC MERGER.    Effective January 1, 2001, Health Net, Inc. merged its wholly-owned subsidiary, Foundation Health Corporation, with and into Health Net, Inc., thereby terminating the separate existence of Foundation Health Corporation.

CAUTIONARY STATEMENTS

        In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we are hereby filing cautionary statements identifying important risk factors that could cause our actual results to differ materially from those projected in "forward-looking statements" of the Company made by or on behalf of the Company, 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. 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", and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the factors set forth below and the risks discussed in our other filings with the SEC.

        We wish to caution readers that these factors, among others, could cause our actual financial or enrollment results to differ materially from those expressed in any projected, estimated or forward-looking statements relating to the Company. The following 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 comments contained in press releases, presentations to securities analysts or investors, or other communications by us. You should not place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof.

        In making these statements, we are not undertaking to address or update each factor in future filings or communications regarding our business or results, nor are we undertaking to address how any of these factors may have caused changes to matters discussed or information contained in previous filings or communications. In addition, certain of these factors may have affected our past results and may affect future results.

20

        HEALTH CARE COSTS.    A large portion of the revenue we receive is expended to pay the costs of health care services or supplies delivered to our members. The total health care costs incurred by us are affected by the number of individual services rendered and the cost of each service. Much of our premium revenue is set in advance of the actual delivery of services and the related incurring of the cost, usually on a prospective annual basis. While we attempt to base the premiums we charge at least in part on our estimate of expected health care costs over the fixed premium period, competition, regulations and other circumstances may limit our ability to fully base premiums on estimated costs. In addition, many factors may and often do cause actual health care costs to exceed those costs estimated and reflected in premiums. These factors may include increased utilization of services, increased cost of individual services, catastrophes, epidemics, seasonality, new mandated benefits or other regulatory changes, and insured population characteristics.

        The managed health care industry is labor intensive and its profit margin is low. Hence, it is especially sensitive to inflation. Health care industry costs have been rising annually at rates higher than the Consumer Price Index. Increases in medical expenses without corresponding increases in premiums could have a material adverse effect on us.

        RESERVES FOR CLAIMS.    Our reserves for claims are estimates of future costs based on various assumptions. The accuracy of these estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment, the judicious administration of claims, medical costs and other factors. Included in the reserves for claims are estimates for the costs of services which have been incurred but not reported. Estimates are continually monitored and reviewed and, as settlements are made or estimates adjusted, differences are reflected in current operations. Such estimates are subject to the impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts reserved. Moreover, if the assumptions on which the estimates are based prove to be incorrect and reserves are inadequate to cover our actual experience, our financial condition could be adversely affected.

        PHARMACEUTICAL COSTS.    The costs of pharmaceutical products and services are increasing faster than the costs of other medical products and services. Thus, our HMOs face ever higher pharmaceutical expenses. The inability to manage pharmaceutical costs could have an adverse effect on our financial condition.

        FEDERAL AND STATE LEGISLATION.    There are frequently legislative proposals before the United States Congress and the state legislatures which, if enacted, could materially affect the managed health care industry and the regulatory environment. Recent financial difficulties of certain health care service providers and plans and/or continued publicity of the health care industry could alter or increase legislative consideration of these or additional proposals. These proposals include federal and state "patients' bill of rights" legislation and other initiatives which, if enacted, could have significant adverse effects on our operations. Such measures propose, among other things, to:

•

expand health plan exposure to tort and other liability, under federal and/or state law, including for coverage determinations, provider malpractice and care decisions;



•

restrict a health plan's ability to limit coverage to medically necessary care;



•

require third party review of certain care decisions;



•

expedite or modify grievance and appeals procedures;



•

reduce the reimbursement or payment levels for services provided under government programs such as Medicare or Medicaid;



•

mandate certain benefits and services that could increase costs;



•

restrict a health plan's ability to select and/or terminate providers; and

21

•

restrict or eliminate the use of prescription drug formularies.

        We cannot predict the outcome of any of these legislative or regulatory proposals, nor the extent to which we may be affected by the enactment of any such legislation or regulation. Legislation or regulation which causes us to change our current manner of operation or increases our exposure to liability could have a material adverse effect on our results of operations, financial condition and ability to compete.

        In addition, in December 2000, the Department of Health and Human Services promulgated regulations under HIPAA related to the privacy and security of electronically transmitted protected health information ("PHI"). The new regulations require health plans, clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage and disclosure of PHI, (b) adopt rigorous internal procedures to safeguard PHI and (c) enter into specific written agreements with business associates to whom PHI is disclosed. The regulations also establish significant criminal penalties and civil sanctions for non-compliance. In addition, the regulations could expose us to additional liability for, among other things, violations of the regulations by our business associates. We believe that the costs required to comply with these regulations will be significant and could have a material adverse impact on our business or results of operations.

        PROVIDER RELATIONS.    We contract with physicians, hospitals and other providers as a means to manage health care costs and utilization and to monitor the quality of care being delivered. In any particular market providers could refuse to contract with us, demand higher payments or take other actions which could result in higher health care costs, less desirable products for customers and members, insufficient provider access for current members or to support growth, or difficulty in meeting regulatory or accreditation requirements.

        In some markets, certain providers, particularly hospitals, physician/hospital organizations and multi-specialty physician groups, may have significant market positions or even monopolies. Many of these providers may compete directly with us. If these providers refuse to contract with us or utilize their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market our products or to be profitable in those areas could be adversely affected.

        We contract with providers in California and Connecticut primarily through capitation fee arrangements. We also use capitation fee arrangements in areas other than California and Connecticut, but to a lesser extent. Under a capitation fee arrangement, we pay the provider a fixed amount per member on a regular basis and the provider accepts the risk of the frequency and cost of member utilization of services. Providers who enter into capitation fee arrangements generally contract with specialists and other secondary providers to provide services not offered by the primary provider. The inability of providers to properly manage costs under capitation arrangements can result in their financial instability and the termination of their relationship with us. In addition, payment or other disputes between the primary provider and specialists with whom the primary provider contracts can result in a disruption in the provision of services to our members or a reduction in the services available. A primary provider's financial instability or failure to pay secondary providers for services rendered could lead secondary providers to demand payment from us, even though we have made our regular capitated payments to the primary provider. Depending on state law, we could be liable for such claims. In California, the liability of our HMO subsidiaries for unpaid provider claims has not been definitively settled. There can be no assurance that our subsidiaries will not be liable for unpaid provider claims. There can also be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with secondary providers, the failure of any of which could have an adverse effect on the provision of services to members and our operations.

22

        GOVERNMENT PROGRAMS AND REGULATION.    Our business is subject to extensive federal and state laws and regulations, including, but not limited to, financial requirements, licensing requirements, enrollment requirements and periodic examinations by governmental agencies. The laws and rules governing our business and interpretations of those laws and rules are subject to frequent change. Existing or future laws and rules could force us to change how we do business and may restrict our revenue and/or enrollment growth, and/or increase its health care and administrative costs, and/or increase our exposure to liability with respect to members, providers or others. In particular, our HMO and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net worth, premium rates, and approval of policy language and benefits. Although these regulations have not significantly impeded the growth of our business to date, there can be no assurance that we will be able to continue to obtain or maintain required governmental approvals or licenses or that regulatory changes will not have a material adverse effect on our business. Delays in obtaining or failure to obtain or maintain governmental approvals, or moratoria imposed by regulatory authorities, could adversely affect our revenue or the number of our members, increase costs or adversely affect our ability to bring new products to market as forecasted. In addition, efforts to enact changes to Medicare could impact the structure of the Medicare program, benefit designs and reimbursement. Changes to the current operation of our Medicare services could have a material adverse affect on our results of operations.

        A significant portion of our revenues relate to federal, state and local government health care coverage programs, such as Medicare, Medicaid and TRICARE programs. Such contracts are generally subject to frequent change including changes which may reduce the number of persons enrolled or eligible, reduce the revenue received by us or increase our administrative or health care costs under such programs. In the event government reimbursement were to decline from projected amounts, our failure to reduce the health care costs associated with such programs could have a material adverse effect upon our business. Changes to government health care coverage programs in the future may also affect our willingness to participate in these programs.

        We are also subject to various federal and state governmental audits and investigations. These audits and investigations could result in the loss of licensure or the right to participate in certain programs, or the imposition of fines, penalties and other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our reputation in various markets and make it more difficult for us to sell our products and services.

        The amount of government receivables set forth in our financial statements represents our best estimate of the government's liability under TRICARE and other federal government contracts. In December, 2000, our subsidiary, Federal Services, and the United States Department of Defense agreed to a settlement of approximately $389 million for outstanding receivables, of which we received $60 million in December 2000 and the remainder in January 2001. See "Government Contracts and Specialty Services Segment—Government Contracts—TRICARE" for a description of the settlement. In general, government receivables are estimates and subject to government audit and negotiation. In addition, inherent in government contracts are an uncertainty of and vulnerability to government disagreements. Final amounts we actually receive under government contracts may be significantly greater or less than the amounts we recognize.

        INTERNET-RELATED OPERATIONS.    We believe that the Internet and related new technologies will fundamentally change managed care organizations. Our Business Transformation and Innovation Services Division focuses on our strategic direction in light of the Internet and related technologies and pursues opportunities consistent with that strategic direction. The division is developing collaborative approaches with business partners to transform their existing assets and expertise into new e-business opportunities. We believe that net-enabled connectivity among purchasers, consumers, managed care organizations, providers and other trading partners is a prerequisite to creating and capturing e-business opportunities. We are developing business concepts to take advantage of those market opportunities that provide value to consumers, purchasers of benefits and the providers of medical and

23

health care services. See "Government Contracts and Specialty Services Segment—Business Transformation and Innovation Services—Innovation Services" for a description of certain of our Internet initiatives.

        There can be no assurance that we will be able to recognize or capitalize on the Internet-related opportunities or technologies that ultimately prove to be accepted and effective within the managed care industry, the provider communities and/or among consumers. There can also be no assurance that new technologies invested in or developed by us or our business partners will prove operational; that they will be accepted by consumers, providers or business partners; that they will achieve their intended results; that we will recoup our investment in Internet-related technologies or related ventures; or that other technologies will not be more accepted or prove more effective. In addition, we contract with and rely upon third parties for certain Internet-related content, tools and services. We have also contracted to establish links between our websites and third party websites. Any failure by those third parties to perform in accordance with the terms of their agreements or to comply with applicable law could adversely impact our Internet operations and services, and could expose us to liability.

        MEDICAL MANAGEMENT.    Our profitability is dependent, to a large extent, upon our ability to manage health care costs. Our ability to manage costs depend, in turn, on a number of factors, including, without limitation, our degree of success in making accurate cost projections, achieving appropriate benefit design, employing utilization review and case management programs, and securing appropriate risk-sharing arrangements with providers while providing members with quality health care. For example, high out-of-network utilization of health care providers and services may have significant adverse effects on our ability to manage health care costs and member utilization of health care. There can be no assurance that we will be able to continue to manage medical costs sufficiently to maintain profitability in our product lines.

        MANAGEMENT INFORMATION SYSTEMS.    Our business depends significantly on effective information systems. The information gathered and processed by our management information systems assists us in, among other things, pricing our services, monitoring utilization and other cost factors, processing provider claims, billing our customers on a timely basis and identifying accounts for collection. Our customers and providers also depend upon our information systems for membership verification, claims status and other information. We have many different information systems for our various businesses and these systems require continual maintenance, upgrading and enhancement to meet our operational needs. Moreover, our merger, acquisition and divestiture activity requires frequent transitions to or from, and the integration of, various information management systems. We are in the process of attempting to reduce the number of our systems, to upgrade and expand our information systems capabilities, and to obtain and develop new, more efficient information systems. Any difficulty associated with the transition to or from information systems, any inability or failure to properly maintain management information systems, or any inability or failure to successfully update or expand processing capability or develop new capabilities to meet our business needs, could result in operational disruptions, loss of existing customers, difficulty in attracting new customers, disputes with customers and providers, regulatory problems, increases in administrative expenses and/or other adverse consequences. In addition, we may, from time-to-time, obtain significant portions of our systems-related or other services or facilities from independent third parties which may make our operations vulnerable to adverse effects if such third parties fail to perform adequately.

        COMPETITION.    We compete with a number of other entities in the geographic and product markets in which we operate, some of which other entities may have certain characteristics, capabilities or resources that give them an advantage in competing with us. These competitors include HMOs, PPOs, self-funded employers, insurance companies, hospitals, health care facilities and other health care providers. In addition, financial services or other technology-based companies could enter the market and compete with us on the basis of their stream-lined administrative functions. We believe

24

there are few barriers to entry in these markets, so that the addition of new competitors can readily occur. Customers of ours may decide to perform for themselves functions or services currently provided by us, which could result in a decrease in our revenues. Our providers and suppliers may decide to market products and services to our customers in competition with us. In addition, significant merger and acquisition activity has occurred both in our industry and in industries which act as our suppliers, such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors and/or result in higher health care costs. Health care providers may establish provider service organizations to offer competing managed care products. To the extent that there is strong competition or that competition intensifies in any market, our ability to retain or increase customers, our revenue growth, our pricing flexibility, our control over medical cost trends and our marketing expenses may all be adversely affected.

        LITIGATION AND INSURANCE.    We are subject to a variety of legal actions to which any corporation may be subject, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, including for securities fraud, and intellectual property related litigation. In addition, we incur and likely will continue to incur potential liability for claims particularly related to our business, such as failure to pay for or provide health care, poor outcomes for care delivered or arranged, provider disputes, including disputes over withheld compensation, and claims related to self-funded business. Also, there are currently, and may be in the future, attempts to bring class action lawsuits against various managed care organizations, including us, which could expose us to significant potential liability or cause us to make operational changes. In some cases, substantial non-economic or punitive damages are being sought. While we currently have insurance coverage for some of these potential liabilities, others (such as punitive damages), may not be covered by insurance, the insurers may dispute coverage or the amount of insurance may not be sufficient to cover the damages awarded. In addition, insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future.

        ADMINISTRATION AND MANAGEMENT.    The level of administrative expense is a partial determinant of our profitability. While we attempt to effectively manage such expenses, including through the development of online functionalities and resources designed to create administrative efficiencies, increases in staff-related and other administrative expenses may occur from time to time due to business or product start-ups or expansions, growth or changes in business, acquisitions, regulatory requirements, including compliance with HIPAA regulations, or other reasons. Administrative expense increases are difficult to predict and may adversely affect results.

        We believe we have a relatively experienced, capable management staff. Loss of certain managers or a number of such managers could adversely affect our ability to administer and manage our business.

        FINANCING CONDITIONS.    Our indebtedness includes $400 million in unsecured senior notes due 2001 and amounts outstanding under a $525 million five-year credit facility that expires in June 2006 and a 364-day revolving credit facility that expires in June 2002. See the discussion under the headings "Other Information/Recent Developments—Debt Offering" and "Other Information/Recent Developments—Credit Agreements". Accordingly, we are considering our financing alternatives, including renewing or terming out the 364-day credit facility, obtaining a new credit facility and pursuing a public debt offering. Our ability to obtain any financing, whether through renewal of our existing credit facilities, obtaining a new credit facility, issuing public debt or otherwise, and the terms of any such financing are dependent on, among other things, our financial condition, financial market conditions within our industry and generally, credit ratings and numerous other factors. There can be no assurance that we will be able to renew our current credit facility prior to its expiration, or obtain a new credit facility, on terms similar to those of our current credit facility or on favorable terms, if at

25

all, or initiate and complete a public debt offering or otherwise obtain financing on acceptable terms or within an acceptable time, if at all. Failure to renew the existing 364-day credit facility prior to its expiration or to otherwise obtain financing on terms and within a time acceptable to us could, in addition to other negative effects, have a material adverse effect on our operations, financial condition, ability to compete or ability to comply with regulatory requirements.

        MARKETING.    We market our products and services both through sales people employed by us and through independent sales agents. Although we have a number of sales employees and agents, if key sales employees or agents or a large subset of these individuals were to leave us, our ability to retain existing customers and members could be impaired. In addition, certain of our customers or potential customers consider necessary or important the rating, accreditation or certification of us and our subsidiaries by various private or governmental bodies or rating agencies. Certain of our health plans or other business units may not have obtained or may not desire or be able to obtain or maintain the rating, accreditation or certification these customers or potential customers desire, which could adversely affect our ability to obtain or retain business.

        Our marketing efforts may be affected by the significant amount of negative publicity to which the managed care industry has been subject, as well as by speculation and uncertainty relating to merger and acquisition activity among companies in our industry. Negative publicity about our industry, or any negative publicity regarding us in particular, could adversely affect our ability to sell our products or services, could require changes to our products or services, or could stimulate additional regulation that adversely affects us. In this regard, some of our subsidiaries have experienced significant negative enrollment trends in certain lines of business. The managed care industry recently has experienced significant merger and acquisition activity, giving rise to speculation and uncertainty regarding the status of companies in our industry. Speculation, uncertainty or negative publicity about us, our industry or our lines of business could adversely affect our ability to market our products.

        POTENTIAL DIVESTITURES.    In 1999, we substantially completed a program to divest certain non-core assets. There can be no assurance that, having divested such non-core operations, we will be able to achieve greater (or any) profitability, strengthen our core operations or compete more effectively in our existing markets. In 2001, we sold our Florida health plan. In addition, we continue to evaluate the profitability realized or likely to be realized by our existing businesses and operations, and we are reviewing from a strategic standpoint which, if any, of our businesses or operations should be divested. Entering into, evaluating or consummating divestiture transactions may entail risks and uncertainties in addition to those which may result from the divestiture-related change in our business operations, including but not limited to extraordinary transaction costs, unknown indemnification liabilities and unforeseen administrative complications, any of which could result in reduced revenues, increased charges, or post-transaction administrative costs or could otherwise have a material adverse effect on our business, financial condition or results of operations. See "Divestitures and Other Investments."

        MANAGEMENT OF GROWTH.    We have made large acquisitions from time to time, including our acquisition of Health Net of the Northeast, Inc. (formerly Physicians Health Services, Inc.), and continue to explore acquisition opportunities. Failure to effectively integrate acquired operations could result in increased administrative costs or customer confusion or dissatisfaction. We also may not be able to manage acquisition-related growth effectively if, among other potential difficulties, we are unable to continue to develop processes and systems to support growing operations.

        STOCK MARKET.    Recently, the market prices of the securities of certain of the publicly-held companies in the industry in which we operate have shown volatility and sensitivity in response to many factors, including public communications regarding managed care, legislative or regulatory actions, litigation or threatened litigation, health care cost trends, pricing trends, competition, earning or membership reports of particular industry participants, and acquisition activity. There can be no

26

assurances regarding the level or stability of our share price at any time or the impact of these or any other factors on our stock price.

        DISASTER RECOVERY.    We are in the process of updating our disaster recovery plans including maintaining fully redundant systems for our operations at an alternate site. Before these plans are fully updated, a disaster such as fire, flood, earthquake, tornado, power loss, virus, telecommunications failure, break-in or similar event could severely damage or interrupt our systems and operations, result in loss of data, and/or delay or impair our ability to service our members and providers. Even after the plans are updated, there can be no assurance that such adverse effects will not occur in the event of a disaster. Due to the limited availability of electricity in California this past year, where a substantial part of our operations are located, certain of our locations in that state have experienced sporadic periods of electricity outages. A substantial or sustained interruption in the power supplied to our facilities and systems in California or elsewhere could significantly and negatively impact our ability to conduct our business. Any such disaster, power loss or similar event could have a material adverse effect on our business, financial condition and results of operations.

        TERRORIST AND OTHER MALICIOUS ACTIVITY.    We are in the process of updating and implementing our procedures for dealing with potential terrorist related activity such as the September 11, 2001 attack, recent anthrax cases and other potential future events involving malicious activity. Even after we update our procedures, there can be no assurance that such events will not occur or that such events will not materially or negatively affect the Company, including through adverse effects on general economic conditions, industry- and company- specific economic conditions, the price and availability of products or services, the availability or morale of employees, our operations and or its facilities, or the demand for our products and services.

ITEM 2. PROPERTIES

        We lease office space for our principal executive offices in Woodland Hills, California and our offices in Rancho Cordova, California. Our executive offices, comprising approximately 115,000 square feet, are occupied under a lease expiring December 31, 2004. A significant portion of our California HMO operations are also housed in Woodland Hills, in a separate, 325,000 square foot leased facility. This new, two-building facility was occupied at the end of 2001, under a lease that expires December 31, 2011. Combined rent for our Woodland Hills facilities was approximately $12.1 million in 2001.

        We also lease an aggregate of approximately 410,000 square feet of office space in Rancho Cordova, California. Our aggregate rent obligations under these leases were approximately $6.6 million in 2001. These leases expire at various dates through January 2003. The Rancho Cordova facilities house certain operations of our California HMO and our Government Contracts/Specialty Services segment. We also lease a total of approximately 250,000 square feet of office space in Irvine, California and San Rafael, California for certain specialty services operations.

        In addition to the office space referenced above, we lease approximately 120 sites in 22 states, totaling roughly 1.47 million square feet of space.

        We also own facilities comprising, in the aggregate, approximately 850,000 square feet of space. These facilities include headquarters for our health plan subsidiaries in Arizona and Connecticut, as well as a data processing facility in Rancho Cordova, California.

        We believe that our ownership and rental costs are consistent with those associated with similar space in the applicable local areas. Our properties are well maintained, adequately meet our needs and are being utilized for their intended purposes.

27

ITEM 3. LEGAL PROCEEDINGS

SUPERIOR NATIONAL INSURANCE GROUP, INC.

        We and our former wholly-owned subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001, were named in an adversary proceeding, Superior National Insurance Group, Inc. v. Foundation Health Corporation, Foundation Health Systems, Inc. and Milliman & Robertson, Inc. (M&R), filed on April 28, 2000, in the United States Bankruptcy Court for the Central District of California, case number SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance Group, Inc. (BIG), a holding company of workers' compensation companies operating primarily in California, by FHC to Superior National Insurance Group, Inc. (Superior).

        On March 3, 2000, the California Department of Insurance seized BIG and Superior's other California insurance subsidiaries. On April 26, 2000, Superior filed for bankruptcy. Two days later, Superior filed its lawsuit against us, FHC and M&R. Superior alleges in the lawsuit that:

•

the BIG transaction was a fraudulent transfer under federal and California bankruptcy laws in that Superior did not receive reasonably equivalent value for the $285 million in consideration paid for BIG;



•

we, FHC and M&R defrauded Superior by making misstatements as to the adequacy of BIG's reserves;



•

Superior is entitled to rescind its purchase of BIG;



•

Superior is entitled to indemnification for losses it allegedly incurred in connection with the BIG transaction;



•

FHC breached the Stock Purchase Agreement; and



•

we and FHC were guilty of California securities laws violations in connection with the sale of BIG.

        Superior seeks $300 million in compensatory damages, unspecified punitive damages and the costs of the action, including attorneys' fees.

        On August 1, 2000, a motion filed by us and FHC to remove the lawsuit from the jurisdiction of the Bankruptcy Court to the United States District Court for the Central District of California was granted. The lawsuit is now pending in the District Court under case number SACV00-0658 GLT. The parties are currently engaged in discovery.

        We intend to defend ourselves vigorously in this litigation.

FPA MEDICAL MANAGEMENT, INC.

        Since May 1998, several complaints have been filed in federal and state courts seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of common stock, convertible subordinated debentures and options to purchase common stock of FPA Medical Management, Inc. (FPA) at various times between February 3, 1997 and May 15, 1998. The complaints name as defendants FPA, certain of FPA's auditors, us and certain of our former officers. The complaints allege that we and such former officers violated federal and state securities laws by misrepresenting and failing to disclose certain information about a 1996 transaction between us and FPA, about FPA's business and about our 1997 sale of FPA common stock held by us. All claims against our former officers were voluntarily dismissed from the consolidated class actions in both federal and state court. In early 2000, we filed a motion to dismiss all claims asserted against us in the consolidated federal class actions but have not formally responded to the other complaints. That motion has been withdrawn without prejudice and the consolidated federal class actions have been stayed pending resolution of matters in a related case in which we are not a party. We intend to vigorously defend the actions.

28

STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.

        Physicians Health Services, Inc. (PHS), a subsidiary of ours, was sued on December 14, 1999 in the United States District Court in Connecticut by the Attorney General of Connecticut, Richard Blumenthal, acting on behalf of a group of state residents. The lawsuit was premised on ERISA, and alleged that PHS violated its duties under ERISA by managing its prescription drug formulary in a manner that served its own financial interest rather than those of plan beneficiaries. The suit sought to have PHS revamp its formulary system, and to provide patients with written denial notices and instructions on how to appeal. PHS filed a motion to dismiss which asserted that the state residents the Attorney General purported to represent all received a prescription drug appropriate for their conditions and therefore suffered no injuries whatsoever, that his office lacked standing to bring the suit and that the allegations failed to state a claim under ERISA. On July 12, 2000, the court granted PHS' motion and dismissed the action. The State of Connecticut has appealed the dismissal and argument on the appeal was held before the United States Court of Appeals for the Second Circuit on May 1, 2001. We intend to vigorously defend the action.

IN RE MANAGED CARE LITIGATION

        The Judicial Panel on Multidistrict Litigation has transferred various class action lawsuits against managed care companies, including us, to the United States District Court for the Southern District of Florida for coordinated or consolidated pretrial proceedings in In re Managed Care Litigation, MDL 1334. This proceeding is divided into two tracks, the subscriber track, which includes actions brought on behalf of health plan members, and the provider track, which includes suits brought on behalf of physicians. We intend to vigorously defend all actions in MDL 1334.

Subscriber Track

        The subscriber track includes the following actions involving us: Pay v. Foundation Health Systems, Inc. (filed in the Southern District of Mississippi on November 22, 1999), Romero v. Foundation Health Systems, Inc. (filed in the Southern District of Florida on June 23, 2000 as an amendment to a suit filed in the Southern District of Mississippi), State of Connecticut v. Physicians Health Services of Connecticut, Inc. (filed in the District of Connecticut on September 7, 2000), and Albert v. CIGNA Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and Foundation Health Systems, Inc.) (filed in the District of Connecticut on September 7, 2000). The Pay and Romero actions seek certification of nationwide class actions, unspecified damages and injunctive relief, and allege that cost containment measures used by our health maintenance organizations, preferred provider organizations and point-of-service health plans violate provisions of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) and the federal Employee Retirement Income Security Act (ERISA). The Albert suit also alleges violations of ERISA and seeks certification of a nationwide class and unspecified damages and injunctive relief. The State of Connecticut action asserts claims against our subsidiary, Physicians Health Services of Connecticut, Inc., and us that are similar, if not identical, to those asserted in the previous lawsuit that was dismissed, as discussed above, on July 12, 2000.

        We filed a motion to dismiss the lead subscriber track case, Romero v. Foundation Health Systems, Inc., and on June 12, 2001, the court entered an order dismissing all claims in that suit brought against us with leave for the plaintiffs to re-file an amended complaint. On this same date, the court stayed discovery until after the court rules upon motions to dismiss the amended complaints and any motions to compel arbitration. On June 29, 2001, the plaintiffs in Romero filed a third amended class action complaint which re-alleges causes of action under RICO, ERISA, common law civil conspiracy and common law unjust enrichment. The third amended class action complaint seeks unspecified compensatory and treble damages and equitable relief. On July 24, 2001, the court heard oral argument on class certification issues. On August 13, 2001, we filed a motion to dismiss the third amended complaint in Romero. On February 20, 2002, the court ruled on our motion to dismiss the

29

third amended complaint in Romero. The court dismissed all claims against us except one ERISA claim. The court further ordered that plaintiffs may file amended complaints no later than March 20, 2002, but that no new plaintiffs or claims will be permitted without prior leave of the court. Both plaintiffs and defendants have filed motions for reconsideration relating to various parts of the court's dismissal order.

Provider Track

        The provider track includes the following actions involving us: Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on August 17, 2000 as an amendment to a suit filed in the Southern District of Mississippi), California Medical Association v. Blue Cross of California, Inc., PacifiCare Health Systems, Inc., PacifiCare Operations, Inc. and Foundation Health Systems, Inc. (filed in the Northern District of California in May 2000), Klay v. Prudential Ins. Co. of America, et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on February 22, 2001 as an amendment to a case filed in the Northern District of California), Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court on February 14, 2001), and Lynch v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court on February 14, 2001).

        On August 17, 2000, a complaint was filed in the United States District Court for the Southern District of Florida in Shane, the lead provider track action in MDL 1334. The complaint seeks certification of a nationwide class action on behalf of physicians and alleges that the defendant managed care companies' methods of reimbursing physicians violate provisions of RICO, ERISA, certain federal regulations and various state laws. The action seeks unspecified damages and injunctive relief.

        On September 22, 2000, we filed a motion to dismiss, or in the alternative to compel arbitration, in Shane. On December 11, 2000, the court granted in part and denied in part our motion to compel arbitration. Under the court's December arbitration order, plaintiff Dennis Breen, the single named plaintiff to allege a direct contractual relationship with us in the August complaint, was compelled to arbitrate his direct claims against us. We filed an appeal in the United States Court of Appeals for the 11th Circuit seeking to overturn the portion of the district court's December ruling that did not order certain claims to arbitration. On April 26, 2001, the court modified its December arbitration order and is now retaining jurisdiction over certain direct claims of plaintiff Breen relating to a single contract. On March 2, 2001, the District Court for the Southern District of Florida issued an order in Shane granting the dismissal of certain claims with prejudice and the dismissal of certain other claims without prejudice, and denying the dismissal of certain claims.

        On March 26, 2001, a consolidated amended complaint was filed in Shane against managed care companies, including us. This consolidated complaint adds new plaintiffs, including Leonard Klay and the California Medical Association (who, as set forth below, had previously filed claims against the Company), and has, in addition to revising the pleadings of the original claims, added a claim under the California Business and Professions Code. On May 1, 2001, we filed a motion to compel arbitration in Shane of the claims of all individual plaintiffs that allege to have treated persons insured by us. On that same date, we filed a motion to dismiss this action. Preliminary discovery and briefing regarding the plaintiffs' motion for class certification has taken place. On May 7, 2001, the court heard oral argument on class certification issues in Shane. On May 9, 2001, the court entered a scheduling order permitting further discovery. On May 14, 2001, Health Net joined in a motion for stay of proceedings in Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (00-1334-MD) in the United States District Court for the Southern District of Florida pending appeal in the 11th Circuit Court of Appeals. On June 17, 2001, the district court stayed discovery until after the district court rules upon motions to dismiss and motions to compel arbitration. This order staying discovery also applies to other actions transferred to the district court by the Judicial Panel on Multidistrict Litigation, namely California Medical Association v. Blue Cross of California, Inc. et al., Klay v. Prudential Ins. Co. of

30

America, et al., Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc., and Lynch v. Physicians Health Services of Connecticut, Inc. On June 25, 2001, the 11th Circuit Court of Appeals entered an order staying proceedings in the district court pending resolution of the appeals relating to the district court's ruling on motions to compel arbitration. On March 14, 2002, the 11th Circuit affirmed the district court's ruling on motions to compel arbitration.

        The CMA action alleges violations of RICO, certain federal regulations, and the California Business and Professions Code and seeks declaratory and injunctive relief, as well as costs and attorneys' fees. As set forth above, on March 26, 2001, the California Medical Association was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The Klay suit is a purported class action allegedly brought on behalf of individual physicians in California who provided health care services to members of the defendants' health plans. The complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and Professions Code and certain state common law doctrines, and seeks declaratory and injunctive relief, and damages. As set forth above, on March 26, 2001, Leonard Klay was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The CSMS case was originally brought in Connecticut state court against Physicians Health Services of Connecticut, Inc. ("PHS-CT") alleging violations of the Connecticut Unfair Trade Practices Act. The complaint alleges that PHS-CT engaged in conduct that was designed to delay, deny, impede and reduce lawful reimbursement to physicians who rendered medically necessary health care services to PHS-CT health plan members. The complaint, which is similar to others filed against us and other managed care companies, seeks declaratory and injunctive relief. On March 13, 2001, the Company removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the District Court of Connecticut consolidated this action and Lynch v. Physicians Health Services of Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        The Lynch case was also originally filed in Connecticut state court. This case was purportedly brought on behalf of physician members of the Connecticut State Medical Society who provide health care services to PHS-CT health plan members pursuant to provider service contracts. The complaint alleges that PHS-CT engaged in improper, unfair and deceptive practices by denying, impeding and/or delaying lawful reimbursement to physicians. The complaint, similar to the complaint referred to above filed against PHS-CT on the same day by the Connecticut State Medical Society, seeks declaratory and injunctive relief and damages. On March 13, 2001, we removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the District Court of Connecticut consolidated this action and CSMS v. Physicians Health Services of Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        As noted above, on June 17, 2001, the district court entered an order which applies to the Shane, CMA, Klay, CSMS and Lynch actions and stays discovery until after the court rules upon motions to dismiss and motions to compel arbitration.

MISCELLANEOUS PROCEEDINGS

        We and certain of our subsidiaries are also parties to various other legal proceedings, many of which involve claims for coverage encountered in the ordinary course of our business. Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material adverse effect upon our results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        There were no matters submitted to a vote of the security holders of the Company, either through solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2001.

31

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The following table sets forth the high and low sales prices of the Company's Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), on The New York Stock Exchange, Inc. ("NYSE") since January 3, 2000.

		HIGH*		LOW*
Calendar Quarter—2000
	First Quarter	11	11/16	7	5/8
	Second Quarter	14	11/16	7	11/16
	Third Quarter	18	9/16	13	1/4
	Fourth Quarter	26	15/16	15	9/16
Calendar Quarter—2001
	First Quarter	26.19		17.42
	Second Quarter	21.91		16.35
	Third Quarter	19.72		16.00
	Fourth Quarter	23.99		18.50
Calendar Quarter—2002
	First Quarter (through March 14, 2002)	25.74		20.55

*

The NYSE converted from fractional quotations of the Company's stock price to decimal quotations beginning in January 2001.

        On March 14, 2002, the last reported sales price per share of the Class A Common Stock was $25.60 per share.

DIVIDENDS

        We have paid no dividends on the Class A Common Stock during the preceding two fiscal years. We have no present intention of paying any dividends on the Class A Common Stock.

        We are a holding company and, therefore, our ability to pay dividends depends on distributions received from our subsidiaries, which are subject to regulatory net worth requirements and additional state regulations which may restrict the declaration of dividends by HMOs, insurance companies and licensed managed health care plans. The payment of any dividend is at the discretion of our Board of Directors and depends upon our earnings, financial position, capital requirements and such other factors as our Board of Directors deems relevant.

        Under our credit agreements with Bank of America, N.A., as agent, we cannot declare or pay cash dividends to our stockholders or purchase, redeem or otherwise acquire shares of our capital stock or warrants, rights or options to acquire such shares for cash except to the extent permitted under the credit agreements, which are described elsewhere in this Annual Report.

HOLDERS

        As of March 14, 2002, there were approximately 1,600 holders of record of Class A Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

        The information required by this Item 6 is set forth in the Company's 2001 Annual Report to Stockholders on page 2, and is incorporated herein by reference and made a part hereof.

32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The information required by this Item 7 is set forth in the Company's 2001 Annual Report to Stockholders on pages 19 through 29, and is incorporated herein by reference and made a part hereof.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information required by this Item 7A is set forth in the Company's 2001 Annual Report to Stockholders on pages 29 and 30, and is incorporated herein by reference and made a part hereof.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by this Item 8 is incorporated herein by reference to the Company's 2001 Annual Report to Stockholders and made a part hereof as follows: (1) the consolidated financial statements of Health Net, Inc. and subsidiaries on pages 32 through 57 of the Company's 2001 Annual Report to Stockholders are so incorporated by reference and made a part hereof and (2) the Report of Independent Auditors on page 31 of the Company's 2001 Annual Report to Stockholders is so incorporated by reference and made a part hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2001. Such information is incorporated herein by reference and made a part hereof.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2001. Such information is incorporated herein by reference and made a part hereof.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2001. Such information is incorporated herein by reference and made a part hereof.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2001. Such information is incorporated herein by reference and made a part hereof.

33

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

1. FINANCIAL STATEMENTS

        The following consolidated financial statements are incorporated by reference into this Annual Report on Form 10-K from pages 31 through 57 of the Company's 2001 Annual Report to Stockholders:

Report of Deloitte & Touche LLP

Consolidated balance sheets as of December 31, 2001 and 2000

Consolidated statements of operations for each of the three years in the period ended December 31, 2001

Consolidated statements of stockholders' equity for each of the three years in the period ended December 31, 2001

Consolidated statements of cash flows for each of the three years in the period ended December 31, 2001

Notes to consolidated financial statements

2. FINANCIAL STATEMENT SCHEDULE

        The following financial statement schedules and accompanying report thereon are filed as a part of this Annual Report on Form 10-K:

Report of Deloitte & Touche LLP

Schedule I—Condensed Financial Information of Registrant (Parent Company Only)

Schedule II—Valuation and Qualifying Accounts and Reserves

        All other schedules are omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto which are incorporated by reference into this Annual Report on Form 10-K from the Company's 2001 Annual Report to Stockholders.

3. EXHIBITS

        The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference:

2.1	Agreement and Plan of Merger, dated October 1, 1996, by and among Health Systems International, Inc., FH Acquisition Corp. and Foundation Health Corporation (filed as Exhibit 2.5 to the Company's Registration Statement on Form S-4 (File No. 333-19273) on January 6, 1997 and incorporated herein by reference).
3.1	Fifth Amended and Restated Certificate of Incorporation of Health Net, Inc.(filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4 (File No. 333-67258) on August 10, 2001 and incorporated herein by reference).
+3.2	Eighth Amended and Restated Bylaws of Health Net, Inc., a copy of which is filed herewith.

34

4.1	Form of Class A Common Stock Certificate (included as Exhibit 4.2 to the Company's Registration Statements on Forms S-1 and S-4 (File Nos. 33-72892 and 33-72892-01, respectively) on December 9, 1993 and incorporated herein by reference).
4.2	Rights Agreement dated as of June 1, 1996 by and between Heath Systems International, Inc. and Harris Trust and Savings Bank, as Rights Agent (filed as Exhibit 99.1 to the Company's Registration Statement on Form 8-A (File No. 1-12718) on July 16, 1996 and incorporated herein by reference).
4.3	Amendment, dated as of October 1, 1996, to the Rights Agreement, by and between Health Systems International, Inc. and Harris Trust and Savings Bank (filed as Exhibit 2 to the Company's Registration Statement on Form 8-A/A (Amendment No. 1)(File No. 1-12718) on May 9, 2001 and incorporated herein by reference).
4.4	Second Amendment to Rights Agreement, dated as of May 3, 2001, by and among Health Net, Inc., Harris Trust and Savings Bank and Computershare Investor Services, L.L.C. (filed as Exhibit 3 to the Company's Registration Statement on Form 8-A/A (Amendment No. 2) (File No. 1-12718) on May 9, 2001 and incorporated herein by reference).
*10.1	Employment Letter Agreement between Foundation Health Systems, Inc. and Karin D. Mayhew dated January 22, 1999 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-12718) and incorporated herein by reference).
*10.2	Letter Agreement dated June 25, 1998 between B. Curtis Westen and Foundation Heath Systems, Inc. (filed as Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.3	Employment Letter Agreement dated July 3, 1996 between Jay M. Gellert and Health Systems International, Inc. (filed as Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-12718) and incorporated herein by reference).
*10.4	Amended Letter Agreement between Foundation Health Systems, Inc. and Jay M. Gellert dated as of August 22, 1997 (filed as Exhibit 10.69 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12718) and incorporated herein by reference).
*10.5	Letter Agreement between Foundation Health Systems, Inc. and Jay M. Gellert dated as of March 2, 2000 (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.6	Employment Letter Agreement between Managed Health Network and Jeffrey J. Bairstow dated as of January 29, 1998 (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.7	Employment Letter Agreement between Foundation Health Systems, Inc. and Steven P. Erwin dated March 11, 1998 (filed as Exhibit 10.72 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12718) and incorporated herein by reference).
*10.8	Employment Letter Agreement between Foundation Health Corporation and Gary S. Velasquez dated May 1, 1996 (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).

35

*10.9	Employment Letter Agreement between Foundation Health Systems, Inc. and Cora Tellez dated November 16, 1998 (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.10	Employment Letter Agreement between Health Net, Inc. and Timothy J. Moore, M.D. dated March 12, 2001 (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-12718) and incorporated herein by reference).
+*10.11	Employment Letter Agreement between Health Net, Inc. and Marvin P. Rich dated January 25, 2002, a copy of which is filed herewith.
+*10.12	Separation, Waiver and Release Agreement between Health Net, Inc. and Steven P. Erwin dated March 15, 2002, a copy of which is filed herewith.
*10.13	Form of Severance Payment Agreement dated December 4, 1998 by and between Foundation Health Systems, Inc. and various of its executive officers (filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.14	Form of Agreement amending Severance Payment Agreement by and between Health Net, Inc. and various of its executive officers (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.15	Foundation Health Systems, Inc. Deferred Compensation Plan (filed as Exhibit 10.66 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.16	Foundation Health Systems, Inc. Deferred Compensation Plan Trust Agreement effective September 1, 1998 between Foundation Health Systems, Inc. and Union Bank of California (filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.17	Foundation Health Systems, Inc. Second Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.18	Amendment to Second Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.19	Foundation Health Systems, Inc. 1997 Stock Option Plan (as amended and restated on May 4, 2000) (filed as Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-12718) and incorporated herein by reference.
*10.20	Amendment to 1997 Stock Option Plan (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.21	Foundation Health Systems, Inc. 1998 Stock Option Plan (as amended and restated on May 4, 2000) (filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-12718) and incorporated herein by reference.

36

*10.22	Amendments to Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.23	Health Systems International, Inc. Second Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.31 to Registration Statement on Form S-4 (File No. 33-86524) on November 18, 1994 and incorporated herein by reference).
*10.24	Foundation Health Systems, Inc. Third Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-12718) and incorporated herein by reference).
+*10.25	Health Net, Inc. Employee Stock Purchase Plan, as amended and restated as of January 1, 2002, a copy of which is filed herewith.
*10.26	Foundation Health Systems, Inc. Executive Officer Incentive Plan (filed as Annex A to the Company's definitive proxy statement on March 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.27	Health Net, Inc. 401(k) Savings Plan (filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.28	Foundation Health Systems, Inc. Supplemental Executive Retirement Plan effective as of January 1, 1996 (filed as Exhibit 10.65 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.29	Managed Health Network, Inc. Incentive Stock Option Plan (filed as Exhibit 4.8 to the Company's Registration Statement on Form S-8 (File No. 333-24621) on April 4, 1997 and incorporated herein by reference).
*10.30	Managed Health Network, Inc. Amended and Restated 1991 Stock Option Plan (filed as Exhibit 4.9 to the Company's Registration Statement on Form S-8 (File No. 333-24621) on April 4, 1997 and incorporated herein by reference).
*10.31	1990 Stock Option Plan of Foundation Health Corporation (as amended and restated effective April 20, 1994) (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 (File No. 333-24621) on April 4, 1997 and incorporated herein by reference).
*10.32	Foundation Health Corporation Directors Retirement Plan (filed as Exhibit 10.96 to Foundation Health Corporation's Annual Report on Form 10-K for the year ended June 30, 1994 (File No. 1-10540) and incorporated herein by reference).
*10.33	Amended and Restated Deferred -Compensation Plan of Foundation Health Corporation (filed as Exhibit 10.99 to Foundation Health Corporation's Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference).
*10.34	Foundation Health Corporation Supplemental Executive Retirement Plan (As Amended and Restated effective April 25, 1995) (filed as Exhibit 10.100 to Foundation Health Corporation's Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference).

37

*10.35	Foundation Health Corporation Executive Retiree Medical Plan (As amended and restated effective April 25, 1995) (filed as Exhibit 10.101 to Foundation Health Corporation's Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference).
10.36	Five-Year Credit Agreement dated as of June 28, 2001 among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Issuing Bank and Swingline Lender (filed as Exhibit 10.34 to the Company's Registration Statement on Form S-4 (File No. 333-67258) on August 10, 2001 and incorporated herein by reference).
10.37	364-Day Credit Agreement dated as of June 28, 2001 among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent (filed as Exhibit 10.35 to the Company's Registration Statement on Form S-4 (File No. 333-67258) on August 10, 2001 and incorporated herein by reference).
+10.38	First Amendment to Office Lease, dated May 14, 2001, between Health Net (a California corporation) and LNR Warner Center, LLC, a copy of which is filed herewith.
10.39	Lease Agreement between HAS-First Associates and Foundation Health Corporation dated August 1, 1998 and form of amendment thereto (filed as Exhibit 10.20 to Foundation Health Corporation's Registration Statement on Form S-1 (File No. 33-34963) on May 17, 1990 and incorporated herein by reference).
10.40	Office Lease dated September 20, 2000 by and among Health Net of California, Inc., DCA Homes, Inc. and Lennar Rolling Ridge, Inc. (filed as Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-12718) and incorporated herein by reference).
10.41	Purchase Agreement dated as of April 9, 2001, by and among the Company, JP Morgan, a division of Chase Securities Inc., Banc of America Securities LLC, Fleet Securities, Inc., Mizuho International plc, Salomon Smith Barney Inc. and Scotia Capital (USA) Inc. (filed as Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-12718) and incorporated herein by reference).
10.42	Stock Purchase Agreement dated January 19, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.43	Amendment to Stock Purchase Agreement dated February 2, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.44	Second Amendment to Stock Purchase Agreement dated February 8, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.45	Third Amendment to Stock Purchase Agreement dated February 16, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).

38

10.46	Fourth Amendment to Stock Purchase Agreement dated February 28, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.5 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.47	Fifth Amendment to Stock Purchase Agreement dated May 1, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.6 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.48	Sixth Amendment to Stock Purchase Agreement dated June 4, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.7 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.49	Seventh Amendment to Stock Purchase Agreement dated June 29, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.8 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
11.1	Statement relative to computation of per share earnings of the Company (included in Exhibit 13.1 to this Annual Report on Form 10-K under Note 2 to the consolidated financial statements on pages 37 through 42 of Health Net,  Inc.'s 2001 Annual Report to Stockholders.
+12.1	Statement relative to computation of ratio of earnings to fixed charges—consolidated basis, a copy of which is filed herewith.
+13.1	Selected portions of Health Net, Inc. 2001 Annual Report to Stockholders, a copy of which portions are filed herewith.
+21.1	Subsidiaries of the Company, a copy of which is filed herewith.
+23.1	Consent of Deloitte & Touche LLP, a copy of which is filed herewith.

*

Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of Form 10-K.

+

A copy of the exhibit is being filed with this Annual Report on Form 10-K.

(b)

Reports on Form 8-K

        No Current Reports on Form 8-K were filed by the Company during the fourth quarter ended December 31, 2001.

39

INDEPENDENT AUDITORS' REPORT ON SCHEDULES

To the Board of Directors and Stockholders of
Health Net, Inc.
Woodland Hills, California

        We have audited the consolidated financial statements of Health Net, Inc. (the "Company") as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated February 12, 2002; such financial statements and report are included in your 2001 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedules of Health Net, Inc., listed in Item 14(a)(2). These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP
Los Angeles, California
February 12, 2002

40

SUPPLEMENTAL SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)

HEALTH NET, INC.

CONDENSED BALANCE SHEETS

(Amounts in thousands)

				December 31, 2001			December 31, 2000
ASSETS
Current Assets:
	Cash and cash equivalents			$	101,550		$	16,251
	Investments—available for sale				3,316			5,344
	Other assets				10,190			12,950
	Deferred taxes				—			50,530
	Notes receivable due from subsidiaries				54,603			127,545
	Due from subsidiaries				126,473			84,042
		Total current assets			296,132			296,662
Property and equipment, net					43,707			57,349
Goodwill and other intangible assets, net					406,754			419,288
Investment in subsidiaries					1,607,264			1,540,673
Other noncurrent deferred taxes					54,918			30,160
Notes receivable due from subsidiaries					2,435			44,528
Other noncurrent assets					92,285			76,578
		Total Assets		$	2,503,495		$	2,465,238
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Due to subsidiaries			$	93,635		$	171,435
	Intercompany notes payable				35,052			124,883
	Deferred taxes				24,732			—
	Other current liabilities				114,786			106,122
		Total current liabilities			268,205			402,440
Intercompany notes payable—long term					438,549			216,483
Revolving credit facility and capital leases					195,182			766,450
Senior notes payable					398,678			—
Other noncurrent liabilities					37,369			18,734
		Total Liabilities			1,337,983			1,404,107
Commitments and contingencies
Stockholders' Equity:
	Common stock and additional paid-in capital				662,867			649,292
	Retained earnings				597,753			511,224
	Common stock held in treasury, at cost				(95,831	)		(95,831	)
	Accumulated other comprehensive gain (loss)				723			(3,554	)
		Total Stockholders' Equity			1,165,512			1,061,131
			Total Liabilities and Stockholders' Equity	$	2,503,495		$	2,465,238

See accompanying note to condensed financial statements.

41

HEALTH NET, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Amounts in thousands)

			Year Ended December 31,
			2001			2000			1999
Revenues:
	Investment and other income		$	10,827		$	11,585		$	11,766
	Administrative service agreements			154,266			126,346			73,451
		Total revenues		165,093			137,931			85,217
Expenses:
	General and administrative			145,429			126,486			98,380
	Amortization and depreciation			28,460			30,847			24,763
	Interest			66,301			98,618			92,979
	Net loss (gain) on sale of businesses and properties			71,724			409			(59,343	)
	Asset impairment and restructuring charges			13,217			—			2,057
		Total expenses		325,131			256,360			158,836
Loss from continuing operations before income taxes and equity in net income of subsidiaries				(160,038	)		(118,429	)		(73,619	)
Income tax benefit				59,214			43,819			27,239
Equity in net income of subsidiaries				187,353			238,233			189,658
Income from operations before effect of a change in accounting principle				86,529			163,623			143,278
Cumulative effect of a change in accounting principle, net of tax				—			—			(913	)
Net income			$	86,529		$	163,623		$	142,365

See accompanying note to condensed financial statements.

42

HEALTH NET, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

		Year Ended December 31,
		2001			2000			1999
Net Cash Flows from Operating Activities		$	200,009		$	98,574		$	100,352
Cash Flows from Investing Activities:
	Sales or maturities of investments		8,496			11,713			22,576
	Purchases of investments		(5,108	)		(9,121	)		(11,715	)
	Net purchases of property and equipment		(11,762	)		(32,312	)		(1,939	)
	Other assets		(15,311	)		(8,626	)		(6,124	)
	Cash received from the sale of businesses, net of cash disposed		—			—			137,728
Net cash (used in) provided by investing activities			(23,685	)		(38,346	)		140,526
Cash Flows from Financing Activities:
	Proceeds from exercise of stock options and employee stock purchases		10,449			5,794			1,553
	Proceeds from issuance of notes and other financing arrangements		601,076			250,000			220,000
	Repayment of debt		(777,532	)		(522,807	)		(416,279	)
	Dividends received from subsidiaries		163,496			159,503			75,259
	Capital contributions to subsidiaries		(88,514	)		(45,525	)		(105,411	)
Net cash used in financing activities			(91,025	)		(153,035	)		(224,878	)
Net increase (decrease) in cash and cash equivalents			85,299			(92,807	)		16,000
Cash and cash equivalents, beginning of period			16,251			109,058			93,058
Cash and cash equivalents, end of period		$	101,550		$	16,251		$	109,058
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Notes and stocks received on sale of businesses			26,000			—			22,909
Settlement of intercompany notes payable through dividends from subsidiaries			62,337			—			—
Settlement of intercompany notes receivable through capital contributions to subsidiaries			(55,063	)		(33,000	)		—

See accompanying note to condensed financial statements.

43

HEALTH NET, INC.

NOTE TO CONDENSED FINANCIAL STATEMENTS

NOTE 1—BASIS OF PRESENTATION

        Health Net, Inc.'s ("HNT") investment in subsidiaries is stated at cost plus equity in undistributed earnings (losses) of subsidiaries. HNT's share of net income (loss) of its unconsolidated subsidiaries is included in consolidated income using the equity method. This condensed financial information of registrant should be read in conjunction with the consolidated financial statements of Health Net, Inc. and subsidiaries.

        Effective January 1, 2001, HNT merged its wholly owned subsidiary, Foundation Health Corporation, with and into HNT, thereby terminating the separate existence of Foundation Health Corporation. As a result, condensed financial information of registrant (parent company only) as of December 31, 2000 and 1999 have been restated to reflect this merger.

44

SUPPLEMENTAL SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
HEALTH NET, INC.

(Amounts in thousands)

		Balance at beginning of period		Charged to costs and expenses		Charged to other accounts(1)			Deductions(2)			Balance at end of period
2001:
Allowance for doubtful accounts:
	Premiums receivable	$	19,822	$	3,573	$	(8,106	)	$	(694	)	$	14,595
2000:
Allowance for doubtful accounts:
	Premiums receivable	$	21,937	$	13,779	$	(15,894	)		—		$	19,822
1999:
Allowance for doubtful accounts:
	Premiums receivable	$	28,522	$	13,323	$	(7,002	)	$	(12,906	)	$	21,937

(1)

Credited to asset accounts on the Consolidated Balance Sheets.

(2)

The amounts for 1999 and 2001 are the result of the sale of certain of our subsidiaries.

45

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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.
By:	/s/  MARVIN P. RICH Marvin P. Rich Executive Vice President, Finance and Operations
Date:        March 18, 2002

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE
/s/  JAY M. GELLERT Jay M. Gellert	President and Chief Executive Officer and Director (Principal Executive Officer)	March 18, 2002
/s/  MARVIN P. RICH Marvin P. Rich	Executive Vice President, Finance and Operations (Principal Accounting and Financial Officer)	March 18, 2002
J. Thomas Bouchard	Director
/s/  GEORGE DEUKMEJIAN Gov. George Deukmejian	Director	March 18, 2002
/s/  THOMAS T. FARLEY Thomas T. Farley	Director	March 18, 2002
/s/  GALE S. FITZGERALD Gale S. Fitzgerald	Director	March 18, 2002
/s/  PATRICK FOLEY Patrick Foley	Director	March 18, 2002

46

/s/  ROGER F. GREAVES Roger F. Greaves	Director	March 18, 2002
/s/  RICHARD W. HANSELMAN Richard W. Hanselman	Director	March 18, 2002
/s/  RICHARD J. STEGEMEIER Richard J. Stegemeier	Director	March 18, 2002
/s/  RAYMOND S. TROUBH Raymond S. Troubh	Director	March 18, 2002
/s/  BRUCE G. WILLISON Bruce G. Willison	Director	March 18, 2002

47

QuickLinks

PART I

ITEM 1. BUSINESS

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

INDEPENDENT AUDITORS' REPORT ON SCHEDULES
HEALTH NET, INC. CONDENSED BALANCE SHEETS (Amounts in thousands)
HEALTH NET, INC. CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands)
HEALTH NET, INC. CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands)
HEALTH NET, INC. NOTE TO CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES HEALTH NET, INC. (Amounts in thousands)
SIGNATURES

EX-3.2

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 3.2

EIGHTH AMENDED AND

RESTATED BYLAWS

OF

HEALTH NET, INC.

ARTICLE I

OFFICES

        Section 1    Registered Office.    The registered office of Health Net, Inc. (the "Corporation") in the State of Delaware shall be at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Corporation.

        Section 2    Executive Offices.    The Corporation will maintain its executive offices in such location as may be determined by the Corporation's board of directors (the "Board of Directors").

        Section 3    Other Offices.    The Corporation may also have an office or offices and keep the books and records of the Corporation, except as may otherwise be required by law, at such other place or places, either within or outside of the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation requires.

ARTICLE II

MEETINGS OF STOCKHOLDERS

        Section 1    Place of Meeting.    Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the Board of Directors. In the absence of any such designation by the Board of Directors, stockholders' meetings shall be held at the principal executive office of the Corporation.

        Section 2    Annual Meetings.    The annual meeting of the Stockholders for the election of directors and for the transaction of such other business as may properly come before such meeting shall be held on the second Friday of May each year at 10:00 A.M., if not a legal holiday under the laws of the place where such meeting is to be held, and if a legal holiday, then on the next succeeding day not a legal holiday under the laws of that place, or on such other date and at such hour as may be fixed from time to time by a majority of the Board of Directors.

        Section 3    Special Meetings.    Subject to the rights of the holders of any class or series of stock having a preference over the Corporation's common stock (the "Common Stock") as to dividends or upon liquidation, special meetings of the Stockholders for any purpose or purposes may be called only by a majority of the entire Board of Directors. Only the business specified in the notice of any special meeting of the Stockholders shall come before such meeting.

        Section 4    Notice of Meetings.    Written notice of each meeting of the Stockholders, whether annual or special, shall be given, either by personal delivery or by mail, not less than 10 days nor more than 60 days before the date of such meeting to each Stockholder of record entitled to notice of the meeting. If mailed, the notice shall be deemed to be given when deposited in the United States of America mail, postage prepaid, directed to the Stockholder at the Stockholder's address as it appears on the records of the Corporation. Each notice shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called.

        Notice of any meeting of Stockholders shall be deemed waived by any Stockholder who shall attend the meeting in person or by proxy without protesting, prior to or at the commencement of the meeting, the lack of proper notice or who shall waive notice thereof as provided in Article X of these Bylaws. Notice of adjournment of a meeting of Stockholders need not be given if the time and place to which it is adjourned are announced at the meeting, unless the adjournment is for more than 30 days or, after adjournment, a new record date is fixed for the adjourned meeting.

        Section 5    Quorum.    The holders of a majority of the votes entitled to be cast by the Stockholders entitled to vote, which if any vote is to be taken by classes shall mean the holders of a majority of the votes entitled to be cast by the Stockholders of each class, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the Stockholders.

        Section 6    Adjournments.    In the absence of a quorum, the holders of a majority of the votes entitled to be cast by the Stockholders, present in person or by proxy, may adjourn the meeting from time to time. Whether or not a quorum is present at such meeting, the chairman of the meeting may adjourn the meeting from time to time. At any adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called.

        Section 7    Order of Business.    At each meeting of the Stockholders, the Chairman of the Board, or, in his absence, such person designated by the Board of Directors, shall act as chairman.

        Section 8    List of Stockholders.    It shall be the duty of the Secretary or other officer of the Corporation who has charge of the stock ledger to prepare and make, at least 10 days before each meeting of the Stockholders, a complete list of the Stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in the Stockholder's name. The list shall be produced and kept available at the times and places required by law.

        Section 9    Voting.    Each Stockholder of record of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation shall be entitled at each meeting of the Stockholders to that number of votes for each share of the stock as may be fixed in the Corporation's Certificate of Incorporation (the "Certificate of Incorporation") or in the resolution or resolutions adopted by the Board of Directors providing for the issuance of the stock. Unless specifically provided otherwise in the Certificate of Incorporation or in resolutions adopted by the Board of Directors providing for the issuance of a class or series of Common Stock, each Stockholder of record of Common Stock shall be entitled at each meeting of the Stockholders to one vote for each share of the stock registered in that Stockholder's name on the books of the Corporation:

        (a)  on the date fixed pursuant to Section 7.6 of Article VII of these Bylaws as the record date for the determination of Stockholders entitled to notice of and to vote at the meeting; or

        (b)  if no record date shall have been fixed, then at the close of business on the day next preceding the day on which notice of the meeting is given, or if notice is waived, then at the close of business on the day next preceding the day on which the meeting is held.

        Each Stockholder entitled to vote at any meeting of the Stockholders may authorize not in excess of three persons to act for the Stockholder by a proxy signed by the Stockholder or the Stockholder's attorney-in-fact. Any proxy shall be delivered to the Secretary of the Corporation at or prior to the time designated for holding the meeting, but in any event not later than the time designated in the order of business for so delivering proxies. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

        Except as provided in the Certificate of Incorporation, at each meeting of the Stockholders, all corporate actions to be taken by vote of the Stockholders shall be authorized by a majority of the votes cast by the Stockholders entitled to vote thereon, present in person or represented by proxy, and where a separate vote by class is required, a majority of the votes cast by the Stockholders of that class, present in person or represented by proxy, shall be the act of the class.

        Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter, including the election of directors, need not be by written ballot, In the case of a vote by written ballot, each ballot shall be signed by the Stockholder voting, or by the Stockholder's proxy, and shall state the number of shares voted.

        Section 10    Inspectors.    Either the Board of Directors or, in the absence of designation of inspectors by the Board of Directors, the chairman of the meeting of the Stockholders may, in its or such person's discretion, appoint one or more inspectors to act at any meeting of the Stockholders. The inspectors shall perform such duties as shall be specified by the Board of Directors or the chairman of

2

the meeting. Inspectors need not be Stockholders. No director or nominee for the office of director shall be appointed as an inspector.

        Section 11    Consent in Lieu of Meeting.    Notwithstanding anything contained in these Bylaws to the contrary, no action required or permitted to be taken at any meeting of Stockholders of this Corporation may be taken by written consent without a meeting of Stockholders.

ARTICLE III

BOARD OF DIRECTORS

        Section 1    General Powers.    The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which may exercise all powers of the Corporation and do all lawful acts and things as are not by law or by the Certificate of Incorporation directed or required to be exercised or done by the Stockholders.

        Section 2    Number, Qualification and Election.    The Board of Directors shall consist of not less than three (3) nor more than twenty (20) directors, the exact number of which shall be fixed from time to time by the Board of Directors. A majority of the directors comprising the Board of Directors shall be Independent Directors (as defined below).

        Each of the directors of the Corporation shall hold office for the term for which he is elected and until (i) his successor has been elected and qualified or (ii) his earlier death, resignation or removal. At each annual meeting of the Stockholders, subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, directors shall be elected to hold office for a term of one (1) year or until the next annual meeting of Stockholders.

        Directors need not be Stockholders. In any election of directors, the persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed to be elected.

        Directors shall be deemed to have retired and resigned from the Board of Directors effective immediately prior to the first annual meeting of stockholders of the Corporation occurring after such Director attains seventy-two years of age, provided, however, that members of the Board of Directors on February 4, 1999 shall be deemed to have retired and resigned from the Board of Directors effective upon the date of the first annual meeting of stockholders of the Corporation occurring after such Director attains seventy-five years of age; and provided further that the Board of Directors shall have the power to waive the application of this paragraph to a given Director on a case-by-case basis after considering all of the applicable facts and circumstances.

        For the purposes of these Bylaws, the term "Independent Director" shall mean a director who:

(a)

is not currently employed by the Corporation in an executive capacity;



(b)

is not, and is not affiliated with a company or firm that is an advisor or consultant to the Corporation;



(c)

has no personal services contract(s) with the Corporation or the Corporation's senior management, unless such a contract has been approved by a majority of the Independent Directors for a special engagement for a limited period of time;



(d)

is not an officer, director, employee or paid consultant of a not-for-profit entity that receives significant contributions from the Corporation;



(e)

within the last year, has not had any business relationship with the Corporation that the Corporation has been required to disclose under the Securities and Exchange Commission disclosure regulations, unless a majority of the Independent Directors determine that such

3

business relationship is not material to the Corporation and does not interfere with the exercise of the director's independent judgment;

(f)

is not employed by a public company at which an executive officer of the Corporation serves as a director;



(g)

has not had a relationship described in (a) through (f) above with any affiliate of the Corporation; and



(h)

is not a member of the immediate family of any person described in (a) through (g) above.

        Section 3    Notification of Nominations.    Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors shall be made by the Committee on Directors as provided in Article IV, Section 4.4, or by any Stockholder entitled to vote for the election of directors.

        A Stockholder's nomination shall be made by giving timely notice in proper written form thereof to the Secretary of the Corporation. To be timely, a Stockholder's notice shall be delivered to or mailed and received at the executive offices of the Corporation not less than 60 calendar days nor more than 90 calendar days prior to the meeting; provided that, in the event that less than 40 calendar days' notice or prior public disclosure of the date of the meeting is given or made to the Stockholders, notice by the Stockholder to be timely must be so received not later than the close of business on the tenth calendar day following the day on which the notice of the date of the meeting was mailed or public disclosure was made.

        To be in proper written form, a Stockholder's notice shall set forth in writing: (i) as to each person whom the Stockholder proposes to nominate for election as a director, all information relating to that person that is required to be disclosed in solicitations of proxies for the election of directors or is otherwise required, in each case pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, including, but not limited to, the person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (ii) as to the Stockholder giving the notice, (w) the name and record address, as they appear on the Corporation's books, of the Stockholder, (x) the class and number of shares of stock of the Corporation which are owned beneficially or of record by the Stockholder, (y) a description of all arrangements or understandings between the Stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nominations are to be made by the Stockholder and (z) a representation that the Stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in the notice. At the request of the Board of Directors, any person nominated by the Committee on Directors for election as a director shall furnish to the Secretary of the Corporation the information required to be set forth in a Stockholder's notice of nomination which pertains to the nominee.

        In the event that a Stockholder seeks to nominate one or more directors, the Secretary shall appoint an inspector, who shall not be affiliated with the Corporation, to determine whether the Stockholder has complied with this Section 3.3. If the inspector shall determine that the Stockholder has not complied with this Section 3.3, then the inspector shall direct the chairman of the meeting to declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and the chairman shall so declare to the meeting and the defective nomination shall be disregarded.

        Section 4    Quorum and Manner of Acting.    Except as may otherwise be provided by these Bylaws or the Certificate of Incorporation, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the

4

Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting to another time and place. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called.

        Section 5    Place of Meeting.    The Board of Directors may hold its meetings, both regular and special, at such place or places within or without the State of Delaware as the Board of Directors may from time to time determine, or as shall be specified or fixed in the respective notices or waivers of notice thereof.

        Section 6    Regular Meetings.    Regular meetings of the Board of Directors shall be held at such times as the Board of Directors shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday under the laws of the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day.

        Section 7    Special Meetings.    Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board or by a majority of the Board of Directors.

        Section 8    Notice of Meetings.    Notice of regular meetings of the Board of Directors or of any adjourned meeting thereof need not be given. Notice of each special meeting of the Board of Directors shall be mailed to each director, addressed to the director at the director's residence or usual place of business, at least one calendar day before the day on which the meeting is to be held or shall be sent to the director at such place by telegraph or be given personally or by telephone or telecopy not later than one calendar day before the meeting is to be held, but notice need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend the meeting without protesting, prior to or at its commencement, the lack of notice. Every notice shall state the time and place but need not state the purpose of the meeting.

        Section 9    Order of Business.    The Chairman of the Board shall preside at meetings of the Board of Directors and shall call such meetings to order and may adjourn such meetings from time to time. In the absence of the Chairman of the Board, the President and Chief Executive Officer shall preside at meetings of the Board of Directors.

        Section 10    Participation in Meeting by Means of Communications Equipment.    Any one or more members of the Board of Directors or any committee thereof may participate in any meeting of the Board of Directors or of any such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

        Section 11    Action Without Meeting.    Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all of the members of the Board of Directors or of the committee consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or of the committee.

        Section 12    Resignations.    Any director of the Corporation may at any time resign by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, or, if the time is not specified, upon receipt thereof; and, unless otherwise specified therein, the acceptance of the resignation shall not be necessary to make it effective.

        Section 13    Removal of Directors.    Any director may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. A vacancy in the Board of Directors caused by any removal may be filled by the Stockholders at that meeting or as provided in Section 3.14 of these Bylaws.

5

        Section 14    Vacancies.    In the case of any vacancy on the Board of Directors or in the case of any newly created directorship, a director elected to fill the vacancy or the newly created directorship for the unexpired portion of the term being filled shall be filled by the Committee on Directors. The director elected to fill a vacancy shall hold office for the unexpired term in respect of which the vacancy occurred and until his successor shall be elected and shall qualify or until his earlier death, resignation or removal in the manner provided by these Bylaws.

        Section 15    Compensation.    Each director who shall not at the time also be a salaried officer or employee of the Corporation or any of its subsidiaries (hereinafter referred to as an "outside director"), in consideration of such person serving as a director, shall be entitled to receive from the Corporation such amount per annum and such fees for attendance at meetings of the Board of Directors or of committees of the Board of Directors, or both, as the Board of Directors shall from time to time determine. In addition, each director, whether or not an outside director, shall be entitled to receive from the Corporation reimbursement for the reasonable expenses incurred by such person in connection with the performance of such person's duties as a director. Nothing contained in this Section 3.15 shall preclude any director from serving the Corporation or any of its subsidiaries in any other capacity and receiving proper consideration therefor.

ARTICLE IV

COMMITTEES

        Section 1    Committees.    The standing committees of the Board of Directors of the Corporation shall be a Compensation and Stock Option Committee, an Audit Committee, a Finance Committee and a Committee on Directors. Members of each committee of the Board of Directors, including committees established under Section 4.6 hereof, shall be designated by a majority of the Board of Directors. The Chairman of the Board shall appoint the chairman of each committee.

        Section 2    Compensation and Stock Option Committee.    The Compensation and Stock Option Committee shall have the exclusive power:

        (a)  To recommend to the Board of Directors the compensation, including direct regular compensation, stock options or other appropriate incentive plans, and perquisites, if any, of the two most highly compensated Corporate Officers of the Corporation, which recommendation shall be subject to ratification, modification or rejection by the Board of Directors;

        (b)  To approve the compensation, including direct regular compensation, stock options or other appropriate incentive plans, and perquisites, if any, of up to thirty-five senior officers of the Corporation and its subsidiaries including the two Corporate Officers covered in Subsection (a) above, which senior officers shall be designated by the Committee in consultation with management;

        (c)  To review and approve, on a general and policy level basis only, the compensation and benefits of officers, managers and employees other than those covered in (a) and (b) above, based on management's presentation of all relevant factors of proposed actions in totality, and advise the Board of Directors of actions taken; and such compensation and benefit matters shall be deemed within the Committee's general oversight;

        (d)  To recommend to the Board of Directors corporate-wide policies with respect to direct regular compensation, stock options or other appropriate incentive plans, and perquisites, if any;

        (e)  To administer the Corporation's stock option or other stock-based and equity-based plans (the "Plans"), including the review and approval of all grants thereunder;

6

        (f)    To fulfill the purposes of the Plans, including, without limitation, through the conditional grant of options and other benefits under the Plans;

        (g)  To recommend to the Board of Directors any revisions or additions to the Plans;

        (h)  To recommend to the Board of Directors appropriate actions with respect to modification, revision or termination of trusteed employee benefit or welfare plans (such as 401(k) or pension plans), with action with respect to such trusteed plans being reserved to the Board of Directors; and

        (i)    To review and report to the Board of Directors, when so requested, on any compensation matter.

        Section 3    Audit Committee.    The Audit Committee shall have the following responsibilities:

        (a)  To review the scope, cost, and results of the independent audit of the Corporation's books and records, including the annual financial statements, through conferences and direct communication with the independent auditors;

        (b)  To review the results of the independent audit of the annual financial statements with management and the internal auditors;

        (c)  To review the adequacy of the Corporation's accounting, financial, and operating controls, and the recommendations of the independent auditors related thereto, through conferences and direct communication with the internal auditors and other responsible corporate executives;

        (d)  To recommend annually to the Board of Directors the selection of the independent auditors;

        (e)  To approve the appointment or removal of the independent audit manager;

        (f)    To consider proposals made by the Corporation's independent auditors for consulting work other than normal auditing and to judge whether or not such work could result in a loss of "independence"; and

        (g)  To review and report to the Board of Directors, when so requested, on any accounting or financial matters.

        Section 4    Committee on Directors.    The Committee on Directors shall have the following responsibilities:

        (a)  To review qualifications of candidates for Board of Directors membership from whatever source received;

        (b)  (i) To nominate candidates for election to the Board of Directors at each annual meeting of Stockholders of the Corporation and (ii) to fill vacancies on the Board of Directors which occur between annual meetings of Stockholders;

        (c)  To recommend to the Board of Directors criteria relating to tenure as a director, such as retirement age, limitations on the number of times a director may stand for reelection, the continuation of directors in an honorary or similar capacity and the definition of independence as it relates to the directors; and

        (d)  To recommend to the Board of Directors the actual assignments of individual directors (by name) to Board of Directors committees; and

        (e)  To be responsible for implementing a process for the Board of Directors to perform a self-evaluation of its performance on at least an annual basis.

7

        Section 5    Finance Committee.    The Finance Committee shall have the following responsibilities:

        (a)  To review the Corporation's investment policies and guidelines;

        (b)  To monitor performance of the Corporation's investment portfolio;

        (c)  To review the Corporation's financial structure and operations in light of the Corporation's long-term objectives and to coordinate such review with the Audit Committee;

        (d)  To review and recommend to the Board of Directors appropriate action on proposed acquisitions and divestitures;

        (e)  To establish appropriate authority levels for various officials of the Corporation with respect to mergers and acquisitions, divestitures and capital expenditures; and

        (f)    To review and recommend appropriate action with respect to the Corporation's short- and long-term debt structure.

        Section 6    Other Committees.    The Board of Directors may, by resolution adopted by a majority of the entire Board of Directors, designate from among its members one or more other committees, each of which shall have such authority of the Board of Directors as may be specified in the resolution of the Board of Directors designating such committee.

        Section 7    Procedures.    Any committee of the Board of Directors may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate of Incorporation or these Bylaws for the conduct of its meetings as the committee may deem to be proper. A majority of the members of a committee of the Board of Directors shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the members thereof present at a meeting at which a quorum is present shall be the act of the committee. No meeting of any committee of the Board of Directors may be held unless notice has been given and/or waived by the members of the committee. Meetings may be held at such times and places as shall be fixed by resolution adopted by a majority of the members thereof. Special meetings of any committee of the Board of Directors shall be called at the request of any member thereof. Notice of each committee meeting of the Board of Directors shall be sent by mail telegraph or telephone or delivered personally to each member thereof not later than one calendar day before the day on which the meetings is to be held, but notice need not be given to any member who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend the meeting without protesting prior to or at its commencement the lack of notice. Any special meeting of any committee of the Board of Directors shall be a legal meeting without any notice thereof having been given if all of the members thereof shall be present thereat and shall not protest the holding of the meeting. Any committee of the Board of Directors shall keep written minutes of its proceedings and shall report on its proceedings to the Board of Directors.

ARTICLE V

OFFICERS

        Section 1    Election.    The officers of the Corporation shall include a Chairman of the Board (who must be a director), a President and Chief Executive Officer, a Chief Financial Officer, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors or, except for the office of Chairman of the Board and President and Chief Executive Officer, by the President and Chief Executive Officer. The Board of Directors or the President and Chief Executive Officer, in its or his discretion, may also choose one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Each officer of the Corporation shall hold office for such term and shall exercise such powers and perform such duties as set forth in these Bylaws and as shall be determined from time to time by the Board of Directors, if such officer was appointed by the Board of Directors, or by the President and Chief Executive Officer,

8

if such officer was appointed by the President and Chief Executive Officer. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors or by the President and Chief Executive Officer in accordance with this Section 5.1.

        Section 2    Removal.    All officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any officer other than the President and Chief Executive Officer and the Chairman of the Board may also be removed at any time by the President and Chief Executive Officer.

        Section 3    Resignation.    Any officer may resign at any time by giving notice to the Board of Directors, the President and Chief Executive Officer or the Secretary of the Corporation. Any resignation shall take effect at the date of receipt of the notice of resignation or at any later date specified therein, but the acceptance of the resignation shall not be necessary to make it effective.

        Section 4    Vacancies.    A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for election to the office.

        Section 5    Chairman of the Board.    The duties of the Chairman of the Board shall be to preside at meetings of the Board of Directors and, if present, to preside at the meetings of the Stockholders. The Chairman of the Board shall preside as chairman of the meetings of the Board of Directors or of any committee on which he serves, and shall preside as chairman of the Stockholder meetings. The Chairman shall work in cooperation with the President and Chief Executive Officer to prepare agendas and presentations for all meetings of the Board of Directors and of Stockholders. Except where by law the signature of the President is required the Chairman of the Board shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation that may be authorized by the Board of Directors. The Chairman of the Board shall perform such other duties and may exercise such other powers as from time to time may be assigned to him by the Bylaws or by the Board of Directors.

        Section 6    President and Chief Executive Officer.    The President and Chief Executive Officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board, the President and Chief Executive Officer shall preside at all meetings of the Stockholders and the Board of Directors and otherwise exercise and discharge all the duties of the Chairman. The President and Chief Executive Officer shall perform such other duties as the Board of Directors may from time to time determine, subject to the terms of applicable employment agreements.

        Section 7    Chief Financial Officer.    The Chief Financial Officer shall perform all duties incident to the office of Chief Financial Officer and such other duties as from time to time may be assigned to him by the President and Chief Executive Officer or the Board of Directors.

        Section 8    Treasurer.    The Treasurer shall perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President and Chief Executive Officer or the Board of Directors.

        Section 9    Executive Vice Presidents, Senior Vice Presidents and Vice Presidents.    Each Executive Vice President, Senior Vice President and Vice President shall have such powers and duties as shall be prescribed by the President and Chief Executive Officer or the Board of Directors.

9

        Section 10    Secretary.    The Secretary shall see that all notices required to be given by the Corporation are duly given and served. The Secretary shall be custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed to all certificates of stock of the Corporation (unless the seal of the Corporation on the certificates shall be a facsimile, as hereinafter provided) and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these Bylaws. The Secretary shall have charge of the stock ledger and also of the other books, records and papers of the Corporation and shall see that the reports, statements and other documents required by law are properly kept and filed, and the Secretary shall in general perform all of the duties incident to the office of Secretary and such other duties as from time to time may be assigned by the President and Chief Executive Officer or the Board of Directors.

        Section 11    Assistant Treasurers and Assistant Secretaries.    The Assistant Treasurers and Assistant Secretaries, if any, shall perform such duties as shall be assigned to them by the President and Chief Executive Officer or the Board of Directors, and in the absence of the Secretary or Treasurer, as the case may be, or in the event of his disability or refusal to act, shall perform the duties of the Secretary or Treasurer, respectively, and when so acting shall have all the powers of and be subject to all the restrictions upon the Secretary or Treasurer, respectively.

ARTICLE VI

INDEMNIFICATION

        Section 1    Directors and Officers.    The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or an officer of the Corporation, against expenses (including, but not limited to, attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent and in the manner set forth in and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time may be in effect. To the maximum extent permitted by law, the Corporation shall advance expenses (including attorneys' fees) incurred by any person indemnified hereunder in defending any civil, criminal, administrative or investigative action, suit or proceeding upon any undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation. Such right of indemnification and advancement of expenses shall not be deemed to be exclusive of any other rights to which such director or officer may be entitled apart from the foregoing provisions. The foregoing provisions of this Section 6.1 shall be deemed to be a contract between the Corporation and each director or officer who serves in such capacity at any time while this Section 6.1 and the relevant provisions of the General Corporation Law of the State of Delaware and other applicable law, if any, are in effect, and any repeal or modification thereof shall not affect any right or obligation then existing, with respect to any state of facts then or theretofore existing, or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts.

        Section 2    Agents and Employees.    The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including, but not limited to, attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the extent and in the manner set forth in and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time may be in effect. Such

10

right of indemnification shall not be deemed to be exclusive of any other right to which such person may be entitled apart from the foregoing provisions.

ARTICLE VII

CAPITAL STOCK

        Section 1    Certificates of Shares.    Certificates representing shares of stock of each class of the Corporation, whenever authorized by the Board of Directors, shall be in such form as shall be approved by the Board of Directors. The certificates representing shares of stock of each class shall be signed by, or in the name of the Corporation by, the Chairman of the Board or the President and Chief Executive Officer or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation, and sealed with the seal of the Corporation, which may be a facsimile thereof. Any or all signatures may be facsimiles if countersigned by a transfer agent or registrar. If any officer, transfer agent or registrar whose manual or facsimile signature is affixed to any certificate ceases to be an officer, transfer agent or registrar before the certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if the officer, transfer agent or registrar were still such at the date of its issue.

        Section 2    Transfer of Shares.    Transfers of shares of stock of each class of the Corporation shall be made only on the books of the Corporation by the holder thereof or by such holder's attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary of the Corporation or a transfer agent for such stock, if any, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The person in whose name such shares of stock stand on the books of the Corporation shall be deemed to be the owner thereof for all purposes as regards the Corporation; provided that whenever any transfer of shares of stock shall be made for collateral security and not absolutely, and written notice thereof shall be given to the Secretary or to such transfer agent, such fact shall be stated in the stock ledger entry for the transfer. No transfer of shares of stock shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.

        Section 3    Addresses of Stockholders.    Each Stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notice of meetings and all other corporate notices may be served or mailed to such person, and, if any Stockholder shall fail to designate such address, corporate notices may be served upon such person by mail directed to the person at the person's post office address, if any, as the same appears on the stock record books of the Corporation or at such person's last known post office address.

        Section 4    Lost, Destroyed and Mutilated Certificates.    The holder of any share of stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificate therefor. The Corporation may issue to such holder a new certificate or certificates for such shares of stock, upon the surrender of the mutilated certificates or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction. The Board of Directors, or a committee designated thereby, or the transfer agents and registrars for the stock, may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or such person's legal representative, to give the Corporation a bond in such sum and with such surety or sureties as they may direct to indemnify the Corporation and such transfer agents and registrars against any claim that may be made on account of the alleged loss, theft or destruction of any certificate or the issuance of a new certificate.

        Section 5    Regulations.    The Board of Directors may make such additional rules and regulations as it may deem to be expedient concerning the issue and transfer of certificates representing shares of

11

stock of each class of the Corporation and may make such rules and take such action as it may deem to be expedient concerning the issue of certificates in lieu of certificates claimed to have been lost, destroyed, stolen or mutilated.

        Section 6    Fixing Date for Determination of Stockholders of Record.    In order that the Corporation may determine the Stockholders entitled to notice of or to vote at any meeting of the Stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment or any right, or entitled to exercise any right in respect of any change, conversion or exchange of stock or for the purpose of any lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 calendar days nor less than 10 calendar days before the date of such meeting, nor more than 60 calendar days prior to any other action. A determination of the Stockholders entitled to notice or to vote at a meeting of the Stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting.

ARTICLE VIII

SEAL

        The Board of Directors shall provide a corporate seal, which shall bear the full name of the Corporation and such other words and figures as the Board of Directors may approve and adopt. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

ARTICLE IX

FISCAL YEAR

        The fiscal year of the Corporation shall end on the 31st day of December in each year.

ARTICLE X

WAIVER OF NOTICE

        Whenever any notice whatsoever is required to be given by these Bylaws, by the Certificate of Incorporation or by law, the person entitled thereto may, either before or after the meeting or other matter in respect of which such notice is to be given, waive such notice in writing, which writing shall be filed with or entered upon the records of the meeting or the records kept with respect to such other matter, as the case may be, and in such event such notice need not be given to such person and such waiver shall be deemed to be equivalent to such notice.

ARTICLE XI

AMENDMENTS

        The Board of Directors shall have the power to amend, alter or repeal these Bylaws and to adopt new Bylaws from time to time by an affirmative vote of seventy-five percent (75%) of the entire Board of Directors, as then constituted.

ARTICLE XII

MISCELLANEOUS

        Section 1    Execution of Documents.    The Board of Directors or any committee thereof shall designate the officers, employees and agents of the Corporation who shall have the power to execute and deliver deeds, contracts, mortgages, bonds, debentures, notes, checks and other orders for the

12

payment of money and other documents for and in the name of the Corporation and may authorize such officers, employees and agents to delegate such power (including, but not limited to, the authority to redelegate) by written instrument to other officers, employees or agents of the Corporation. Such delegation may be by resolution or otherwise and the authority granted shall be general or confined to specific matters, all as the Board of Directors or any such committee may determine. In the absence of such designation referred to in the first sentence of this Section 12.1, the officers of the Corporation shall have such power so referred to, to the extent incident to the normal performance of their duties.

        Section 2    Deposits.    All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board of Directors or any committee thereof or any officer of the Corporation to whom power in that respect shall have been delegated by the Board of Directors or any such committee shall select.

        Section 3    Checks.    All checks, drafts, and other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board of Directors or of any committee thereof.

        Section 4    Proxies in Respect of Stock or Other Securities of Other Corporations.    The Board of Directors or any committee thereof shall designate the officers of the Corporation who shall have the authority from time to time to appoint an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation and to vote or consent in respect of such stock or securities. Such designated officers may instruct the person or persons so appointed as to the manner of exercising such powers and rights, and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, powers of attorney or other instruments as they may deem to be necessary or proper so that the Corporation may exercise its powers and rights. In the absence of any such designation, the President shall have the authority granted under this Section 12.4.

        Section 5    Bylaws Subject to Law and Certificate of Incorporation.    Each provision of these Bylaws is subject to any contrary provision contained in the Certificate of Incorporation or of any applicable law as from time to time may be in effect, and, to the extent any such provision is inconsistent therewith, such provision shall be superseded thereby for as long as and in any case in which it is inconsistent, but for all other purposes these Bylaws shall continue in full force and effect.

13

QuickLinks

Exhibit 3.2

EX-10.11

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.11

January 25, 2002

Mr. Marvin P. Rich
1930 Ocean Avenue #205
Santa Monica, CA 90405

Dear Mr. Rich:

        Congratulations! On behalf of Health Net, Inc. (the "Company"), we would like to make you an offer of employment as our Executive Vice President, Finance and Operations. The terms and conditions of your employment by the Company, which employment would commence on January 28, 2002, are as set forth in this letter agreement (this "Agreement"):

        1.    Salary and Engagement Bonus.

        A.    Salary.    You will be paid an annual base salary of $500,000, less applicable withholdings (payable on a bi-weekly basis) ("Base Salary"), which covers all hours worked. Generally, your Base Salary will be reviewed annually, but the Company reserves the right, subject to the provisions of Sections 8 and 9 below, to change your compensation from time-to-time. Pursuant to the By-laws of the Company, any adjustment to your compensation must be made with the approval of the Compensation and Stock Option Committee (the "Committee") of the Company's Board of Directors (or, in the event that you constitute one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company's Board of Directors).

        B.    Engagement Bonus.    You will also receive a bonus in the amount of $450,000 payable within thirty (30) days of your effective date of employment ("Engagement Bonus"). You must be actively employed and on the Company payroll in order to receive the Engagement Bonus. In addition, if you voluntarily terminate your employment without Good Reason (as defined below) or the Company terminates you for Cause (as defined below) within the first two (2) years of employment, you will be required to repay to the Company a percentage of the Engagement Bonus determined by dividing (i) twenty-four (24) less the number of months you were employed by the Company by (ii) twenty-four (24).

        2.    Duties.    Your duties and responsibilities will include the oversight of finance, information systems, and health plan operations, including such functions as claims, membership services, membership accounting and customer service, but the Company reserves the right, subject to the provisions of Sections 8 and 9 below, to assign you other duties as needed and to change your duties from time to time on reasonable notice, based on your skills and the needs of the Company. You will report directly to Jay Gellert, Chief Executive Officer and President of the Company, but your reporting relationship may be changed from time to time at the discretion of the Company. Your title will be Executive Vice President, Finance and Operations, but may be changed at the discretion of the Company to a title that reflects a similarly senior executive position.

        3.    Adjustments and Changes in Employment Status.    You understand that the Company reserves the right, subject to the provisions of Sections 8 and 9 below, to make personnel decisions regarding your employment, including but not limited to decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including termination, consistent with the needs of the business. Generally, performance and compensation are reviewed on an annual basis.

        4.    Protection of Proprietary and Confidential Information.    You agree that your employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by you during your employment.

        A.    You agree not to directly or indirectly use or disclose any of the Proprietary and Confidential Information (as defined below) of the Company or any of its affiliates at any time except in connection with the services you provide to such entities. "Proprietary and Confidential Information" shall mean trade secrets, confidential knowledge, data or any other proprietary or

confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information which (i) was publicly known and made generally available in the public domain prior to the time of disclosure to you by the Company or (ii) becomes publicly known and made generally available after disclosure to you by the Company. By way of illustration but not limitation, "Proprietary and Confidential Information" includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity's business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

        B.    You further agree that at all times during your employment and thereafter, you will keep in confidence and trust all Proprietary and Confidential Information, and that you will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing your duties to the Company.

        C.    All property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to you by the Company or any of its affiliates or produced by you or others in connection with your providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. You shall return and deliver all such property upon termination of your employment, and you may not take any such property or any reproduction of such property upon such termination.

        D.    You recognize that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity's part to maintain the confidentiality of such information and to use it only for certain limited purposes. You agree that during your employment, and thereafter, you owe such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out your work for such entities consistent with such entities' agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities' agreements with such third parties.

        E.    Any breach of this Section shall be a material breach of this Agreement.

        5.    Representation and Warranty of Employee.    You represent and warrant to the Company that the performance of your duties, and the entering into of this Agreement, has not and will not violate any agreements with or trade secrets of any other person or entity. You further represent to the Company that the letter from WebMD Corporation ("WebMD") dated January 23, 2002, a copy of which you have provided to us, is a true and correct copy of such letter. In addition, you represent and warrant to the Company that you have not shared or disclosed, and will not share or disclose to the Company, any proprietary or confidential information of your previous employers or any other third party.

        6.    Employee Benefits.

        A.    Employee Benefit Programs.    You may be eligible for various employee benefit programs if you meet the applicable participation requirements. These benefit programs include paid time off ("PTO"), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company's 401(k) plan and tuition reimbursement plan. You will also be eligible to participate in any employee benefit programs added at any future time that are

2

generally applicable to senior executives of the Company and that have been approved by the Committee, provided that you meet the applicable participation requirements; provided, however, that this provision does not extend to any individually negotiated or tailored benefits, plans or programs covering a particular employee or employees. Although the Company may sponsor a benefit or plan or program for some employees, it is not required to do so for all employees and may exclude certain employees now or in the future from one or more benefits, plans or programs. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

        B.    Required Insurance.    You will be covered by workers' compensation insurance and state disability insurance, as required by state law.

        C.    Automobile Allowance.    The Company will provide you with an automobile allowance of $1,000 per month, subject to normal payroll deductions.

        D.    Financial Counseling Allowance.    You will be reimbursed up to the amount of $5,000 per year for documented costs incurred for your personal financial counseling services.

        E.    Incentive Bonus.    You will also be eligible to participate in the Health Net, Inc. Executive Incentive Plan (also known as the Management Incentive Plan ("MIP")) in accordance with the terms of the MIP, which provides you with a target opportunity to earn up to 70% of your Base Salary, prorated from your date of hire, as additional compensation, according to the terms of the actual MIP documents. The bonus payment will range from 0% to 150% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by you in order for you to be eligible to receive above target payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the guidelines of the MIP. You acknowledge that in the event you are one of the top five (5) highest paid executive officers of the Company for a given year under applicable federal securities laws, your bonus for that year, if any, will be subject to the Company's Performance Based 162(m) Plan in lieu of the MIP.

        F.    Relocation Benefits.    You agree that, notwithstanding any Company policy that may be in effect, you will not be eligible to receive any relocation benefits in connection with your employment by the Company.

        G.    Expenses.    Subject to and in accordance with the Company's written guidelines and procedures for business and travel expenses, you will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by you in the performance of your duties pursuant to this Agreement.

        7.    Equity Based Stock Options.    With a grant date effective as of the first date of your employment hereunder, you will be granted non-qualified stock options to purchase 800,000 shares of the Class A Common Stock of the Company (the "Stock Options"). All options granted to you will be granted under the applicable Company Stock Option Plan (the "Stock Option Plan"), and will be subject to the terms of the Company's form of option agreement as adopted by the Stock Option Committee (the "Stock Option Agreement"). These options will expire ten (10) years from the grant date (subject to earlier termination as provided in the Stock Option Agreement or the Stock Option Plan), will be subject to the vesting schedule set forth below and will have an exercise price equal to the closing sales price of the Common Stock on your first day of employment. In the event of any inconsistency with this Agreement, the terms of the Stock Option Agreement and the Stock Option Plan shall control. Any future recommendation for additional options made by the Company's management will be made consistent with your performance and generally comparable to your peers at the time option recommendations are presented to the Stock Option Committee. It is further agreed

3

that this initial grant to you will be considered a "mega-grant" and you will therefore not be eligible to receive additional option grants until 2003.

        A.    Vesting.

        (1)  One-half (¹/2) of the options (400,000) will vest in four (4) equal annual installments, beginning on the first anniversary of your first day of employment.

        (2)  The remaining one-half (¹/2) of the options (400,000) will vest in the following amounts at the earlier of (i) the occurrence of the following performance requirements which accelerate the vesting date (subject to a requirement that the shares must be held for one (1) year after the acceleration date) or (ii) the following vesting dates:

•

133,334 vest at either (a) the time the closing share price for 20 consecutive trading days is equal to or greater than $30 or (b) 5 years after the grant date;



•

133,333 vest at either (a) the time the closing share price for 20 consecutive trading days is equal to or greater than $35 or (b) 5 years after the grant date;



•

133,333 vest at either (a) the time the closing share price for 20 consecutive trading days is equal to or greater than $40 or (b) 5 years after the grant date.

        8.    Termination of Employment.    Your employment with the Company is "at will," which means that either you or the Company may terminate the employment relationship at any time, with or without notice and with or without Cause or Good Reason (as defined below), subject to the provisions of Section 9 below.

        A.    Termination by the Company for Cause.    The Company may terminate your employment for "Cause." For purposes of this Agreement, Cause shall mean: (i) an act of dishonesty causing harm to the Company or any of its affiliates; (ii) abuse of alcohol or use of illegal drugs; (iii) conviction of or plea of nolo contendere to a felony or a misdemeanor involving moral turpitude; (iv) willful refusal to perform or gross neglect of the duties assigned to you; (v) willful breach of any law that, directly or indirectly, adversely affects the Company or any of its affiliates; (vi) a material breach by you following a Change in Control of those duties and responsibilities of yours that do not differ in any material respect from your duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on your part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach; or (vii) breach of your obligations hereunder (or under any written Company policy) to protect the Proprietary and Confidential Information of the Company or any of its affiliates.

        B.    Termination by the Company without Cause.    The Company may terminate your employment at any time and for any reason. For purposes of this Agreement, termination of your employment by the Company for any reason other than Cause shall be considered "without Cause."

        C.    Termination by you for Good Reason.    You may terminate this Agreement at any time for "Good Reason" by giving the Company at least fourteen (14) days prior written notice of the effective date of such termination. For purposes of this Agreement, Good Reason shall have one of the following meanings, depending on when such termination takes place:

        (a)  Within the first two (2) years following a Change in Control (as defined below) of the Company, Good Reason shall mean, without your prior written consent: (i) a demotion or a substantial reduction in the scope of your position, duties, responsibilities or status with the

4

Company (including, but not limited to, a demotion in your position with the Company so that you no longer report directly to the Chief Executive Officer of the Company), or any removal of you from or any failure to reelect you to any of the positions (or functional equivalent of such positions) referred to in the introductory paragraphs hereof, except in connection with the termination of your employment due to Death, Disability (as defined below), normal retirement or for Cause or by you voluntarily other than for Good Reason; (ii) a reduction by the Company in your Base Salary or a material reduction in the benefits or perquisites available to you as in effect immediately prior to any such reduction; (iii) a relocation of you to a work location more than fifty (50) miles from your work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for you based on your residence immediately prior to such relocation; or (iv) the failure of the Company to obtain an assumption agreement from any successor contemplated under Section 13 of this Agreement. You understand and agree that if the Company undergoes a Change in Control (as defined below) and you terminate your employment with the Company (as opposed to the Company terminating your employment) because WebMD asserts that your continued employment with the Company would breach an agreement between you and WebMD, such termination would not in itself constitute a termination for Good Reason entitling you to receive a severance payment or benefits under this Agreement.

        (b)  At any time that is not within the first two (2) years following a Change in Control (as defined below) of the Company, Good Reason shall mean, without your prior written consent: (i) a reduction in your Base Salary; (ii) a demotion in your position with the Company so that you no longer report directly to the Chief Executive Officer of the Company; or (iii) the corporate headquarters of the Company is relocated outside of the State of California.

        D.    Termination by you without Good Reason.    You may voluntarily terminate your employment at any time and for any reason. For purposes of this Agreement, voluntary termination of your employment for any reason other than for Good Reason shall be considered "without Good Reason."

        E.    Termination by the Company due to Death or Disability.    The Company may terminate your employment due to your Death or "Disability." For purposes of this Agreement, Disability shall mean your absence from your duties hereunder on a full-time basis for a period of six (6) consecutive months as a result of your incapacity due to physical or mental disability, as determined in accordance with the Company's short term and long term disability plans.

        9.    Rights on Termination; Severance.

        A.    Termination by the Company for Cause.    In the event that your employment is terminated by the Company for Cause, you will be paid (in each case to the extent not theretofore paid) within thirty (30) days following your date of termination (or such shorter period that may be required by applicable law): your annual Base Salary through the date of termination, any compensation previously deferred by you (together with any interest and earnings therein) subject to the election options in the Health Net, Inc. Deferred Compensation Plan if you have elected to participate therein, accrued but unused PTO, reimbursable expenses incurred by you prior to the termination date and any other compensatory plan, arrangement or program payment to which you may be entitled. In the event that your employment is terminated by the Company for Cause, then you shall not be eligible to receive any other payments or benefits provided in this Section 9.

        B.    Termination by the Company without Cause or by you for Good Reason.

        (1)  If your employment is terminated by the Company without Cause or you terminate your employment for Good Reason (by giving the Company at least fourteen (14) days prior

5

written notice of the effective date of termination) at any time that is not within the first two (2) years after a Change in Control (as defined below) of the Company, you will be entitled to receive, provided you sign a Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twenty-four (24) months of your Base Salary in effect immediately prior to the date of your termination and, in the event that the trading price for the Class A Common Stock of the Company is at least $35 per share at the time of such termination, an "incentive bonus amount" in addition to any other bonus amounts to which you may be entitled for the year in which such termination occurs or prior years (with the "incentive bonus amount" calculated for these purposes using two (2) times the greater of (A) the target incentive amount applicable to you for such year under the MIP and (B) the incentive amount that was earned by you under the MIP for the immediately preceding plan year), (ii) the continuation of your medical, dental and vision benefits for you and your dependents for six (6) months following the effective date of your termination, and (iii) after expiration of such six (6) month benefits continuation period, the premium payments for continuation, under COBRA, of your medical, dental and vision benefits (as maintained for your benefit immediately prior to the date of your termination) for you and your dependents for a period of eighteen (18) months, provided you properly elect to continue those benefits under COBRA; provided, however, that in the event the Company requests, in writing, prior to such termination by you for Good Reason that you continue in the employ of the Company for up to an additional three (3) months, you must continue to remain so employed by the Company during such additional period of time in order to receive the foregoing severance benefits. The lump sum payment referred to above will be paid within thirty (30) days following your termination of employment.

        (2)  If your employment is terminated by the Company without Cause or you terminate your employment for Good Reason (by giving the Company at least fourteen (14) days prior written notice of the effective date of termination) at any time within the first two (2) years after a Change in Control (as defined below) of the Company, then you will be entitled to receive, provided you sign a Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to thirty-six (36) months of your Base Salary in effect immediately prior to the date of your termination and an "incentive bonus amount" in lieu of any other bonus amounts to which you may be entitled for the year in which such termination occurs (with the "incentive bonus amount" calculated for these purposes using three (3) times the greater of (A) the target incentive amount applicable to you for such year under the MIP and (B) the incentive amount that was earned by you under the MIP for the immediately preceding plan year), (ii) the continuation of your medical, dental and vision benefits for you and your dependents for eighteen (18) months following the effective date of your termination, and (iii) after expiration of such eighteen (18) month benefits continuation period, the premium payments for continuation, under COBRA, of your medical, dental and vision benefits (maintained for your benefit immediately prior to the date of your termination) for you and your dependents for a period of eighteen (18) months, provided you properly elect to continue those benefits under COBRA; provided, however, that in the event the Company requests, in writing, prior to such termination by you for Good Reason that you continue in the employ of the Company for up to an additional three (3) months, you must continue to remain so employed by the Company during such additional period of time in order to receive the foregoing severance benefits. The lump sum payment referred to above will be paid within thirty (30) days following your termination of employment.

        C.    Termination by you without Good Reason.    In the event that you voluntarily terminate your employment with the Company without Good Reason, you will be paid (in each case to the

6

extent not theretofore paid) within thirty (30) days following your date of termination (or such shorter period that may be required by applicable law): your annual Base Salary through the date of termination, any compensation previously deferred by you (together with any interest and earnings therein) subject to the election options in the Health Net, Inc. Deferred Compensation Plan if you have elected to participate therein, accrued but unused PTO, reimbursable expenses incurred by you prior to the termination date and any other compensatory plan, arrangement or program payment to which you may be entitled. In the event that you voluntarily terminate your employment with the Company without Good Reason, then you shall not be eligible to receive any other payments or benefits provided in this Section 9.

        D.    Termination by the Company due to Death or Disability.    In the event that your employment is terminated at any time due to Death or Disability, you (or your beneficiaries or estate) shall be entitled to (a) continuation of all medical and dental insurance for a period of twelve (12) months from the date of termination and (b) a lump sum payment equal to twelve (12) months of your Base Salary in effect immediately prior to the date of your termination and, in the event that the trading price for the Class A Common Stock of the Company is at least $35 per share at the time of such termination, an "incentive bonus amount" in lieu of any other bonus amounts to which you may be entitled for the year in which such termination occurs (with the "incentive bonus amount" calculated for these purposes using the greater of (A) the target incentive amount applicable to you for such year under the MIP and (B) the incentive amount that was earned by you under the MIP for the immediately preceding plan year), to be paid within thirty (30) days following your termination of employment, provided in the event of a termination due to Disability, you sign the Waiver and Release of Claims which is incorporated into this Agreement by reference as Exhibit A.

        E.    Definition of "Change in Control".    For purposes of this Agreement, Change in Control shall mean any of the following:

        (a)  Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), corporation or other entity (other than the Company or any of its subsidiaries, or any employee benefit plan sponsored by the Company or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty percent (20%) or more of the combined voting power of the outstanding securities of the Company which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company's securities) (the "Securities");

        (b)  As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of the Company immediately prior to such transaction cease to constitute a majority of the Board of Directors of the Company (or any successor corporations) immediately after such transaction;

        (c)  The Company is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of the Company, as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction;

        (d)  A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of the Company;

        (e)  The Company transfers, exchanges or leases substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of the Company; or

7

        (f)    The Company enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of the Company and such management agreement extends hiring and firing authority over you to an individual or organization other than the Company.

        10.    Withholding.    All payments required to be made by the Company hereunder to you or your estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

        11.    Potential Tax Consequences for "Parachute" Payments.

        11.1 Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (all such payments and distributions, including the severance payments and benefits provided for in Section 9 hereof (the "Severance Payments"), being hereinafter called "Total Payments") would be subject (in whole or part) to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision enacted under the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax") and (ii) there are any excess parachute payments (within the meaning of Section 280G(b) of the Code or any successor provision enacted under the Code), in the aggregate, in respect of such Total Payments in excess of $50,000, then the Company shall pay to you an additional cash payment (the "Tax Gross-up") so that after receipt of such Tax Gross-up, the payment of any additional federal, state and local income taxes on such Tax Gross-up amount and the payment of any Excise Taxes, you shall receive such net amount of Total Payments equal to the amount that you would have received if no Excise Tax was due; provided, however, that you shall cooperate in good faith with the Company to minimize the amount of the Excise Tax that may become payable by taking any such action or making any such election as may be reasonably requested by the Company in respect of the Total Payments due to you.

        11.2 Subject to the provisions of Section 11.3, all determinations required to be made under this Section 11, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change in Control, was the Company's independent auditor (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and you within fifteen (15) business days of the receipt of notice from you that you have received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section 11, shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you, then the Accounting Firm shall furnish to you a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of any tax assessment or a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company. As a result of any uncertainty in the application of Section 4999 of the Code at the time of the determination by the Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 11.3 and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall

8

determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit.

        11.3 You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall:

        (1)  give the Company any information reasonably requested by the Company relating to such claim,

        (2)  take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

        (3)  cooperate with the Company in good faith in order effectively to contest such claim, and

        (4)  permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this [Section] 10.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance and any and all costs and expenses of any such contest, dispute and/or appeal that you pay directly; and provided further, that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Tax Gross-Up would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

        11.4 If, after your receipt of an amount advanced by the Company pursuant to Section 11.3, you become entitled to receive, and receive, any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of Section 11.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to Section 11.3, a determination is made that you shall not be entitled to any refund with respect

9

to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Tax Gross-Up required to be paid.

        11.5 At the time that payments are made under Section 11 of this Agreement, the Company shall provide you with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from tax counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

        12.    Restrictive Covenants.

        A.    You hereby agree that, during (i) the six (6)-month period following a termination of your employment with the Company that entitles you to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a termination of your employment with the Company that does not entitle you to receive such severance benefits (the period referred to in either clause (i) or (ii), the "Restricted Period"), you shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the "Market Area"), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon you to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which you had access during your employment with the Company. If you take a position as a vice president (or higher position) or as a director of a Competitor it will be presumed for purposes of this Agreement that the loyal and complete fulfillment of your duties would require you to use such information and you would therefore be deemed to be in breach of this provision. For purposes of this Section, "Competitor" shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

        B.    In addition, you agree that, during the applicable Restricted Period following termination of your employment with the Company, you shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, you or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

        C.    It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 12 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

        D.    You also acknowledge that the services to be rendered by you to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by you of any of the provisions contained in this Section will cause the Company or any of its affiliates irreparable injury. You therefore agree that the Company may be entitled, in addition to the remedies set forth above in this Section and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the

10

posting of any bond or security, enjoining or restraining you from any such violation or threatened violations.

        13.    Successors; Binding Agreement.

        A.    This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

        B.    The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 13, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to you (or his beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall be a breach of this Agreement and shall entitle you to compensation and other benefits from the Company in the same amount and on the same terms as you would be entitled hereunder if your employment were terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of termination.

        C.    This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you shall die while any amounts would be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by you to receive such amounts or, if no person is so appointed, to your estate.

        14.    Severability.    If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

        15.    Integrated Agreement.    This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between you and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by you and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the By-laws of the Company).

        16.    Waiver.    No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

        17.    Notices.    All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) day after being sent by Federal Express or a similar commercial overnight service or (c) three (3) days after being mailed by registered

11

or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc. Organization Effectiveness Department 21650 Oxnard Street, 22nd Floor Woodland Hills, CA 91367 Attention: Karin Mayhew
If to the Employee:	Marvin P. Rich 1930 Ocean Avenue # 205 Santa Monica, CA 90405
With a copy to:	Buchalter, Nemer, Fields & Younger, P.C. 601 South Figueroa Street, 24th Floor Los Angeles, CA 90017 Attention: Stuart D. Buchalter, Esq.

        18.    Governing Law.    The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

        19.    Survival and Enforcement.    Sections 4 and 12 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or your employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 4 or 12 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

        20.    Acknowledgement.    You acknowledge that you have had the opportunity to discuss this matter with and obtain advice from your attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and you are knowingly and voluntarily entering into this Agreement. You further acknowledge that you are obligated to become familiar with and comply at all times with all written Company policies.

        We look forward to your joining our organization. In order to confirm your agreement with the Company and your acceptance of these terms, please sign one copy of this letter agreement and return it to me.

Sincerely,

/s/  KARIN D. MAYHEW Karin D. Mayhew
Senior Vice President, Organization Effectiveness

cc: Jay Gellert

12

This will confirm my agreement to the terms of my employment with the Company as set forth in this letter agreement.

/s/  MARVIN P. RICH Marvin P. Rich
Date:	January 26, 2002

13

QuickLinks

Exhibit 10.11

EX-10.12

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.12

SEPARATION, WAIVER AND RELEASE AGREEMENT

        This Separation, Waiver and Release Agreement (this "Agreement") is entered by and between Health Net, Inc., a Delaware corporation (the "Company"), on the one hand, and Steven P. Erwin ("Employee"), on the other hand (collectively, the "Parties").

        WHEREAS, Employee was employed as the Executive Vice President and Chief Financial Officer of the Company, which title was relinquished by Employee on January 28, 2002; and

        WHEREAS, Employee and the Company both desire to transition Employee's duties as the Executive Vice President and Chief Financial Officer of the Company to other employees and officers of the Company and to terminate Employee's employment upon the terms and conditions set forth in this Agreement; and

        WHEREAS, the Company anticipates requiring ongoing cooperation and assistance from Employee relating to such transition; and

        WHEREAS, Employee desires to provide such cooperation and assistance upon the terms and conditions set forth in this Agreement.

        NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein, the validity and sufficiency of which are expressly recognized, the Company and Employee hereby agree as follows:

        1.    Termination of Employment

        1.1  Employee's employment with the Company will terminate on January 1, 2003 (the "Termination Date"). Employee shall be entitled to his accrued and unpaid base annual salary in effect as of January 28, 2002 ("Base Salary"), less required payroll taxes and other applicable deductions, through the Termination Date. In addition, he shall continue to accrue paid-time-off ("PTO") through the Termination Date and it is acknowledged that Employee will receive a lump sum payment equal to the maximum amount of 384 hours of PTO, less required payroll taxes and other applicable deductions, accrued as of the Termination Date. Employee is not entitled to receive any payments under any bonus plans of the Company for the Plan Year 2002.

        1.2  On and after the Termination Date, Employee will not represent to anyone that he is an employee of the Company or any of its affiliated entities and will not say or do anything purporting to bind the Company or any of its affiliated entities, and during the Transition Period (as defined in Section 3.1 below). Employee will not say or do anything purporting to bind the Company or any of its affiliated entities except as necessary to perform the Transition Services (as defined in Section 3.1 below). As of January 28, 2002, Employee shall be deemed to have resigned from all officer and director positions with the Company and any of its affiliated entities that may be held by Employee.

        2.    Severance Benefits

        2.1  After Employee signs a further release agreement with the Company (the "Second Release Agreement") on or about the Termination Date updating Section 6 to cover the time period from the Effective Date (as defined in Section 7) up to and including the Termination Date and provided that Employee does not exercise his revocation rights during the seven-day revocation period following his signing of the Second Release Agreement such that it becomes effective on the eighth day of his execution (the "Second Effective Date"), Employee shall be entitled to receive (i) as a severance payment, either (a) a lump sum payment in the amount of $770,000 (less required payroll taxes and other applicable deductions) representing twenty-one (21) months of Employee's base annual salary in effect as of January 28, 2002, or (b) in the event

1

of a Change of Control (as defined in Section 2.4), Employee will receive a lump sum payment in the amount of $1,210,000 (less required payroll taxes and other applicable deductions) representing thirty-three (33) months of Employee's base annual salary in effect as of January 28, 2002 and (ii) the Benefits referenced in Section 2.2 below.

        2.2  All medical and dental insurance maintained for Employee's benefit on the same terms and conditions provided immediately prior to the Termination Date (collectively, "Benefits") shall be continued by the Company for a period of twenty-one (21) months after the Termination Date; provided, however, in the event of a Change of Control (as defined in Section 2.4), Employee shall instead receive Benefits continued by the Company for a period of thirty-three (33) months after the Termination Date. The Company will continue such Benefits either through the payment of 100 percent of the applicable COBRA premiums by the Company or through the payment of 100 percent of the premiums on a comparable policy or policies. Accordingly, Employee agrees to execute all documents presented to him by the Company that are required to elect COBRA coverage on or after the Termination Date.

        2.3  Upon attainment of age 62, Employee shall become eligible for receipt of payment under the Company's Supplemental Executive Retirement Plan (the "SERP") according to the terms and conditions of the SERP, as modified pursuant to the acceleration of the vesting schedule set forth in his employment letter agreement dated March 11, 1998 (the "Employment Letter Agreement"). In the event of a Change of Control (as defined in Section 2.4), Employee will become fully vested in the SERP in the same manner as if Employee had been employed for 15 years and reached age 62.

        2.4  Change of Control shall mean any of the following which occurs prior to the Termination Date: (i) any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty percent (20%) or more of the combined voting power of the outstanding securities of the Company which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company's securities) (the "Securities"); (ii) as a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of the Company immediately prior to such transaction cease to constitute a majority of the Board of Directors of the Company (or any successor corporations) immediately after such transaction; (iii) the Company is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of the Company, as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction; (iv) a tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of the company; (v) the Company transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of the Company; or (vi) the Company enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of the Company and such management agreement extends hiring and firing authority over Employee to an individual or organization other than the Company.

        2.5  Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change of Control or any person affiliated with the Company or such person, all such payments and

2

distributions, including the severance payments and benefits provided for in this Section ("Total Payments")) would be subject (in whole or part) to the excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax") and (ii) there are any excess parachute payments (within the meaning of section 280G(b) of the Code), in the aggregate, in respect of such Total Payments in excess of $50,000, then the Company shall pay to Employee an additional cash payment (the "Tax Gross-up") so that after receipt of such Tax Gross-up, the payment of any additional federal, state and local income taxes on such Tax Gross-up amount and the payment of any Excise Taxes, Employee shall receive such net amount of Total Payments equal to the amount that he would have received if no Excise Tax was due; provided however that Employee shall cooperate in good faith with the Company to minimize the amount of the Excise Tax that may become payable by taking any such action or making any such election as may be reasonably requested by the Company in respect of the Total Payments due to Employee.

        2.6  Subject to the provisions of Section 2.7, all determinations required to be made under this Section, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change of Control, was the Company's independent auditor (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Employee within fifteen (15) business days of the receipt of notice from Employee that Employee has received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section, shall be paid by the Company to Employee within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Employee, then the Accounting Firm shall furnish to Employee a written opinion that failure to report the Excise Tax on Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and Employee. As a result of any uncertainty in the application of section 4999 of the Code at the time of the determination by the Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 2.7 and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee.

        2.7  Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than ten (10) business days after Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company

3

in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee on an interest-free basis and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Tax Gross-Up would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

        2.8  If, after the receipt by Employee of an amount advanced by the Company pursuant to Section 2.7, Employee becomes entitled to receive, and receives, any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of Section 2.7) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Employee of an amount advanced by the Company pursuant to Section 2.7, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Tax Gross-Up required to be paid.

        3.    Cooperation in Transition Period

        3.1  From January 28, 2002 through the Termination Date (the "Transition Period"), and upon request by the Company after reasonable prior notice, Employee shall provide reasonable assistance to the Company and its designees with respect to the Company's transition of the management functions previously handled by Employee as the Executive Vice President and Chief Financial Officer of the Company to other employees and officers of the Company (collectively, the "Transition Services").

        3.2  It is agreed that Employee shall have the ability to undertake outside consulting services during the Transition Period provided that (i) such consulting services do not interfere with Employee's provision of the Transition Services in any way, (ii) such work is not provided to a Competitor of the Company as defined in Section 10 below, and (iii) unless the Company provides prior written consent, no single consulting engagement shall exceed ninety (90) consecutive days.

        3.3  During the Transition Period, Employee shall be provided with office space to the extent required to perform the Transition Duties requested by the Company; provided that all access to

4

the Company's offices by Employee shall be coordinated through the office of the Company's General Counsel. The Company shall also continue to afford Employee his reserved parking space at the Company's headquarters through the later date to apply from the Transition Period or the Outplacement Services Period (as defined in Section 3.5); provided Employee continues to pay the monthly parking co-payment applicable to senior executives of the Company.

        3.4  Employee shall be entitled to continued participation as an active employee in all employee benefit plans maintained by the Company, including an automobile allowance of $1,000 per month (subject to payroll taxes and other applicable deductions) and reimbursement of up to $5,000 per calendar year for expenses incurred by Employee in receiving tax preparation assistance and/or financial planning services, during the Transition Period on the same terms and conditions applicable to Employee on the Effective Date.

        3.5  Employee shall be entitled to outplacement services offered under the Company's executive-level program for twelve (12) consecutive months commencing on a date selected by Employee in the year 2002; provided, however, receipt of such outplacement services will automatically cease once Employee secures full-time employment or consulting services not otherwise permitted under Section 3.2 (the "Outplacement Services Period").

        3.6  Employee acknowledges that no further PTO benefits will accrue after the Termination Date.

        3.7  Employee's participation in all Company employee benefit plans (except as provided for in Sections 2.2 and 2.3 of this Agreement) as an active employee shall cease on the Termination Date, and Employee shall not be eligible to make contributions to or to receive Company allocations under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company on or after the Termination Date.

        4.    Cooperation in Litigation

        Upon request by the Company, Employee shall provide reasonable assistance and cooperation to the Company and its designees in activities related to the prosecution or defense of any pending or future lawsuits, arbitrations, regulatory inquiries or other legal proceedings or claims involving the Company or its affiliates (excluding any proceeding involving any alleged breach of this Agreement), and make himself available to Company representatives, including legal counsel, upon reasonable notice and without the need for issuance of any subpoena or similar process to testify in any such proceeding.

        5.    Expenses

        The Company shall reimburse Employee for his reasonable expenses that are consistent with the expense reimbursement policy of the Company and are incurred in connection with his activities undertaken pursuant to Sections 3 and 4 of this Agreement. All requests for reimbursement of such expenses shall be submitted to the attention of the office of the Company's General Counsel.

        6.    Waivers and Releases of Claims

        6.1  In consideration of the Company providing Employee those benefits and payments set forth herein, Employee knowingly and voluntarily enters into this Agreement and by signing this Agreement, Employee, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, attorneys, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns (collectively, the "Released Parties"), from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or

5

local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act of 1990, the Worker Adjustment and Retraining Notification Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the California Fair Employment and Housing Act, the California Labor Code, the California Civil Code, the California Business and Professions Code, and the California Constitution, all as amended from time to time, or claims growing out of any alleged legal restrictions on the Company's right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known or unknown, suspected or unsuspected, that Employee or Employee's successors-in-interest had, now has, or may hereafter claim to have by reason of any matter or thing arising from any cause whatsover on and before the date of Employee's execution of this Agreement, with the exception of claims arising under this Agreement, the SERP, and the Company's 1997 Stock Option Plan, along with the Employee's non-qualified stock option agreements dated March 11, 1998, December 4, 1998, February 14, 2000, and February 9, 2001 (collectively, the "Stock Option Agreements"). The provisions in this Section are not intended to prohibit Employee from filing a claim for unemployment insurance. Furthermore, it is expressly agreed that the payments set forth herein shall fully and finally release the Released Parties from all obligations it may have under any and all prior agreements with Employee, and that no other payments or benefits will be asserted or requested by Employee.

        6.2  Employee expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Agreement. Employee makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives all rights under Section 1542 of the California Civil Code or any similar law against Released Parties. Section 1542 reads as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

        Employee understands and acknowledges the significance and consequence of this Agreement and of such specific waiver of Section 1542 or any similar law, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

        6.3  Employee agrees forever to refrain from filing or otherwise initiating or causing to be initiated against the Released Parties any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract, law or regulation, federal, state or local, pertaining to any claims released under Section 6, except to the extent required by law, order or regulation and Employee waives the right to any damages pursuant to any such action.

        7.    Review and Revocation Period

        Employee acknowledges that (i) Employee has not relied upon any representations, written or oral, not set forth in this Agreement and (ii) at the time Employee was given this Agreement, including the Waivers and Releases contained herein, Employee was informed in writing by the Company that (a) Employee had at least twenty-one (21) days in which to consider whether Employee would sign this

6

Agreement, (b) to the extent that Employee takes less than twenty-one (21) days to consider this Agreement prior to execution, Employee acknowledges that Employee had sufficient time to consider this Agreement with counsel and that Employee expressly, voluntarily and knowingly waives any additional time, (c) Employee should consult with an attorney before signing this Agreement, and (d) Employee had an opportunity to consult with an attorney or has voluntarily decided to sign this Agreement without consulting an attorney. Employee further acknowledges that he may revoke acceptance of this Agreement, including the Waivers and Releases contained herein, by delivering a letter of revocation no later than 5:00 p.m. Pacific Standard Time on the seventh (7^th) day after Employee has signed this Agreement to: Health Net Corporate Legal Department, 21650 Oxnard Street, Woodland Hills, California 91367. Employee acknowledges that he understands that this Agreement, including the Waivers and Releases contained herein, will not become effective or enforceable until the date on which such seven (7) day-revocation period has expired (the "Effective Date"). Employee further agrees that in the event that he revokes this Agreement, it shall have no force or effect except to the extent otherwise expressly stated herein, and he shall have no right to receive any payment hereunder.

        8.    Return of Company Property

        Employee represents that (i) he has returned to the Company any and all building key(s), security pass or other access or identification cards and any and all Company property that was in his possession, including but not limited to, any documents, credit cards, computer equipment or data files (provided that Employee shall be entitled to keep his cell phone, fax machine, laptop computer, printer, and printer accessories); (ii) he has cleared all expense accounts; (iii) he has paid all amounts owed on any corporate credit card(s) which the Company previously issued to Employee and (iv) he has moved all cell phone and internet access accounts into his name in order to pay for such items personally. To the extent Employee has not complied with (i), (ii), (iii) and (iv) above, Employee will immediately do so.

        9.    Company Information

        Employee acknowledges and agrees that during the period of his employment by the Company, and by virtue of his obligations of ongoing cooperation as specified herein, Employee had and may continue to have access to and become acquainted with the Company's trade secrets and confidential and proprietary information, including but not limited to, various procedures, practices, information regarding the organization and operation of the Company, confidential customer information, marketing methods and compilations of records and information that are owned by the Company and that are regularly used in the operation of its business. The Parties agree that such items of information are important, material and confidential and/or proprietary information and affect the successful conduct of the Company's business and its goodwill, and that any breach of this Section shall be a material breach of this Agreement. All documents, memoranda, reports, files, correspondence, lists, and other written and graphic records affecting or relating to the Company's business that Employee may prepare, use, observe, possess or control shall be and remain the Company's sole property. Employee shall not without the Company's written consent, disclose (directly or indirectly), use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

        10.    Unfair Competition

        10.1     Employee hereby agrees that, during the Transition Period and the six (6)-month period following the Termination Date (the "Protected Period"), Employee shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below), in any geographic areas in which the Company operates (the "Market Area")

7

where the loyal and complete fulfillment of the duties of the competitive employment or activity would inevitably call upon Employee to reveal, to make judgments on or otherwise use any confidential business information or trade secrets of the business of the Company to which Employee had access during his employment with the Company. For purposes of this Section, "Competitor" shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

        10.2     In addition, Employee agrees that, during the Protected Period, Employee shall not, directly or indirectly, solicit, recruit, interfere with or induce any person, who is or was an employee of the Company or any of its subsidiaries at the time of such solicitation, recruitment, interference or inducement, to discontinue his relationship with the Company or any of its subsidiaries or to accept employment by, or enter into a business relationship with, Employee or any other entity or person.

        10.3     It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the Parties hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

        10.4     Employee acknowledges that a material breach or threatened breach by him/her of any of the provisions contained in this Section will cause the Company irreparable injury which may not be reasonably or adequately compensated for by damages in an action at law. Employee therefore agrees that the Company may be entitled, in addition to any other remedies, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Employee from any such violation or threatened violations.

        11.    Exercise of Company Options/Loan Forgiveness

        11.1     It is agreed that Employee shall only have three (3) months after the Termination Date (i.e., only until April 1, 2003) to exercise his outstanding vested options, at which time all outstanding options held by Employee which were not previously exercised shall expire. Employee's outstanding options shall continue to vest through the Termination Date, but all options not yet vested as of the Termination Date shall expire as of such date.

        11.2     It is acknowledged that the outstanding loan to Employee in the principal amount of $125,000 shall be forgiven (along with all accrued interest) by the Company on March 11, 2002, and that Employee shall be obligated to pay all taxes (including all applicable tax-withholding amounts) related to such forgiveness (except that the interest amount forgiven shall be "grossed up" by the Company for tax purposes).

        12.    Status as Officer and Director

        12.1     It is acknowledged that as of January 28, 2002, the Company no longer considers Employee to be an executive officer of the Company for purposes of securities laws or regulations.

        12.2     It is acknowledged that in accordance with Article VI, Section 1 of the Company's By-Laws, the Company will provide indemnification to Employee if he is ever made a party to any legal action, suit, or proceeding by reason of the fact that he was an officer or director of the Company through January 28, 2002. In addition, it is acknowledged that the Company's director and officer liability insurance will cover eligible acts committed by Employee as an officer or director of the Company through January 28, 2002.

8

        13.    No Admission of Liability

        Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Agreement.

        14.    No Disparagement

        Employee agrees not to make any public or private statements disparaging any of the Released Parties.

        15.    Successors; Binding Agreement

        15.1     This Agreement shall not be terminated by any merger or consolidation of the Company, irrespective of whether the Company is the surviving or resulting corporation, or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation, or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

        15.2     This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee shall die while any amounts would be payable to Employee hereunder had Employee continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Employee to receive such amounts or, if no person is so appointed, to Employee's estate.

        16.    Severability and Enforceability

        If any part or term of this Agreement is held invalid or unenforceable, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Agreement.

        17.    Choice of Law

        The interpretation, construction and performance of this Agreement shall be construed and governed by the laws of the State of Delaware without regard to its conflicts of laws rules.

        18.    Counterparts

        This Agreement may be executed in one or more counterparts, and may include multiple signature pages, all of which shall be deemed to be one instrument. Fully executed copies of this Agreement may be used in lieu of the original.

        19.    Entire Agreement

        This Agreement shall constitute the full and complete agreement of the Parties and shall supercede all prior agreements, communications, or understandings, whether oral or in writing, between Employee and Company on the subject matter hereof, including but not limited to the Employment Letter Agreement, but specifically not including the SERP (except as its terms have been modified in this Agreement) and the Stock Option Agreements. There may be no modification of the terms of this Agreement except in writing signed by both Parties.

        20.    Voluntary Agreement

        Employee acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Agreement including the Waivers and Releases contained herein, that he has been advised by the Company to do so, that Employee has read this Agreement and understands its terms, and that Employee enters into this Agreement freely, voluntarily, without coercion, and based on Employee's own judgment and that this Agreement fully and accurately reflects the content of any and all understandings and agreements between the Parties concerning the matters

9

referenced herein, and that Employee is not relying upon any other representations or promises whatsoever as an inducement to execute this Agreement.

        IN WITNESS WHEREOF, the Parties have executed this Agreement as of the dates set forth below.

Employee		Health Net, Inc.
By:	/s/  STEVEN P. ERWIN	By:	/s/  JAY M. GELLERT
Name:	Steven P. Erwin	Name:	Jay M. Gellert
		Title:	President and Chief Executive Officer
Dated:	March 15, 2002	Dated:	March 15, 2002

10

QuickLinks

Exhibit 10.12

SEPARATION, WAIVER AND RELEASE AGREEMENT

EX-10.25

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.25

HEALTH NET, INC.
EMPLOYEE STOCK PURCHASE PLAN
(as amended and restated effective January 1, 2002)

I. INTRODUCTION

        The title of this Plan shall be the Health Net, Inc. Employee Stock Purchase Plan (the "Plan"). This Plan is an amendment and restatement of the Foundation Health Systems, Inc. Employee Stock Purchase Plan which was originally effective as of September 1, 1997, and is effective as of January 1, 2002. This Plan was established by Health Net, Inc. (formerly, Foundation Health Systems, Inc.) (the "Company") to encourage and facilitate the purchase of shares of common stock of the Company by eligible employees of the Company and its subsidiaries.

II. DEFINITIONS

        For purposes of the Plan, the following capitalized terms shall have the meanings set forth in this Article.

        2.1  "Benefits Committee" means the committee designated by the Committee (as defined below) (or its designee) to assist in the review, administration and fiduciary compliance of all the Company's benefit plans.

        2.2  "Benefits Representative" means the Human Resources Department of the Company or such other person or persons designated by the Committee to assist the Committee with the administration of the Plan.

        2.3  "Board" means the Board of Directors of the Company as from time to time constituted.

        2.4  "Committee" means the Compensation and Stock Option Committee of the Board.

        2.5  "Common Stock" means the Class A Common Stock, par value $.001 per share, of the Company.

        2.6  "Company" means Health Net, Inc., a Delaware corporation, and any successor thereto.

        2.7  "Compensation" means the base compensation paid to a Participant by an Employer, including shift differentials but excluding bonuses, commissions, overtime or any other pay outside the regular work schedule, as determined by the Committee.

        2.8  "Effective Date" means September 1, 1997.

        2.9  "Employee Stock Purchase Account" means the account established pursuant to Section 5(c) of the Plan to which a Participant's payroll deductions are credited.

        2.10 "Employer" means the Company and each Subsidiary, other than a Subsidiary, if any, which the Committee excludes from participation in the Plan.

        2.11 "Entry Date" means a date which is September 1, 1997, or the first day of each subsequent month.

        2.12 "Excluded Employee" means an employee of an Employer who (i) is one of up to thirty-five senior officers of the Company and its Subsidiaries whose compensation is subject to Committee approval under the by-laws of the Company or (ii) is scheduled to work less than 20 hours a week.

1

        2.13 "Fair Market Value" means the closing price of a share of Common Stock as reported in The Wall Street Journal on the New York Stock Exchange Composite Transactions list for the date as of which such value is being determined or, if there shall be no reported transaction on such date or if such date is not a trading day, on the next immediately preceding date for which a transaction was reported or which was a trading day, provided that if Fair Market Value for any date cannot be so determined, Fair Market Value shall be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate.

        2.14 "Participant" means any employee of an Employer who meets the eligibility requirements of Article III and has elected to participate in the Plan as described in such Article. An individual shall cease to be a Participant as of the date he or she terminates employment with all Employers, for whatever reason, or abandons his or her election pursuant to Article VII hereof.

        2.15 "Plan" means the Health Net, Inc. Employee Stock Purchase Plan herein set forth and any amendment hereto.

        2.16 "Purchase Date" means a date which is September 30, 1997, or the last day of each subsequent month.

        2.17 "Purchase Period" means a monthly period ending on a Purchase Date.

        2.18 "Purchase Price" means, with respect to a share of Common Stock purchased on a Purchase Date, the lesser of (i) 85 percent of the Fair Market Value of a share of Common Stock on the first day of the Purchase Period ending on such Purchase Date or (ii) 85 percent of the Fair Market Value of a share of Common Stock on such Purchase Date, provided that if such price includes a fraction of a cent, the Purchase Price shall be rounded up to the next whole cent.

        2.19 "Subsidiary" means a corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Any corporation that satisfies the conditions set forth in the immediately preceding sentence after the date the Plan is adopted by the Board shall be a "Subsidiary" beginning on the date such corporation satisfies such conditions.

        2.20 "Termination Date" means the earlier of (i) the date as of which the Board terminates the Plan or (ii) the Purchase Date on which all shares available for issuance under the Plan shall have been purchased by Participants under the Plan.

III. ELIGIBILITY AND ADMINISTRATION

        3.1    ELIGIBILITY AND PARTICIPATION.

        (a)  Any employee of an Employer who is not an Excluded Employee shall be eligible to participate in the Plan as of the first Entry Date following such employee's satisfaction of the "eligibility service requirement" (as defined below in this Section 4(a)), or, if later, the first Entry Date following the date on which the employee's Employer adopted the Plan. An employee shall have satisfied the eligibility service requirement on the Entry Date following his or her completion of at least 30 days of continuous service with an Employer. For the sole purpose of calculating days of continuous service under the Plan, employees shall be credited with service for an Employer or a Subsidiary (even though such service may have been performed prior to (i) the Effective Date or (ii) the Company's acquisition of such Subsidiary. No eligibility provision hereof shall permit participation in the Plan in a manner contrary to the applicable requirements of the Code and the regulations promulgated thereunder.

        (b)  At least 15 days (or such other period as may be prescribed by the Committee) prior to any Entry Date, an employee who is eligible to participate in the Plan pursuant to subsection

2

(a) of this Section may execute and deliver to the Benefits Representative an application on the prescribed form specifying his or her chosen rate of payroll deductions, as described in Article IV. Such application shall authorize the employee's Employer to reduce the employee's Compensation by the amount of any such payroll deductions. The application shall also evidence the employee's acceptance of and agreement to all provisions of the Plan.

        (c)  If a Participant is transferred from one Employer to another Employer, such transfer shall not terminate the Participant's participation in the Plan. Such Participant shall continue to make payroll deductions under the Plan, provided that such Participant completes any forms as the Committee may require, in the time and manner prescribed by the Committee.

        (d)  If an individual terminates employment with all Employers so as to discontinue participation in the Plan, and such individual is subsequently reemployed by an Employer, such individual shall be required to satisfy the eligibility service requirement described in subsection (a) of this Section as if he or she were a new employee.

        (e)  Notwithstanding anything herein to the contrary, no employee shall be entitled to participate in the Plan for a Purchase Period if such employee, on the first day of such Purchase Period would own shares (including shares which may be purchased under the Plan during such Purchase Period) possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or any of its Subsidiaries. For purposes of the foregoing sentence, the rules of stock attribution set forth in Section 424(d) of the Code shall apply in determining share ownership.

        3.2    ADMINISTRATION.    The Plan shall be administered by the Committee. Subject to the express provisions hereof, the Committee shall have complete authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for its administration. Such determinations made by the Committee shall be conclusive. No member of the Committee shall be personally liable for any decision or determination made in good faith under the Plan. The Committee may delegate some or all of the Committee's powers and authority hereunder to the Benefits Committee of the Company and further authorizes the Benefits Committee to delegate any of the powers and authority delegated to the Benefits Committee by the Committee to any other person the Benefits Committee in its discretion deems appropriate to carry out such delegated powers and authority.

IV. PARTICIPANT PAYROLL DEDUCTIONS

        4.1    ELECTIONS.    Each Participant may elect, in the manner described in Section 4, to make payroll deductions under the Plan in an amount equal to a whole dollar amount or a whole percentage, of such Participant's Compensation for each payroll period, beginning with the first pay date which occurs on or after the Entry Date as of which such Participant commences participation in the Plan. Payroll deductions for each payroll period under the Plan shall be at least two percent of a Participant's Compensation for such payroll period and may be limited by such maximum percentage or whole dollar amount, if any, as the Committee may designate from time to time. Once a Participant's participation in the Plan commences, such Participant shall continue to participate in the Plan for each succeeding Purchase Period until he or she withdraws from the Plan pursuant to Article VII or ceases to be an eligible employee.

        4.2    ELECTION CHANGES.    At least 15 days (or such other period as may be prescribed by the Committee) prior to the first day of any Purchase Period, a Participant shall have the right to elect to increase or decrease his or her designated rate of payroll deductions under the Plan by executing and delivering to the Benefits Representative an application on the prescribed form specifying his or her chosen rate of payroll deductions.

3

        4.3    ACCOUNTS.    The Committee shall cause to be established a separate Employee Stock Purchase Account on behalf of each Participant. Such Employee Stock Purchase Accounts shall be solely for accounting purposes, and there shall be no segregation of assets among the separate accounts. Such accounts shall not be credited with interest or other investment earnings.

V. PURCHASE OF COMMON SHARES

        5.1    NUMBER OF SHARES PURCHASED.    Subject to a Participant's right of abandonment described in Article VII, the balance of each Participant's Employee Stock Purchase Account shall be applied on each Purchase Date to purchase the number of whole and fractional shares of Common Stock determined by dividing the balance of such Participant's Employee Stock Purchase Account as of such date by the Purchase Price. The Participant's Employee Stock Purchase Account shall be debited accordingly.

        5.2    MAXIMUM SHARES PURCHASED.

        (a)  Notwithstanding any provision of the Plan to the contrary, the maximum number of shares which shall be available for purchase under the Plan shall be 1,000,000 shares of Common Stock, subject to adjustment as provided in Section 9.2. The shares of Common Stock available under the Plan may be treasury shares, shares originally issued for such purpose or shares purchased by the Company, as the Company may decide. In the event that the aggregate number of shares of Common Stock which all Participants elect to purchase during a Participation Period exceeds the number of shares remaining available for issuance under the Plan, then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares which such Participant has elected to purchase and the denominator of which is the number of shares which all Participants have elected to purchase.

        (b)  Notwithstanding any provision contained herein to the contrary, no Participant shall be permitted to purchase shares of Common Stock in any calendar year under the Plan and other employee stock purchase plans (within the meaning of Section 423 of the Code) of the Company and its Subsidiaries with an aggregate fair market value (determined at the time the options to purchase such shares are granted) in excess of $25,000, all determined in the manner provided by Section 423 (b) (8) of the Code. Any portion of the balance of a Participant's Employee Stock Purchase Account that is not applied to purchase shares of Common Stock due to the application of this subsection shall be refunded to such Participant as soon as administratively practicable.

        5.3    TERMINATION OF EMPLOYMENT.    If a Participant dies, terminates employment with all the Employers for any reason or otherwise becomes an Excluded Employee, then the Participant's payroll deductions shall be suspended and the balance of the Participant's Employee Stock Purchase Account shall be applied to purchase shares of Common Stock on the Purchase Date next occurring after the effective date of such transfer, except to the extent the Participant abandons his or her election to purchase shares of Common Stock as described in Article VII.

VI. ISSUANCE OF CERTIFICATES

        As soon as administratively practicable after each Purchase Date, the Company, in its sole discretion, shall purchase or issue shares of Common Stock and at the election of the Company, a certificate representing the shares of Common Stock purchased by such Participant under the Plan on such date shall be issued and delivered to such Participant or a notation of noncertificated shares shall be made on the stock records of the Company. Shares of Common Stock purchased by a Participant under the Plan shall be registered in the name of the Participant. Shares of Common Stock purchased hereunder may not be sold, assigned, transferred, pledged, exchanged, encumbered or otherwise disposed of in any way (other than by will or the laws of descent and distribution) for a period

4

commencing on the Purchase Date and ending one year thereafter (the "Holding Period"); provided, however, that the Committee or, in the event that the Committee has delegated such power and authority to the Benefits Committee and/or the Benefits Committee has further delegated such power and authority to such other person(s) as the Benefits Committee in its discretion deems appropriate, the Benefits Committee or its designee, in its discretion, may shorten the Holding Period or otherwise provide for the lapse of any restrictions outstanding on any shares. All certificates issues to Participants following each Purchase Date shall bear a legend in substantially the following form:

        The shares represented by this certificate may not be sold, assigned, transferred, pledged, exchanged, encumbered or otherwise disposed of in any way (other than by will or the laws of descent and distribution) for a period commencing on [insert applicable Purchase Date] and ending one year thereafter (the "Holding Period"); provided, however, that the committee administering the Health Net, Inc. Employee Stock Purchase Plan, in its discretion, may shorten the Holding Period or otherwise provide for the lapse of any restrictions outstanding on any such shares.

VII. PARTICIPANT'S RIGHT TO ABANDON PURCHASE OF SHARES

        At any time during a Purchase Period, but in no event later than 15 days (or such shorter period prescribed by the Committee) prior to a Purchase Date, a Participant may elect to abandon his or her election to purchase shares of Common Stock under the Plan. Such abandonment election shall be made on forms prescribed by the Committee and delivered to the Benefits Representative. Upon such an election by a Participant, the amount credited to the Participant's Employee Stock Purchase Account for the current Purchase Period shall be refunded to the Participant as soon as is administratively practicable, and such Participant's participation in the Plan shall terminate.

VIII. SUSPENSION ON ACCOUNT OF HARDSHIP WITHDRAWAL

        If a Participant makes a hardship withdrawal from any plan with a cash or deferred arrangement qualified under Section 401(k) of the Code, which plan is sponsored, or participated in, by the Participant's Employer, such Participant shall be suspended from making payroll deductions under the Plan for a period of twelve months from the date of such withdrawal. The balance of such Participant's Employee Stock Purchase Account shall be applied to purchase shares of Common Stock on the Purchase Date next occurring after the effective date of such withdrawal, except to the extent the Participant abandons his or her election to purchase shares of Common Stock as described in Article VII. After the expiration of such twelve-month period, the Participant may resume his or her payroll deductions in accordance with Article IV.

IX. GENERAL

        9.1    RIGHTS NOT TRANSFERABLE.    The right to purchase shares of Common Stock under the Plan shall not be transferable by any Participant other than by will or the laws of descent and distribution, and must be exercisable, during his or her lifetime, only by the Participant.

        9.2    CHANGES IN THE COMPANY'S CAPITAL STRUCTURE.

        (a)  The existence of the Plan shall not affect in any way the right or power of the Company or its shareholders to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock that affects the shares of Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.

5

        (b)  If, during the term of the Plan, the Company shall effect (i) a distribution or payment of a dividend on its Common Stock in shares of the Company, (ii) a subdivision of its outstanding Common Stock by a stock split or otherwise, (iii) a combination of the outstanding shares of Common Stock into a smaller number of shares by a reverse stock split or otherwise, or (iv) an issuance by reclassification or other reorganization of its Common Stock (other than by merger or consolidation) of any shares of the Company, then each Participant shall be entitled to receive upon the purchase of shares of Common Stock pursuant to the Plan such shares of the Company which the Participant would have owned or would have been entitled to receive after the happening of such event had the Participant purchased shares of Common Stock pursuant to the Plan immediately prior to the happening of such event. If any other event shall occur that, in the judgment of the Board, necessitates adjusting the Purchase Price, the number of shares of Common Stock offered or other terms of the Plan, the Board shall take any action that in its judgment shall be necessary to preserve each Participant's rights substantially proportionate to the rights existing prior to such event. To the extent that any event or action pursuant to this paragraph shall entitle Participants to purchase additional shares of Common Stock or other shares of the Company, the shares available under the Plan shall be deemed to include such additional shares of Common Stock or such other shares.

        (c)  In the event of a merger of one or more corporations into the Company, or a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, each Participant in the Plan shall, at no additional cost, be entitled, upon his or her payment for all or part of the shares of Common Stock purchasable by him or her under the Plan, to receive (subject to any required action by shareholders) in lieu of the number of shares of Common Stock which he or she was entitled to purchase, the number and class of shares of stock or other securities to which such holder would have been entitled pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of the number of shares of Common Stock equal to the number of shares paid for by the Participant.

        (d)  If the Company is merged into or consolidated with another corporation under circumstances where the Company is not the surviving corporation, or if the Company sells or otherwise disposes of substantially all its assets to another corporation during the term of the Plan, each holder of a right to purchase shall be entitled to receive, upon his or her payment for all or part of the shares of Common Stock purchasable by him or her under the Plan and in lieu of such shares of Common Stock, shares of such stock or other securities as the holders of shares of Common Stock received pursuant to the terms of the merger, consolidation or sale.

        (e)  Except as heretofore expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then available for purchase under the Plan.

        9.3    SHAREHOLDER APPROVAL.    The Plan was originally submitted to the stockholders of the Company for approval and approved by the affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the1997 annual meeting of stockholders, and originally became effective as of September 1,1997.

        9.4    RIGHTS OF A SHAREHOLDER.    No Participant shall have rights or privileges of a shareholder of the Company with respect to shares purchasable under the Plan unless and until the Participant shall become the holder of record of one or more shares of Common Stock.

6

        9.5    NO REPURCHASE OF COMMON STOCK BY COMPANY.    The Company is not obligated to repurchase any shares of Common Stock acquired under the Plan.

        9.6    AMENDMENT OF THE PLAN.    The Board may amend the Plan as it shall deem advisable, subject to any requirement of stockholder approval required by applicable law, rule or regulation, including Section 423 of the Code; provided, however, that no amendment shall be made without stockholder approval if such amendment would increase the maximum number of shares of Common Stock available under the Plan (subject to Section 9.2). No amendment may impair the rights of a holder of an outstanding award without the consent of such holder.

        9.7    TERMINATION OF THE PLAN.    While it is intended that the Plan remain in effect as long as shares of Common Stock are available for purchase under the Plan, the Board may terminate the Plan at any time in its discretion by resolutions duly adopted. Upon termination of the Plan, the Committee shall terminate payroll deductions and shall apply the balance of each Participant's Employee Stock Purchase Account to purchase shares of Common Stock as described in Section 6 as if such termination date were a Purchase Date under the Plan. Notwithstanding the foregoing, in the event of the termination of the Plan, a Participant may elect, in the time and manner prescribed by the Committee, to abandon his or her right to purchase all or a portion of the shares of Common Stock purchasable by him. As soon as administratively practicable after the termination of the Plan, the Committee shall refund to each Participant who elects to abandon his or her right to purchase shares of Common Stock, the entire balance of in his or her Employee Stock Purchase Plan Account, or the applicable portion thereof.

        Notwithstanding any provision in the Plan to the contrary, the Plan shall automatically terminate as of the Purchase Date on which all shares available for issuance under the Plan shall have been purchased by Participants under the Plan.

        9.8    COMPLIANCE WITH STATUTES AND REGULATIONS.    The sale and delivery of Common Stock under the Plan shall be in compliance with relevant statutes and regulations of governmental authorities, including state securities laws and regulations, and with the regulations of applicable stock exchanges.

        9.9    GOVERNING LAW.    The Plan and all determinations made hereunder and actions taken pursuant hereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws.

        9.10    COMPANY AS AGENT FOR THE EMPLOYERS.    Each Employer, by adopting the Plan, appoints the Company, the Board and the Committee as its agents to exercise on its behalf all of the powers and authorities hereby conferred upon the Company, the Board and the Committee by the terms of the Plan, including, but not by way of limitation, the power to amend and terminate the Plan. The authority of the Company, the Board and the Committee to act as such agents shall continue for as long as necessary to carry out the purposes of the Plan.

7

QuickLinks

Exhibit 10.25

HEALTH NET, INC. EMPLOYEE STOCK PURCHASE PLAN (as amended and restated effective January 1, 2002)
I. INTRODUCTION
II. DEFINITIONS
III. ELIGIBILITY AND ADMINISTRATION
IV. PARTICIPANT PAYROLL DEDUCTIONS
V. PURCHASE OF COMMON SHARES
VI. ISSUANCE OF CERTIFICATES
VII. PARTICIPANT'S RIGHT TO ABANDON PURCHASE OF SHARES
VIII. SUSPENSION ON ACCOUNT OF HARDSHIP WITHDRAWAL
IX. GENERAL

EX-10.38

QuickLinks -- Click here to rapidly navigate through this document

EXHIBIT 10.38

FIRST AMENDMENT TO LEASE

        This FIRST AMENDMENT TO LEASE ("First Amendment") is made and entered into effective as of May 14, 2001, by and between LNR WARNER CENTER, LLC, a California limited liability company ("Landlord"), and HEALTH NET, a California corporation ("Tenant").

RECITALS:

        A.    DCA Homes, Inc., a Florida corporation and Lennar Rolling Ridge, Inc., a California corporation (collectively, "Prior Landlord") and Tenant entered into that certain Office Lease dated as of September 20, 2000 (the "Lease") pursuant to which Prior Landlord leased to Tenant and Tenant leased from Prior Landlord certain "Premises," as described in the Lease, consisting of the entire rentable square feet of Building B located at 21281 Burbank Boulevard, Woodland Hills, California, and the 3rd, 4th and 5th floors of Building C located at 21271 Burbank Boulevard, Woodland Hills, California, as more particularly described in the Lease. The Premises currently leased by Tenant under the Lease is sometimes referred to herein as the "Original Premises".

        B.    Landlord has succeeded to the interest of Prior Landlord as the landlord under the Lease.

        C.    Except as otherwise set forth herein, all capitalized terms used in this First Amendment shall have the same meaning as given such terms in the Lease.

        D.    Landlord and Tenant desire to amend the Lease to (i) expand the Original Premises leased by Tenant to include that certain space located on the second (2nd) floor of Building C containing approximately 34,987 rentable and 32,906 usable square feet of space (subject to adjustment as provided in Section 1.2 of the Lease) as depicted on Exhibit "A" attached hereto (the "2nd Floor Building C Space") and (ii) otherwise modify the Lease, all upon the terms and conditions as hereinafter provided.

        NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

        1.    Modification of Premises; 2nd Floor Lease Term.

        (a)    Addition of 2nd Floor Building C Space.    The "Premises" described in the Lease are hereby modified by adding thereto the 2nd Floor Building C Space. As a result of such modification, (i) all references in the Lease to the "Premises" shall include the 2nd Floor Building C Space, unless otherwise set forth herein, and (ii) the 2nd Floor Building C Space shall be leased upon and subject to the same terms and conditions set forth in the Lease as applicable to the Original Premises, subject to the modifications set forth herein. As a result of the addition of the 2nd Floor Building C Space to the Premises, the "Premises" shall contain a total of approximately 323,736 rentable square feet and 303,913 usable square feet of space, including (A) the entire rentable and usable square feet of Building B as described in Section 6.2 of the Summary, plus (B) approximately 145,491 rentable square feet and 136,528 usable square feet of space in Building C on the 2nd, 3rd, 4th and 5th floors of Building C.

        (b)    2nd Floor Lease Term.    Notwithstanding the foregoing, the Lease Term for the 2nd Floor Building C Space (the "2nd Floor Lease Term") shall only be for a term of six (6) years commencing upon the same Lease Commencement Date as applicable for the Original Premises, as determined pursuant to Section 7.2 of the Summary; provided, however, Tenant shall have the option (the "2nd Floor Extension Option") to extend the 2nd Floor Lease Term for an additional

1

four (4) year period (the "2nd Floor Extension Term") to be conterminous with the initial Lease Term for the Original Premises, by delivering written notice of exercise of such option ("2nd Floor Exercise Notice") to Landlord not less than nine (9) months prior to the expiration date of such 6-year term. Notwithstanding the foregoing, at Landlord's option, and in addition to all of Landlord's remedies under the Lease (as amended hereby), at law or in equity, the 2nd Floor Extension Option hereinabove granted to Tenant shall not be deemed to be properly exercised if, as of the date of Tenant's delivery of the 2nd Floor Exercise Notice, Tenant is in monetary or material non-monetary default under the Lease (as amended hereby) and any applicable notice of such default has been delivered and any applicable cure period has expired; provided, however, that Tenant shall be entitled to an additional five (5) business days from the date of Tenant's receipt of Landlord's notice to cure any such monetary or material non-monetary default in order to preserve the 2nd Floor Extension Option so exercised by Tenant. If Tenant does not timely exercise the 2nd Floor Extension Term, then upon the expiration of the initial 6-year 2nd Floor Lease Term, the "Premises" shall no longer include the 2nd Floor Building C Space for all purposes under the Lease, including for determining the amount of parking spaces Tenant shall be entitled to use pursuant to Article 24 of the Lease. If Tenant timely exercises the 2nd Floor Extension Option, then the Lease Term for the 2nd Floor Building C Space shall thereafter be conterminous with the Lease Term for the Original Premises, as may be extended pursuant to the Extension Rider attached to the Lease.

        2.    Base Rent.    The Base Rent payable for the 2nd Floor Building C Space shall be calculated separate and apart from the Base Rent payable for the Original Premises and shall be as set forth in the following schedule:

Months of 2nd Floor Lease Term	Annual Base Rent		Monthly Installment of Base Rent		Monthly Rental Rate per Rentable Square Foot
1 - 12	$	1,070,602.20	$	89,216.85	$	2.550
13 - 24	$	1,102,930.20	$	91,910.85	$	2.627
25 - 36	$	1,135,678.00	$	94,639.84	$	2.705
37 - 48	$	1,169,685.30	$	97,473.78	$	2.786
49 - 60	$	1,204,952.28	$	100,412.69	$	2.87
61 - 72	$	1,241,058.86	$	103,421.57	$	2.956

        If Tenant timely exercises the 2nd Floor Extension Term, the Base Rent for the 2nd Floor Building C Space for months 73 through 120 of the Lease Term shall be as follows:

Months of 2nd Floor Lease Term	Annual Base Rent		Monthly Installment of Base Rent		Monthly Rental Rate per Rentable Square Foot
73 - 84	$	1,278,424.98	$	106,535.42	$	3.045
85 - 96	$	1,316,630.78	$	109,719.23	$	3.136
97 - 108	$	1,356,096.12	$	113,008.01	$	3.230
109 - 120	$	1,396,820.99	$	116,401.75	$	3.327

        The foregoing Base Rent amounts shall be adjusted upon the final determination of the amount of rentable square feet of the 2nd Floor Building C Space pursuant to Section 1.2 of the Lease. The parties shall also modify the Base Rent schedule set forth in the amendment attached to the Lease as Exhibit C to reflect the addition of the 2nd Floor Building C Space to the Premises when they execute such amendment in accordance with Section 2.1 of the Lease.

        3.    Tenant's Building C Share of Direct Expenses.    During the 2nd Floor Lease Term, as may be extended, Tenant's Building C Share of Direct Expenses shall be increased to 81.62% to reflect the addition of the 2nd Floor Building C Space to the Premises.

2

        4.    Parking.    As a result of the addition of the 2nd Floor Building C Space to the Premises, Tenant shall be entitled to use an additional four (4) unreserved parking spaces for every 1,000 rentable square feet of the 2nd Floor Building C Space during the 2nd Floor Lease Term therefor, as may be extended. All of such parking spaces shall be unreserved, undesignated parking spaces at such locations in the Parking Facilities as Landlord shall determine from time to time. Tenant shall not be charged any parking charges for the use of such parking spaces during the initial 2nd Floor Lease Term and the 2nd Floor Extension Term if Tenant exercises its 2nd Floor Extension Option. Thereafter during any applicable Option Term, Tenant shall be charged for the use of such parking spaces at the prevailing parking rates, if any, charged by Landlord and/or Landlord's parking operator from time to time for parking in the Parking Facilities.

        5.    Tenant Improvements for 2nd Floor Building C Space; Work Letter.    The Base, Shell and Core and Tenant Improvements for the 2nd Floor Building C Space shall be designed and constructed in accordance with the provisions of the Tenant Work Letter attached to the Lease as Exhibit "B", with the following modifications:

          (i)  Section 1.2(iv) of the Tenant Work Letter is hereby deleted and replaced with the following:

"(iv)

any work to be constructed on the first (1st) floor of Building C, except for the ground floor lobby and curtain wall shown on the Phase I Project Plan";

        (ii)  the Tenant Improvement Allowance to be provided for the 2nd Floor Building C Space shall equal $1,151,710.00 (i.e., $35.00 per usable square foot of the 2nd Floor Building C Space);

        (iii)  the total minimum amount of the Building C Portion set forth in Section 2.1.1(i)(A) of the Tenant Work Letter is hereby increased from $2,849,605.00 to $3,754,520.00 to reflect the addition of the 2nd Floor Building C Space to the Premises; (i.e., $27.50 per usable square foot of the Premises, including the 2nd Floor Building C Space).

        (iv)  for purposes of determining the Tenant's Maximum Available MPP Amount in Section 2.1.2 of the Tenant Work Letter, (A) the amount set forth in clause (2) thereof is hereby increased from $4,607,119.00 to $4,853,914.00 to reflect the addition of the 2nd Floor Building C Space to the Premises (i.e., the sum of $17.00 per usable square foot of the Original Premises, plus $7.50 per usable square foot of the 2nd Floor Building C Space), and (B) notwithstanding the addition of the 2nd Floor Building C Space to the Premises, the foregoing revised amount set forth in clause (2) of the Tenant Work Letter may be increased as currently provided in the fourth sentence of Section 2.1.2 of the Tenant Work Letter, but in determining any such increase, all references in such fourth (4th) sentence to the "Premises" shall exclude the 2nd Floor Building C Space and thus the $6,639,671.50 amount set forth in clause (II) thereof shall not be revised (i.e., such amount equals $24.50 per usable square foot of the Original Premises, specifically excluding the 2nd Floor Building C Space);

        (v)  the date for Tenant and Architect to prepare the Final Space Plan for the 2nd Floor Building C Space pursuant to Section 3.2 of the Tenant Work Letter shall be modified to the date of full execution and delivery of this First Amendment, but all other Time Deadlines currently set forth in the Tenant Work Letter for Tenant to perform its obligations with respect to the Construction Drawings, Permits and design and construction of the initial Tenant Improvements for the Original Premises (including the FWD Delivery Date and the Permits Issuance Date ) shall apply and be the same Time Deadlines for Tenant's obligations with respect to the Construction Drawings, Permits and design and construction of the initial Tenant Improvements for the 2nd Floor Building C Space;

        (vi)  Notwithstanding Sections 5.1.1 and 5.1.3 of the Tenant Work Letter (A) the Delivery Condition Date for the 2nd Floor Building C Space (which, for purposes of the Tenant Work

3

Letter shall be known as "Stage 1A") shall be October 1, 2001, and (B) the outside Substantial Completion Date for the 2nd Floor Building C Space shall be October 17, 2001; and

      (vii)  the exclusions/modifications to the Base, Shell and Core set forth in Schedule 2 to the Tenant Work Letter are hereby modified with respect to the 2nd Floor Building C Space as follows: as part of the Base, Shell and Core for Building C, Landlord shall install, in the elevator lobby of the 2nd floor of the Building C (A) the 2nd floor elevator lobby finishes (including aluminum column covers and wall reveals), and (B) the 2nd floor elevator lobby ceiling finishes and lighting.

        6.    Right of First Offer.    Tenant acknowledges that Landlord has previously delivered to Tenant a First Offer Notice to lease the Aetna First Offer Space pursuant to Section 1.5.1.2 of the Lease, and Tenant failed to timely exercise such right; accordingly, notwithstanding any references to the Aetna First Offer Space set forth in the Lease, Tenant's right of first offer to lease any portion of the Aetna First Offer Space is of no further force or effect, subject to any subsequent right to lease such space as provided in Section 1.5.3 of the Lease. Further, Tenant acknowledges and agrees that although Landlord has previously submitted offers to third parties to lease all or portions of the First Floor Offer Space described in Section 1.5.1.1 above, Landlord is not in default of the provisions of Section 1.5 of the Lease for failing to deliver any First Offer Notice to Tenant therefor; however, Landlord acknowledges and agrees that it shall not enter into a Third Party Lease with any third party other than Aetna for the First Floor First Offer Space without first offering to lease such space to Tenant pursant to Section 1.5.1.1 of the Lease.

        7.    Miscellaneous Modifications.    Section 25.25.2 of the Lease is hereby deleted in its entirety and of no further force or effect.

        8.    Brokers.    Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Amendment other than Colliers Seeley representing Landlord and Cushman & Wakefield, Inc. representing Tenant, and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Amendment. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing in connection with this Amendment on account of the indemnifying party's dealings with any other real estate broker or agent.

        9.    SNDA.    The parties hereby acknowledge that this First Amendment shall be incorporated as part of the "Lease" pursuant to, and thus shall be subject to the terms and conditions contained in, that certain Subordination, Non-Disturbance and Attornment Agreement dated December 19, 2000 among Landlord, Tenant and U.S. Bank National Association, a national banking association ("US Bank"). Landlord shall cause US Bank to consent to this First Amendment by executing the consent at the end of this First Amendment or in a separate consent document acceptable to US Bank and reasonably acceptable to Landlord and Tenant.

        10.    Counterparts.    This Amendment may be executed in any number of original counterparts. Any such counterpart, when executed, shall constitute an original of this Amendment, and all such counterparts together shall constitute one and the same Amendment.

        11.    No Further Modification.    Except as set forth in this First Amendment, all of the terms and provisions of the Lease shall remain unmodified and in full force and effect.

4

        IN WITNESS WHEREOF, this First Amendment to Lease has been executed as of the day and year first above written.

"LANDLORD":
LNR WARNER CENTER, LLC, a California limited liability company
By:	/s/ David O. Team
	Name:	David O. Team
	Title:	Vice President
By:	/s/ Curtis J. Stephenson
	Name:	Curtis J. Stephenson
	Title:	Asst VP
"TENANT":
HEALTH NET, a California corporation
By:	/s/ Michael Radford
	Name:	Michael Radford
	Title:	Vice President

5

QuickLinks

EXHIBIT 10.38

FIRST AMENDMENT TO LEASE
RECITALS

EX-12.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 12.1

Health Net, Inc.

Calculation of Ratio of Earnings to Fixed Charges — Consolidated Basis

(Amount in Thousands, Except Ratios)

	Year Ended December 31,
	2001			2000			1999			1998			1997
Income from continuing operations	$	137,350		$	262,747		$	244,008		$	(254,154	)	$	(89,248	)
Interest expense		54,940			87,930			83,808			92,159			63,555
Amortization of debt expense		3,280			3,395			3,170			1,100			—
Interest portion of rental expense (a)		8,403			7,470			7,350			7,545			7,305
Earnings	$	203,973		$	361,542		$	338,336		$	(153,350	)	$	(18,388	)
Fixed Charges	$	66,623		$	98,795		$	94,328		$	100,804		$	70,860
(Total of interest expense, amort. and interest portion of rental expense)
Ratio of earnings to fixed charges		3.1	×		3.7	×		3.6	×		(b	)		(b	)

(a)

Interest portion of rental expense is estimated to be 15%.

(b)

No ratio is shown for 1998 and 1997 because earnings were insufficient to cover fixed charges by $153.4 million and $18.4 million, respectively.

QuickLinks

Exhibit 12.1

Health Net, Inc. Calculation of Ratio of Earnings to Fixed Charges — Consolidated Basis (Amount in Thousands, Except Ratios)

EX-13.1

QuickLinks -- Click here to rapidly navigate through this document

Financial Highlights
Health Net, Inc.

			Year ended December 31,
(Amounts in thousands, except per share data)
			2001		2000		1999			1998			1997
STATEMENT OF OPERATIONS DATA(1):
REVENUES
	Health plan services premiums		$	8,292,602	$	7,351,098	$	7,031,055		$	7,124,161		$	5,482,893
	Government contracts/Specialty services			1,687,420		1,623,158		1,529,855			1,411,267			1,408,402
	Investment and other income			84,438		102,299		86,977			93,441			114,300
	Total revenues			10,064,460		9,076,555		8,647,887			8,628,869			7,005,595
EXPENSES
	Health plan services			7,083,052		6,242,282		5,950,002			6,090,472			4,470,816
	Government contracts/Specialty services			1,212,497		1,080,407		1,002,893			924,075			990,576
	Selling, general and administrative			1,322,187		1,296,881		1,301,743			1,413,771			1,185,018
	Depreciation and amortization			98,695		105,899		112,041			128,093			98,353
	Interest			54,940		87,930		83,808			92,159			63,555
	Asset impairment, merger, restructuring and other costs			79,667		—		11,724			240,053			286,525
	Net loss (gain) on sale of businesses and properties			76,072		409		(58,332	)		(5,600	)		—
		Total expenses		9,927,110		8,813,808		8,403,879			8,883,023			7,094,843
Income (loss) from continuing operations before income taxes				137,350		262,747		244,008			(254,154	)		(89,248	)
Income tax provision (benefit)				50,821		99,124		96,226			(88,996	)		(21,418	)
Income (loss) from continuing operations				86,529		163,623		147,782			(165,158	)		(67,830	)
Discontinued operations(1):
	Loss from discontinued operations, net of tax			—		—		—			—			(30,409	)
	Loss on disposition, net of tax			—		—		—			—			(88,845	)
Income (loss) before cumulative effect of change in accounting principle				86,529		163,623		147,782			(165,158	)		(187,084	)
Cumulative effect of a change in accounting principle, net of tax				—		—		(5,417	)		—			—
Net income (loss)			$	86,529	$	163,623	$	142,365		$	(165,158	)	$	(187,084	)
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations			$	0.70	$	1.34	$	1.21		$	(1.35	)	$	(0.55	)
Loss from discontinued operations, net of tax				—		—		—			—			(0.25	)
Loss on disposition, net of tax				—		—		—			—			(0.72	)
Cumulative effect of a change in accounting principle				—		—		(0.05	)		—			—
Net			$	0.70	$	1.34	$	1.16		$	(1.35	)	$	(1.52	)
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations			$	0.69	$	1.33	$	1.21		$	(1.35	)	$	(0.55	)
Loss from discontinued operations, net of tax				—		—		—			—			(0.25	)
Loss on disposition, net of tax				—		—		—			—			(0.72	)
Cumulative effect of a change in accounting principle				—		—		(0.05	)		—			—
Net			$	0.69	$	1.33	$	1.16		$	(1.35	)	$	(1.52	)
Weighted average shares outstanding:
Basic				123,192		122,471		122,289			121,974			123,333
Diluted				125,186		123,453		122,343			121,974			123,333
BALANCE SHEET DATA:
Cash and cash equivalents and investments available for sale			$	1,766,154	$	1,533,637	$	1,467,142		$	1,288,947		$	1,112,361
Total assets				3,559,647		3,670,116		3,696,481			3,863,269			4,076,350
Revolving credit facilities and capital leases				195,182		766,450		1,039,352			1,254,278			1,308,979
Senior notes payable				398,678		—		—			—			—
Stockholders' equity(2)				1,165,512		1,061,131		891,199			744,042			895,974
OPERATING CASH FLOW			$	546,484	$	366,163	$	297,128		$	100,867		$	(125,872	)

(1)

See Note 3 to the Consolidated Financial Statements for discussion of dispositions during 1999 and 2001 impacting the comparability of information. We purchased four health plans and one insurance company during 1997, which also impacts the comparability of information. Additionally, our workers' compensation segment sold in 1998 has been accounted for as discontinued operations.

(2)

No cash dividends were declared in each of the years presented.

2

Management's Discussion and Analysis of Financial Condition and Results of Operations

        Health Net, Inc. (formerly named Foundation Health Systems, Inc.) (together with its subsidiaries, the Company, we, us or our) is an integrated managed care organization that administers the delivery of managed health care services. Through our subsidiaries, we offer group, individual, Medicaid and Medicare health maintenance organization (HMO), point of service (POS) and preferred provider organization (PPO) plans; government-sponsored managed care plans; and managed care products related to administration and cost containment, behavioral health, dental, vision and pharmaceutical products and other services.

        We currently operate within two segments: Health Plan Services and Government Contracts/Specialty Services. The Health Plan Services segment operates through its health plans in the following states: Arizona, California, Connecticut, New Jersey, New York, Oregon and Pennsylvania. During 2000 and most of 2001, the Health Plan Services segment consisted of two regional divisions: Western Division (Arizona, California and Oregon) and Eastern Division (Connecticut, Florida, New Jersey, New York and Pennsylvania). During the fourth quarter of 2001, we decided that we would no longer view our health plan operations through these two regional divisions. We are one of the largest managed health care companies in the United States, with about 4.1 million at-risk and administrative services only ("ASO") members in our Health Plan Services segment. We also own health and life insurance companies licensed to sell PPO, POS and indemnity products, as well as auxiliary non-health products such as life and accidental death and disability insurance in 35 states and the District of Columbia.

        In 2000, we decided to exit the Ohio, West Virginia and Western Pennsylvania markets and provided notice of our intention to withdraw from these service areas to the appropriate regulators. As of February 2001, we no longer had any members in such markets.

        Effective August 1, 2001, we completed the sale of our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, L.L.C. The Florida health plan had approximately 166,000 members at the close of sale. See "Net (Loss) Gain on Sale of Businesses and Properties."

        The Government Contracts/Specialty Services segment administers large, multi-year managed health care government contracts. Certain components of these contracts, including administration and assumption of health care risk, are subcontracted to affiliated and unrelated third parties. The Company administers health care programs covering approximately 1.5 million eligible individuals under TRICARE. The Company has three TRICARE contracts that cover Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon, Washington and parts of Arizona, Idaho, Louisiana and Texas. Through this segment, the Company also offers behavioral health, dental and vision services as well as managed care products related to bill review, administration and cost containment for hospitals, health plans and other entities.

        This discussion and analysis and other portions of this 2001 Annual Report to Stockholders and our Annual Report on Form 10-K for the year ended December 31, 2001 (the Form 10-K) 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 risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the matters described in the "Cautionary Statements" section and other portions of the Form 10-K and the risks discussed in our other filings with the SEC. You should not place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. Except as required by law, we undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this report.

RESULTS OF OPERATIONS

CONSOLIDATED OPERATING RESULTS

        Our net income for the year ended December 31, 2001 was $86.5 million or $0.69 per diluted share compared to net income for the same period in 2000 of $163.6 million, or $1.33 per diluted share. Our net income for the year ended December 31, 1999 was $142.4 million, or $1.16 per diluted share. Included in our results for the year ended December 31, 2001, are a loss of $76.1 million on the sales of our Florida health plan and related corporate facility building and costs of $79.7 million related to our 2001 restructuring plan. See "Asset Impairment and Restructuring Charges" and "Net Loss (Gain) on Sale of Businesses and Properties."

19

        The table below and the discussion that follows summarize the Company's performance in the last three fiscal years.

			Year ended December 31,
			2001			2000			1999
			(Amounts in thousands, except per member per month data)
REVENUES:
	Health plan services premiums		$	8,292,602		$	7,351,098		$	7,031,055
	Government contracts/Specialty services			1,687,420			1,623,158			1,529,855
	Investment and other income			84,438			102,299			86,977
		Total revenues		10,064,460			9,076,555			8,647,887
EXPENSES:
	Health plan services			7,083,052			6,242,282			5,950,002
	Government contracts/Specialty services			1,212,497			1,080,407			1,002,893
	Selling, general and administrative			1,322,187			1,296,881			1,301,743
	Depreciation			61,073			67,260			70,010
	Amortization			37,622			38,639			42,031
	Interest			54,940			87,930			83,808
	Asset impairment and restructuring charges			79,667			—			11,724
	Net loss (gain) on sale of businesses and properties			76,072			409			(58,332	)
		Total expenses		9,927,110			8,813,808			8,403,879
Income from operations before income tax provision and cumulative effect of a change in accounting principle				137,350			262,747			244,008
Income tax provision				50,821			99,124			96,226
Income before cumulative effect of a change in accounting principle				86,529			163,623			147,782
Cumulative effect of a change in accounting principle, net of tax				—			—			(5,417	)
Net income			$	86,529		$	163,623		$	142,365
Health plan services medical care ratio (MCR)				85.4	%		84.9	%		84.6	%
Government contracts/Specialty services MCR				71.9	%		66.6	%		65.6	%
Administrative (SG&A + Depreciation) ratio				13.9	%		15.2	%		16.0	%
Health plan services premiums per member per month			$	167.42		$	156.71		$	138.76
Health plan services per member per month			$	143.00		$	133.07		$	117.42

ENROLLMENT INFORMATION

        The table below summarizes the Company's at-risk insured and ASO enrollment information for the last three fiscal years.

	Year ended December 31,
	2001	Percent Change		2000	Percent Change		1999
	(Amounts in thousands)
Health Plan Services:
Commercial	2,985	(0.4	)%	2,996	4.7	%	2,862
Federal Program	216	(20.6	)%	272	3.8	%	262
State Programs	788	18.3	%	666	7.6	%	619
Continuing Plans	3,989	1.4	%	3,934	5.1	%	3,743
Discontinued Plans	—	(100.0	)%	3	(98.7	)%	228
Total Health Plan Services	3,989	1.3	%	3,937	(0.9	)%	3,971
Government Contracts:
TRICARE and Indemnity	508	(9.6	)%	562	(12.7	)%	644
TRICARE HMO	959	6.4	%	901	5.8	%	852
Total Government Contracts	1,467	0.3	%	1,463	(2.2	)%	1,496
ASO	78	(6.0	)%	83	(19.4	)%	103

20

        Commercial membership decreased by approximately 11,000 members or less than 1% at December 31, 2001 compared to the same period for 2000 primarily due to the following:

•

Decrease of 109,000 members in Florida due to the sale of the Florida health plan effective August 1, 2001,



•

Decrease of 132,000 members in Arizona primarily due to membership losses in the large group market. The loss of the State of Arizona employer group accounted for 65,000 of the membership loss,



•

Combined decreases of 43,000 members in Oregon and Connecticut in the large group market attributable to premium rate increases, partially offset by



•

Increase of 206,000 members in California, primarily due to enrollment increases of 103,000 members within the small group market most notably as a result of the growth of 84,000 members in our PPO product in 2001, 41,000 members in individual growth, and 60,000 members in the large group market, and



•

Increase of 67,000 members in New Jersey due to membership increases equally distributed between the small group and large group markets.

        Membership in the federal Medicare program decreased by approximately 56,000 members or 21% at December 31, 2001 compared to the same period for 2000 primarily due to the following:

•

Decrease of 45,000 members in Florida due to the sale of the Florida health plan effective August 1, 2001, and



•

Decrease of 11,000 members in Arizona due to our exit from unprofitable counties.

        Membership in state programs (including Medicaid) increased by approximately 122,000 members or 18% at December 31, 2001 compared to the same period for 2000 primarily due to the following:

•

Increase of 115,000 members in California primarily in Los Angeles County,



•

Increase of 29,000 members in Connecticut and New Jersey, partially offset by



•

Decrease of 22,000 members in Florida due to the sale of the Florida health plan effective August 1, 2001.

        Discontinued plans in 1999 and 2000 include our membership in Colorado and Washington. We no longer have any membership in these plans as of December 31, 2001.

        Commercial membership increased 5% to approximately 3.0 million members at December 31, 2000 compared to 2.9 million members at December 31, 1999 due to membership increases in California primarily in POS products and in the small, mid-market and large groups in Connecticut and New York.

        Medicare membership increased 4% to 272,000 members at December 31, 2000 compared to 262,000 members at December 31, 1999 primarily due to growth in Florida and California.

        Medicaid membership increased 8% to 666,000 members at December 31, 2000 compared to 619,000 members at December 31, 1999 primarily due to increases in the Healthy Families program in California.

        Government contracts covered approximately 1.5 million eligible individuals under the TRICARE program at December 31, 2001 and 2000. Dependents of active-duty military personnel and retirees and their dependents are automatically eligible to receive benefits under the TRICARE program. Any changes in the enrollment reflect the timing of when the individuals become eligible.

HEALTH PLAN SERVICES PREMIUMS

        Health Plan Services premiums increased $941.5 million or 13% for the year ended December 31, 2001 compared to the same period in 2000 primarily due to the following:

•

The increase in commercial premiums of $691.4 million or 14% is due to average commercial premium rate increases of 10% combined with a 4% increase in member months. Excluding Arizona, all our health plans experienced growth in commercial membership,



•

The increase in the federal health program of $41.3 million or 3% is due to an 8% increase in the premium yield which reflects the Medicare+Choice reimbursement increase that was effective January 1, 2001, partially offset by a 5% decrease in member months, and



•

The increase in state health programs of $211.2 million or 28% is driven by rate increases of 8% in California and a 20% increase in member months for the year ended December 31, 2001.

        Health Plan Services premiums increased $320.0 million or 5% for the year ended December 31, 2000 compared to the same period in 1999 primarily due to the following: average commercial premium rate increases of 11%, average Medicare premium rate increases of 14%, and average Medicaid premium rate increases of 2%, partially offset by net membership decrease of 0.9%.

        Our 10 largest employer groups accounted for approximately 15% and 16% of premium revenue for the years ended December 31, 2001 and 2000, respectively.

GOVERNMENT CONTRACTS/SPECIALTY SERVICES REVENUES

        Government Contracts/Specialty Services revenues increased $64.3 million or 4% for the year ended December 31, 2001 compared to the same period in 2000. The increase is primarily due to:

•

An increase in TRICARE revenue from increased change order activity of $55.9 million,



•

Successful negotiation on new extension pricing of $30.2 million primarily from our involvement with the TRICARE for Life program,



•

An increase in behavioral health revenues of $52.5 million or 31% due to rate increases of 17% and from growth in California reflecting an increase in member months of 14%, partially offset by



•

A decrease in revenues of $74.3 million or 75% from the behavioral health portion of the TRICARE contracts shifting from fee-for-service to ASO contracts resulting in a 75% decrease in per member per month revenue.

21

        Government Contracts/Specialty Services segment revenues increased $93.3 million or 6% for the year ended December 31, 2000 compared to the same period in 1999. The increase was primarily due to an increase in TRICARE revenues comprised of: higher health care costs resulting in higher risk share revenues from the Government and increased change orders and bid price adjustments. This increase in TRICARE revenues is primarily due to the continuing shift in health care utilization from military facilities to civilian facilities for the three contracts the Company holds with the TRICARE programs for dependents of active-duty military personnel and retirees and their dependents.

INVESTMENT AND OTHER INCOME

        Investment and other income decreased $17.9 million or 17% for the year ended December 31, 2001 compared to the same period in 2000. Investment income decreased by $10.4 million due to decreases in the average yield partially offset by higher average investable assets. The decrease in the average yield for 2001 is reflective of the Federal Reserve's continued lowering of interest rates. In the latter part of the fourth quarter of 2001, we began to reposition certain of our investable assets within our regulated health plans to increase investment income by investing in investments with longer durations which resulted in an over 75% increase in investments available for sale as of December 31, 2001 from December 31, 2000. The decrease in other income of $7.5 million is primarily due to certain one-time payments of $4.0 million received during 2000 as part of the sale of certain membership from states we exited in 1999.

        Investment and other income increased $15.3 million or 18% for the year ended December 31, 2000 compared to the same period in 1999. The increase is primarily due to an increase in the average yield rate combined with higher investable assets.

HEALTH PLAN SERVICES COSTS

        Health Plan Services MCR increased to 85.4% for the year ended December 31, 2001 compared to 84.9% for the same period in 2000. Total Health Plan Services costs on a per member per month basis increased to $143.00 or 8% for the year ended December 31, 2001 from $133.07 for the same period in 2000 primarily due to a 10% increase in commercial health care cost on per member per month basis. This increase was primarily due to increases in inpatient and outpatient hospital costs of 9% for the year ended December 31, 2001 from the same period in 2000 reflecting significant shifts from dual risk to shared risk and fee-for-service contracts and a 10% increase in pharmacy costs on a per member per month basis due to increased pricing and utilization.

        Health Plan Services MCR increased to 84.9% for the year ended December 31, 2000 compared to 84.6% for the same period in 1999. This increase was primarily due to the following: an increase in the pharmacy costs for the majority of the health plans, and higher fee-for-service medical costs from increased utilization of physician and hospital services.

        Our reserves for claims and other settlements were $1,278.0 million and $1,242.4 million as of December 31, 2001 and 2000, respectively. Included in these amounts are $1,092.6 million and $1,043.9 million of estimated reserves for incurred but not reported claims as of December 31, 2001 and 2000, respectively. We estimate the amount of the provision for service costs incurred but not reported using standard actuarial 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. The estimates for service costs incurred but not reported are 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. Such estimates are subject to the impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts provided. While the ultimate amount of claims and losses paid are dependent on future developments, management is of the opinion that the recorded reserves are adequate to cover such costs. These liabilities are reduced by estimated amounts recoverable from third parties for subrogation.

        We have risk-sharing arrangements with certain of our providers related to approximately 1,250,000 members primarily in the California commercial market. Shared-risk arrangements provide for our providers and us to share in the variance between actual costs and predetermined goals. Our health plans in Connecticut, New Jersey and New York market to small employer groups through a joint venture with The Guardian Life Insurance Company of America. We have approximately 267,000 members under this arrangement. In general, we share equally in the profits of the joint venture, subject to certain terms of the joint venture arrangement related to expenses, with The Guardian Life Insurance Company of America. Total members associated with the risk-sharing and joint venture arrangements were approximately 37% of the total enrollees at December 31, 2001.

GOVERNMENT CONTRACTS/SPECIALTY SERVICES COSTS

        The Government Contracts/Specialty Services MCR increased to 71.9% for the year ended December 31, 2001 as compared to 66.6% for the same period in 2000. The increase is primarily due to:

•

A change in the copay requirement for certain TRICARE contracts where the copay requirement for dependents of a service person is eliminated resulting in additional health care costs that must be paid by us to the provider, which resulted in additional costs of $54.9 million,



•

Increased costs and utilization of behavioral health services due to parity provisions which require behavioral health service providers to offer the same level of services to all current health plan members in California of $13.7 million, and

22

•

Decrease in net revenues of $21.8 million from the behavioral health portion of the TRICARE contracts shifting from fee-for-service to ASO contracts.

        The Government Contracts/Specialty Services MCR increased to 66.6% for the year ended December 31, 2000 as compared to 65.6% for the same period in 1999. This increase was primarily due to the following: continued movement of health care services from military treatment facilities to civilian facilities which resulted in higher costs than originally specified in the contract, and Managed Health Network (MHN), the Company's behavioral health care subsidiary, increased benefit payments due to parity provisions instituted by certain states during the year ended December 31, 2000. These provisions require behavioral health service providers to offer the same level of services to all current health plan members.

SELLING, GENERAL AND ADMINISTRATIVE COSTS

        The administrative expense ratio (SG&A and depreciation as a percentage of Health Plan Services premiums and Government Contracts/Specialty Services revenues) decreased to 13.9% for the year ended December 31, 2001 from 15.2% for the same period in 2000. This decrease was attributable to our ongoing efforts to control our SG&A costs including implementing a restructuring plan in the third quarter of 2001. We expect the administrative expense ratio to continue to decline in 2002 due to the full impact of the cost savings occurring in 2002 as a result of our ongoing initiatives.

        The administrative expense ratio decreased to 15.2% for the year ended December 31, 2000 from 16.0% for the same period in 1999. This decrease was primarily attributable to: the Company's ongoing efforts to control its SG&A expenses, improved efficiencies associated with consolidating certain administrative processing functions in the Western and Eastern Divisions, and continued fixed cost savings from the 1999 disposition of certain non-core plans.

AMORTIZATION AND DEPRECIATION

        Amortization and depreciation expense decreased by $7.2 million or 7% for the year ended December 31, 2001 from the same period in 2000. This decrease was primarily due to a $3.9 million decrease in depreciation expense from asset impairments included in the restructuring charges recorded in the third quarter of 2001 and the sale of the Florida health plan also in the third quarter of 2001. The remaining decrease is primarily due to various leasehold improvements, personal computer equipment and software being completely depreciated prior to or during 2001. The effect of the suspension of the depreciation on the corporate facility building in Florida was immaterial for the year ended December 31, 2001.

        In 2002, we expect amortization expense to decrease by approximately $25 million from the 2001 level of $37.6 million due to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires amortization of goodwill to cease effective January 1, 2002.

        Amortization and depreciation expense decreased by $6.1 million or 5% for the year ended December 31, 2000 from the same period in 1999. This decrease was primarily due to reductions of $7.6 million in goodwill and $17.5 million in properties and equipment as a result of divestitures of certain operations.

INTEREST EXPENSE

        Interest expense decreased by $33.0 million or 38% for the year ended December 31, 2001 from the same period in 2000. This decrease in interest expense reflects:

•

A $172.6 million decrease in long-term debt from December 31, 2000, and



•

A lower average borrowing rate of 7.1% in 2001 compared to the average borrowing rate of 7.6% in 2000.

        Interest expense increased by $4.1 million or 5% for the year ended December 31, 2000 from the same period in 1999. This increase in interest expense reflects the higher average borrowing rate of 7.6% in 2000 compared to 7.2% in 1999. This increase in the average borrowing rate was partially offset by a reduction in the average revolving credit facility balance.

ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

        This section should be read in conjunction with Note 14, and the tables contained therein, to the consolidated financial statements.

2001 Charges

        As part of our ongoing selling, general and administrative expense reduction efforts, during the third quarter of 2001, we initiated a formal plan to reduce operating and administrative expenses for all business units within the Company (the 2001 Plan). The 2001 Plan included enterprise-wide staff reductions and consolidations of certain administrative, financial and technology functions, and, in connection therewith, the Company recorded pre-tax restructuring charges of $79.7 million during the third quarter (the 2001 Charge). The 2001 Charge included the following:

•

Severance and benefit related costs of $43.3 million related to enterprise-wide staff reductions of 1,517 positions;



•

Asset impairment charges of $27.9 million consisting entirely of non-cash write downs of information technology equipment, building improvements and software application and development costs;



•

Charges of $5.1 million related to the termination of lease obligations and non-cancelable lease costs for excess office space resulting from streamlined operations and consolidation efforts; and



•

Charges of $3.4 million related to costs associated with closing certain data center operations and systems and functions and other activities which are expected to be completed in the first quarter of 2002.

23

        The following table summarizes the 2001 Charge we recorded during the third quarter ended September 30, 2001:

	2001 Charge		Cash Payments			Non-cash			Balance at December 31, 2001		Expected Future Cash Outlays
	(Amounts in millions)
Severance and benefit related costs	$	43.3	$	(20.5	)	$	—		$	22.8	$	22.8
Asset impairment costs		27.9		—			(27.9	)		—		—
Real estate lease termination costs		5.1		(0.3	)		—			4.8		4.8
Other costs		3.4		(0.4	)		(2.3	)		0.7		0.7
Total asset impairment and restructuring charges	$	79.7	$	(21.2	)	$	(30.2	)	$	28.3	$	28.3

        We plan on funding the expected future cash outlays with cash flows from operations. We expect the 2001 Plan to be substantially completed by September 30, 2002. As of December 31, 2001, 916 positions were eliminated. It is anticipated that the elimination of the remaining 601 positions will be completed by September 30, 2002. No changes to the 2001 Plan are expected.

1999 Charges

        During the fourth quarter of 1998, the Company initiated a formal plan to dispose of certain health plans of the Company's then Central Division included in the Company's Health Plan Services segment in accordance with its anticipated divestitures program. In this connection, the Company announced in 1999 its plan to close the Colorado regional processing center, terminate employees and transfer its operations to the Company's other administrative facilities. In addition, the Company also announced its plans to consolidate certain administrative functions in its Oregon and Washington health plan operations. During the year ended December 31, 1999, the Company recorded pretax charges for restructuring and other charges of $27.3 million (the 1999 Charges). After modifications to the 1999 Charges and prior restructuring plans, we recorded $11.7 million of pretax restructuring charges.

        Severance and Benefit Related Costs—The 1999 Charges included $18.5 million for severance and benefit costs related to executives and operations employees at the Colorado regional processing center and operations employees at the Northwest health plans. The operations functions included premium accounting, claims, medical management, customer service, sales and other related departments. The 1999 Charges included the termination of a total of 773 employees. As of December 31, 2000, termination of the employees was completed and $17.2 million had been paid. There are no expected future cash outlays. Modifications to the initial estimate of $1.3 million were recorded during the year ended December 31, 1999.

        Asset Impairment Costs—During the fourth quarter ended December 31, 1999, the Company recorded asset impairment costs totaling $6.2 million related to impairment of certain long-lived assets held for disposal.

        Real Estate Lease Termination and Other Costs—The 1999 Charges included $2.6 million related to termination of real estate obligations and other costs to close the Colorado regional processing center.

        The 1999 restructuring plan was completed as of December 31, 2000.

NET (LOSS) GAIN ON SALE OF BUSINESSES AND PROPERTIES

        Effective August 1, 2001, we completed the sale of our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received approximately $49 million which consisted of $23 million in cash and approximately $26 million in a secured six-year note bearing eight percent interest per annum. We also sold the corporate facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing eight percent interest per annum. We estimated and recorded a $76.1 million pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001. Included in the pretax loss amount are the following:

•

Non-cash asset impairment charges totaling $40.8 million consisting of $18.5 million for goodwill impairment on the Florida health plan, $4.4 million write-down to its fair value of the corporate facility building owned by one of our subsidiaries and used by the Florida health plan, $15.3 million write-off for other contractual receivables and $2.6 million write-off of an unrealizable deferred tax asset related to the Florida health plan;



•

Obligations under the terms of the amended definitive agreement to provide up to $28 million of reinsurance to guarantee against claims costs in excess of certain medical care ratio levels of the Florida health plan for the 18-month period subsequent to the close of the sale; and



•

Other accrued costs resulting from the sale of the Florida health plan totaling $7.3 million.

        As part of the Florida sale agreement and certain reinsurance and indemnification obligations of the Company, there will be a series of true up processes that will take place during 2002 that could result in additional loss or gain which was not able to be estimated as of December 31, 2001. The Florida health plan, excluding the $76.1 million loss on net assets held for sale, had premium revenues of $339.7 million and a net loss of $11.5 million through the first seven months of 2001. Such amounts are included in the accompanying financial statements for the year ended December 31, 2001. The Florida health

24

plan had premium revenues of $505.3 million and a net loss of $33.4 million for the year ended December 31, 2000.

        Net loss on sale of businesses and properties for the year ended December 31, 2000 was comprised of a gain on sale of a building in California of $1.1 million, and loss on sale of HMO operations in Washington due to a purchase price adjustment of $1.5 million.

        Net gain on sale of businesses and properties for the year ended December 31, 1999 was comprised of a gain on sale of pharmacy benefits management operations of $60.6 million, net loss on sale of non-core operations of $9.1 million, and gain on sale of buildings of $6.8 million.

INCOME TAX PROVISION

        The effective income tax rate was 37.0% for the year ended December 31, 2001 compared with 37.7% for the same period in 2000. The rate declined due to examination settlements.

        The effective income tax rate was 37.7% for the year ended December 31, 2000 compared with 39.4% for the same period in 1999. The rate declined primarily due to tax minimization strategies and the Company's change in business mix after divestiture of non-core operations.

IMPACT OF INFLATION AND OTHER ELEMENTS

        The managed health care industry is labor intensive and its profit margin is low; hence, it is especially sensitive to inflation. Increases in medical expenses or contracted medical rates without corresponding increases in premiums could have a material adverse effect on the Company.

        Various federal and state legislative initiatives regarding the health care industry continue to be proposed during legislative sessions. If further health care reform or similar legislation is enacted, such legislation could impact the Company. Management cannot at this time predict whether any such initiative will be enacted and, if enacted, the impact on the financial condition or results of operations of the Company.

        The Company's ability to expand its business is dependent, in part, on competitive premium pricing and its ability to secure cost-effective contracts with providers. Achieving these objectives is becoming increasingly difficult due to the competitive environment. In addition, the Company's profitability is dependent, in part, on its ability to maintain effective control over health care costs while providing members with quality care. Factors such as health care reform, regulatory changes, increased cost of medical services, utilization, new technologies and drugs, hospital costs, major epidemics and numerous other external influences may affect the Company's operating results. Accordingly, past financial performance is not necessarily a reliable indicator of future performance, and investors should not use historical records to anticipate results or future period trends.

        The Company's HMO and insurance subsidiaries are required to maintain reserves to cover their estimated ultimate liability for expenses with respect to reported and unreported claims incurred. These reserves are estimates of future payments based on various assumptions. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience, which in the past has resulted, and in the future could result, in loss reserves being too high or too low. The accuracy of these estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment, medical costs and other factors. Future loss development or governmental regulators could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. In light of present facts and current legal interpretations, management believes that adequate provisions have been made for claims and loss reserves.

        The Company's California HMO subsidiary contracts with providers in California primarily through capitation fee arrangements. The Company's other HMO subsidiaries contract with providers, to a lesser degree, in other areas through capitation fee arrangements. Under a capitation fee arrangement, the Company's subsidiary pays the provider a fixed amount per member on a regular basis and the provider accepts the risk of the frequency and cost of member utilization of services. The inability of providers to properly manage costs under capitation arrangements can result in financial instability of such providers. Any financial instability of capitated providers could lead to claims for unpaid health care against the Company's HMO subsidiaries, even though such subsidiaries have made their regular payments to the capitated providers. Depending on state law, the Company's HMO subsidiaries may or may not be liable for such claims. In California, the issue of whether HMOs are liable for unpaid provider claims has not been definitively settled. The California agency that until July 1, 1999 acted as regulator of HMOs, had issued a written statement to the effect that HMOs are not liable for such claims. However, there is currently ongoing litigation on the subject among providers and HMOs, including the Company's California HMO subsidiary.

        On June 2, 2001, the United States Senate passed legislation, sometimes referred to as "patients' rights" or "patients' bill of rights" legislation, that seeks, among other things, to hold health plans liable for claims regarding health care delivery and improper denial of care. The United States House of Representatives passed similar legislation on August 2, 2001. Congress will attempt to reconcile the two bills in a conference committee. Although both bills provide for independent review of decisions regarding medical care, the bills differ on the circumstances under which lawsuits may be brought against managed care organizations and the scope of their liability. If patients' bill of rights legislation is enacted into law, we could be subject to significant additional litigation risk and regulatory compliance costs, which could be costly to us and could have a significant effect on our results of operations. Although we could attempt to mitigate our ultimate exposure to litigation and regulatory compliance costs through, among other things, increases in premiums, there can be no assurance that we would be able to mitigate or cover the costs stemming from litigation arising under

25

patients' bill of rights legislation or the other costs that we could incur in connection with complying with patients' bill of rights legislation.

LIQUIDITY AND CAPITAL RESOURCES

        Certain of the Company's subsidiaries must comply with minimum capital and surplus requirements under applicable state laws and regulations, and must have adequate reserves for claims. As of December 31, 2001, we estimated that our regulated subsidiaries had more than $675 million in statutory net worth, or more than $250 million in excess of current regulatory requirements. We generally manage our aggregate regulated subsidiary capital against 150% of Risk Based Capital (RBC) Company Action Levels, although RBC standards are not yet applicable to all of our regulated subsidiaries. Certain subsidiaries must maintain ratios of current assets to current liabilities pursuant to certain government contracts. The Company believes it is in compliance with these contractual and regulatory requirements in all material respects.

        The Company believes that cash from operations, existing working capital, lines of credit, and funds from planned divestitures of business are adequate to fund existing obligations, introduce new products and services, and continue to develop health care-related businesses. The Company regularly evaluates cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. The Company may elect to raise additional funds for these purposes, either through additional debt or equity, the sale of investment securities or otherwise, as appropriate.

        The Company's investment objective is to maintain safety and preservation of principal by investing in high-quality, investment grade securities while maintaining liquidity in each portfolio sufficient to meet the Company's cash flow requirements and attaining the highest total return on invested funds.

        Government health care receivables are best estimates of payments that are ultimately collectible or payable. Since these amounts are subject to government audit, negotiation and appropriations, amounts ultimately collected may vary significantly from current estimates. Additionally, the timely collection of such receivables is also impacted by government audit and negotiation and could extend for periods beyond a year. Amounts receivable under government contracts were $99.6 million and $334.2 million as of December 31, 2001 and 2000, respectively. The decrease is primarily due to the global settlement discussed in the "Operating Cash Flows" section below.

        In 1997, the Company purchased convertible and nonconvertible debentures of FOHP, Inc., a New Jersey corporation (FOHP), in the aggregate principal amounts of approximately $80.7 million and $24.0 million, respectively. In 1997 and 1998, the Company converted certain of the convertible debentures into shares of Common Stock of FOHP, resulting in the Company owning 99.6% of the outstanding common stock of FOHP. The nonconvertible debentures mature on December 31, 2002.

        Effective January 1, 1999, Physicians Health Services of New Jersey, Inc., a New Jersey HMO wholly-owned by the Company, merged with and into First Option Health Plan of New Jersey (FOHP-NJ), a New Jersey HMO subsidiary of FOHP, and FOHP-NJ changed its name to Physicians Health Services of New Jersey, Inc. (PHS-NJ). Effective July 30, 1999, upon approval by the stockholders of FOHP at a special meeting, a wholly-owned subsidiary of the Company merged into FOHP and FOHP became a wholly-owned subsidiary of the Company. In connection with the merger, the former minority shareholders of FOHP were entitled to receive either $0.25 per share (the value per FOHP share as of December 31, 1998 as determined by an outside appraiser) or payment rights which entitle the holders to receive as much as $15.00 per payment right on or about July 1, 2001, provided certain hospital and other provider participation conditions are met. Also in connection with the merger, additional consideration of $2.25 per payment right will be paid to certain holders of the payment rights if PHS-NJ achieves certain annual returns on common equity and the participation conditions are met. The Company recorded a current liability and a purchase price adjustment to goodwill of $33.7 million as of December 31, 2000. As of December 31, 2001, the remaining liability was $11.8 million which is expected to be paid out during 2002.

OPERATING CASH FLOWS

        Net cash provided by operating activities was $546.5 million at December 31, 2001 compared to $366.2 million at December 31, 2000. The $180.3 million increase in operating cash flows was due primarily to the increase in cash collection on the outstanding TRICARE receivables as part of our global settlement, partially offset by a decrease in unearned premiums due to timing of cash receipts, primarily from Medicaid and Medicare, of approximately $84.7 million net of the effects of the Florida health plan disposition. In December 2000, our subsidiary, Health Net Federal Services, Inc., and the Department of Defense agreed to a settlement of approximately $389 million for outstanding receivables related to our three TRICARE contracts and for the completed contract for the CHAMPUS Reform Initiative. Approximately $60 million of the settlement amount was received in December 2000. The majority of the remaining settlement that was received on January 5, 2001 reduced the amounts receivable under government contracts on the Company's balance sheets. The receivable items settled by this payment included change orders, bid price adjustments, equitable adjustments and claims. These receivables developed as a result of TRICARE health care costs rising faster than the forecasted health care cost trends used in the original contract bids, data revisions on formal contract adjustments, and routine contract changes for benefits. The net settlement amount of $284 million, after paying vendors, providers and amounts owed back to the government, was applied to the continuing operating needs of the three TRICARE contracts and to reducing the outstanding balance of the notes payable.

26

INVESTING ACTIVITIES

        Net cash used in investing activities was $517.6 million for December 31, 2001 compared to net cash used in investing activities of $61.9 million for December 31, 2000. This increase in cash used in investing activities of $455.7 million is primarily due to $422.5 million increase in net purchases of investments. During the fourth quarter of 2001, we started to reposition our investments within our regulated plans to increase investment income which resulted in increased purchases with cash of investments with longer durations.

        Effective August 1, 2001, we completed the sale of our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received approximately $49 million which consisted of $23 million in cash, before net of cash sold of $83.1 million, and approximately $26 million in a secured six-year note bearing eight percent interest per annum. We also sold the corporate facility building used by our former Florida health plan to DGE Properties, L.L.C. for $15 million, payable by a secured five-year note bearing eight percent interest per annum. We recorded a $76.1 million pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001. As part of the Florida sale agreement, there will be a series of true up processes that will take place during 2002 that could result in additional loss or gain which was not able to be estimated as of December 31, 2001.

        Throughout 2000, 2001 and the first quarter of 2002, the Company has provided funding in the amount of approximately $12.4 million in exchange for preferred stock in MedUnite, Inc., an independent company, funded and organized by seven major managed health care companies. MedUnite, Inc. is designed to provide online internet provider connectivity services including eligibility information, referrals, authorizations, claims submission and payment. The funded amounts are included in other noncurrent assets.

        During 2000, the Company secured an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. (CSMS-IPA) for $15.0 million. CSMS-IPA is an association of medical doctors providing health care primarily in Connecticut. The amounts paid to CSMS-IPA for this agreement are included in other noncurrent assets. During 2001, we continued to develop this service capability.

        In 1995, the Company entered into a five year tax retention operating lease for the construction of various health care centers and a corporate facility. Upon expiration in May 2000, the lease was extended for four months through September 2000 whereupon the Company settled its obligations under the agreement and purchased the leased properties which were comprised of three rental health care centers and a corporate facility for $35.4 million. The health care centers are held as investment rental properties and are included in other noncurrent assets. The corporate facility building was used in operations and included in property and equipment prior to being sold as part of the Florida sale. The buildings are being depreciated over a remaining useful life of 35 years.

FINANCING ACTIVITIES

        Net cash used in financing activities was $166.0 million at December 31, 2001 compared to $268.1 million at December 31, 2000. This decrease in net cash used in financing activities of $102.1 million was primarily due to lower net repayment of funds previously drawn under the Company's credit facility in 2001 compared to 2000.

        On April 12, 2001, we completed our offering of $400 million aggregate principal amount of 8.375 percent Senior Notes due in April 2011. The effective interest rate on the notes when all offering costs are taken into account and amortized over the term of the note is 8.54 percent per annum. The net proceeds of $395.1 million from the Senior Notes were used to repay outstanding borrowings under our then-existing revolving credit facility. On October 4, 2001, we completed an exchange offer for the Senior Notes in which the outstanding Senior Notes were exchanged for an equal aggregate principal amount of new 8.375 percent Senior Notes due 2011 that have been registered under the Securities Act of 1933, as amended.

        On June 28, 2001, we refinanced our previous $1.5 billion revolving credit facility with credit agreements for two new revolving syndicated credit facilities, with Bank of America, N.A. as administrative agent, that replaced the $1.5 billion credit facility. The new credit facilities, providing for an aggregate of $700 million in borrowings, consist of:

•

a $175 million 364-day revolving credit facility; and



•

a $525 million five-year revolving credit and competitive advance facility.

        We established the credit facilities to refinance our then-existing credit facility and to finance any lawful general corporate purposes, including acquisitions and working capital. The credit facilities allow us to borrow funds:

•

by obtaining committed loans from the group of lenders as a whole on a pro rata basis;



•

by obtaining under the five-year facility loans from individual lenders within the group by way of a bidding process;



•

by obtaining under the five-year facility swingline loans in an aggregate amount of up to $50 million that may be requested on an expedited basis; and



•

by obtaining under the five-year facility letters of credit in an aggregate amount of up to $200 million.

        The 364-day credit facility expires on June 27, 2002. We must repay all borrowings under the 364-day credit facility by June 27, 2004. The five-year credit facility expires in June 2006, and we must repay all borrowings under the five-year credit facility by June 28, 2006, unless the five-year credit facility is extended. The five-year credit facility may, at our request and subject to approval by lenders holding two-thirds of

27

the aggregate amount of the commitments under the five-year credit facility, be extended for up to two twelve-month periods to the extent of the commitments made under the five-year credit facility by such approving lenders. Swingline loans under the five-year credit facility are subject to repayment within no more than seven days.

        The credit agreements provide for acceleration of repayment of indebtedness under the credit facilities upon the occurrence of customary events of default such as failing to pay any principal or interest when due; providing materially incorrect representations; failing to observe any covenant or condition; judgments against us involving in the aggregate a liability of $25 million or more that are not covered by insurance; our non-compliance with any material terms of HMO or insurance regulations pertaining to fiscal soundness, solvency or financial condition; the occurrence of specified adverse events in connection with any employee pension benefit plan of ours; our failure to comply with the terms of other indebtedness with an aggregate amount exceeding $40 million such that the other indebtedness can be or is accelerated; or a change in control of the Company.

        The maximum amount outstanding under the new facilities during 2001 was $280 million and the maximum commitment level was $700 million at December 31, 2001.

        Scheduled principal repayments on the senior notes payable and capital leases for the next five years are as follows (amounts in thousands):

Contractual Cash Obligations	Total		2002		2003		2004	2005	2006		Thereafter
Five-year revolving credit facility	$	195,000							$	195,000
Senior notes		400,000									$	400,000
Capital leases		578	$	396	$	182

        The credit agreements contain negative covenants, including financial covenants, that impose restrictions on our operations. The financial covenants in the credit agreements provide that

•

for any period of four consecutive fiscal quarters, the consolidated leverage ratio, which is the ratio of (i) our consolidated funded debt to (ii) our consolidated net income before interest, taxes, depreciation, amortization and other specified items (consolidated EBITDA), must not exceed 3 to 1;



•

for any period of four consecutive fiscal quarters, the consolidated fixed charge coverage ratio, which is the ratio of (i) our consolidated EBITDA plus consolidated rental expense minus consolidated capital expenditures to (ii) our consolidated scheduled debt payments, (defined as the sum of scheduled principal payments, interest expense and rent expense) must be at least 1.5 to 1; and



•

we must maintain our consolidated net worth at a level equal to at least $945 million (less the sum of a pretax charge associated with our sale of the Florida Health Plan and specified pretax charges relating to the write-off of goodwill) plus 50% of our consolidated net income and 100% of our net cash proceeds from equity issuances.

        The other covenants in the credit agreements include, among other things, limitations on incurrence of indebtedness by subsidiaries of Health Net, Inc. and on our ability to

•

incur liens;



•

extend credit and make investments;



•

merge, consolidate, dispose of stock in subsidiaries, lease or otherwise dispose of assets and liquidate or dissolve;



•

engage in transactions with affiliates;



•

substantially alter the character or conduct of the business of Health Net, Inc. or any of its "significant subsidiaries" within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC;



•

make restricted payments, including dividends and other distributions on capital stock and redemptions of capital stock; and



•

become subject to other agreements or arrangements that restrict (i)the payment of dividends by any Health Net, Inc. subsidiary, (ii)the ability of Health Net, Inc. subsidiaries to make or repay loans or advances to us, (iii) the ability of any subsidiary of Health Net, Inc. to guarantee our indebtedness or (iv) the creation of any lien on our property.

        As of December 31, 2001, we were in compliance with the covenants of the credit facilities.

        Committed loans under the credit facilities bear interest at a rate equal to either (1) the greater of the federal funds rate plus 0.5% and the applicable prime rate or (2) LIBOR plus a margin that depends on our senior unsecured credit rating. Loans obtained through the bidding process bear interest at a rate determined in the bidding process. Swingline loans under the five-year credit facility bear interest equal to, at our option, either a base rate plus a margin that depends on our senior unsecured credit rating or a rate quoted to us by the swingline lender. We pay fees on outstanding letters of credit and a facility fee, computed as a percentage of the lenders' commitments under the credit facilities, which varies from 0.130% to 0.320% per annum for the 364-day credit facility and from 0.155% to 0.375% per annum for the five-year credit facility, depending on our senior unsecured credit rating.

        We lease office space under various operating leases. In addition, we have entered into long-term service agreements with third parties. As of December 31, 2001, there are eight years remaining on these service agreements with minimum future commitments totaling $78.8 million. These lease and service agreements are cancelable

28

with substantial penalties. Our future minimum lease and service fee commitments are as follows (amounts in thousands):

2002	$	65,556
2003		59,813
2004		51,481
2005		35,647
2006		30,164
Thereafter		119,970
Total minimum commitments	$	362,631

STATUTORY CAPITAL REQUIREMENTS

        The Company's subsidiaries must comply with certain minimum capital requirements under applicable state laws and regulations. The Company contributed $67.5 million to certain of its subsidiaries to meet capital requirements during the year ended December 31, 2001. As of December 31, 2001, the Company's subsidiaries were in compliance with minimum capital requirements.

        Effective January 1, 2001, certain of the states in which our regulated subsidiaries operate adopted the codification of statutory accounting principles. As of December 31, 2001, the adoption of the codification of statutory accounting principles did not have a material impact on the amount of capital contributions required to meet risk-based capital and other minimum capital requirements.

        Legislation has been or may be enacted in certain states in which the Company's 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 subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to the Company. Such restrictions, unless amended or waived, limit the use of any cash generated by these subsidiaries to pay obligations of the Company. The maximum amount of dividends which can be paid by the insurance company subsidiaries to the Company without prior approval of the insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. Management believes that as of December 31, 2001, all of the Company's health plans and insurance subsidiaries met their respective regulatory requirements.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 (HIPAA)

        In December 2000, the Department of Health and Human Services (DHHS) promulgated regulations under HIPAA related to the privacy and security of electronically transmitted protected health information. The new regulations require health plans, clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage and disclosure of protected health information, (b) adopt rigorous internal procedures to safeguard protected health information and (c) enter into specific written agreements with business associates to whom protected health information is disclosed. The regulations also establish significant criminal penalties and civil sanctions for noncompliance. In addition, the regulations could expose the Company to additional liability for, among other things, violations of the regulations by its business associates. The Company believes that the costs required to comply with these regulations under HIPAA will be significant and could have a material adverse impact on the Company's business or results of operations.

Quantitative and Qualitative Disclosures about Market Risk

        The Company is exposed to interest rate and market risk primarily due to its 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 in equity prices. Interest rate risk is a consequence of maintaining fixed income investments. The Company is 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, the Company is exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer's credit rating or credit perception may affect the value of financial instruments.

        The Company has several bond portfolios to fund reserves. The Company attempts to manage the interest rate risks related to its investment portfolios by actively managing the asset/liability duration of its investment portfolios. The overall goal for the investment portfolios is to provide a source of liquidity and support the ongoing operations of the Company's business units. The Company's philosophy is to actively manage assets to maximize total return over a multiple-year time horizon, subject to appropriate levels of risk. Each business unit has additional requirements with respect to liquidity, current income and contribution to surplus. The Company manages these risks by setting risk tolerances, targeting asset-class allocations, diversifying among assets and asset characteristics, and using performance measurement and reporting.

        The Company uses a value-at-risk (VAR) model, which follows a variance/covariance methodology, to assess the market risk for its investment portfolio. VAR is a method of assessing investment risk that uses standard statistical techniques to measure the worst expected loss in the portfolio over an assumed portfolio disposition period under normal market conditions. The determination is made at a given statistical confidence level.

29

        The Company assumed a portfolio disposition period of 30 days with a confidence level of 95 percent for the 2001 computation of VAR. The computation further assumes that the distribution of returns is normal. Based on such methodology and assumptions, the computed VAR was approximately $7.1 million as of December 31, 2001.

        The Company's calculated value-at-risk exposure represents an estimate of reasonably possible net losses that could be recognized on its investment portfolios assuming hypothetical movements in future market rates and are not necessarily indicative of actual results which may occur. It does not represent the maximum possible loss nor any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in the Company's investment portfolios during the year. The Company, however, believes that any loss incurred would be substantially offset by the effects of interest rate movements on the Company's liabilities, since these liabilities are affected by many of the same factors that affect asset performance; that is, economic activity, inflation and interest rates, as well as regional and industry factors.

        In addition to the market risk associated with its investments, the Company has some interest rate market risk due to its floating rate borrowings. Notes payable, capital leases and other floating rate and fixed rate financing arrangements totaled $594.3 million at December 31, 2001 with a related average interest rate of 7.1% (which interest rate is subject to change because of the varying interest rates that apply to borrowings under the credit facilities). See a description of the credit facilities under "Liquidity and Capital Resources."

        The floating rate borrowings are presumed to have equal book and fair values because the interest rates paid on these accounts are based on prevailing market rates. The fair value of our fixed rate borrowing as of December 31, 2001 was approximately $415 million which was based on bid quotations from third party data providers. The following table presents the expected cash outflows relating to market risk sensitive debt obligations as of December 31, 2001. These cash outflows include both expected principal and interest payments consistent with the terms of the outstanding debt as of December 31, 2001.

(Amounts in millions)		2002		2003		2004		2005		2006		Thereafter		Total
Long-term floating rate borrowing:
	Principal	$	—	$	—	$	—	$	—	$	195.0	$	—	$	195.0
	Interest		5.9		5.9		5.9		5.9		3.0		—		26.6
Cash outflow on long-term floating rate borrowing		$	5.9	$	5.9	$	5.9	$	5.9	$	198.0	$	—	$	221.6
Fixed-rate borrowing:
	Principal	$	—	$	—	$	—	$	—	$	—	$	400.0	$	400.0
	Interest		33.5		33.5		33.5		33.5		33.5		150.8		318.3
Cash outflow on fixed-rate borrowing		$	33.5	$	33.5	$	33.5	$	33.5	$	33.5	$	550.8	$	718.3
Total cash outflow on all borrowings		$	39.4	$	39.4	$	39.4	$	39.4	$	231.5	$	550.8	$	939.9

30

Report of Independent Auditors

To the Board of Directors and Stockholders of
Health Net, Inc.
Woodland Hills, California

        We have audited the accompanying consolidated balance sheets of Health Net, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Health Net, Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP
Los Angeles, California
February 12, 2002

31

Consolidated Balance Sheets
Health Net, Inc.

		December 31,
		2001			2000
		(Amounts in thousands)
ASSETS
Current Assets:
	Cash and cash equivalents	$	909,594		$	1,046,735
	Investments—available for sale		856,560			486,902
	Premiums receivable, net of allowance for doubtful accounts (2001—$14,595; 2000—$19,822)		183,824			174,654
	Amounts receivable under government contracts		99,619			334,187
	Reinsurance and other receivables		136,854			141,140
	Deferred taxes		72,909			141,752
	Other assets		82,583			74,184
Total current assets			2,341,943			2,399,554
Property and equipment, net			253,063			296,009
Goodwill and other intangible assets, net			801,814			863,419
Deferred taxes			23,359			—
Other noncurrent assets			139,468			111,134
Total Assets		$	3,559,647		$	3,670,116
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Reserves for claims and other settlements	$	1,278,036		$	1,242,389
	Unearned premiums		166,842			238,571
	Amounts payable under government contracts		2,284			972
	Accounts payable and other liabilities		308,364			329,149
Total current liabilities			1,755,526			1,811,081
Revolving credit facilities and capital leases			195,182			766,450
Senior notes payable			398,678			—
Deferred taxes			—			8,635
Other noncurrent liabilities			44,749			22,819
Total Liabilities			2,394,135			2,608,985
Commitments and contingencies
Stockholders' Equity:
	Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding)		—			—
	Class A common stock ($0.001 par value, 350,000 shares authorized; issued 2001—126,879 shares; 2000—125,994 shares)		127			126
	Class B non-voting convertible common stock ($0.001 par value, 30,000 shares authorized; issued and outstanding 2001—0 shares; 2000—0 shares)		—			—
	Additional paid-in capital		662,740			649,166
	Treasury Class A common stock, at cost (2001—3,194 shares; 2000—3,194 shares)		(95,831	)		(95,831	)
	Retained earnings		597,753			511,224
	Accumulated other comprehensive income (loss)		723			(3,554	)
Total Stockholders' Equity			1,165,512			1,061,131
Total Liabilities and Stockholders' Equity		$	3,559,647		$	3,670,116

See accompanying notes to consolidated financial statements.

32

Consolidated Statements of Operations
Health Net, Inc.

			Year ended December 31,
			2001		2000		1999
			(Amounts in thousands, except per share data)
REVENUES
	Health plan services premiums		$	8,292,602	$	7,351,098	$	7,031,055
	Government contracts/Specialty services			1,687,420		1,623,158		1,529,855
	Investment and other income			84,438		102,299		86,977
		Total revenues		10,064,460		9,076,555		8,647,887
EXPENSES
	Health plan services			7,083,052		6,242,282		5,950,002
	Government contracts/Specialty services			1,212,497		1,080,407		1,002,893
	Selling, general and administrative			1,322,187		1,296,881		1,301,743
	Depreciation			61,073		67,260		70,010
	Amortization			37,622		38,639		42,031
	Interest			54,940		87,930		83,808
	Asset impairment and restructuring charges			79,667		—		11,724
	Net loss (gain) on sale of businesses and properties			76,072		409		(58,332	)
	Total expenses			9,927,110		8,813,808		8,403,879
Income from operations before income taxes and cumulative effect of a change in accounting principle				137,350		262,747		244,008
Income tax provision				50,821		99,124		96,226
Income before cumulative effect of a change in accounting principle				86,529		163,623		147,782
Cumulative effect of a change in accounting principle, net of tax				—		—		(5,417	)
Net income			$	86,529	$	163,623	$	142,365
Basic earnings per share:
Income from operations			$	0.70	$	1.34	$	1.21
Cumulative effect of a change in accounting principle				—		—		(0.05	)
Net			$	0.70	$	1.34	$	1.16
Diluted earnings per share:
Income from operations			$	0.69	$	1.33	$	1.21
Cumulative effect of a change in accounting principle				—		—		(0.05	)
Net			$	0.69	$	1.33	$	1.16
Weighted average shares outstanding:
	Basic			123,192		122,471		122,289
	Diluted			125,186		123,453		122,343

See accompanying notes to consolidated financial statements.

33

Consolidated Statements of Stockholders' Equity
Health Net, Inc.

		Common Stock
		Class A			Class B
										Additional Paid-in Capital
		Shares	Amount		Shares		Amount
		(Amounts in thousands)
Balance at January 1, 1999		120,362	$	121	5,048		$	5		$	641,819
Comprehensive income:
	Net income
	Change in unrealized depreciation on investments, net of tax of $2,159
Total comprehensive income
Exercise of stock options including related tax benefit		5
Conversion of Class B to Class A		2,910		3	(2,910	)		(3	)
Employee stock purchase plan		152									1,553
Balance at December 31, 1999		123,429		124	2,138			2			643,372
Comprehensive income:
	Net income
	Change in unrealized depreciation on investments, net of tax of $343
Total comprehensive income
Exercise of stock options including related tax benefit		314									4,683
Conversion of Class B to Class A		2,138		2	(2,138	)		(2	)
Employee stock purchase plan		113									1,111
Balance at December 31, 2000		125,994		126	—			—			649,166
Comprehensive income:
	Net income
	Change in unrealized depreciation on investments, net of tax of $2,865
Total comprehensive income
Exercise of stock options including related tax benefit		820		1							12,495
Employee stock purchase plan		65									1,079
Balance at December 31, 2001		126,879	$	127	—		$	—		$	662,740

See accompanying notes to consolidated financial statements.

34

Consolidated Statements of Stockholders' Equity (continued)
Health Net, Inc.

		Common Stock Held in Treasury
							Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
		Shares		Amount
		(Amounts in thousands)
Balance at January 1, 1999		(3,194	)	$	(95,831	)	$	205,236	$	(7,308	)	$	744,042
Comprehensive income:
	Net income							142,365					142,365
	Change in unrealized depreciation on investments, net of tax of $2,159									3,239			3,239
Total comprehensive income													145,604
Exercise of stock options including related tax benefit													—
Conversion of Class B to Class A													—
Employee stock purchase plan													1,553
Balance at December 31, 1999		(3,194	)		(95,831	)		347,601		(4,069	)		891,199
Comprehensive income:
	Net income							163,623					163,623
	Change in unrealized depreciation on investments, net of tax of $343									515			515
Total comprehensive income													164,138
Exercise of stock options including related tax benefit													4,683
Conversion of Class B to Class A													—
Employee stock purchase plan													1,111
Balance at December 31, 2000		(3,194	)		(95,831	)		511,224		(3,554	)		1,061,131
Comprehensive income:
	Net income							86,529					86,529
	Change in unrealized depreciation on investments, net of tax of $2,865									4,277			4,277
Total comprehensive income													90,806
Exercise of stock options including related tax benefit													12,496
Employee stock purchase plan													1,079
Balance at December 31, 2001		(3,194	)	$	(95,831	)	$	597,753	$	723		$	1,165,512

See accompanying notes to consolidated financial statements.

35

Consolidated Statements of Cash Flows
Health Net, Inc.

		Year Ended December 31,
		2001			2000			1999
		(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	86,529		$	163,623		$	142,365
Adjustments to reconcile net income to net cash provided by operating activities:
	Amortization and depreciation		98,695			105,899			112,041
	Net loss (gain) on sale of businesses and properties		76,072			409			(58,332	)
	Cumulative effect of a change in accounting principle		—			—			5,417
	Asset impairments		27,760			—			11,724
	Other changes		3,656			10,035			5,648
Changes in assets and liabilities, net of effects of dispositions:
	Premiums receivable and unearned premiums		(79,658	)		(10,472	)		(8,973	)
	Other assets		3,672			105,659			63,902
	Amounts receivable/payable under government contracts		235,880			(86,729	)		5,130
	Reserves for claims and other settlements		72,112			103,588			167,084
	Accounts payable and other liabilities		21,766			(25,849	)		(148,878	)
Net cash provided by operating activities			546,484			366,163			297,128
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales or maturities of investments			833,539			304,523			642,150
Purchase of investments			(1,204,667	)		(253,141	)		(606,350	)
Net purchases of property and equipment			(69,512	)		(86,853	)		(36,592	)
Cash (paid) received from the sale of businesses and properties, net of cash disposed			(58,997	)		3,505			137,728
Other			(17,941	)		(29,943	)		26,486
Net cash (used in) provided by investing activities			(517,578	)		(61,909	)		163,422
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases			10,449			5,794			1,553
Proceeds from issuance of notes payable and other financing arrangements			601,102			250,033			221,276
Repayment of debt and other noncurrent liabilities			(777,598	)		(523,885	)		(436,705	)
Net cash used in financing activities			(166,047	)		(268,058	)		(213,876	)
Net (decrease) increase in cash and cash equivalents			(137,141	)		36,196			246,674
Cash and cash equivalents, beginning of year			1,046,735			1,010,539			763,865
Cash and cash equivalents, end of year		$	909,594		$	1,046,735		$	1,010,539
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid		$	46,501		$	87,023		$	85,212
Income taxes paid			24,154			9,694			6,106
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes and stocks received on sale of businesses		$	41,000		$	—		$	22,909

See accompanying notes to consolidated financial statements.

36

Notes to Consolidated Financial Statements

NOTE 1—DESCRIPTION OF BUSINESS

        On November 3, 2000, the Company changed its name from Foundation Health Systems, Inc. to Health Net, Inc. and changed its ticker symbol on the New York Stock Exchange (effective November 6, 2000) from "FHS" to "HNT." The Company accomplished the name change by merging a wholly-owned subsidiary, HNI Shell, Inc., with and into the Company and, in connection with such merger, amending its Certificate of Incorporation to change the Company's name to Health Net, Inc.

        The current operations of Health Net, Inc. (referred to herein as the Company, we, us, our or HNT) are a result of the April 1, 1997 merger transaction (the FHS Combination) involving Health Systems International, Inc. (HSI) and Foundation Health Corporation (FHC). Pursuant to the FHS Combination, FH Acquisition Corp., a wholly-owned subsidiary of HSI (Merger Sub), merged with and into FHC and FHC survived as a wholly-owned subsidiary of HSI, which changed its name to Foundation Health Systems, Inc. Pursuant to the Agreement and Plan of Merger (the Merger Agreement) that evidenced the FHS Combination, FHC stockholders received 1.3 shares of the Company's Class A Common Stock for every share of FHC common stock held, resulting in the issuance of approximately 76.7 million shares of the Company's Class A Common Stock to FHC stockholders. The shares of the Company's Class A Common Stock issued to FHC's stockholders in the FHS Combination constituted approximately 61% of the outstanding stock of the Company after the FHS Combination and the shares held by the Company's stockholders prior to the FHS Combination (i.e. the prior stockholders of HSI) constituted approximately 39% of the outstanding stock of the Company after the FHS Combination.

        The FHS Combination was accounted for as a pooling of interests for accounting and financial reporting purposes. The pooling of interests method of accounting is intended to present, as a single interest, two or more common stockholder interests which were previously independent and assumes that the combining companies have been merged from inception.

        We are an integrated managed care organization which administers through its subsidiaries the delivery of managed health care services. Through our subsidiaries, we offer group, individual, Medicaid and Medicare health maintenance organization (HMO), point of service (POS) and preferred provider organization (PPO) plans; government sponsored managed care plans; and managed care products related to administration and cost containment, behavioral health, dental, vision and pharmaceutical products and other related services.

        We currently operate within two segments: Health Plan Services and Government Contracts/Specialty Services. Our Health Plan Services segment operates in Arizona, California, Connecticut, New Jersey, New York, Oregon and Pennsylvania. During 2000 and most of 2001, the Health Plan Services segment consisted of two regional divisions: Western Division (Arizona, California and Oregon) and Eastern Division (Connecticut, Florida, New Jersey, New York and Pennsylvania). During the fourth quarter of 2001, we decided that we would no longer view our health plan operations through these two regional divisions. We are one of the largest managed health care companies in the United States, with approximately 4.1 million at-risk and administrative services only (ASO) members in our Health Plan Services segment. We also own health and life insurance companies licensed to sell PPO, POS and indemnity products, as well as certain auxiliary non-health products such as life and accidental death and disability insurance in 35 states and the District of Columbia.

        The Government Contracts/Specialty Services segment administers large, multi-year managed care government contracts. This segment subcontracts to affiliated and unrelated third parties the administration and health care risk of parts of these contracts and currently administers health care programs covering 1.5 million eligible individuals under TRICARE (formerly known as the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)). The Company has three TRICARE contracts that cover Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon and Washington, and parts of Arizona, Idaho, Louisiana and Texas. This segment also offers behavioral health, dental and vision services as well as managed care products related to bill review, administration and cost containment for hospitals, health plans and other entities.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

        The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Reclassifications

        Certain amounts in the 2000 and 1999 consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2001 presentation. The reclassifications have no effect on net earnings or stockholders' equity as previously reported.

37

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal areas requiring the use of estimates include the determination of allowances for doubtful accounts, reserves for claims and other settlements, reserves for professional and general liabilities, amounts receivable or payable under government contracts, remaining reserves for restructuring and other charges, and net realizable values for assets where impairment charges have been recorded.

Revenue Recognition

        Health plan services premium revenues include HMO, POS and 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. Revenue is recognized in the month in which the related enrollees are entitled to health care services. Premiums collected in advance are recorded as unearned premiums.

        Government contracts/Specialty services revenues are recognized in the month in which the eligible beneficiaries are entitled to health care services or in the month in which the administrative services are performed or the period that coverage for services is provided. Government contracts also contain cost and performance incentive provisions which adjust the contract price based on actual performance, and revenue under government contracts is subject to price adjustments attributable to inflation and other factors. The effects of these adjustments are recognized on a monthly basis, although the final determination of these amounts could extend significantly beyond the period during which the services were provided. Amounts receivable under government contracts are comprised primarily of estimated amounts receivable under these cost and performance incentive provisions, price adjustments, and change orders for services not originally specified in the contracts. These receivables develop as a result of TRICARE health care costs rising faster than the forecasted health care cost trends used in the original contract bids, data revisions on formal contract adjustments and routine contract changes for benefit adjustments.

        In December 1999, the Securities and Exchange Commission issued, then subsequently amended, Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101, as amended, provides guidance on applying accounting principles generally accepted in the United States of America to revenue recognition issues in financial statements. We adopted SAB 101 effective October 1, 2000. The adoption of SAB 101 did not have a material effect on our consolidated financial position or results of operations.

Health Plan Services

        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 which have been incurred but not yet reported. Such costs include payments to primary care physicians, specialists, hospitals, outpatient care facilities and the costs associated with managing the extent of such care. We estimate the amount of the provision for service costs incurred but not reported using standard actuarial 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. The estimates for service costs incurred but not reported are 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. Such estimates are subject to the impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts provided. While the ultimate amount of claims and losses paid are dependent on future developments, management is of the opinion that the recorded reserves are adequate to cover such costs. These liabilities are reduced by estimated amounts recoverable from third parties for subrogation.

        Our HMOs, primarily in California and Connecticut, generally contract with various medical groups to provide professional care to certain of its members on a capitated, or fixed per member per month fee basis. Capitation contracts generally include a provision for stop-loss and non-capitated services for which we are liable. Professional capitated contracts also generally contain provisions for shared risk, whereby the Company and the medical groups share in the variance between actual costs and predetermined goals. Additionally, we contract with certain hospitals to provide hospital care to enrolled members on a capitation basis. Our HMOs also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital per diems, and case rates under which providers bill the HMOs for each individual service provided to enrollees.

        We assess the profitability of contracts for providing health care services when operating results or forecasts indicate probable future losses. Contracts are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing anticipated premiums to estimates for the total of health care related costs less reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are recognized in the period the loss is determined and are classified as Health Plan Services.

38

Cash and Cash Equivalents

        Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased.

        We and our consolidated subsidiaries are required to set aside certain funds for restricted purposes pursuant to regulatory requirements. As of December 31, 2001 and 2000, the restricted cash and cash equivalents balances totaled $4.4 million and $4.1 million, respectively, and are included in other noncurrent assets.

Investments

        Investments classified as available for sale are reported at fair value based on quoted market prices, with unrealized gains and losses 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 investment income.

        Certain long-term debt investments are held by trustees or agencies pursuant to state regulatory requirements. These investments totaled $1.4 million and $3.0 million as of December 31, 2001 and 2000, respectively, and are included in other noncurrent assets. Short-term investments held by trustees or agencies pursuant to state regulatory requirements were $86.1 million and $89.5 million as of December 31, 2001 and 2000, respectively, and are included in investments available for sale (see Note 11). Market values approximate carrying value as of December 31, 2001 and 2000.

Government Contracts

        Amounts receivable or payable under government contracts are based on three TRICARE contracts in five regions which include both amounts billed ($17.4 million and $1.2 million of net receivables at December 31, 2001 and 2000, respectively) and estimates for amounts to be received under cost and performance incentive provisions, price adjustments and change orders for services not originally specified in the contracts. Such estimates are determined based on information available as well as historical performance and collection of which could extend for periods beyond a year. Differences, which may be material, between the amounts estimated and final amounts collected are recorded in the period when determined.

        In December 2000, our subsidiary, Health Net Federal Services, Inc., and the Department of Defense agreed to a settlement of approximately $389 million for outstanding receivables related to our three TRICARE contracts and for the completed contract for the CHAMPUS Reform Initiative. Approximately $60 million of the settlement amount was received in December 2000. The remaining settlement amount was received on January 5, 2001.

        Additionally, the reserves for claims and other settlements include approximately $224.0 million and $205.3 million relating to health care services provided under these contracts as of December 31, 2001 and 2000, respectively.

Property and Equipment

        Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the lesser of estimated useful lives of the various classes of assets or the lease term. The useful life for buildings and improvements is estimated at 35 to 40 years, and the useful lives for furniture, equipment and software range from three to eight years (see Note 5).

        Effective January 1, 1999, we adopted Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and changed our method of accounting for the costs of internally developed computer software. The change involved capitalizing certain consulting costs, payroll and payroll related costs for employees related to computer software developed for internal use and subsequently amortizing such costs over a three to five year period. The Company had previously expensed such costs.

        Expenditures for maintenance and repairs are expensed as incurred. Major improvements which increase the estimated useful life of an asset are capitalized. Upon the sale or retirement of assets, the recorded cost and the related accumulated depreciation are removed from the accounts, and any gain or loss on disposal is reflected in operations.

        During 2001, we recorded impairment charges of $27.9 million for certain information technology-related assets (see Note 14).

Goodwill and Other Intangible Assets

        Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets consist of the value of employer group contracts, provider networks and non-compete agreements. Goodwill and other intangible assets are amortized using the straight-line method over the estimated lives of the related assets listed below. In accordance with Accounting Principles Board (APB) Opinion No. 17, we periodically evaluate these estimated lives to determine if events and circumstances warrant revised periods of amortization. We further evaluate the carrying value of our goodwill and other intangible assets based on estimated fair value or undiscounted operating cash flows whenever significant events or changes occur which might impair recovery of recorded costs. Fully amortized goodwill and other intangible assets and the related accumulated amortization are removed from the accounts.

        Impairment is measured in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and is based on whether the asset will be held and used or held for disposal. An impairment loss on assets to be held and used is measured as the amount by which the carrying amount exceeds the fair value of the asset. Fair value of assets held for disposal would additionally be reduced by costs to sell the asset. For the purposes of analyzing

39

impairment, assets, including goodwill, are grouped at the lowest level for which there are identifiable independent cash flows, which is generally at the operating subsidiary level. Estimates of fair value are determined using various techniques depending on the event that indicated potential impairment. Impairment charges for goodwill in 1999 amounted to $4.7 million (see Note 14).

        Goodwill and other intangible assets consisted of the following as of December 31, 2001:

(Amounts in thousands)	Cost		Accumulated Amortization		Net Balance		Amortization Period
Goodwill	$	974,103	$	209,722	$	764,381	9-40 years
Provider network		35,726		14,239		21,487	14-40 years
Employer group contracts		92,900		85,174		7,726	11-23 years
Other		29,031		20,811		8,220	5-7 years
Total	$	1,131,760	$	329,946	$	801,814

        Goodwill and other intangible assets consisted of the following as of December 31, 2000:

(Amounts in thousands)	Cost		Accumulated Amortization		Net Balance		Amortization Period
Goodwill	$	972,707	$	181,509	$	791,198	9-40 years
Provider network		69,466		18,992		50,474	14-40 years
Employer group contracts		92,900		77,024		15,876	11-23 years
Other		27,002		21,131		5,871	5-7 years
Total	$	1,162,075	$	298,656	$	863,419

Change in Accounting Principle

        Effective January 1, 1999, we adopted Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" and changed our method of accounting for start-up and organization costs. The change involved expensing these costs as incurred, rather than our previous accounting principle of capitalizing and subsequently amortizing such costs.

        The change in accounting principle resulted in the write-off of the costs capitalized as of January 1, 1999. The cumulative effect of the write-off was $5.4 million (net of tax benefit of $3.7 million) and has been expensed and reflected in the consolidated statement of operations for the year ended December 31, 1999.

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 limit the amounts which may be invested with one issuer. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising our customer base. Our 10 largest employer groups accounted for 57%, 36% and 32% of premiums receivable and 15%, 16% and 15% of premium revenue as of December 31, 2001, 2000 and 1999, respectively, and for the years then ended.

Earnings Per Share

        Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods presented. Diluted EPS is based upon the weighted average shares of common stock and dilutive common stock equivalents (stock options) outstanding during the periods presented.

        Common stock equivalents arising from dilutive stock options are computed using the treasury stock method; in 2001, 2000, and 1999, this amounted to 1,994,000, 982,000 and 54,000 shares, respectively.

        Options to purchase an aggregate of 6.5 million, 4.6 million and 11.4 million shares of common stock were considered anti-dilutive during 2001, 2000 and 1999, respectively, and were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common stock for each respective period. These options expire through December 2011 (see Note 7).

Fair Value of Financial Instruments

        The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and notes receivable and notes payable approximate their carrying amounts in the financial statements and have been determined by us 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. The fair values of investments are estimated based

40

on quoted market prices and dealer quotes for similar investments. 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 carrying value of long-term notes receivable, non-marketable securities and revolving credit facilities approximate the fair value of such financial instruments. The carrying value of the senior notes payable was $398.7 million and the fair value was $415 million as of December 31, 2001. Considerable judgment is required to develop estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts we could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

        The fair value estimates are based on pertinent information available to management as of December 31, 2001 and 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly.

        In June 1998, the Financial Accounting Standards Board (FASB) issued, then subsequently amended, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133, as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that all derivatives be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. We adopted SFAS No. 133, as amended, effective January 1, 2001. The adoption of SFAS No. 133 had no effect on our consolidated financial position or results of operations.

Stock-Based Compensation

        SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. As permitted under SFAS 123, we have elected to continue accounting for stock-based compensation under the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value method, compensation cost for stock options is measured at the date of grant as the excess, if any, of the quoted market price of our stock over the exercise price of the option (see Note 7).

Comprehensive Income

        SFAS No. 130 "Reporting Comprehensive Income" establishes standards for reporting and presenting comprehensive income and its components. Comprehensive income includes all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income and net unrealized appreciation (depreciation), after tax, on investments available for sale. Reclassification adjustments for net gains (losses) realized, net of tax, in net income were $0.8 million, $(0.04) million and $0.4 million for the years ended December 31, 2001, 2000 and 1999, respectively.

Recently Issued Accounting Pronouncements

        In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and some provisions of Accounting Principles Board (APB) Opinion 30. SFAS No. 144 sets new criteria for determining when an asset can be classified as held-for-sale as well as modifying the financial statement presentation requirements of operating losses from discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We do not expect the adoption of SFAS No. 144 to have a material effect on our consolidated financial position or results of operations.

        In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 provides accounting standards for closure or removal-type costs similar to the costs of nuclear decommissioning, but it applies to other industries and assets as well. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, however, earlier application is encouraged. We do not expect the adoption of SFAS No. 143 to have a material effect on our consolidated financial position or results of operations.

        In July 2001, the FASB issued two new pronouncements: SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS No. 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. We are currently evaluating the provisions of SFAS No. 142. SFAS No. 142 requires amortization of goodwill to cease effective January 1, 2002. In 2002, we expect amortization expense to decrease by approximately $25 million from the 2001 level of $37.6 million due to the adoption of SFAS No. 142. The adoption of SFAS No. 141 has had no material effect on our consolidated financial position or results of operations.

41

Taxes Based on Premiums

        We provide services in certain states which require premium taxes to be paid by us based on membership or billed premiums. These taxes are paid in lieu of or in addition to state income taxes and totaled $12.3 million in 2001, $9.9 million in 2000 and $11.7 million in 1999. These amounts are recorded in selling, general and administrative expenses on our consolidated statements of operations.

Income Taxes

        We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse (see Note 10).

NOTE 3—ACQUISITIONS AND DISPOSITIONS

        The following summarizes acquisitions, strategic investments, and dispositions made by us during the three years ended December 31, 2001.

2001 Transactions

        Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received approximately $49 million which consists of $23 million in cash and approximately $26 million in a secured six-year note bearing eight percent interest per annum. We also sold the corporate facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing eight percent interest per annum. We estimated and recorded a $76.1 million pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001. As part of the Florida sale agreement and certain reinsurance and indemnification obligations of the Company, there will be a true up process that will take place during 2002 that could result in additional loss or gain which was not able to be estimated as of December 31, 2001.

        The Florida health plan, excluding the $76.1 million loss on sale, had premium revenues of $339.7 million and a net loss of $11.5 million for the seven months through the disposition date that are included in our results for the year ended December 31, 2001. The effect of the suspension of the depreciation on the corporate facility building was immaterial for the year ended December 31, 2001. At the date of sale, the Florida health plan had $41.5 million in net equity.

2000 Transactions

        We sold a property in California and received cash proceeds of $3.5 million and recognized a gain of $1.1 million, before taxes.

        As discussed in the "1999 TRANSACTIONS," we completed the sale of our HMO operations in Washington. As part of the final sales true-up adjustment, we recorded a loss on the sale of our Washington HMO operations of $1.5 million, before taxes, during 2000.

        In 1995, we entered into a five year tax retention operating lease for the construction of various health care centers and a corporate facility. Upon expiration in May 2000, the lease was extended for four months through September 2000 whereupon we settled our obligations under the agreement and purchased the leased properties which were comprised of three rental health care centers and a corporate facility for $35.4 million. The health care centers are held as investment rental properties and are included in other noncurrent assets. The corporate facility building used by our Florida health plan was sold to DGE Properties LLC concurrent with the sale of our Florida health plan. The buildings are being depreciated over a remaining useful life of 35 years.

        Throughout 2000 and 2001, we have provided funding in the amount of approximately $10.0 million in exchange for preferred stock in MedUnite, Inc., an independent company, funded and organized by seven major managed health care companies. MedUnite, Inc. is designed to provide online internet provider connectivity services including eligibility information, referrals, authorizations, claims submission and payment. The funded amounts are included in other noncurrent assets.

        During 2000, we secured an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. (CSMS-IPA) for $15.0 million. CSMS-IPA is an association of medical doctors providing health care primarily in Connecticut. The amounts paid to CSMS-IPA for this agreement are included in other noncurrent assets. During 2001, we continued to develop this service capability.

1999 Transactions

        In connection with its planned divestiture of non-core operations, we completed the sale of certain of our non-affiliate pharmacy benefits management operations for net cash proceeds of $65.0 million and recognized a net gain of $60.6 million. In addition, we also completed the sale of our HMO operations in Utah, Washington, New Mexico, Louisiana, Texas and Oklahoma, as well as the sale of our two hospitals, a third-party administrator subsidiary and a PPO network subsidiary. For these businesses, we received an aggregate of $60.5 million in net cash proceeds, $12.2 million in notes receivable, $10.7 million in stocks and recognized a net loss of $9.1 million, before taxes. We also recorded a gain on sale of buildings of $6.8 million.

        In connection with the disposition of the HMO operations in Washington, we transferred the Medicaid and Basic Health Plan membership and retained the commercial membership under a reinsurance and administrative agreement. At the same time, we entered into definitive agreements with PacifiCare of Washington, Inc. and Premera Blue Cross to transition our commercial membership in Washington. The transition was completed as of June 30, 2000. We also entered into a definitive agreement with PacifiCare of Colorado, Inc. to transition our HMO membership in Colorado. The transition was completed as of June 30, 2000. These transfers did not have a material effect on the consolidated financial statements.

42

NOTE 4—INVESTMENTS

        As of December 31, the amortized cost, gross unrealized holding gains and losses and fair value of our available-for-sale investments were as follows:

	2001
(Amounts in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
Asset-backed securities	$	317,226	$	2,469	$	(796	)	$	318,899
U.S. government and agencies		245,260		2,399		(332	)		247,327
Obligations of states and other political subdivisions		63,737		668		(290	)		64,115
Corporate debt securities		211,988		1,366		(1,268	)		212,086
Other securities		16,123		364		(2,354	)		14,133
	$	854,334	$	7,266	$	(5,040	)	$	856,560

	2000
(Amounts in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
Asset-backed securities	$	108,308	$	564	$	(148	)	$	108,724
U.S. government and agencies		122,340		868		(101	)		123,107
Obligations of states and other political subdivisions		125,630		688		(93	)		126,225
Corporate debt securities		91,339		571		(3,216	)		88,694
Other securities		44,201		120		(4,169	)		40,152
	$	491,818	$	2,811	$	(7,727	)	$	486,902

        As of December 31, 2001, the contractual maturities of our available-for-sale investments were as follows:

(Amounts in thousands)	Cost		Estimated Fair Value
Due in one year or less	$	66,408	$	67,081
Due after one year through five years		314,909		317,892
Due after five years through ten years		265,667		265,692
Due after ten years		198,336		199,509
Equity securities (no maturity)		9,014		6,386
Total available for sale	$	854,334	$	856,560

        Proceeds from sales and maturities of investments available for sale during 2001 were $833.5 million, resulting in realized gains and losses of $3.8 million and $2.4 million, respectively. Proceeds from sales and maturities of investments available for sale during 2000 were $304.5 million, resulting in realized gains and losses of $.04 million and $.1 million, respectively. Proceeds from sales and maturities of investments available for sale during 1999 were $642.2 million, resulting in realized gains and losses of $.7 million and $.1 million, respectively.

NOTE 5—PROPERTY AND EQUIPMENT

        Property and equipment comprised the following as of December 31:

(Amounts in thousands)	2001		2000
Land	$	15,100	$	20,700
Internal use software under development		14,315		2,082
Buildings and improvements		91,409		126,702
Furniture, equipment and software		511,090		541,654
		631,914		691,138
Less accumulated depreciation		378,851		395,129
	$	253,063	$	296,009

43

NOTE 6—FINANCING ARRANGEMENTS

        Senior notes payable, revolving credit facility and capital leases and other financing arrangements comprised the following as of December 31:

(Amounts in thousands)	2001		2000
Senior notes payable—noncurrent	$	398,678	$	—
Revolving credit facility, unsecured		195,000		766,450
Capital leases		578		49
Total credit facility and capital leases		195,578		766,499
Less credit facility and capital leases—current portion		396		49
Credit facility and capital leases—noncurrent portion	$	195,182	$	766,450

        The weighted average annual interest rate on our financing arrangements was approximately 7.1%, 7.9% and 6.8% for the years ended December 31, 2001, 2000 and 1999, respectively.

Senior Notes Payable

        On April 12, 2001, we completed our offering of $400 million aggregate principal amount of 8.375 percent Senior Notes due in April 2011 at a discount of $1.4 million. The proceeds, net of discount and other issuance costs, of $395.1 million from the Senior Notes were used to repay outstanding borrowings under our then-existing revolving credit facility. Effective October 4, 2001, we completed an exchange offer for the Senior Notes in which the outstanding Senior Notes were exchanged for an equal aggregate principal amount of new 8.375 percent Senior Notes due 2011 that have been registered under the Securities Act of 1933, as amended.

Revolving Credit Facility

        On June 28, 2001, we entered into credit agreements for two new revolving syndicated credit facilities with Bank of America, N.A. as administrative agent, that replaced our previous credit facility. The new facilities, providing for an aggregate of $700 million in borrowings, consist of a $175 million 364-day revolving credit facility and a $525 million five-year revolving credit and competitive advance facility. The 364-day credit facility expires on June 27, 2002. We must repay all borrowings under the 364-day credit facility by June 27, 2004. The five-year credit facility expires in June 2006, and we must repay all borrowings under the five-year credit facility by June 28, 2006. The five-year credit facility may be extended at our request under certain circumstances for up to two twelve-month periods. Swingline loans under the five-year credit facility are subject to repayment within seven days. Committed loans under the credit facilities bear interest at a rate equal to either (1) the greater of the federal funds rate plus 0.5% and the applicable prime rate or (2) LIBOR plus a margin that depends on our senior unsecured credit rating. Loans obtained through the bidding process bear interest at a rate determined in the bidding process. Swing-line loans under the five-year credit facility bear interest equal to, at our option, either a base rate plus a margin that depends on our senior unsecured credit rating or a rate quoted to us by the swingline lender. The credit agreements provide for acceleration of repayment of indebtedness under the credit facilities upon the occurrence of customary events of default such as failing to pay any principal or interest when due; providing materially incorrect representations; failing to observe any covenant or condition; judgments against us involving in the aggregate a liability of $25 million or more that is not covered by insurance; our non-compliance with any material terms of HMO or insurance regulations pertaining to fiscal soundness, solvency or financial condition; the occurrence of specified adverse events in connection with any employee pension benefit plan of ours; our failure to comply with the terms of other indebtedness with an aggregate amount exceeding $40 million such that the other indebtedness can be or is accelerated; or a change in control. The $195.0 million outstanding as of December 31, 2001 under the credit facilities is under the five-year facility. The maximum amount outstanding under the new facilities during 2001 was $280 million and the maximum commitment level is $700 million as of December 31, 2001. The credit agreements contain negative covenants, including financial covenants that impose restrictions on our operations and other covenants, including, among other things, limitations on incurrence of indebtedness by subsidiaries of Health Net, Inc. As of December 31, 2001, we were in compliance with the covenants of the credit facilities.

        The previous credit facility for $1.5 billion was established in July 1997 with Bank of America (as Administrative Agent for the Lenders thereto, as amended in April, July, and November 1998, March 1999, and September 2000 (the Amendments). At our election, and subject to customary covenants, loans were initiated on a bid or committed basis and carried interest at offshore or domestic rates, at the applicable LIBOR Rate plus margin or the bank reference rate. Actual rates on borrowings under the credit facility varied, based on competitive bids and our unsecured credit rating at the time of the borrowing. The maximum amount outstanding under the previous credit facility during 2001 was $766 million.

44

        Scheduled principal repayments on the senior notes payable and capital leases for the next five years are as follows (amounts in thousands):

Contractual Cash Obligations	Total		2002		2003		2004	2005	2006		Thereafter
Five-year revolving credit facility	$	195,000							$	195,000
Senior notes		400,000									$	400,000
Capital leases		578	$	396	$	182

NOTE 7—STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS

        We have various stock option plans which cover certain employees, officers and non-employee directors, and an employee stock purchase plan under which substantially all of our full-time employees are eligible to participate. The stockholders have approved these plans except for the 1998 Stock Option Plan which was adopted by our Board of Directors.

        Under our various employee stock option plans and our non-employee director stock option plan, we grant options at prices at or above the fair market value of the stock on the date of grant. The options carry a maximum term of up to 10 years and in general vest ratably over three to five years, except for certain option grants under the 1997 and 1998 plans where vesting is accelerated by virtue of attaining a target closing market price of $25 per share for 20 consecutive trading days. We have reserved a total of 20.9 million shares of our Class A Common Stock for issuance under the stock option plans.

        Under our Employee Stock Purchase Plan, we provide employees with the opportunity to purchase stock through payroll deductions. Eligible employees may purchase on a monthly basis our Class A Common Stock at 85% of the lower of the market price on either the first or last day of each month.

        Stock option activity and weighted average exercise prices for the years ended December 31 are presented below:

	2001				2000				1999
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding at January 1	12,219,782		$	17.83	12,284,417		$	20.47	13,418,473		$	20.87
Granted	5,439,036			22.79	3,932,353			9.54	785,549			12.62
Exercised	(820,247	)		11.52	(314,384	)		17.73	(5,000	)		14.50
Canceled	(3,732,387	)		25.05	(3,682,604	)		17.86	(1,914,605	)		19.93
Outstanding at December 31	13,106,184		$	18.25	12,219,782		$	17.83	12,284,417		$	20.47
Exercisable at December 31	3,364,436				4,890,364				4,824,708

        The following table summarizes the weighted average exercise price and weighted average remaining contractual life for significant option groups outstanding at December 31, 2001:

		Options Outstanding				Options Exercisable
Range of Exercise Prices		Number of Options	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$	6.69 – $9.88	2,653,397	6.18	$	9.04	468,016	$	9.06
	9.94 – 12.94	3,269,280	3.14		12.82	689,615		12.53
	13.06 – 22.88	1,101,912	6.95		17.88	579,266		16.60
	23.02	4,452,956	8.49		23.02	—		—
	23.75 – 36.25	1,628,639	5.40		31.37	1,627,539		31.37
$	6.69 – $36.25	13,106,184	6.18	$	18.25	3,364,436	$	21.86

        The weighted average fair value for options granted during 2001, 2000 and 1999 was $9.14, $5.18 and $6.10, respectively. The fair values were estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were used in the fair value calculation for 2001, 2000 and 1999, respectively: (i) risk-free interest rate of 4.88%, 5.97% and 6.31%; (ii) expected option lives of 3.6 years, 4.2 years and 3.9 years; (iii) expected volatility for options of 55.9%, 63.7% and 55.7%; and (iv) no expected dividend yield.

45

        We apply APB Opinion No. 25 and related Interpretations in accounting for our plans. Accordingly, no compensation cost has been recognized for our stock option or employee stock purchase plans. Had compensation cost for our plans been determined based on the fair value at the grant dates of options and employee purchase rights consistent with the method of SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended December 31 (amounts in thousands, except per share data):

		2001		2000		1999
Net income	As reported Pro forma	$	86,529 67,394	$	163,623 156,701	$	142,365 132,043
Basic earnings per share	As reported Pro forma		0.70 0.55		1.34 1.28		1.16 1.08
Diluted earnings per share	As reported Pro forma		0.69 0.54		1.33 1.27		1.16 1.08

        As fair value criteria was not applied to option grants and employee purchase rights prior to 1995, and additional awards in future years are anticipated, the effects on net income and earnings per share in this pro forma disclosure may not be indicative of future amounts.

NOTE 8—CAPITAL STOCK

        We have two classes of Common Stock. Our Class B Common Stock has the same economic benefits as our Class A Common Stock but is non-voting. As of December 31, 2001, there were 123,685,000 shares of our Class A Common Stock outstanding and no shares of our Class B Common Stock outstanding.

Public Offering

        On May 15, 1996, we completed a public offering in which we sold 3,194,374 shares of Class A Common Stock and the California Wellness Foundation (CWF) sold 6,386,510 shares of Class A Common Stock (constituting 6,386,510 shares of Class B Common Stock which automatically converted into shares of Class A Common Stock upon the sale) for a per share purchase price to the public of $30.00 (the Offering). The proceeds received by us from the sale of the 3,194,374 shares of Class A Common Stock were approximately $92.4 million after deducting underwriting discounts and commissions and estimated expenses of the Offering payable by us. We used the net proceeds from the Offering to repurchase 3,194,374 shares of Class A Common Stock from certain Class A Stockholders. We repurchased these shares of Class A Common Stock from the Class A Stockholders at $30.00 per share less transaction costs associated with the Offering, amounting to $1.08 per share. All of these 3,194,374 shares of Class A Common Stock repurchased are currently held in treasury. We did not receive any of the proceeds from the sale of shares of Class A Common Stock in the Offering by the CWF.

        On June 27, 1997, we redeemed 4,550,000 shares of Class B Common Stock from the CWF at a price of $24.469 per share. We provided our consent to permit the CWF to sell 3,000,000 shares of Class B Common Stock to an unrelated third party in June of 1997 and the CWF had the right to sell an additional 450,000 shares of Class B Common Stock to unrelated third parties, which it did throughout August of 1997. On November 6, 1997, we also provided our consent to permit the CWF to sell 1,000,000 shares of Class B Common Stock to unrelated third parties. In addition, on June 1, 1998, we gave our consent to permit the CWF to sell (and on June 18, 1998, the CWF sold) 5,250,000 shares of Class B Common Stock to unrelated third parties. In 2000 and 1999, the CWF sold 2,138,000 and 2,909,600 shares of Class B Common Stock to unrelated third parties, respectively. As a result of such sale, the CWF no longer holds any shares of Class B Common Stock. Pursuant to our Certificate of Incorporation, all of such shares of Class B Common Stock sold automatically converted into shares of Class A Common Stock in the hands of such third parties.

Shareholder Rights Plan

        On May 20, 1996, our Board of Directors declared a dividend distribution of one right (a Right) for each outstanding share of our Class A Common Stock and Class B Common Stock (collectively, the Common Stock), to stockholders of record at the close of business on July 31, 1996 (the Record Date). Our Board of Directors also authorized the issuance of one Right for each share of Common Stock issued after the Record Date and prior to the earliest of the "Distribution Date," the Rights separate from the Common Stock under the circumstances described below and in accordance with the provisions of the Rights Agreement, as defined below, the redemption of the Rights, and the expiration of the Rights and in certain other circumstances. Rights will attach to all Common Stock certificates representing shares then outstanding and no separate Rights Certificates will be distributed. Subject to certain exceptions contained in the Rights Agreement (as amended), the Rights will separate from the Common Stock following any person, together with its affiliates and associates (an Acquiring Person), becoming the beneficial owner of 15% or more of the outstanding Class A Common Stock, the commencement of a tender or exchange offer that would result in any person, together with its affiliates and associates, becoming the beneficial owner of 15% or more

46

of the outstanding Class A Common Stock or the determination by the Board of Directors that a person, together with its affiliates and associates, has become the beneficial owner of 10% or more of the Class A Common Stock and that such person is an "Adverse Person," as defined in the Rights Agreement.

        The Rights will first become exercisable on the Distribution Date and will expire on July 31, 2006, unless earlier redeemed by us as described below. Except as set forth below and subject to adjustment as provided in the Rights Agreement, each Right entitles its registered holder, upon the occurrence of a Distribution Date, to purchase from us one one-thousandth of a share of Series A Junior Participating Preferred Stock, at a price of $170.00 per one-thousandth share.

        Subject to certain exceptions contained in the Rights Agreement, in the event that any person shall become an Acquiring Person or be declared an Adverse Person, then the Rights will "flip-in" and entitle each holder of a Right, other than any Acquiring Person or Adverse Person, to purchase, upon exercise at the then-current exercise price of such Right, that number of shares of Class A Common Stock having a market value of two times such exercise price.

        In addition and subject to certain exceptions contained in the Rights Agreement, in the event that we are acquired in a merger or other business combination in which the Class A Common Stock does not remain outstanding or is changed or 50% of our assets or earning power is sold or otherwise transferred to any other person, the Rights will "flip-over" and entitle each holder of a Right, other than an Acquiring Person or an Adverse Person, to purchase, upon exercise at the then-current exercise price of such Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times such exercise price.

        We may redeem the rights until the earlier of 10 days following the date that any person becomes the beneficial owner of 15% or more of the outstanding Class A Common Stock and the date the Rights expire at a price of $.01 per Right.

        In connection with the FHS Combination, we entered into Amendment No. 1 to the Rights Agreement to exempt the FHS Combination and related transactions from triggering the separation of the Rights. In addition, the amendment modified certain terms of the Rights Agreement applicable to the determination of certain "Adverse Persons," which modifications became effective upon consummation of the FHS Combination.

        In 2001, we entered into Amendment No. 2 to the Rights Agreement. The amendment provides that certain passive institutional investors that beneficially own less than 17.5% of the outstanding shares of our common stock shall not be deemed to be "Acquiring Persons," as defined in the Rights Agreement. The amendment also provides, among other things, for the appointment of Computershare Investor Services, L.L.C. as the Rights Agent.

NOTE 9—EMPLOYEE BENEFIT PLANS

Defined Contribution Retirement Plans

        We and certain of our subsidiaries sponsor defined contribution retirement plans intended to qualify under Section 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the Code). Participation in the plans is available to substantially all employees who meet certain eligibility requirements and elect to participate. Employees may contribute up to the maximum limits allowed by Sections 401(k) and 415 of the Code, with Company contributions based on matching or other formulas. Our expense under these plans totaled $8.4 million, $8.6 million and $7.8 million for the years ended December 31, 2001, 2000 and 1999, respectively.

Deferred Compensation Plans

        Effective May 1, 1998, we adopted a deferred compensation plan pursuant to which certain management and highly compensated employees are eligible to defer between 5% and 50% of their regular compensation and between 5% and 100% of their bonuses, and non-employee Board members are eligible to defer up to 100% of their directors compensation. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. Each plan participant is fully vested in all deferred compensation and earnings credited to his or her account. As of December 31, 2001, the employee deferrals were invested through a trust.

        Prior to May 1997, certain members of management, highly compensated employees and non-employee Board members were permitted to defer payment of up to 90% of their compensation under a prior deferred compensation plan (the Prior Plan). The Prior Plan was frozen in May 1997 at which time each participant's account was credited with three times the 1996 Company match (or a lesser amount for certain participants) and each participant became 100% vested in all such contributions. The current provisions with respect to the form and timing of payments under the Prior Plan remain unchanged. As of December 31, 2001 and 2000, the liability under these plans amounted to $23.1 million and $21.6 million, respectively. Our expense under these plans totaled $2.3 million, $2.8 million and $1.9 million for the years ended December 31, 2001, 2000 and 1999, respectively.

Pension and Other Postretirement Benefit Plans

Retirement Plans—We have two unfunded non-qualified defined benefit pension plans, a Supplemental Executive Retirement Plan (adopted in 1996) and a Directors' Retirement Plan (collectively, the HSI SERPs). These plans cover key executives, as selected by the Board of Directors, and non-employee directors. Benefits under the plans are based on years of service and level of compensation.

47

Postretirement Health and Life Plans—Certain of our subsidiaries sponsor postretirement defined benefit health care plans that provide postretirement medical benefits to directors, key executives, employees and dependents who meet certain eligibility requirements. Under these plans, we pay a percentage of the costs of medical, dental and vision benefits during retirement. The plans include certain cost-sharing features such as deductibles, co-insurance and maximum annual benefit amounts which vary based principally on years of credited service.

        On December 31, 1998, we adopted SFAS No. 132 "Employers' Disclosures about Pension and Other Postretirement Benefits" (SFAS No. 132), which revises and standardizes employers' disclosures about pension and other postretirement benefit plans. We have chosen to disclose the information required by SFAS No. 132 by aggregating retirement plans into the "Pension Benefits" category and postretirement plans into the "Other Benefits" category.

        The following table sets forth the plans' funded status and amounts recognized in our financial statements:

		Pension Benefits						Other Benefits
		2001			2000			2001			2000
		(Amounts in thousands)
Change in benefit obligation:
	Benefit obligation, beginning of year	$	14,174		$	12,287		$	6,446		$	5,506
	Service cost		1,132			1,174			221			595
	Interest cost		1,031			972			331			388
	Plan amendments		—			—			(1,626	)		—
	Benefits paid		(725	)		(967	)		(161	)		(95	)
	Actuarial loss (gain)		1,368			708			(2	)		52
	Projected benefit obligation, end of year	$	16,980		$	14,174		$	5,209		$	6,446
Change in fair value of plan assets:
	Plan assets, beginning of year	$	—		$	—		$	—		$	—
	Employer contribution		725			967			161			95
	Benefits paid		(725	)		(967	)		(161	)		(95	)
	Plan assets, end of year	$	—		$	—		$	—		$	—
	Funded status of plans	$	(16,980	)	$	(14,174	)	$	(5,209	)	$	(6,446	)
	Unrecognized prior service cost		4,040			4,499			315			(204	)
	Unrecognized gain		(956	)		(2,465	)		(1,345	)		(1,511	)
	Net amount recognized as accrued benefit liability	$	(13,896	)	$	(12,140	)	$	(6,239	)	$	(8,161	)

        We have multiple postretirement medical benefit plans. The Health Net plan is non-contributory for employees retired prior to December 1, 1995 who have attained the age of 62; employees retiring after December 1, 1995 who have attained age 62 contribute from 25% to 100% of the cost of coverage depending upon years of service. We have two other benefit plans that we have acquired as part of the acquisitions made in 1997. One of the plans is frozen and non-contributory, whereas the other plan is contributory by certain participants.

        The components of net periodic benefit costs for the years ended December 31, 2001, 2000 and 1999 are as follows:

	Pension Benefits								Other Benefits
	2001			2000			1999		2001			2000			1999
	(Amounts in thousands)
Service cost	$	1,132		$	1,174		$	1,762	$	221		$	595		$	603
Interest cost		1,031			972			989		331			388			324
Amortization of prior service cost		459			469			474		31			(6	)		(6	)
Amortization of unrecognized (gain) loss		(141	)		(165	)		103		(168	)		(82	)		(58	)
		2,481			2,450			3,328		415			895			863
Subsidiary plan curtailment credit		—			—			—		(2,176	)		—			—
Net periodic benefit expense (income)	$	2,481		$	2,450		$	3,328	$	(1,761	)	$	895		$	863

        One of our subsidiaries recorded a curtailment gain of $2,176,000 during the year ended December 31, 2001 due to termination of certain benefits in accordance with plan amendments.

48

        The weighted average annual discount rate assumed was 7.0% and 7.50% for the years ended December 31, 2001 and 2000, respectively, for both pension plan benefit plans and other postretirement benefit plans. Weighted average compensation increases of between 2.0% to 6.0% for the years ended December 31, 2001 and 2000 were assumed for the pension benefit plans.

        For measurement purposes, depending upon the type of coverage offered, a 7.0% to 8.5% annual rate of increase in the per capita cost covered health care benefits was assumed for 2001, and 6.0% to 9.0% was assumed for 2000. These rates were assumed to decrease gradually to between 5.0% to 5.5% in 2008 for 2001 and to between 5.5% and 6.0% in 2007 for 2000.

        A one percentage point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2001:

	1-percentage point increase		1-percentage point decrease
	(Amounts in thousands)
Effect on total of service and interest cost	$	87	$	(70	)
Effect on postretirement benefit obligation	$	679	$	(544	)

        We have no minimum pension liability adjustment to be included in comprehensive income.

NOTE 10—INCOME TAXES

        Significant components of the provision for income taxes are as follows for the years ended December 31:

		2001			2000		1999
		(Amounts in thousands)
Current:
	Federal	$	583		$	18,459	$	29,080
	State		16,254			10,349		(6,448	)
Total current			16,837			28,808		22,632
Deferred:
	Federal		42,618			64,644		52,419
	State		(8,634	)		5,672		21,175
Total deferred			33,984			70,316		73,594
Total provision for income taxes		$	50,821		$	99,124	$	96,226

        A reconciliation of the statutory federal income tax rate and the effective income tax rate on income is as follows for the years ended December 31:

	2001		2000		1999
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal income tax effect	3.6		4.0		3.9
Tax exempt interest income	(1.1	)	(0.9	)	(1.1	)
Goodwill amortization	6.0		3.3		3.4
Examination settlements	(7.2	)	(2.3	)	(1.9	)
Other, net	0.7		(1.4	)	0.1
Effective income tax rate	37.0	%	37.7	%	39.4	%

        Significant components of our deferred tax assets and liabilities as of December 31 are as follows:

	2001			2000
	(Amounts in thousands)
DEFERRED TAX ASSETS:
Accrued liabilities	$	48,556		$	28,570
Insurance loss reserves and unearned premiums		4,953			4,627
Tax credit carryforwards		3,154			12,709
Accrued compensation and benefits		34,964			33,089
Net operating loss carryforwards		52,128			115,462
Other		10,391			8,687
Deferred tax assets before valuation allowance		154,146			203,144
Valuation allowance		(16,813	)		(16,813	)
Net deferred tax assets	$	137,333		$	186,331
DEFERRED TAX LIABILITIES:
Depreciable and amortizable property	$	35,810		$	53,214
Other		5,255			—
Deferred tax liabilities	$	41,065		$	53,214

        In 2001, 2000 and 1999, income tax benefits attributable to employee stock option transactions of $2.8 million, $0.5 million and $0, respectively, were allocated to stockholders' equity.

        As of December 31, 2001, we had federal and state net operating loss carryforwards of approximately $115.8 million and $232.5 million, respectively. The net operating loss carryforwards expire between 2002 and 2019. Limitations on utilization may apply to approximately $36.9 million and $80.7 million of the federal and state net operating loss carryforwards, respectively. Accordingly, valuation allowances have been provided to account for the potential limitations on utilization of these tax benefits. During the year ended December 31, 2000, the valuation allowance decreased by $30.3 million resulting from changes in realizability of an acquired subsidiary's deferred tax assets.

49

The tax benefit reduced associated goodwill. Of the remaining valuation allowance, $14.9 million will also be allocated to goodwill in the event certain deferred tax assets are realized.

NOTE 11—REGULATORY REQUIREMENTS

        All of our health plans as well as our insurance subsidiaries are required to periodically file financial statements with regulatory agencies in accordance with statutory accounting and reporting practices. Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must comply with certain minimum capital or tangible net equity requirements. Our non-California health plans, as well as our health and life insurance companies, must comply with their respective state's minimum regulatory capital requirements and, in certain cases, maintain minimum investment amounts for the restricted use of the regulators which, as of December 31, 2001 and 2000, totaled $5.9 million and $7.2 million, respectively. Short-term investments held by trustees or agencies pursuant to state regulatory requirements were $86.1 million and $89.5 million as of December 31, 2001 and 2000, respectively. Also, under certain government regulations, certain subsidiaries are required to maintain a current ratio of 1:1 and to meet other financial standards.

        As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to us. Such restrictions, unless amended or waived, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends which can be paid by the insurance company subsidiaries to us without prior approval of the insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. Management believes that as of December 31, 2001, all of our health plans and insurance subsidiaries met their respective regulatory requirements.

NOTE 12—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

SUPERIOR NATIONAL INSURANCE GROUP, INC.

        We and our former wholly-owned subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001, were named in an adversary proceeding, Superior National Insurance Group, Inc. v. Foundation Health Corporation, Foundation Health Systems, Inc. and Milliman & Robertson, Inc. (M&R), filed on Apri1 28, 2000, in the United States Bankruptcy Court for the Central District of California, case number SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance Group, Inc. (BIG), a holding company of workers' compensation companies operating primarily in California, by FHC to Superior National Insurance Group, Inc. (Superior).

        On March 3, 2000, the California Department of Insurance seized BIG and Superior's other California insurance subsidiaries. On April 26, 2000, Superior filed for bankruptcy. Two days later, Superior filed its lawsuit against us, FHC and M&R. Superior alleges in the lawsuit that:

•

the BIG transaction was a fraudulent transfer under federal and California bankruptcy laws in that Superior did not receive reasonably equivalent value for the $285 million in consideration paid for BIG;



•

we, FHC and M&R defrauded Superior by making misstatements as to the adequacy of BIG's reserves;



•

Superior is entitled to rescind its purchase of BIG;



•

Superior is entitled to indemnification for losses it allegedly incurred in connection with the BIG transaction;



•

FHC breached the Stock Purchase Agreement; and



•

we and FHC were guilty of California securities laws violations in connection with the sale of BIG.

        Superior seeks $300 million in compensatory damages, unspecified punitive damages and the costs of the action, including attorneys' fees.

        On August 1, 2000, a motion filed by us and FHC to remove the lawsuit from the jurisdiction of the Bankruptcy Court to the United States District Court for the Central District of California was granted. The lawsuit is now pending in the District Court under case number SACV00-0658 GLT. The parties are currently engaged in discovery.

        We intend to defend ourselves vigorously in this litigation. Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material effect upon our results of operations or financial condition.

FPA MEDICAL MANAGEMENT, INC.

        Since May 1998, several complaints have been filed in federal and state courts seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of common stock, convertible subordinated debentures and options to purchase common stock of FPA Medical Management, Inc. (FPA) at various times between February 3, 1997 and May 15, 1998. The complaints name as defendants FPA, certain of FPA's auditors, us and certain of our former officers. The complaints allege that we and such former officers violated federal and state securities laws by misrepresenting and failing to disclose certain information about a 1996 transaction between us and FPA, about FPA's business and about our 1997 sale of FPA common stock held by us. All claims against our former officers were voluntarily dismissed from the consolidated class actions in both federal and state court. In early 2000, we filed a motion to dismiss all claims asserted against us in the consolidated federal class actions but have not formally responded to the other complaints. That motion has been withdrawn without prejudice and the consolidated federal class actions have been stayed pending resolution of matters in a related case in which we are not a party. We intend to vigorously defend the actions.

50

Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material effect upon our results of operations or financial condition.

STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.

        Physicians Health Services, Inc. (PHS), a subsidiary of ours, was sued on December 14, 1999 in the United States District Court in Connecticut by the Attorney General of Connecticut, Richard Blumenthal, acting on behalf of a group of state residents. The lawsuit was premised on ERISA, and alleged that PHS violated its duties under ERISA by managing its prescription drug formulary in a manner that served its own financial interest rather than those of plan beneficiaries. The suit sought to have PHS revamp its formulary system, and to provide patients with written denial notices and instructions on how to appeal. PHS filed a motion to dismiss which asserted that the state residents the Attorney General purported to represent all received a prescription drug appropriate for their conditions and therefore suffered no injuries whatsoever, that his office lacked standing to bring the suit and that the allegations failed to state a claim under ERISA. On July 12, 2000, the court granted PHS' motion and dismissed the action. The State of Connecticut has appealed the dismissal and argument on the appeal was held before the United States Court of Appeals for the Second Circuit on May 1, 2001. We intend to vigorously defend the action. Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material effect upon our results of operations or financial condition.

IN RE MANAGED CARE LITIGATION

        The Judicial Panel on Multidistrict Litigation has transferred various class action lawsuits against managed care companies, including us, to the United States District Court for the Southern District of Florida for coordinated or consolidated pretrial proceedings in In re Managed Care Litigation, MDL 1334. This proceeding is divided into two tracks, the subscriber track, which includes actions brought on behalf of health plan members, and the provider track, which includes suits brought on behalf of physicians. We intend to vigorously defend all actions in MDL 1334. Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material effect upon our results of operations or financial condition.

Subscriber Track

        The subscriber track includes the following actions involving us: Pay v. Foundation Health Systems, Inc. (filed in the Southern District of Mississippi on November 22, 1999), Romero v.Foundation Health Systems, Inc. (filed in the Southern District of Florida on June 23, 2000, as an amendment to a suit filed in the Southern District of Mississippi), State of Connecticut v. Physicians Health Services of Connecticut, Inc. (filed in the District of Connecticut on September 7, 2000), and Albert v. CIGNA Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and Foundation Health Systems, Inc.) (filed in the District of Connecticut on September 7, 2000). The Pay and Romero actions seek certification of nationwide class actions, unspecified damages and injunctive relief, and allege that cost containment measures used by our health maintenance organizations, preferred provider organizations and point-of-service health plans violate provisions of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) and the federal Employee Retirement Income Security Act (ERISA). The Albert suit also alleges violations of ERISA and seeks certification of a nationwide class and unspecified damages and injunctive relief. The State of Connecticut action asserts claims against our subsidiary, Physicians Health Services of Connecticut, Inc., and us that are similar, if not identical, to those asserted in the previous lawsuit that was dismissed, as discussed above, on July 12, 2000.

        We filed a motion to dismiss the lead subscriber track case, Romero v. Foundation Health Systems, Inc., and on June 12, 2001, the court entered an order dismissing all claims in that suit brought against us with leave for the plaintiffs to re-file an amended complaint. On this same date, the court stayed discovery until after the court rules upon motions to dismiss the amended complaints and any motions to compel arbitration. On June 29, 2001, the plaintiffs in Romero filed a third amended class action complaint which re-alleges causes of action under RICO, ERISA, common law civil conspiracy and common law unjust enrichment. The third amended class action complaint seeks unspecified compensatory and treble damages and equitable relief. On July 24, 2001, the court heard oral argument on class certification issues. On August 13, 2001, we filed a motion to dismiss the third amended complaint in Romero.

        Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material effect upon our results of operations or financial condition.

Provider Track

        The provider track includes the following actions involving us: Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on August 17, 2000, as an amendment to a suit filed in the Southern District of Mississippi), California Medical Association v. Blue Cross of California, Inc., PacifiCare Health Systems, Inc., PacifiCare Operations, Inc. and Foundation Health Systems, Inc. (filed in the Northern District of California in May 2000), Klay v. Prudential Ins. Co. of America, et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on February 22, 2001, as an amendment to a case filed in the Northern District of California), Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court on

51

February 14, 2001), and Lynch v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court on February 14, 2001).

        On August 17, 2000, a complaint was filed in the United States District Court for the Southern District of Florida in Shane, the lead provider track action in MDL 1334. The complaint seeks certification of a nationwide class action on behalf of physicians and alleges that the defendant managed care companies' methods of reimbursing physicians violate provisions of RICO, ERISA, certain federal regulations and various state laws. The action seeks unspecified damages and injunctive relief.

        On September 22, 2000, we filed a motion to dismiss or, in the alternative, to compel arbitration, in Shane. On December 11, 2000, the court granted in part and denied in part our motion to compel arbitration. Under the court's December arbitration order, plaintiff Dennis Breen, the single named plaintiff to allege a direct contractual relationship with us in the August complaint, was compelled to arbitrate his direct claims against us. We have filed an appeal in the United States Court of Appeals for the 11th Circuit seeking to overturn the portion of the district court's December ruling that did not order certain claims to arbitration. On April 26, 2001, the court modified its December arbitration order and is now retaining jurisdiction over certain direct claims of plaintiff Breen relating to a single contract. On March 2, 2001, the District Court for the Southern District of Florida issued an order in Shane granting the dismissal of certain claims with prejudice and the dismissal of certain other claims without prejudice, and denying the dismissal of certain claims.

        On March 26, 2001, a consolidated amended complaint was filed in Shane against managed care companies, including us. This consolidated complaint adds new plaintiffs, including Leonard Klay and the California Medical Association (who, as set forth below, had previously filed claims against the Company), and has, in addition to revising the pleadings of the original claims, added a claim under the California Business and Professions Code. On May 1, 2001, we filed a motion to compel arbitration in Shane of the claims of all individual plaintiffs that allege to have treated persons insured by us. On that same date, we filed a motion to dismiss this action. Preliminary discovery and briefing regarding the plaintiffs' motion for class certification has taken place. On May 7, 2001, the court heard oral argument on class certification issues in Shane. On May 9, 2001, the court entered a scheduling order permitting further discovery. On May 14, 2001, Health Net joined in a motion for stay of proceedings in Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (00-1334-MD) in the United States District Court for the Southern District of Florida pending appeal in the 11th Circuit Court of Appeals. On June 17, 2001, the district court stayed discovery until after the district court rules upon motions to dismiss and motions to compel arbitration. This order staying discovery also applies to other actions transferred to the district court by the Judicial Panel on Multidistrict Litigation, namely California Medical Association v. Blue Cross of California, Inc. et al.; Klay v. Prudential Ins. Co. of America, et al.; Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc.; and Lynch v. Physicians Health Services of Connecticut, Inc. On June 25, 2001, the 11th Circuit Court of Appeals entered an order staying proceedings in the district court pending resolution of the appeals relating to the district court's ruling on motions to compel arbitration. The 11th Circuit heard oral argument on the arbitration issues on January 10, 2002.

        The CMA action alleges violations of RICO, certain federal regulations, and the California Business and Professions Code and seeks declaratory and injunctive relief, as well as costs and attorneys' fees. As set forth above, on March 26, 2001, the California Medical Association was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The Klay suit is a purported class action allegedly brought on behalf of individual physicians in California who provided health care services to members of the defendants' health plans. The complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and Professions Code and certain state common law doctrines, and seeks declaratory and injunctive relief, and damages. As set forth above, on March 26, 2001, Leonard Klay was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The CSMS case was originally brought in Connecticut state court against Physicians Health Services of Connecticut, Inc. (PHS-CT) alleging violations of the Connecticut Unfair Trade Practices Act. The complaint alleges that PHS-CT engaged in conduct that was designed to delay, deny, impede and reduce lawful reimbursement to physicians who rendered medically necessary health care services to PHS-CT health plan members. The complaint, which is similar to others filed against us and other managed care companies, seeks declaratory and injunctive relief. On March 13, 2001, the Company removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the District Court of Connecticut consolidated this action and Lynch v. Physicians Health Services of Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        The Lynch case was also originally filed in Connecticut state court. This case was purportedly brought on behalf of physician members of the Connecticut State Medical Society who provide health care services to PHS-CT health plan members pursuant to provider service contracts. The complaint alleges that PHS-CT engaged in improper, unfair and deceptive practices by denying, impeding and/or delaying lawful reimbursement to physicians. The complaint, similar to the complaint referred to above filed against PHS-CT on the same day by the Connecticut State Medical Society, seeks declaratory and injunctive relief and damages. On March 13, 2001, we removed this action to

52

federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the District Court of Connecticut consolidated this action and CSMS v. Physicians Health Services of Connecticut,  Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        As noted above, on June 17, 2001, the district court entered an order which applies to the Shane,CMA,Klay,CSMS and Lynch actions and stays discovery until after the court rules upon motions to dismiss and motions to compel arbitration.

        Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material effect upon our results of operations or financial condition.

MISCELLANEOUS PROCEEDINGS

        We and certain of our subsidiaries are also parties to various other legal proceedings, many of which involve claims for coverage encountered in the ordinary course of our business. Based in part on advice from our litigation counsel and upon information presently available, we are of the opinion that the final outcome of all such proceedings should not have a material adverse effect upon our results of operations or financial condition.

Operating Leases and Other Commitments

        We lease administrative office space under various operating leases. Certain leases contain renewal options and rent escalation clauses.

        On September 30, 2000, Health Net of California, Inc. entered into an operating lease agreement to lease office space in Woodland Hills, California for substantially all of its operations. As of December 31, 2001, Health Net of California, Inc. completed its relocation into the new facilities. The new lease is for a term of 10 years. The total future minimum lease commitments under the lease are approximately $96.7 million.

        In February 1999, we entered into a long-term service agreement for 10 years with an external third party to receive mail order, network claims processing and other pharmacy benefit management services. Future minimum commitments are approximately $36 million and are included in the table below.

        In December 1998, we entered into a long-term services agreement with an external third party to provide call center operation services to our members for a period of 10 years. Future minimum commitments are approximately $43 million and are included in the table below.

        These leases and service agreements are cancelable with substantial penalties.

        Future minimum commitments for operating leases and service agreements as of December 31, 2001 are as follows:

(Amounts in thousands)
2002	$	65,556
2003		59,813
2004		51,481
2005		35,647
2006		30,164
Thereafter		119,970
Total minimum commitments	$	362,631

        Rent expense totaled $56.0 million, $49.8 million and $49.0 million in 2001, 2000 and 1999, respectively. Service expense totaled $17.4 million, $14.1 million and $11.1 million in 2001, 2000 and 1999, respectively.

NOTE 13—RELATED PARTIES

        One current director of the Company was a partner in a law firm which received legal fees totaling $0.4 million, $0.3 million, and $1.2 million, in 2001, 2000 and 1999, respectively. Such law firm is also an employer group of the Company from which the Company receives premium revenues at standard rates. This director retired from the law firm in 2000. One current director was an officer of IBM which the Company paid $7.0 million, $16.7 million, and $9.0 million for products and services in 2001, 2000 and 1999, respectively. This director retired from IBM in 2000. This director is also a director of a temporary staffing company which the Company paid $0, $1.9 million and $11.0 million in 2001, 2000 and 1999, respectively. Another current director is also a director of another temporary staffing company which the Company paid $11,000, $0 and $0 in 2001, 2000 and 1999, respectively.

        A director of the Company was paid $70,000 and $25,000 in consulting fees in 2000 and 1999, respectively, due to various services provided to the Company in connection with the closing of its operations in Pueblo, Colorado. In addition, as a result of a competitive bidding process, two of this director's law firm partners purchased a building from the Company in Pueblo, Colorado, for $405,000 in 1999. The director has no ownership in the building.

        A current executive officer of the Company is a director of two non-profit organizations which the Company paid annual dues of $50,000 in 2001.

        During 1998, three executive officers of the Company, in connection with their hire or relocation, received one-time loans from the Company aggregating $775,000 which ranged from $125,000 to $400,000 each. The loans accrue interest at the prime rate and each is payable upon demand by the Company in the event of a voluntary termination of employment of the respective officer or termination for cause. Of the loans made in 1998, $83,333, $283,333 and $283,334 were forgiven in 1999, 2000 and 2001, respectively. During 1999,

53

three executive officers of the Company, in connection with their hire or relocation, received one-time loans from the Company aggregating $550,000 which ranged from $100,000 to $300,000 each. Two of the loans totaling $250,000 and a $60,000 portion of a third loan made during 1999 were forgiven by the Company in 2000. During 2001, two executive officers of the Company, in connection with their hire or relocation, received one-time loans from the Company aggregating $200,000. The loans accrue interest at the prime rate and each is payable upon demand by the Company in the event of a voluntary termination of employment of the respective officer or termination for cause.

        The principal and interest of the loans will be forgiven by the Company at varying times between one and five years after the date of hire or relocation of the respective officers. As of December 31, 2001, the aggregate outstanding principal balance of the four loans was $565,000.

NOTE 14—ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

        The following sets forth the principal components of asset impairment and restructuring charges for the years ended December 31:

	2001		2000		1999
	(Amounts in millions)
Severance and benefit related costs	$	43.3	$	—	$	17.2
Asset impairment costs		27.9		—		6.2
Real estate lease termination costs		5.1		—		0.8
Other costs		3.4		—		1.7
		79.7		—		25.9
Modifications to prior year restructuring plans		—		—		(14.2	)
Total	$	79.7	$	—	$	11.7

2001 Charges

        The following table summarizes the charges we recorded in 2001:

	2001 Activity
	2001 Charges		Cash Payments			Non-cash			Balance at December 31, 2001		Expected Future Cash Outlays
	(Amounts in millions)
Severance and benefit related costs	$	43.3	$	(20.5	)	$	—		$	22.8	$	22.8
Asset impairment costs		27.9		—			(27.9	)		—		—
Real estate lease termination costs		5.1		(0.3	)		—			4.8		4.8
Other costs		3.4		(0.4	)		(2.3	)		0.7		0.7
Total	$	79.7	$	(21.2	)	$	(30.2	)	$	28.3	$	28.3

        As part of our ongoing selling, general and administrative expense reduction efforts, during the third quarter of 2001, we finalized a formal plan to reduce operating and administrative expenses for all business units within the Company (the 2001 Plan). In connection with the 2001 Plan, we decided on enterprise-wide staff reductions and consolidations of certain administrative, financial and technology functions. We recorded pretax restructuring charges of $79.7 million during the third quarter ended September 30, 2001 (2001 Charge). Of the total 2001 Charge, approximately $49.5 million will result in cash outlays. We plan to use cash flows from operations to fund these payments.

Severance and Benefit Related Costs—During the third quarter ended September 30, 2001, we recorded severance and benefit related costs of $43.3 million related to enterprise-wide staff reductions, which costs were included in the 2001 Charge. These reductions include the elimination of approximately 1,517 positions throughout all functional groups, divisions and corporate offices within the Company. As of December 31, 2001, 916 positions were eliminated and $20.5 million of the severance and benefit related costs have been paid out. We expect the remaining balance to be paid during 2002. It is anticipated that the elimination of the remaining 601 positions will be completed by September 30, 2002.

Asset Impairment Costs—Pursuant to Statement of Financial Accounting Standards (SFAS) No. 121, we evaluated the carrying value of certain long-lived assets that were affected by the 2001 Plan. The affected assets were primarily comprised of information technology systems and equipment, software development projects and leasehold improvements. We determined that the carrying value of these assets exceeded their estimated fair values. The fair values of these assets were determined based on market information available for similar assets. For certain of the assets, we determined that they had no continuing value to us due to our abandoning certain plans and projects in connection with our workforce reductions.

        Accordingly, we recorded asset impairment charges of $27.9 million consisting entirely of non-cash write-downs of equipment, building improvements and software application and development costs, which charges were included in the 2001 Charge. The carrying value of these assets was $9.0 million as of December 31, 2001.

        The asset impairment charges of $27.9 million consist of $10.8 million for write-downs of assets related to the consolidation of four data centers, including all computer platforms, networks and applications into a single processing facility at our Hazel Data Center; $16.3

54

million related to abandoned software applications and development projects resulting from the workforce reductions, migration of certain systems and investments to more robust technologies; and $0.8 million for write-downs of leasehold improvements (see Note 15 for segment information).

RealEstate Lease Termination Costs—The 2001 Charge included charges of $5.1 million related to termination of lease obligations and non-cancelable lease costs for excess office space resulting from streamlined operations and consolidation efforts. The remainder of the termination obligations will be paid during 2002 and throughout the respective lease terms.

Other Costs—The 2001 Charge included charges of $3.4 million related to costs associated with closing certain data center operations and systems and other activities which are expected to be completed and paid for in the first quarter of 2002.

        No changes to the 2001 Plan are expected.

1999 Charges

        The following table summarizes the 1999 charges by quarter and by type (amounts in millions):

								1999 and 2000 Activity
	1999 Charges		1999 Modifications to Estimate			Net 1999 Charges		Cash Payments			Non-Cash			Balance at December 31, 2000
Severance and benefit related costs	$	18.5	$	(1.3	)	$	17.2	$	(17.2	)	$	—		$	—
Asset impairment costs		6.2		—			6.2		—			(6.2	)		—
Real estate lease termination costs		0.8		—			0.8		(0.8	)		—			—
Other costs		1.8		(0.1	)		1.7		(1.7	)		—			—
Total	$	27.3	$	(1.4	)	$	25.9	$	(19.7	)	$	(6.2	)	$	—
First Quarter 1999 Charge	$	21.1	$	(1.4	)	$	19.7	$	(19.7	)	$	—		$	—
Fourth Quarter 1999 Charge		6.2		—			6.2		—			(6.2	)		—
Total	$	27.3	$	(1.4	)	$	25.9	$	(19.7	)	$	(6.2	)	$	—

        During the fourth quarter of 1998, the Company initiated a formal plan to dispose of certain health plans of the Company's then Central Division included in the Company's Health Plan Services segment in accordance with its anticipated divestitures program. In this connection, the Company announced in 1999 its plan to close the Colorado regional processing center, terminate employees and transfer its operations to the Company's other administrative facilities. In addition, the Company also announced its plans to consolidate certain administrative functions in its Oregon and Washington health plan operations. During the year ended December 31, 1999, the Company recorded pretax charges for restructuring and other charges of $27.3 million (the 1999 Charges). After modifications of the 1999 Charges and prior restructuring plans, we recorded $11.7 million of pretax restructuring charges.

Severance and Benefit Related Costs—The 1999 Charges included $18.5 million for severance and benefit costs related to executives and operations employees at the Colorado regional processing center and operations employees at the Northwest health plans. The operations functions include premium accounting, claims, medical management, customer service, sales and other related departments. The 1999 Charges included the termination of a total of 773 employees. Modifications to the initial estimate of $1.3 million were recorded during the year ended December 31, 1999. As of December 31, 2000, termination of the employees was completed and $17.2 million had been paid. There are no expected future cash outlays.

Asset Impairment Costs—The 1999 Charges included asset impairment costs totaling $6.2 million in connection with pending dispositions of non-core businesses. These charges included a $4.7 million reduction in the net carrying value of the Company's Pittsburgh health plans to fair value. The Company also adjusted the carrying value of its subacute operations by $1.5 million to fair value. As of December 31, 2001, we no longer had any operations in Pittsburgh. The revenue and pretax income attributable to these operations were $14.4 million and $3.4 million, respectively, for the year ended December 31, 2001. Revenue and pretax income attributable to these operations were $59.7 million and $1.3 million, respectively, for the year ended December 31, 2000. The carrying value of these assets as of December 31, 2001 and 2000 was $17.3 million and $14.5 million, respectively.

Real Estate Lease Termination and Other Costs—The 1999 Charges included $2.6 million related to termination of real estate obligations and other costs to close the Colorado regional processing center.

        The 1999 restructuring plan was completed as of December 31, 2000.

55

NOTE 15—SEGMENT INFORMATION

        SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131) establishes annual and interim reporting standards for an enterprise's reportable segments and related disclosures about its products, services, geographic areas and major customers. Under SFAS 131, reportable segments are to be defined on a basis consistent with reports used by management to assess performance and allocate resources. The Company's reportable segments are business units that offer different products to different classes of customers. The Company has two reportable segments: Health Plan Services and Government Contracts/Specialty Services. The Health Plan Services segment provides a comprehensive range of health care services offered through HMO, POS and PPO products. The Government Contracts/Specialty Services segment administers large, multi-year managed care government contracts and also offers behavioral, dental and vision services.

        The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies, except intersegment transactions are not eliminated.

        Presented below are segment data for the three years in the period ended December 31 (amounts in thousands):

2001	Health Plan Services		Government Contracts/ Specialty Services			Corporate and Other(i)			Total
Revenues from external sources	$	8,292,602	$	1,687,420		$	—		$	9,980,022
Intersegment revenues		—		107,128			(107,128	)		—
Investment and other income		89,640		3,785			(8,987	)		84,438
Interest expense		5,843		20			49,077			54,940
Depreciation and amortization		52,469		12,270			33,956			98,695
Asset impairment and restructuring charges		40,677		17,205			21,785			79,667
Loss on sale of businesses and properties		—		—			76,072			76,072
Segment profit (loss)		313,133		30,299			(206,082	)		137,350
Segment assets		2,876,196		608,477			74,974			3,559,647
2000	Health Plan Services		Government Contracts/ Specialty Services			Corporate and Other(i)			Total
Revenues from external sources	$	7,351,098	$	1,623,158		$	—		$	8,974,256
Intersegment revenues		—		67,325			(67,325	)		—
Investment and other income		90,144		11,237			918			102,299
Interest expense		2,796		24			85,110			87,930
Depreciation and amortization		58,711		15,012			32,176			105,899
Segment profit (loss)		297,323		111,147			(145,723	)		262,747
Segment assets		2,815,506		805,609			49,001			3,670,116
1999	Health Plan Services		Government Contracts/ Specialty Services			Corporate and Other(i)			Total
Revenues from external sources	$	7,031,055	$	1,529,855		$	—		$	8,560,910
Intersegment revenues		—		78,083			(78,083	)		—
Investment and other income		81,761		7,820			(2,604	)		86,977
Interest expense		5,624		102			78,082			83,808
Depreciation and amortization		71,409		14,736			25,896			112,041
Asset impairment and restructuring charges, including modifications to prior year restructuring plans		11,045		(742	)		1,421			11,724
Gain on sale of businesses and properties		—		—			58,332			58,332
Segment profit (loss)		218,318		118,455			(92,765	)		244,008
Segment assets		2,596,285		796,362			303,834			3,696,481

(i)

Includes intersegment eliminations.

56

NOTE 16—QUARTERLY INFORMATION (UNAUDITED)

        The following interim financial information presents the 2001 and 2000 results of operations on a quarterly basis (in thousands, except per share data).

2001		March 31		June 30			Sepetmber 30		December 31
Total revenues		$	2,488,124	$	2,546,703		$	2,544,939	$	2,484,694
Income (loss) from continuing operations before income taxes			67,328		(22,548	)		3,691		88,879
Net income (loss)			42,415		(14,205	)		2,326		55,993
BASIC EARNINGS (LOSS) PER SHARE
	Net income (loss)	$	0.35	$	(0.12	)	$	0.02		0.45
DILUTED EARNINGS (LOSS) PER SHARE
	Net income (loss)	$	0.34	$	(0.12	)	$	0.02		0.45
2000		March 31		June 30			Sepetmber 30		December 31
Total revenues		$	2,199,335	$	2,229,600		$	2,287,815	$	2,359,805
Income from continuing operations before income taxes			55,262		62,796			70,444		74,245
Net income			34,055		38,695			44,647		46,226
BASIC EARNINGS PER SHARE
	Net income		0.28		0.32			0.36		0.38
DILUTED EARNINGS PER SHARE
	Net income		0.28		0.32			0.36		0.37

NOTE 17—FOHP, INC.

        In 1997, the Company purchased convertible and nonconvertible debentures of FOHP, Inc., a New Jersey corporation (FOHP), in the aggregate principal amounts of approximately $80.7 million and $24.0 million, respectively. In 1997 and 1998, the Company converted certain of the convertible debentures into shares of Common Stock of FOHP, resulting in the Company owning 99.6% of the outstanding common stock of FOHP. The nonconvertible debentures mature on December 31, 2002.

        Effective January 1, 1999, Physicians Health Services of New Jersey, Inc., a New Jersey HMO wholly-owned by the Company, merged with and into First Option Health Plan of New Jersey (FOHP-NJ), a New Jersey HMO subsidiary of FOHP, and FOHP-NJ changed its name to Physicians Health Services of New Jersey, Inc. (PHS-NJ). Effective July 30, 1999, upon approval by the stockholders of FOHP at a special meeting, a wholly-owned subsidiary of the Company merged into FOHP and FOHP became a wholly-owned subsidiary of the Company. In connection with the merger, the former minority shareholders of FOHP were entitled to receive either $0.25 per share (the value per FOHP share as of December 31, 1998, as determined by an outside appraiser) or payment rights which entitle the holders to receive as much as $15.00 per payment right on or about July 1, 2001, provided certain hospital and other provider participation conditions were met. Also in connection with the merger, additional consideration of $2.25 per payment right will be paid to certain holders of the payment rights if PHS-NJ achieves certain annual returns on common equity and the participation conditions are met. As of December 31, 2000, the Company determined that it was probable that these participation rights would be met and payment rights would need to be paid on or about July 1, 2001. Accordingly, the Company recorded a purchase price adjustment of $33.7 million to goodwill as of December 31, 2000. As of December 31, 2001, the remaining liability was $11.8 million, which we expect to pay during 2002.

57

QuickLinks

Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Report of Independent Auditors

Consolidated Balance Sheets Health Net, Inc.
Consolidated Statements of Operations Health Net, Inc.

Consolidated Statements of Stockholders' Equity Health Net, Inc.
Consolidated Statements of Cash Flows Health Net, Inc.

Notes to Consolidated Financial Statements

EX-21.1

QuickLinks -- Click here to rapidly navigate through this document

x

Exhibit 21.1

Health Net, Inc. (DE)(95-4288333)
(All Subsidiaries wholly owned unless otherwise indicated)
• Health Net of California, Inc. (CA)(95-4402957)
        - Health Net Life Insurance Company (CA)(73-0654885)
• Health Net of the Northeast, Inc. (DE)(06-1116976)
        - FOHP, Inc. (NJ)(22-3314813)
                > Health Net of New Jersey, Inc. (NJ)(22-3241303)
                > First Option Health Plan of Pennsylvania, Inc. (PA)(52-1935749)
                > FOHP Agency, Inc. (NJ)(22-3409934)
        - Physicians Health Services (Bermuda) Ltd. (Bermuda)(98-0153069)
        - Health Net of Connecticut, Inc. (CT)(06-1084283)
        - Health Net of New York, Inc. (NY)(06-1174953)
        - Health Net Insurance of New York, Inc. (NY)(13-3584296)
        - Health Net Insurance Services, Inc. (CT)(06-1254380)
        - Health Net Insurance of Connecticut, Inc. (CT)(06-1434898)
        - PHS Real Estate, Inc. (DE)(06-1467640)
                > PHS Real Estate II, Inc. (DE)(06-1459019)
• Questium, Inc.(DE)(68-0443608)
• QualMed, Inc. (DE)(84-1175468)
        - QualMed Plans for Health of Colorado, Inc. (CO)(84-0975985)
        - Health Net Health Plan of Oregon, Inc. (OR)(93-1004034)
• HSI Eastern Holdings, Inc. (PA)(23-2424663)
        - Greater Atlantic Health Service, Inc. (DE)(23-2632680)
                > Health Net of Pennsylvania, Inc. (PA)(23-2348627)
                > Greater Atlantic Preferred Plus, Inc. (PA)(23-2665783)
                > Employ Better Care, Inc. (PA) (23-2697017)
• HSI Advantage Health Holdings, Inc. (DE)(23-2867299)
        - QualMed Plans for Health of Ohio and West Virginia, Inc. (OH)(25-1803681)
        - QualMed Plans for Health of Western Pennsylvania, Inc. (PA)(23-2867300)
        - Pennsylvania Health Care Plan, Inc. (PA)(25-1516632)
• FH-Arizona Surgery Centers, Inc. (AZ)(86-0836312)
• FH Surgery Limited, Inc. (CA)(68-0390434)
• FH Surgery Centers, Inc. (CA)(68-0390435)
• Foundation Health Facilities, Inc. (CA)(68-0390438)
• FH Assurance Company (Cayman Islands)(98-0150604)
• Foundation Health Warehouse Company (CA)(68-0357852)
• Memorial Hospital of Gardena, Inc. (CA)(33-0466850)
• East Los Angeles Doctors Hospital, Inc. (CA)(95-3275451)
• Foundation Health Vision Services, (dba AVP Vision Plan) (CA)(77-0067022)
• Denticare of California, Inc. (CA)(94-2197624)
• Managed Alternative Care, Inc. (CA)(95-4205929)
• American VitalCare, Inc. (CA)(22-2646452)
        - Health Net Federal Services, Inc. (DE)(68-0214809)
• Health Net Federal Services of Hawaii, Inc. (HI) (99-0240224)
• Health Net Pharmaceutical Services (CA)(68-0295375)
• Intercare, Inc. (AZ)(86-0660443)
• Health Net of Arizona, Inc.(AZ)(36-3097810)
• Interlease of Arizona, Inc. (AZ)(86-0520686)
• Managed Health Network, Inc. (DE)(95-4117722)
        - Health Management Center, Inc. of Wisconsin (WI)(39-1528989)

        - HMC PPO, Inc. (MA)(04-3237484)
        - Managed Health Network (CA)(95-3817988)
        - MHN Reinsurance Company of Arizona (AZ)(95-4361727)
        - MHN Services (CA)(95-4146179)
        - MHN Services IPA, Inc. (NY)(13-4027559)
• Employer & Occupational Services Group, Inc. (CA)(33-0854987)
        - EOS Managed Care Services (CA)(68-0303353)
        - EOS Claims Services (CA)(68-0165539)
        - EOS Services (DE)(94-3037822)
        - CompAmerica, Inc. (DE)
• Gem Holding Corporation (UT)(87-0445881)
        - Gem Insurance Company (UT)(87-0451573)
• National Pharmacy Services, Inc. (DE)(84-1301249)
        - Integrated Pharmacy Systems, Inc. (PA)(23-2789453)*
• QualMed Plans for Health of Pennsylvania, Inc. (PA)(23-2456130)

*

National Pharmacy Services, Inc. owns approximately 90% of the outstanding common stock.

QuickLinks

Exhibit 21.1

EX-23.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

        We consent to the incorporation by reference in Registration Statement Nos. 333-63837, 333-48969, 333-35193, 333-24621, 33-74780 and 33-90976 of Health Net, Inc. on Form S-8 of our report dated February 12, 2002, appearing in and incorporated by reference in this Annual Report on Form 10-K of Health Net, Inc. for the year ended December 31, 2001.

/s/ Deloitte & Touche LLP

Los Angeles, California
March 18, 2002

QuickLinks

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT