8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): NOVEMBER 4, 2004

HEALTH NET, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	1-12718	95-4288333
(State or other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

21650 Oxnard Street

Woodland Hills, California 91367

(Address of Principal Executive Offices) (Zip Code)

(818) 676-6000

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operation and Financial Condition.

On November 4, 2004, Health Net, Inc. issued a press release announcing its earnings for the quarter ended September 30, 2004 and held a conference call to discuss its earnings for the quarter ended September 30, 2004. The press release and a transcript of the conference call are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively.

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits

99.1	Press Release dated November 4, 2004 announcing results for the quarter ended September 30, 2004 for Health Net, Inc.
99.2	Transcript of a conference call held on November 4, 2004 to discuss Health Net, Inc.’s earnings for the quarter ended September 30, 2004.

SIGNATURES

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

Date: November 8, 2004

HEALTH NET, INC.
By:	/s/ B. Curtis Westen
	B. Curtis Westen
	Senior Vice President, General
	Counsel and Secretary

EX-99.1

Exhibit 99.1

                    Health Net, Inc.                     21650 Oxnard Street                     Woodland Hills, CA 91367                     818.676.6000                     800.291.6911                     www.healthnet.com

Contacts: David Olson

818.676.6978

david.w.olson@healthnet.com

Michael Engelhard

818.676.7620

michael.engelhard@healthnet.com

HEALTH NET REPORTS THIRD QUARTER 2004 NET INCOME

OF $.64 PER DILUTED SHARE

Commercial Premium Increases and Administrative Ratio Decline

Drive Sequential Earnings Improvement

LOS ANGELES, November 4, 2004 – Health Net, Inc. (NYSE: HNT) today announced 2004 third quarter net income per diluted share of $.64 compared with a net loss of $.02 per diluted share in the third quarter of 2003 and earnings of $.36 per diluted share in the second quarter of 2004.

Included in the results for the third quarter of 2004 is the full effect of a $5,172,000 pretax charge, or approximately $.03 per diluted share after tax, for severance and related benefits associated with the workforce reduction begun in the second quarter of 2004 and $400,000 of additional loss on the 2001 sale of the company’s Florida health plan as a result of final settlements on this sale.

Health Net reported net income of $71,855,000 in the third quarter of 2004 compared to a net loss of $2,238,000 in the third quarter of 2003 and net income of $41,366,000 in the second quarter of 2004. The net loss in the third quarter of 2003 included an after-tax loss on disposition of discontinued operations of $89,050,000 reflecting the settlement of litigation arising in connection with Health Net’s 1998 sale of its workers’ compensation business. Excluding this settlement, net income for the third quarter of 2004 was $14,957,000 lower than the third quarter of 2003. The year-over-year decline in net income excluding the settlement was primarily the result of higher than expected medical care ratios (MCRs) and, to a lesser extent, enrollment declines. The expected sequential improvement in net income from the second quarter of 2004 to the third quarter of 2004 resulted primarily from a lower MCR.

“We believe we are headed in the right direction as our pricing actions and health care cost initiatives help build momentum toward 2005,” said Jay Gellert, president and chief executive officer of Health Net. “We are pleased with our progress as our earnings performance continues to improve from the first quarter of 2004 and is tracking to our expectations.”

Positive developments for the third quarter of 2004 included:

• Health Net’s MCR was 84.5 percent, a 150 basis point improvement from the second quarter of 2004, though it rose by 230 basis points compared with the third quarter of 2003;

• Commercial revenue per member per month (PMPM) increased by more than $5 in the third quarter of 2004 compared to the second quarter of 2004, consistent with the company’s expectations;

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• General and administrative (G&A) costs continued to reflect the company’s ongoing focus on tightly managing these expenses and adjusting to the enrollment declines; and

• Cash flow from operations of $84,552,000 exceeded net income plus depreciation and amortization for the third quarter of 2004.

Revenues

Health Net’s total revenues rose 4.2 percent in the third quarter of 2004 to $2,935,233,000 from $2,816,723,000 in the third quarter of 2003. Health plan services revenue climbed 4.0 percent to $2,393,160,000 in the third quarter of 2004 compared to $2,300,807,000 in the third quarter of 2003.

Health plan services revenue gains were the result of higher commercial and Medicare premium yields across the company’s health plans. In the third quarter of 2004, the overall premium yield PMPM, including commercial, Medicare and Medicaid enrollment, rose 7.7 percent compared to the same period in 2003. Commercial premium yields were up by 8.7 percent year-over-year and 2.5 percent in the third quarter of 2004 compared to the second quarter of 2004.

“Commercial at-risk yield trends are very encouraging. Last quarter we projected that these yields would increase by more than $5 PMPM and they did,” said Buddy Piszel, executive vice president and chief financial officer of Health Net. “Enrollment is declining, but that must be viewed against our primary goal of improved margins. The pricing discipline drove substantial sequential margin improvement.”

Commercial enrollment, including both at-risk and Administrative Services Only (ASO) membership, was down 3.3 percent in the third quarter of 2004 compared with the second

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quarter of 2004. Oregon commercial enrollment increased by nearly 5,400 members in the third quarter of 2004 compared to the second quarter of 2004, a 4.2 percent gain. In California, the addition of Kern County contributed to the growth in Medicaid enrollment of 32,820 members in the third quarter of 2004 compared to the second quarter of 2004.

“The company initiated pricing actions earlier in 2004 to improve gross margin, and this quarter we realized that goal. This disciplined pricing has resulted in enrollment losses in California that are greater than we planned. However, bolstering margin even at the expense of enrollment losses is the right thing to do. The Northeast also experienced significant PMPM revenue gains in the quarter. Commercial enrollment declines are a direct result of pricing increases designed to cull out less profitable accounts, especially in New Jersey, and improve margins,” Piszel added.

In the third quarter of 2004, Health Net’s Government contracts revenue rose 9.0 percent from the third quarter of 2003, reaching $525,783,000. This increase was due in part to the overlap of the new TRICARE North region contract being fully implemented and the continued provision of services under the old TRICARE Region 6 contract in third quarter of 2004.

“We completed the transition from the old TRICARE contract on October 31 and now solely operate in the TRICARE North region. We are proud to be providing support for the families of our troops in these 23 states and the District of Columbia,” Piszel noted.

Other income decreased by $14,323,000 in the third quarter of 2004 compared to the third quarter of 2003, primarily due to lower revenue resulting from the sale of the company’s Employer Services division in the third quarter of 2003. In the third quarter of 2004, net investment income was $14,750,000, a decrease of $3,027,000 from the third quarter of 2003. The decrease is largely attributable to one-time gains on sale of investments totaling $3,000,000 in the third quarter of 2003. Net investment income in the third quarter of 2004 increased by $932,000 compared to the second quarter of 2004.

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Health Care Costs

Overall PMPM health plan health care costs rose by 10.8 percent in the third quarter of 2004 compared with the third quarter of 2003. Overall PMPM health care costs declined by 30 basis points in the third quarter of 2004 as compared to the second quarter of 2004.

“The experience in the third quarter compared to the second quarter indicates that cost trends are developing as expected and consistent with our gross margin expectations,” Piszel explained. “Physician and pharmacy cost growth is stable, and hospital cost trends declined on a sequential basis.”

The Government contracts cost ratio improved by 90 basis points to 95.4 percent for the third quarter of 2004 compared to the third quarter of 2003. This improvement is due in part to lower bid price adjustment and change order activity in the third quarter of 2003 that negatively affected the cost ratio in that period.

Administrative Expenses

In the third quarter of 2004, total general, administrative and depreciation expenses were $217,674,000. This included $5,900,000 of recoveries associated with the 2001 sale of the company’s Florida health plan. Excluding this one-time benefit, G&A plus depreciation for the third quarter of 2004 would have been $223,574,000, resulting in an administrative ratio of 9.3 percent, 150 basis points better than what the company reported in the third quarter of 2003. The administrative ratio was lower in the third quarter of 2004 as compared to the third quarter of 2003 primarily due to continuing efficiency improvements and the divestiture of the company’s Employer Services division in October 2003.

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The company recorded $5,172,000 in the third quarter of 2004 for severance and related benefits expenses. “Health Net will record approximately $3 million in severance-related expenses associated with the workforce reduction in the fourth quarter of 2004,” Piszel stated.

Health Net’s selling expenses decreased by $2,152,000 to $60,410,000 in the third quarter of 2004 compared with $62,562,000 in the same period in 2003, consistent with the decline in Small Group and Individual enrollment. The selling costs ratio was 2.5 percent for the third quarter of 2004, compared with 2.7 percent in the same period last year.

The Health Net One project is on target and is approximately 75 percent complete, progressing toward the goal of putting Health Net’s health plans on a single operating platform by mid-2005. The California and Oregon divisions’ claims conversions will occur in July or August of 2005 to accommodate the July 1 account renewals.

Balance Sheet Highlights

Cash and investments as of September 30, 2004 were $1,705,872,000 compared with $1,620,787,000 as of June 30, 2004.

The TRICARE receivable increased by $7,375,000 from the end of the second quarter of 2004 to $136,335,000 as of September 30, 2004, consistent with expectations surrounding the contract transitions. Beginning with the third quarter of 2004, a new asset line and a new liability line related to the TRICARE contract for the North region are included on the balance sheet. The two new accounts offset each other and represent the non-cash impact of the incurred but not reported (IBNR) estimates of health care costs for the new TRICARE contract.

Debt increased by $17,530,000 from June 30, 2004 to $401,750,000 as of September 30, 2004, primarily due to the mark-to-market adjustment of the interest rate swap contracts the company uses to hedge against interest rate risk associated with the company’s outstanding fixed rate senior notes. This adjustment is offset by a decrease in other noncurrent liabilities that reflects the mark-to-market value of the swap.

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Interest expense was $740,000 higher in the third quarter of 2004 compared to the second quarter of 2004. This was due to higher floating interest rates and additional interest expense incurred on the senior notes following the downgrade of the company’s senior unsecured debt rating by Moody’s Investors Service, Inc. in September 2004.

Reserves for claims and other settlements decreased by $52,591,000 from the end of the second quarter of 2004 to $990,240,000 as of the end of the third quarter of 2004. The decline in reserves resulted from lower claims inventories and a decline in health plan enrollment. Days claims payable decreased to 46.2 days for the third quarter of 2004 compared with 46.6 days for the second quarter of 2004, and declined by 4.2 days compared to the third quarter of 2003, a direct result of the substantially higher level of paid claims.

“The reserve decrease can be attributed to an acceleration of claims payments that reduced our claims inventory and to lower enrollment,” Piszel commented. “As we pay claims faster and shorten the claims tail, we gain the added benefit of being able to identify emerging cost trends more quickly.”

Cash Flow

Cash flow provided by operations in the third quarter of 2004 amounted to $84,552,000 compared to cash flow provided by operations of $79,648,000 in the third quarter of 2003. As noted in previous releases, cash flow from operations for the full year 2004 is expected to be down from prior years due to the effects of the transition to the new TRICARE North contract and substantially higher levels of paid claims.

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Health Net repurchased 2,171,500 shares of its common stock in the third quarter of 2004 under its stock repurchase program announced in May 2002. Health Net has repurchased 19,978,655 shares under the stock repurchase program at an average price of $26.86 through September 13, 2004. On September 13, 2004, the company announced that it would not repurchase shares of common stock under the share repurchase program through the end of 2004. The company will reevaluate its position on share repurchases after the first of the year.

Outlook

Health Net is conducting a comprehensive review of unresolved provider and claims issues as part of its efforts to more effectively contract for 2005 and beyond. Additional costs may be incurred and recorded in the fourth quarter of 2004 as part of this review and recontracting effort. Excluding these costs and the expected $2.9 million severance and related benefit expense the company will record in the fourth quarter of 2004, Health Net believes its fourth quarter earnings per diluted share will be between $.68 and $.75. The company is still in the planning process for 2005 and currently expects to issue specific earnings guidance for the full year and first quarter by the end of January 2005, once the above-mentioned review is completed and the 2005 plan is finalized.

“Our initial commercial pricing for 2005 is very encouraging. We believe yields will increase between 10 and 11 percent for the business renewing in the first quarter, approximately 100 basis points ahead of expected health care cost trends,” Piszel commented.

“We also expect to see some further enrollment contraction in 2005 due to our pricing discipline. For the full year, we now believe that commercial enrollment will be down modestly, with us gaining membership in key markets in the second half of the year,” he added.

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Conference Call

As previously announced, Health Net will discuss the company’s third quarter results during a conference call with investors on Thursday, November 4, 2004, at approximately 11:00 a.m. EST. To listen to the call, please dial 719.457.2679, code 924502. A live webcast and replay of the conference call also will be available at www.healthnet.com. The conference call webcast is open to all interested parties. The replay of the conference call will be available following the call on Thursday, November 4, 2004 through Monday, November 8, 2004, by dialing 719.457.0820, code 924502. Anyone listening to the company’s conference call will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2003, Quarterly Reports on Form 10-Q for the first, second and third quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively, and other reports filed by the company from time to time with the Securities and Exchange Commission.

Investor Conference

Health Net will host its annual investor conference on Thursday, November 11, 2004, at the Millennium Broadway Hotel, 145 West 44^th Street, New York, New York. The conference will begin at approximately 9:00 a.m. EST and conclude no later than 2:00 p.m. EST. For those unable to attend in person, the conference also will be accessible via Internet webcast and telephone conference call. To join the conference call, dial 719.457.2657 and enter the confirmation code 409235. For the webcast, please go to the Investor Relations section of www.healthnet.com and click on the Investor Conference link. Anyone listening to the company’s investor conference webcast or conference call will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2003, Quarterly Reports on Form 10-Q for the first, second and third quarters ended March 31, 2004, June 30, 2004, and September 30, 2004, respectively, and other reports filed by the company from time to time with the Securities and Exchange Commission.

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About Health Net

Health Net, Inc. is among the nation’s largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company’s HMO, POS, insured PPO and government contracts subsidiaries provide health benefits to approximately 7.3 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE programs. Health Net’s subsidiaries also offer managed health care products related to behavioral health and prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company’s Web site at www.healthnet.com.

Cautionary Statements

Certain matters discussed in this release contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to,

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among other things, rising health care costs, trends in medical care ratios, operational issues, health care reform and general business conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section included within the company’s most recent Annual Report on Form 10-K filed with the SEC and the risks discussed in the company’s other periodic filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this release.

# # #

[Five pages of tables follow]

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Health Net, Inc.

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share and ratio data)

	Third Quarter Ended September 30, 2003			Fourth Quarter Ended December 31, 2003			First Quarter Ended March 31, 2004			Second Quarter Ended June 30, 2004			Third Quarter Ended September 30, 2004
REVENUES:
Health plan services premiums	$	2,300,807		$	2,295,217		$	2,404,355		$	2,398,943			2,393,160
Government contracts		482,276			464,214			503,948			504,317			525,783
Net investment income		17,777			14,212			15,201			13,818			14,750
Other income		15,863			5,989			1,248			1,737			1,540
Total revenues		2,816,723			2,779,632			2,924,752			2,918,815			2,935,233
EXPENSES:
Health plan services		1,890,408			1,876,274			2,107,087			2,062,277			2,022,870
Government contracts		464,295			448,162			480,905			478,927			501,628
General and administrative		236,723			231,814			231,485			214,244			207,187
Selling		62,562			59,021			63,577			59,993			60,410
Depreciation		13,561			12,878			9,983			10,424			10,487
Amortization		669			767			606			606			789
Interest		9,763			9,841			8,438			7,304			8,044
		2,677,981			2,638,757			2,902,081			2,833,775			2,811,415
Asset impairments		—			16,409	(b)		—			—			—
Severance and related benefits		—			—			—			17,402	(e)		5,172	(e)
(Gain) loss on sale of businesses		—			(18,901	)(c)		(1,875	)(d)		—			400	(f)
Total expenses		2,677,981			2,636,265			2,900,206			2,851,177			2,816,987
Income from continuing operations before income taxes		138,742			143,367			24,546			67,638			118,246
Income tax provision		51,930			54,018			9,534			26,272			46,391
Income from continuing operations		86,812			89,349			15,012			41,366			71,855
Discontinued operations:
Loss on settlement from disposition, net of tax		(89,050	)(a)		—			—			—			—
Net (loss) income	$	(2,238	)	$	89,349		$	15,012		$	41,366		$	71,855
Basic earnings (loss) per share:
Income from continuing operations	$	0.75		$	0.79		$	0.13		$	0.37		$	0.64
Loss on settlement from disposition, net of tax		(0.77	)		—			—			—			—
Net	$	(0.02	)	$	0.79		$	0.13		$	0.37		$	0.64
Diluted earnings (loss) per share:
Income from continuing operations	$	0.74		$	0.77		$	0.13		$	0.36		$	0.64
Loss on settlement from disposition, net of tax		(0.76	)		—			—			—			—
Net	$	(0.02	)	$	0.77		$	0.13		$	0.36		$	0.64
Weighted average shares outstanding:
Basic		115,122			113,515			112,600			112,574			111,440
Diluted		117,827			115,943			114,342			113,460			112,397
Ratios:
Health plan services MCR		82.2	%		81.7	%		87.6	%		86.0	%		84.5	%
Government contracts cost ratio		96.3	%		96.5	%		95.4	%		95.0	%		95.4	%
Administrative ratio ((G&A+Dep) / (HP serv rev + Other income))		10.8	%		10.6	%		10.0	%		9.4	%		9.1	%
Selling costs ratio (Selling costs / HP serv rev)		2.7	%		2.6	%		2.6	%		2.5	%		2.5	%
Days claims payable		50.4			49.4			45.2			46.6			46.2

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Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

	September 30, 2003			December 31, 2003			March 31, 2004			June 30, 2004			September 30, 2004
ASSETS
Current Assets
Cash and cash equivalents	$	727,377		$	860,871		$	684,782		$	467,565		$	622,903
Investments - available for sale		1,001,840			1,082,789			1,042,021			1,153,222			1,082,969
Premiums receivable, net		137,485			144,968			186,178			151,619			118,201
Amounts receivable under government contracts		135,570			90,928			121,037			128,960			136,335
Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract		—			—			—			—			114,618
Reinsurance and other receivables		127,562			105,074			94,469			93,920			102,494
Deferred taxes		89,367			43,008			40,827			40,652			41,162
Other assets		80,963			84,842			92,404			103,907			99,578
Total current assets		2,300,164			2,412,480			2,261,718			2,139,845			2,318,260
Property and equipment, net		198,848			190,900			186,700			186,570			185,291
Goodwill, net		762,066			729,506			723,595			723,595			723,595
Other intangible assets, net		20,524			19,918			19,313			21,505			22,716
Deferred taxes		21,289			44,769			41,409			41,868			18,327
Other noncurrent assets		148,067			151,703			214,894			282,258			249,912
Total Assets	$	3,450,958		$	3,549,276		$	3,447,629		$	3,395,641		$	3,518,101
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements	$	990,333		$	1,024,550		$	1,069,247		$	1,042,831		$	990,240
Health care and other costs payable under government contracts		257,048			256,009			233,331			216,816			201,494
IBNR health care costs payable under TRICARE North contract		—			—			—			—			114,618
Unearned premiums		81,682			178,115			95,614			85,894			78,832
Accounts payable and other liabilities		435,176			315,031			272,000			254,453			296,782
Total current liabilities		1,764,239			1,773,705			1,670,192			1,599,994			1,681,966
Senior notes payable		398,928			398,963			406,603			384,220			401,750
Other noncurrent liabilities		65,893			82,383			78,958			95,243			81,657
Total Liabilities		2,229,060			2,255,051			2,155,753			2,079,457			2,165,373
Stockholders’ Equity
Common stock and additional paid-in capital		770,514			789,392			794,602			798,432			805,426
Restricted common stock		5,885			5,885			6,027			5,855			6,483
Unearned compensation		(4,507	)		(3,995	)		(3,624	)		(3,121	)		(3,999	)
Treasury common stock, at cost		(517,064	)		(549,102	)		(577,484	)		(580,634	)		(632,926	)
Retained earnings		962,427			1,051,776			1,066,788			1,108,154			1,180,009
Accumulated other comprehensive income (loss)		4,643			269			5,567			(12,502	)		(2,265	)
Total Stockholders’ Equity		1,221,898			1,294,225			1,291,876			1,316,184			1,352,728
Total Liabilities and Stockholders’ Equity	$	3,450,958		$	3,549,276		$	3,447,629		$	3,395,641		$	3,518,101
Debt-to-Total Capital Ratio		24.6	%		23.6	%		23.9	%		22.6	%		22.9	%

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Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

	Third Quarter Ended September 30, 2003			Fourth Quarter Ended December 31, 2003			First Quarter Ended March 31, 2004			Second Quarter Ended June 30, 2004			Third Quarter Ended September 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(2,238	)	$	89,349		$	15,012		$	41,366		$	71,855
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Amortization and depreciation		14,230			13,645			10,589			11,030			11,276
(Gain) loss on sale of businesses		—			(18,901	)		(1,875	)		—			400
Asset impairments		—			16,409			—			—			—
Other changes		1,351			270			(898	)		1,518			546
Changes in assets and liabilities, net of the effects of dispositions:
Premiums receivable and unearned premiums		54,531			87,769			(130,211	)		24,839			26,356
Other assets		16,942			27,944			4,718			515			5,140
Amounts receivable/payable under government contracts		(22,475	)		43,603			(52,787	)		(24,438	)		(22,697	)
Reserves for claims and other settlements		(89,415	)		37,154			42,962			(26,416	)		(52,591	)
Accounts payable and other liabilities		106,722			(117,256	)		(42,085	)		(15,900	)		44,267
Net cash provided by (used in) operating activities		79,648			179,986			(154,575	)		12,514			84,552
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments		127,622			32,243			125,015			65,320			79,438
Maturities of investments		143,532			121,944			112,345			84,102			30,632
Purchases of investments		(306,732	)		(259,912	)		(186,289	)		(284,446	)		(22,774	)
Purchases of property and equipment		(13,891	)		(12,435	)		(5,853	)		(10,045	)		(9,178	)
Cash received (paid) from the sale of businesses		—			90,316			11,026			—			(400	)
Sales and purchases of restricted investments and other		4,650			(4,685	)		(49,279	)		(84,552	)		39,307
Net cash (used in) provided by investing activities		(44,819	)		(32,529	)		6,965			(229,621	)		117,025
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases		7,414			12,798			4,785			3,040			6,053
Repurchases of common stock		(103,146	)		(26,761	)		(33,264	)		(3,150	)		(52,292	)
Repayment of debt and other noncurrent liabilities		(16	)		—			—			—			—
Net cash used in financing activities		(95,748	)		(13,963	)		(28,479	)		(110	)		(46,239	)
Net (decrease) increase in cash and cash equivalents		(60,919	)		133,494			(176,089	)		(217,217	)		155,338
Cash and cash equivalents, beginning of period		788,296			727,377			860,871			684,782			467,565
Cash and cash equivalents, end of period	$	727,377		$	860,871		$	684,782		$	467,565		$	622,903

Page 14

Health Net, Inc.

Notes to Condensed Consolidated Statements of Operations

Notes:

(a) Loss on settlement from disposition of discontinued operations of $89.1 million, net of tax of $47.9 million, related to the settlement of a lawsuit arising from our 1998 sale of certain of our workers’ compensation subsidiaries.

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

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

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

(e) Pretax severance and related benefit costs of $22.6 million (comprised of $17.4 million in Q2, $5.2 million in Q3) related to our workforce reduction announced in May 2004.

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

Page 15

HEALTH NET, INC.

Medical Covered Lives at September 30, 2004

(in Thousands)

	Commercial - Large Group*			Commercial - Small Group & Individual			Commercial Risk Subtotal			ASO			Commercial Subtotal
	09/04	06/04	09/03	09/04	06/04	09/03	09/04	06/04	09/03	09/04	06/04	09/03	09/04	06/04	09/03
Arizona	74	71	68	55	54	50	129	125	118	—	—	—	129	125	118
California	1,130	1,170	1,150	489	515	518	1,619	1,685	1,668	3	3	2	1,622	1,688	1,670
Connecticut	194	200	213	43	44	47	238	244	260	51	51	58	289	296	318
New Jersey	109	122	144	123	135	150	232	257	294	18	18	19	250	274	313
New York	153	156	158	110	112	115	262	268	273	7	6	10	269	274	283
Oregon	100	95	87	33	33	22	133	128	109	1	—	—	134	128	109
Pennsylvania	—	—	17	—	—	—	—	—	17	—	—	—	—	—	17
Total	1,760	1,815	1,837	853	893	902	2,613	2,707	2,740	80	79	88	2,693	2,786	2,828
Year over Year		(4)%			(5)%			(5)%			(9)%			(5)%
Sequential		(3)%			(4)%			(3)%			2%			(3)%

	Medicare Risk			Medicaid			Health Plan Total
	09/04	06/04	09/03	09/04	06/04	09/03	09/04	06/04	09/03
Arizona	36	36	37	—	—	—	164	161	155
California	97	97	101	695	662	709	2,414	2,447	2,480
Connecticut	27	27	28	95	96	99	411	419	445
New Jersey	—	—	—	43	44	47	293	318	360
New York	6	5	6	—	—	—	275	280	288
Oregon	6	5	0	—	—	—	140	133	109
Pennsylvania	—	—	—	—	—	—	—	—	17
Total	171	170	171	833	803	856	3,696	3,758	3,855
Year over Year		(0)%			(3)%			(4)%
Sequential		1%			4%			(2)%

Page 16

HEALTH NET, INC.

Medical Covered Lives at September 30, 2004

(in Thousands)

Commercial - Large Group*

Commercial - Small Group & Individual

Commercial Risk Subtotal

ASO

Commercial Subtotal

09/04

06/04

09/03

09/04

06/04

09/03

09/04

06/04

09/03

09/04

06/04

09/03

09/04

06/04

09/03

TRICARE

Previous TRICARE Contracts **

642

1,477

1,484

North Contract ***

2,929

—

—

Total TRICARE

3,571

1,477

1,484

* Commercial Large Group includes Medicare Supplement

** Includes only CHAMPUS eligible for which we have health care risk

*** Includes CHAMPUS eligible for which we have health care risk, and those for which we provide Administrative Services Only (ASO), primarily active duty

Page 17

EX-99.2

Exhibit 99.2

Health Net, Inc.

Q3 2004 Earnings Conference Call

November 4, 2004

8:00AM PDT

Corporate Participants:

David Olson, SVP, Investor Relations

Jay Gellert, President & CEO

Buddy Piszel, EVP & CFO

OPERATOR: Good day, everyone, and welcome to this Health Net, Incorporated third quarter earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to the senior vice president of investor relations, Mr. David Olson. Please go ahead, sir.

DAVID OLSON: Thank you, and good morning, everyone. During this call, we will be making forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of 1933 that involve risks and uncertainties. All statements, other than statements of historical facts, are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, intentions, expectations, objectives, goals, or prospects. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our 2003 Form 10-K and our other filings with the SEC from time to time, as well as the cautionary statements in our press release issued in advance of this call. Now, let me turn the call over to our president and CEO, Jay Gellert. Jay.

JAY GELLERT: Thank you, David and good morning. I want to start today with a few brief comments about the quarter and then turn the call over to our new CFO, Buddy Piszel. All of us will have a lot more to say a week from today at our annual investor conference in New York. We’re looking forward to telling you about how we’re back on course, about our confidence in the underlying strength of our franchises, and we’ll show you how we expect to better realize their values next year and in ‘06 and ‘07. You’ll hear that we believe we can generate substantially better financial performance going forward.

We’re encouraged that the third quarter is one of the early chapters in this story. It was a pretty strong quarter, stronger than the second quarter as the second was stronger than the first. These results show a solid and rapid recovery that is consistent with the plan we laid out earlier this year. We are taking down the numbers for Q4. The range we’ve established for Q4 at this time is around consensus. So we expect to see further improvement in that quarter. Things are getting better. We look forward to a solid ‘05. We do admit to having been a little optimistic for ‘04, but we do feel good about the speed of our recovery.

As many of you know, prior period reserve development has been an issue for us this year, and it modestly impacted our results in Q3. In fact, without prior periods, we would have been just ahead of consensus for Q3. Just to remind you — in Q1, the adverse development was $64 million. It dropped to $13 million in Q2, and is down around $6 million in Q3. So the trends are heading in the right direction. We’re going to do whatever it takes to not have any adverse prior period development impact in ‘05.

The first and most obvious solution to the cost and reserve issues we faced earlier this year was to raise premiums. We’ve done it and done it successfully. Commercial premiums rose sequentially by more than $5 PMPM. That’s what we said we needed to do at this time on the second quarter call. Raising premiums has led to margin improvement. In fact, the commercial growth margin from first quarter to third quarter has jumped almost $9, so pricing is working. The biggest concern you have as you embark on such pricing actions is that you’ll push away both good and bad business. Based on the results, we’ve definitely pushed off bad business, especially in the Northeast. In California, we’re sticking to our prices. We’ve seen some of our business go over to competitors at premiums lower than we were willing to accept. We don’t see this as a lasting issue.

The impact of premium increases is some necessary enrollment attrition. This was fully expected and is tracking quite closely to our outlook. We are likely to see some further contraction as we move through the first half of next year as we complete the repricing process. But, other than New Jersey, we think ‘05 enrollment is going to be flat compared to year-end ‘04. We’ll talk more about the enrollment outlook next Thursday.

The second step we took to address our issues was to implement a number of health care cost reduction initiatives. We think we’re just starting to see the beneficial effects of this effort in the form of lower hospital utilization in the Northeast and a slow down in hospital unit cost growth in California.

With Buddy’s arrival we decided to take the opportunity for a long look at the company. What we found is that our markets are solid but some of our basic operations need better focus and coordination. I’m not talking about systems per se; I’m talking about profit enhancements. The operational changes and claims that led to the reserve issues earlier this year are a perfect example. We should have more closely tied these changes to the reserving model. We did, but not soon enough. So simply put, we’re going to make some operational changes to create more uniform processes and more predictable results in pricing, underwriting, reserving, medical management, product development and other areas, so that we can better extract the underlying value our franchises. We’ll talk about this next week.

It’s important for all of us to remember that there are some very good pieces to the Health Net story. The health care cost issue is largely about hospitals and we’re addressing it. Hospital cost growth has slowed in each successive quarter this year. Physician costs are remarkably stable and we’ve done an outstanding job on pharmacy costs. You’ll hear a lot more on the pharmacy front next week at the investor day. Our TRICARE operation continues to do wonderful work serving the families of our men and women in uniform. The transition between the old contracts and new North contract has gone very well. We’re now solidly in place in the 20 new states and we see potential opportunity there over the next several years above and beyond what we’re presently doing for the Department of Defense. In the near term, we expect to see some growth from the inclusion of selected reservists under the new authorization bill.

Our Oregon plan continues to grow profitably. Its success provides a lot of lessons in how we’ll be successful in other markets. And our behavioral health subsidiary, MHN, continues to pick up clients and show pretax improvement. Let us not forget, however, that the California franchise is growing and is showing solid commercial margin improvement. It has a strong market position and the third quarter just showed some of the potential. Added to that, sharp improvement in the pretax performance in the Northeast, which gives us confidence going into next year.

Health Net, Inc.

Q3 2004 Earnings Conference Call

November 4, 2004

Page 2

Let me conclude by saying it’s been a very challenging period over these past few months. I think the evidence is present here in the third quarter that we are successfully focusing on our issues and our turnaround is well under way. We have work to do, but the quarter gives us real confidence.

The arrival of Buddy Piszel is a significant part of our story. He’s been a real shot in the arm for the organization. He comes to us from Prudential, and we’re pleased he decided to leave New Jersey for California. You’ll all have a chance to meet Buddy next week. But for now, let me turn the call over to him. Buddy.

BUDDY PISZEL: Thanks, Jay, and good morning everyone. Let me start by telling you how happy I am to be here and how very excited I am by the opportunity I see in Health Net’s future. I believe that there’s a substantial unrealized franchise value here and our entire management team’s goal for 2005 and beyond is to unlock that value.

When I first got here, I began the process of looking at and reviewing all aspects of the company’s operations. The overriding goal of these reviews is to position us for a clean 2005 that will demonstrate a strong platform for growth for 2006 and beyond.

Let me share with you some initial observations. I’ve been very impressed by the depth of the management talent at Health Net. There’s a lot of bench strength around this organization. I quickly appreciated how solid the California franchise is. It’s stabilizing financially, and it’s clearly our very strongest platform for long-term growth. We’ve got growing businesses in Oregon and in MHN, our behavioral health subsidiary. We did an outstanding job at managing our pharmacy costs. TRICARE is absolutely on top of the transition to the new contract and there are some intriguing growth aspects and opportunities there. We’re also very encouraged that the Northeast returned to profitability in the third quarter. Lastly, the control environment is excellent and we’re on target with our Sarbanes Oxley efforts.

Now, let’s take a look at the quarter. The quarter produced reported earnings per diluted share of $.64. Excluding the severance related line item on the P&L, we had earnings of $.67. That’s within our guidance range despite absorbing the prior period restates. We had two bottom line offsetting items in the quarter. G&A was lower by $5.9 million from the final settlements related to our sold Florida operations. Offsetting that was $5.2 million of severance related expenses associated with Health Net One and the TRICARE transition, costs which we’ve been expensing as we go with those efforts. Additionally, as Jay said, we experienced $6.2 million of negative prior period reserve developments in the quarter, primarily related to 2004 costs. These restates are lower than the prior periods booked in either Q1 or Q2 of this year. The bad news is we weren’t expecting them. And one of my jobs is to figure out how to put these negative prior period reserve restates behind us, so that we don’t have these issues in 2005 and beyond.

Let me move to revenues. Total revenues increased by 4.2 percent compared to the third quarter of 2003. Health plan premiums increased by 4 percent over the same timeframe. Commercial premium yields were up by 8.7 percent in Q3 of 2004 compared to the same quarter of last year. That’s up from the 7.7 percent year-over-year growth we reported to you in 2Q. Even more encouraging, we’re recording strong sequential increases in our premium yields. In the Northeast, commercial premium revenue on a PMPM basis improved by over $6, while in California, our commercial revenue PMPM improved by over $4.90. Our entire commercial book improved by nearly $5.25 PMPM compared to the second quarter. And this is what we told you that we would do.

Health Net, Inc.

Q3 2004 Earnings Conference Call

November 4, 2004

Page 3

In California, in the third quarter, we renewed about 350,000 members at yields between 13 and 14 percent. That helped drive a $6 and 50 percent commercial PMPM gross margin improvement in California compared to the first quarter’s results. In the Northeast, Q3 commercial PMPM gross margins increased by almost $14 since Q1, helping the Northeast achieve profitability in the quarter as compared to pretax losses in the first half — more evidence that our pricing is getting to where it needs to be. The Northeast July 1 renewals were booked at a 13.9 percent increase.

On health care cost trends, we continue to see encouraging developments. Hospital costs, which were trending in the high teens in Q1, are now trending in the low teens. Physician costs that remained in mid single digits all year, pharmacy ticked up a little bit in the quarter but year-over-year trends are still in the mid to upper single digits. This leads to a total commercial cost trend of around 9 percent. Now, reported health care costs ran higher than that as expected due to all the restate issues. With our pricing moving up so dramatically, we can now see that in the next quarter or two, commercial pricing will cross over and be above commercial trends and that sets the stage for a strong 2005.

We’ve really been focused on margin recovery, so let’s take a look at sequential development between Q2 and Q3. Sequentially, commercial health care costs on a PMPM basis were up only 0.5 percent, a sign that we’re purging bad business and that our cost control initiatives are having an effect. But commercial premiums were up 2.5 percent, just further confirmation that our trends are moving in the right direction.

For TRICARE, we had a strong revenue quarter due to the overlap of the old and the new contract, and continued high military activity. Revenue for the quarter was nearly $526 million, up by $21.5 million sequentially and by $43.5 million year-over-year. We will show a drop in TRICARE revenue in the fourth quarter from the effects of the carve-outs in the new contracts, pharmacy and TRICARE for Life, and the end of the overlap. We expect to show Q4 TRICARE revenues in the $430 to $450 million range. This does include one month of Region 6 revenue of approximately $85 million that will drop off. Therefore, Q1 of 2005 revenue will be lower still. Now, while revenue will be down, our margins under the new contract will, we believe, be stronger, keeping us whole or better.

Turning to the balance sheet, let me focus on two areas. First, Moody’s and S&P downgraded our senior unsecured credit rating. The tangible impact of these downgrades is our interest expense will increase by $1.5 million per quarter, reflecting higher interest payments on our senior notes. We understand the road back and we’re committed long-term to returning to investment grade status. Reserves for claims decreased by $53 million compared to the second quarter. Reserves for claims were $900 million in Q3 and $1.43 billion at Q2. The primary reason for the decrease are lower in-house claims, inventory levels driven by a conscious decision to continue to pay claims faster. Additionally, the reserve declines are in line with declining enrollment.

Turning to cash flow, cash flow for the quarter was at $84.5 million which exceeded net income plus depreciation and amortization and that’s the zone we should be in. Despite the strong cash flow in Q3, it’s clear we can’t overcome the hole created by the first half of the year. To get back to our earlier cash flow guidance, we’d need more than $200 million in operating cash flow in the fourth quarter. Cash flow will be positive in the fourth quarter but not at those levels. With the TRICARE issue and the claim paydowns behind us, we look for cash flow for operations to be in line with net income plus depreciation and amortization for the full year 2005.

Health Net, Inc.

Q3 2004 Earnings Conference Call

November 4, 2004

Page 4

In the third quarter, we repurchased nearly 2.2 million shares. As previously announced on September 13th, we suspended our share repurchase program for the remainder of the year. We will assess restarting the program after the first of the year.

On Health Net One, we’re making substantial progress. In the third quarter, we completed conversion to a single sale position, a single broker commissions module, new IVR speech recognition system, and a single appeals and grievance system, just to name some of the work continuing on the project. Our operations are continuing to show overall improvement. EDI rates are up, auto adjudication rates are up, signs that we’re making real progress on the operations front. The final Health Net One claims conversion is now scheduled to occur in mid-2005. We want to mitigate any impact on our July 1 renewals, our second largest renewal month of the year, as well as assuring that we’re completely aligned with all the other activities occurring around the company.

In summary, we’ve achieved what we set out to do in the third quarter. Commercial pricing increased by over $5 PMPM. Health care cost trends improved and combined with pricing disciplines have resulted in gross margin expansion. G&A remained under control in Q3 and we remain committed to keeping it that way.

I’m very glad to be on board, and, again, see a lot of opportunity here at Health Net. But we do have work to do. We need to resolve some of the outstanding internal operational issues. We need to finish Health Net One, and we need to ensure that 2005 is a clean and very strong year for our company. I look forward to investor day next week and to meeting many of you. And with that, let’s open it up for questions.

OPERATOR: Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you’re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one on your touch-tone telephone to ask a question. If you do find that your question has been answered, you may remove yourself from the queue by pressing the pound key.

And we will take our first question from Charles Boorady with Smith Barney.

CHARLES BOORADY: Thanks. Good morning. Two questions. First on the fourth quarter ‘04 expected charges and how we should think about this. Is it going to be specific to the identifiable claims from this year and previous years related to the specific provider disputes? Would there be some additional increasing in reserves or reserve adjustment intake? And if so, can you tell us what percent of RBC you’re at right now and target where you would want it to be and so we can get some magnitude on what to expect?

JAY GELLERT: We’re looking at everything at this point. We’ll have to get back to you on the specific RBC numbers. We are looking at it in the context of our discussions with the rating agencies. But we’ll have more details on that over the next couple of months.

CHARLES BOORADY: Okay. So you’ll give us some color before we get to the actual, you know, January date. In other words, in terms of giving us more parameters around what to expect in the fourth quarter charge?

JAY GELLERT: We’ll give you more clarity before we announce Q4.

Health Net, Inc.

Q3 2004 Earnings Conference Call

November 4, 2004

Page 5

CHARLES BOORADY: Okay. And the next question was just for 2005. Recognizing it’s too early for specific EPS guidance, but just directionally, will it be up from ‘04 based on what you know today, if we normalize ‘04 to bring up the first quarter from $.12 to a more normal run rate and if we exclude the negative reserve developments in this quarter and the last quarter?

BUDDY PISZEL: We’re expecting improved EPS in 2005. We’ll be sharing that with you in January. We’ll probably tie together the guidance on 2005 with the follow-up on the — any charges we may take in the fourth quarter.

CHARLES BOORADY: Any way to put any even wide parameters on that at this point, or just it’s going to be up from the normalized full year ‘04 number, just to be clear?

BUDDY PISZEL: Charles, at this point, I don’t think we’re prepared — as we said, I just got here. Eight weeks into the mission. The fourth quarter I’m going to be spending a lot of time going through all the matters that need to be reviewed, and making sure our business plans and financial plans for ‘05 are in really strong shape. So I prefer to wait until the January period to give you that feedback.

CHARLES BOORADY: Okay. Great. Thanks.

OPERATOR: And our next question will come from Joseph France with Banc of America.

JOSEPH FRANCE: I had two questions. One was how much you spent on share repurchase in the latest period.

BUDDY PISZEL: I think it was $77 million, and we suspended the program on September 10th.

JOSEPH FRANCE: Great. The next question is more of a general one. Everyone else in the industry, or I should say most people, seem to be decelerating rate increases, yet yours are accelerating for reasons that you’ve talked about. How are you doing this? I guess another way of asking it would be: Where are your rates in absolute terms sort of adjusted for product relative to the competition?

JAY GELLERT: Our rates in the Northeast are consistent with the market in Connecticut, and where we’re targeted in New Jersey — in New York, they’re consistent with the market. In some cases, they’re above the market in New Jersey. In California, we’re in some cases pricing towards the higher end of the market. But based on our ‘05 plan, we think we’ll be in the market in California, New York and Connecticut, but we’ll still have some cleanup in New Jersey.

JOSEPH FRANCE: And your comments relative to the market are after your rate increases?

JAY GELLERT: Yes.

JOSEPH FRANCE: Great. Thanks, Jay.

OPERATOR: And moving on, we will go to Christine Arnold with Morgan Stanley.

CHRISTINE ARNOLD: Good morning. Couple questions. First, did you have any bid price or equitable adjustments in the quarter?

JAY GELLERT: I believe not. We’ll check that. If there were any, they had a diminimus effect, but we’ll get back to you.

Health Net, Inc.

Q3 2004 Earnings Conference Call

November 4, 2004

Page 6

CHRISTINE ARNOLD: $85 million in overlap revenue and then assign say a 4 percent margin and that’s kind of the one-time benefit from the TRICARE overlap?

JAY GELLERT: Let us get that exact number to you.

CHRISTINE ARNOLD: Okay. Next question, I know you don’t want to get into the specifics of the charge. But this kind of feels like it’s medical expenses. Does any of it relate to 2004, or is it from before ‘04?

BUDDY PISZEL: The bulk of it will be related to prior to 2004. A lot of the issues that we have with providers, we’ve changed our practices in 2004, so those issues are not here. And the items go back to ‘01, ‘02 and ‘03, predominantly.

CHRISTINE ARNOLD: Okay. So in terms of finding the run rate of earnings, the charge isn’t going to impact that calculation?

BUDDY PISZEL: Minimally is what I would say.

CHRISTINE ARNOLD: That’s good news. And final question relates to your hospital recontracting. In light of the fact you got 30 to 35 percent being recontracted for ‘05 of your hospital costs, how far into that are you, in general, seeing improved or deteriorating pricing with hospitals?

JAY GELLERT: We’re seeing more favorable pricing. And in addition we’re seeing a continued movement away from charge-based pricing to more fixed arrangements.

CHRISTINE ARNOLD: Okay. So decelerating?

JAY GELLERT: Yes. I said yes, Christine.

CHRISTINE ARNOLD: How much? I’m sorry.

JAY GELLERT: I’m sorry. I don’t think we have the exact number now. But I think we will be able to give a little more color at our investor day on that subject.

CHRISTINE ARNOLD: All right. Thanks so much.

OPERATOR: And moving on — from Lehman Brothers, we will hear from Josh Raskin.

JOSH RASKIN: Hi, thanks. I just want to follow up on the review of the unresolved provider claims. If you could just give us a little bit more information, I guess, one in terms of geography. Two, any way to size that. And then three, how we should think about that in, you know, your pricing expectations for 2005 and if that’s been impacted.

BUDDY PISZEL: From a geography standpoint, the bulk of the issues relate to California with a small percentage of them related to the Northeast.

JAY GELLERT: And since we already dealt with them as we looked to ‘05 through these contract modification and other related issues, they won’t affect ‘05 cost or pricing trends.

Health Net, Inc.

Q3 2004 Earnings Conference Call

November 4, 2004

Page 7

JOSH RASKIN: And any way to size the magnitude of, you know, the disputed claims or any initial expectations there?

JAY GELLERT: I think we’ve asked Buddy to go through that, and we’re early in that review process. And I think that we’ll be having more detail a little later.

BUDDY PISZEL: We will be providing a little color in the 10-Q for the Tenet matter. And you can get a sense as to some of the issues based on the disclosures we’ll be making in the 10-Q.

JOSH RASKIN: Okay. But I assume that’s just a portion of what this overall review is.

BUDDY PISZEL: That’s a portion of it. That’s correct.

JOSH RASKIN: Okay. And then real quick just the TRICARE run rate, the revenues, if we drop out the $85 million off of that $440 million expected in the fourth quarter, annualize that for 2005 with a little bit of growth, is that a good way to think about it?

BUDDY PISZEL: The only exception I’d make is that we are expecting margin improvement in 2005. So you can’t just extrapolate those revenues dropping off into a 2005 run rate, because we are expecting margin improvement under the new contract.

JAY GELLERT: In addition, we’ll see the effect of the addition of the reservists under the new defense authorization bill. That effect hasn’t been put into our guidance yet.

JOSH RASKIN: Okay.

BUDDY PISZEL: And while we’re on TRICARE, Christine you had asked a question about whether we had had bid price adjustments or equitable adjustments in the third quarter and there were none.

OPERATOR: And our next question comes from Doug Simpson with Merrill Lynch.

DOUG SIMPSON: Hi. Good morning, everybody. One clarification. When you talk about $.67, you’re excluding the severance but you’re including the 5.9 recapture. Is that right?

JAY GELLERT: The 5.2 severance is included in the $.67. The only severance not included in the $.67 was the severance that we announced in Q2 for the reductions in force we made primarily in the Northeast.

DOUG SIMPSON: Okay. Could you just remind me of your business, how much is actually regulated by Garamendi’s office as opposed to the Department of Managed Care?

JAY GELLERT: The portion that’s regulated by the insurance commissioner is probably in the range of about 10 percent of our business.

DOUG SIMPSON: Similar to WellPoint’s. As you guys look out the next couple of years, some of the little smaller companies are getting the urge to merge and getting together. We’ve seen a lot of acquisition activity. How do you guys see — where do you see Health Net in a couple of years? How do you plan on addressing that dynamic in the industry competitively?

JAY GELLERT: Well, we feel like we’re in a strong position as a standalone. We have, I think, a lot of upside opportunity which we’ll describe. And so at this point, until we get some more clarity about the regulatory situation in California, we’re focused on our own internal operations and focused on improving our numbers.

Health Net, Inc.

Q3 2004 Earnings Conference Call

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DOUG SIMPSON: I mean, it seems like scale, obviously you’d be in a better position with provider discounts and with G&A. I’m just wondering given the scale disadvantage, what is — what do you think Health Net brings to the table that other people can’t right now? What do you see as your advantage?

JAY GELLERT: Well, first of all, I’m not as clear that there are all the scale advantages with provider relationships. I think that increasingly we’re seeing it more regarding the ability to do synergistic things. We’re not convinced that size, per se, particularly over the long hall will be that significant in the provider discount arena. I think what we bring is the following: First of all, we have a very strong TRICARE franchise that has some significant growth opportunities in the future. Secondly, we believe that California is a great market, that there are some significant barriers to entry in California, and that we’ll be able to show some really good growth in California in the foreseeable future, partially because of the relationships we have with providers, partially because of our product mix and partially because of our existing base. We think the Northeast is a good opportunity. We’re strong in Connecticut. We’re the second largest player by revenue in Connecticut. We believe we’re in a competitive position there. We think building up our Guardian relationship and some of our other efforts we have some strong opportunities in New York and New Jersey. So I think the best thing we bring to the table is the fact we’re in these large markets and we have strong share, so we have growth potential. And the key for us is to build an execution machine, which has been our focus.

DOUG SIMPSON: Okay. Then last thing, you may have already said this, and I apologize if you did. The inflection point — thinking about lapse members and the paid claims lag, when do you see that inflection point?

JAY GELLERT: We expect that by the end of the second half — I mean, by the end of the first half, by the end of the second quarter of ‘05, we’ll be back growing on the commercial front.

DOUG SIMPSON: Okay. Great. Thanks.

OPERATOR: Our next question comes from Eric Veiel with Wachovia Securities.

ERIC VEIEL: Real quick. Can you guys help me reconcile. On the last call, I think you said that for the first business you had on your books for ‘05, yields would be up 11 to 13 percent after about 300 basis points of buydown. Can you just help me reconcile that with your comment in this press release that yields will increase between 10 and 11 percent for business you’re doing in the first quarter?

JAY GELLERT: Oh, what we talked about in the first call was the growth we were seeing in the large group account. We’ve had some more buydown experience in the business we’ve booked over the course of the last quarter, particularly in the Northeast.

ERIC VEIEL: Okay. And so can you give us sort of a sense of what the buydown number, then, is looking like for 2005?

JAY GELLERT: It’s about 3 percent.

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ERIC VEIEL: Okay, which is what you had said you were expecting then. So I’ll take the about to mean that it’s something higher than 3 percent?

JAY GELLERT: I think we said, as I recollect, but I’ve got to go back, I think we said 2-250 then and I think we’re probably about 100 bps higher now.

ERICK VEIEL: Okay.

JAY GELLERT: I think I said that, but I’ll go back and check, too, and we can check.

ERIC VEIEL: Okay, great. Second question, just to try and think about the prior period development. This quarter’s prior period development was related to earlier parts of 2004. Did I understand that correctly? And if so, can you help us think about what was it related to — the hospital trend again or where it was coming from?

BUDDY PISZEL: It was related to the hospital trend, and it was sprinkled around the units. And again, our focus has to be to look at our actuarial processes, get more stability in the claims process so we’ll have more predictability and we’re less subjective going forward and we’re going to be really focused on that in the fourth quarter.

ERIC VEIEL: And it was related to 2004.

BUDDY PISZEL: Yes.

ERIC VEIEL: Okay. Thank you.

BUDDY PISZEL: Again, it was $6 million.

ERIC VEIEL: Right.

OPERATOR: And now we’ll hear from Ed Kroll with SG Cowen.

ED KROLL: Good morning. Just some color, if you could, on this comprehensive review, the unresolved provider and claims issues. Would you characterize that as a systems issue? Or is that — or are there flaws, perhaps, in the contract terms that need to be corrected?

JAY GELLERT: Yeah. It’s not a system problem, per se. I think it’s some issues where there’s some ambiguity in the contracts. We’re in a position where we’re resolving those issues on a going forward basis by moving away from claims-based contracts to a significant degree. But there are some past issues which remain to be resolved. And they’re primarily pre- ‘04, many back to ‘02. And our goal is to transition to fixed price contracts, which both help our predictability and are tremendously advantageous as we sell products with more consumer share. So that’s the primary issue we’re looking at.

ED KROLL: Okay. And when you file the Q, you say you’ll have some information in there as well.

JAY GELLERT: There’ll be a little more detail in the Q that you’ll be able to review.

ED KROLL: Okay. And then on membership, I’m not sure if I heard this correctly. Will you be down on 1-1-05 from 12-31-04?

JAY GELLERT: Yes.

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ED KROLL: But then you think you come back during the course of the year and wind up essentially flat?

JAY GELLERT: The expectation is for all of our operations, other than New Jersey, we’ll end up flat for year-end ‘05 over year-end ‘04. We expect to see still some attrition in New Jersey during the course of the year, but we haven’t estimated it fully yet.

ED KROLL: Okay. All righty. And —

JAY GELLERT: The reason for that, again, is that our pricing actions began in Q2 ‘04. So to get the full year of pricing actions, it includes Q1 ‘05.

ED KROLL: Got it. Can you quantify how much you’ll be down on 1-1-05?

JAY GELLERT: I don’t think we’re in a position to do that yet. But I think that we’re still looking at it, but it’d probably be in the 2-4 percent range.

ED KROLL: Okay. All right. And then on the admin, just to clarify, in terms of dollars, is that a good run rate, you know, if we add back those recoveries from the Florida health plan sale? It’s $223.6 million. Is that a good run rate number?

JAY GELLERT: You’re looking at —

ED KROLL: It’s page five of the press release under administrative expenses.

JAY GELLERT: One second. The general and administrative number for the third quarter is 207,187. That’s page 12, Ed. I’ll let you get there. Because we put depreciation in.

ED KROLL: Right.

JAY GELLERT: So the number 207, we, in fact, have — if you add back the Florida, we still have conservatively estimated that our fourth quarter could be as much as $7 to $8 million higher than that. And when we estimated our range, so we’ve been conservative in those estimates.

ED KROLL: Okay. So that’s what’s a higher number is baked into the $.68 to $.75 guidance.

BUDDY PISZEL: Yes.

JAY GELLERT: That’s right.

ED KROLL: Okay.

JAY GELLERT: And in addition the higher interest is baked in that Buddy spoke about.

ED KROLL: Got it. Thank you. And then finally, do you have any thoughts or comments on the whole insurance investigations, you know, either New York, California, Connecticut? Those three are under way. You do business in all those states. Any general comments you’d like to make on that?

JAY GELLERT: Well, contingency commissions are a very small part of our selling costs, in the range of a couple of percent. And so I think that we’re comfortable with the practices we’ve been involved in are well within industry standards, and that the process won’t lead to anything that would surprise anyone.

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ED KROLL: Okay. Very good. Thank you.

OPERATOR: Moving on, we’ll go to Scott Fidel with JP Morgan.

SCOTT FIDEL: Hi, thanks. Good morning. First question just had to do with just following up on the G&A and you gave some guidance for fourth quarter. Can you also just talk about how you think we should think about G&A for next year? Obviously looks like there’s going to be a few moving pieces where you’re going to get the cost savings from Health Net One — but probably going to have some enrollment attrition in the first half. So do you think as G&A as generally stable for next year, or do you think there’s still an opportunity to bring that down?

JAY GELLERT: We’re still reviewing it. It’s part of our ‘05 review, so it’s premature for us to comment.

SCOTT FIDEL: Okay. Just a second question in relation to the elections yesterday and thinking about your Medicare business. Obviously you’ve had a few different initiatives this year with stabilizing the commercial business and with the TRICARE conversion. But assuming that you do stabilize commercial next year, do you see an opportunity to focus on Medicare and see that as a growth area or just what are your general thoughts there?

JAY GELLERT: Yes. We see some opportunities. We’ve had a very positive experience with the Medicare PPO in Oregon. We have, I think, enrolled nearly 8,000 members just this year on a very profitable basis. And so we feel really good that we both have Medicare Advantage experience and now some real solid Medicare PPO experience, which we intend to take advantage of in the states we’re in, plus in some of the TRICARE states.

SCOTT FIDEL: Okay. And then just last question, just in terms of the negative PPD that you reported for this year. How does that break out between the California region and the Northeast? Is that still in both regions or was it primarily in one of the areas?

BUDDY PISZEL: It’s actually sprinkled across all of the regions and not concentrated in any of them, Scott.

SCOTT FIDEL: Okay. Thank you.

OPERATOR: Moving on, we’ll hear from William McKeever with UBS.

WILLIAM McKEEVER: My question was answered. But I did want to follow up on a couple of things. One, on the hospital side, you mentioned the cost trends there are in the teens. Could you break that out between utilization and unit cost?

JAY GELLERT: Probably about 2 percent is utilization and the remainder is unit cost.

WILLIAM McKEEVER: Okay. And then you suspended the share buyback program. Any thoughts why and when share repurchase might begin again?

JAY GELLERT: Well, we’ve indicated we’ve suspended it for ‘04. We’ll reassess it in ‘05, but we don’t have any specific guidance at this time.

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WILLIAM McKEEVER: Okay. Thank you.

OPERATOR: From Bear, Stearns we have John Rex.

JOHN REX: Good morning. Thank you. First, could you quantify for us the impact in the quarter from the Medicare risk adjuster payments received — talking, speaking in particular to the retroactive impact?

JAY GELLERT: There’s no retroactivity in the quarter.

JOHN REX: I guess — what was the total didn’t you receive beginning July 1 of payments that would have included amounts relating to earlier in the year?

JAY GELLERT: Yeah, I think we — those were accrued in Q2 because we knew what they were.

JOHN REX: Okay. So there was no —

JAY GELLERT: Yeah. So we have no extraordinary risk adjuster payments in Q3.

JOHN REX: Okay. Great. Also can you tell us what you’re modeling for your health plan MLR in 4Q, given your EPS guidance?

JAY GELLERT: Yes, we’re expecting 100 BPS of improvement over Q3.

JOHN REX: Great. Thank you.

OPERATOR: Moving on, we will hear from Ari Herman with Goldman Sachs. Mr. Herman, your line is open.

JAY GELLERT: Hello?

MATT BORSCH: Sorry. It’s Matt Borsch. I had a question on the claims inventory just to help us size it. Could you share with us the dollar value of your claims inventory now, what it was at the end of the second quarter, and maybe — if you could — year-end 2003?

JAY GELLERT: We don’t have this right here in front of us. So to give you the right information, let us get back to you on that.

MATT BORSCH: All right. Just so I understand, on the severance items, I was a little confused there. It sounded like there was one that you excluded from the $.67, and another equivalent amount that was included?

BUDDY PISZEL: Matt, the way it is, we break out on the face of the P&L severance related to the actions that we started in the second quarter.

MATT BORSCH: Okay.

BUDDY PISZEL: Now, separate that we do have severance related to ongoing operations, Health Net One and the TRICARE transition. And they are in the P&L. So we did separate them.

MATT BORSCH: Were they about the same amount, then?

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BUDDY PISZEL: They are about the same amounts. One was — the amount in the P&L is $5.2 million. It’s split between G&A expenses and TRICARE expenses. And then the 5.9 is down below as a separate line item.

MATT BORSCH: Got it. Thank you. And then a couple other questions. Can you comment on your profitability of your Arizona operation and just tangentially it looked like the P&L was down somewhat in the first half of the year. And I’m wondering how you did in the third quarter.

JAY GELLERT: It was down somewhat in the first half of the year. And at this point, Arizona is break even to slightly profitable.

MATT BORSCH: Okay. Great. Last question here is in terms of large group accounts for 2005. We had heard that the New York State Nurses account in the Northeast might be moving to a self-insured basis with another carrier. Can you comment on that?

JAY GELLERT: I don’t believe it’s moving to a self-insured basis with another carrier.

MATT BORSCH: You’re retaining that account?

JAY GELLERT: Yes. I believe we’ve retained that account.

MATT BORSCH: Okay. Thank you.

OPERATOR: One final reminder, if you would like to ask a question, please press star one on your touch-tone telephone. And we do have a follow-up from Joseph France with Banc of America.

JOE FRANCE: Thank you. I just wanted to check the number you gave us for share repurchase. I think you said $77 million, and it looks like you only repurchased 2.1 and change million shares. Which is like $35 a share. Did I have the share count wrong?

BUDDY PISZEL: Why don’t we come back to you, Joseph. I took that number off the top of my head. That’s dangerous, being that I’ve been here so new. Let me get back. It will be disclosed fully in the Q.

JOSEPH FRANCE: That’s great. Thanks a lot.

JAY GELLERT: We didn’t overpay.

OPERATOR: And it appears there are no further questions at this time. Mr. Olson, I would like to turn the conference back over to you for any closing remarks.

DAVID OLSON: Thank you. We look forward to seeing all of you next Thursday at the Millennium Hotel at our annual investor day. If you don’t have the details or you haven’t checked in, please call my office at 818-676-6978. We look forward to seeing all of you then. Thanks.

OPERATOR: That does conclude today’s teleconference. We thank you for your participation and have a great day.

[END]

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