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): February 8, 2007

HEALTH NET, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	1-12718	95-4288333
(State or other Jurisdiction of	(Commission File Number)	(IRS Employer
Incorporation)		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))

Section 2- Financial Information

Item 2.02 Results of Operations and Financial Condition.

On February 8, 2007, Health Net, Inc. (the “Company”) issued a press release announcing its earnings for the quarter and year ended December 31, 2006. The press release discloses certain financial information, such as days claims payable and earnings per share, that is considered non-GAAP financial information. The Company believes this non-GAAP financial information provides useful information to both management and investors by excluding certain expenses and other one-time items that are not indicative of our core operating results. Management refers to this financial information to facilitate internal and external comparisons to the Company’s historical operating results and for forecasting purposes. This non-GAAP financial information should be considered in addition to, not as a substitute for financial information prepared in accordance with GAAP. As used herein, “GAAP” refers to accounting principles generally accepted in the United States.

The press release is attached hereto as Exhibit 99.1 and hereby incorporated in this Item 2.02 by reference.

Section 9- Financial Statements and Exhibits

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits

99.1 Press Release dated February 8, 2007 announcing results for the quarter and year ended December 31, 2006 for Health Net, Inc.

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: February 8, 2007

HEALTH NET, INC.
By:	/s/ Linda V. Tiano
	Linda V. Tiano
	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

Angie McCabe

818.676.8692

angeline.mccabe@healthnet.com

HEALTH NET REPORTS FOURTH QUARTER NET INCOME

OF $85 MILLION, OR $.72 PER DILUTED SHARE

Health Plan MCR Improves by 120 Basis Points Sequentially;

Commercial Enrollment Climbs From Third Quarter;

Health Net Repurchased 5.5 Million Shares in the Fourth Quarter for $250 Million;

Company Records $37 Million Pretax Litigation-Related Charge in Quarter

LOS ANGELES, February 8, 2007 – Health Net, Inc. (NYSE: HNT) today announced 2006 fourth quarter net income per diluted share of $.72 compared with net income per diluted share of $.65 in the fourth quarter of 2005. The quarter’s results were impacted by a pretax charge of $37,093,000, or $.19 per diluted share on an after-tax basis. If the charge were excluded, Health Net’s earnings per diluted share for the quarter would have been $.91.

The charge is for legal expenses related to two cases that are pending against Health Net and certain of its affiliates in federal court in New Jersey. These cases involve assertions regarding Health Net’s past payment practices for out-of-network provider claims.

For the full year of 2006, Health Net reported earnings of $2.78 per diluted share, a 39.7 percent increase compared to 2005. Excluding the effect of the financing charge taken in the third quarter, the litigation expense charge taken in the fourth quarter, and the after-tax benefit recorded in the third quarter of 2006, Health Net would have earned $3.05 per diluted share in 2006.

Positive developments for the fourth quarter and full year of 2006 included:

• Pretax margin was 3.7 percent in 2006, a 50 basis point improvement over 2005. In the fourth quarter of 2006, pretax margin declined by 10 basis points compared with the fourth quarter of 2005, due to the impact of the litigation charge in the fourth quarter of 2006;

• Commercial enrollment rose 1 percent in the fourth quarter of 2006 compared to the third quarter of 2006, which the company believes indicates that its strategy of targeting the small group and mid-market segments is succeeding. The company noted that new commercial sales in 2006 were nearly double the amount of new commercial sales in 2005;

• Health Net’s Medicare Advantage enrollment was 199,000 at the end of 2006, a 14 percent increase over 2005. The company’s Medicare Part D enrollment stood at 300,000 at the end of 2006;

• Health Net’s Health Plan Medical Care Ratio (MCR) for the fourth quarter of 2006 was 81.7 percent, a 120 basis point improvement compared to the 82.9 percent reported in the third quarter of 2006. The MCR also was 82.9 percent in the fourth quarter of 2005; and

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• Health Net repurchased 5.5 million of its shares in the fourth quarter of 2006, spending approximately $250 million. The company has approximately $200 million remaining under the share repurchase authorization from its board of directors.

“We are very pleased with our performance in the fourth quarter and for the full year,” said Jay Gellert, president and chief executive officer of Health Net. “Our commercial enrollment is growing again. Our margins continue to expand. Our business diversity gives us multiple opportunities, and we are very committed to being part of the solution to the challenge of providing affordable coverage to the uninsured.”

Revenues

Health Net’s total revenues increased 8.7 percent in the fourth quarter of 2006 to $3,208,173,000 from $2,950,158,000 in the fourth quarter of 2005. Health plan services premiums increased to $2,619,222,000 in the fourth quarter of 2006 compared to $2,354,722,000 in the fourth quarter of 2005.

In the fourth quarter of 2006, Health Net’s Government contracts revenue, which includes both reimbursement for incurred medical expenses and administrative charges, declined 2.6 percent to $545,906,000 from the fourth quarter of 2005, reflecting lower medical expenses. Government contracts revenue declined by $32,608,000 in the fourth quarter of 2006 compared to the third quarter of 2006, due to typical seasonal utilization patterns. “We are working very effectively with TRICARE beneficiaries and have managed to maintain moderate health care cost trends,” said Gellert.

In the fourth quarter of 2006, the overall health plan revenue Per Member Per Month (PMPM), including commercial, Medicare and Medicaid revenue, rose 1.6 percent compared to the same period in 2005. Commercial premium yields climbed 6.4 percent in the fourth quarter of 2006

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compared to the fourth quarter of 2005, and by 7.6 percent for the full year 2006 compared to the full year of 2005.

“We are growing in the small group and mid-market segments, consistent with our strategic goals. In these two segments the PMPM premiums are, on an absolute basis, lower than they are in large group. The speed with which this shift is occurring caused our yields to be somewhat lower than expected in the fourth quarter and for the full year,” noted Gellert.

Total health plan enrollment grew by approximately 14,000 members, or less than 1 percent, in the fourth quarter of 2006 compared to the third quarter of 2006. In the same period, Medicare enrollment rose by approximately 2,000 members while Medicaid enrollment decreased by approximately 7,000 members.

Commercial enrollment, including both at-risk and Administrative Services Only (ASO) membership, rose by approximately 19,000 members, or 1 percent, in the fourth quarter of 2006 compared to the third quarter of 2006.

In the fourth quarter of 2006, Health Net began reporting certain revenues, approximately $15 million in the fourth quarter of 2006, related to a behavioral health contract with the Department of Defense in the Government contracts line in its Condensed Consolidated Statements of Operations. This contract is administered by MHN, the company’s behavioral health subsidiary. Previously, the company reported these revenues in its Administrative Services Fees and Other Income line.

“We had an excellent year as we regained our commercial momentum, built additional Medicare Advantage enrollment and welcomed more than 80,000 new members from our Universal Care acquisition,” Gellert said.

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Health Care Costs

The health plan MCR improved to 81.7 percent in the fourth quarter of 2006 from 82.9 percent in the fourth quarter of 2005, and improved by 120 basis points compared to the third quarter of 2006. The sequential decrease in the health plan MCR reflects the impact of seasonal factors and continued moderate health care cost trends.

Overall PMPM health plan health care costs increased by less than 1 percent in the fourth quarter of 2006 compared to the fourth quarter of 2005, primarily due to the impact of the new Medicare Part D enrollment in 2006. Commercial health care costs PMPM increased by 7.7 percent over the same period. These year-over-year results were consistent with expectations as health care cost trends, particularly in the company’s Northeast health plans, were very low in 2005.

For the full year of 2006, commercial health care costs PMPM rose by 7.3 percent compared with 2005.

The Government contracts cost ratio of 93.6 percent in the fourth quarter of 2006 reflected the impact of lower health care costs in the company’s TRICARE North contract. In the fourth quarter of 2005, the ratio was 95.6 percent. For the full year of 2006, the ratio was 94 percent, a 180 basis point improvement over 2005.

Medicare

The company is the fifth largest Medicare Advantage contractor in the United States based on enrollment, with approximately 199,000 members in its Medicare Advantage plans at the end of the fourth quarter of 2006. This reflects a 2,000-member increase since the end of the third quarter of 2006 and a 25,000-member increase since the end of 2005.

The company’s membership in its Part D plans, the Medicare stand-alone prescription drug benefit, stood at 300,000 at the end of 2006. The company is offering its Part D plans in all 50 states in 2007, after offering plans in just 10 states in 2006.

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“We are very pleased with our Medicare performance and look forward to continued participation in this vital program in the years ahead,” said Gellert.

Administrative Expenses

In the fourth quarter of 2006, total general, administrative and depreciation expenses increased by $15,058,000 to $308,143,000 compared to expenses of $293,085,000 in the third quarter of 2006, and increased by $37,880,000 compared to $270,263,000 in the fourth quarter of 2005.

“Our renewed momentum in the commercial market is partially due to the investments we’ve made to support our efforts. In addition, we typically incur increased Medicare expenses in the fourth quarter due to concentrated open enrollment activities,” commented Gellert.

Health Net’s selling expenses increased by $13,153,000 to $66,353,0000 in the fourth quarter of 2006 compared with $53,200,000 in the same period in 2005, a reflection of increased commercial membership and a higher percentage of the membership being in small group.

“Now, approximately 30 percent of our commercial enrollment is in the small group and individual segments, up from 28 percent as of the end of last year,” Gellert noted.

Balance Sheet Highlights

Cash and investments as of December 31, 2006 were $2,120,844,000 compared with $2,224,847,000 as of September 30, 2006. The company noted that the decrease was largely attributable to the repurchase of its common stock under its share repurchase program.

Reserves for claims and other settlements increased by $13,422,000 to $1,048,796,000 at December 31, 2006 from $1,035,374,000 at September 30, 2006.

Days claims payable (DCP) increased by 2.3 days for the fourth quarter of 2006 to 44.8 days compared to 42.5 days for the third quarter of 2006. These amounts include the effects of provider settlements, capitation payments and Medicare Part D.

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Excluding provider settlements, capitation payments and the impact of Medicare Part D expenses, DCP increased by 4.0 days to 59.2 days in the fourth quarter of 2006 compared to the third quarter of 2006 (see note (d) in the company’s Notes to Condensed Consolidated Financial Statements in the attached tables). The company employs an average claims reserves methodology in calculating DCP.

“This was expected as the average reserves reflect a higher inventory level,” Gellert said.

At the end of the fourth quarter of 2006, the company had $500 million in debt. Health Net’s debt-to-total capital ratio was 21.9 percent as of December 31, 2006.

Interest Expense

Interest expense decreased by $5,318,000 to $10,093,000 in the fourth quarter of 2006 compared with $15,411,000 in the third quarter of 2006 due to the redemption of the company’s Senior Notes in the third quarter of 2006.

Cash Flow

Operating cash flow was $149,249,000 in the fourth quarter of 2006 compared to a negative $67,808,000 in the fourth quarter of 2005. Operating cash flow for the full year 2006 was $277,937,000 compared to $191,394,000 for the full year 2005.

“We had hoped that full year operating cash flow would be equal to net income plus depreciation and amortization. In the fourth quarter, we experienced an increase to our Medicare and TRICARE receivables as a result of improved operating performance,” Gellert said. “This increase did impact operating cash flow. As a result, we now have an improved outlook for 2007 operating cash flow and expect it to reach approximately $520 million.”

Share Repurchase

On December 15, 2006, the company announced that it repurchased 2,689,538 shares of its common stock, at an initial purchase price of $47.22 per share, or $127 million, under an

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accelerated share repurchase (ASR) agreement with JPMorgan dated December 13, 2006. Including the ASR, Health Net has repurchased approximately 5.5 million shares for approximately $250 million since it restarted its stock repurchase program on November 9, 2006.

The company has approximately $200 million in remaining authority under its $450 million stock repurchase program. The company currently is considering additional sources of funds through financing arrangements that could potentially be used, in addition to operating cash flow, for future share repurchases.

The company continues to be committed to maintaining a debt-to-total capital ratio below 30 percent.

Litigation Charge

In the fourth quarter of 2006, Health Net recorded an approximately $37 million litigation charge in connection with developments that occurred during the fourth quarter in the Wachtel v. Health Net, Inc. et al. and McCoy v. Health Net, Inc. et al. cases pending in the United States District Court for the District of New Jersey. These developments include the order disclosed in the company’s Form 8-K filed with the Securities and Exchange Commission on December 12, 2006, as well as actions taken in the Third Circuit Court of Appeals related to class certification. The litigation charge was recorded in anticipation of the company’s ongoing litigation defense expenses in these matters, as well as a probable award of plaintiffs’ attorneys’ fees.

Outlook

Health Net believes its earnings per diluted share for the full year of 2007 will be $3.65 based on a fully diluted share count of 114 million. The company believes earnings per diluted share in the first quarter of 2007 will be $.77. The company also expects that the quarterly progression of its earnings in 2007 will be similar to 2006.

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Conference Call

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2006 results during a conference call scheduled on Thursday, February 8, 2007, at approximately 11:00 a.m. Eastern Time. To listen to the call, please dial 800.819.9193, code 6459688. 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. A replay of the conference call will be available from February 8, 2007 through February 12, 2007, by dialing 888.203.1112, code 6459688. Anyone listening to the company’s conference call will be presumed to have read Health Net’s reports filed from time to time with the Securities and Exchange Commission.

About Health Net

Health Net, Inc. is among the nation’s largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company’s HMO, POS, insured PPO and government contracts subsidiaries provide health benefits to approximately 6.6 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net’s behavioral health subsidiary, MHN, provides behavioral health, substance abuse and employee assistance programs (EAPs) to approximately 7.3 million individuals in various states. The company’s subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

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

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Cautionary Statements

This release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve a number of risks and uncertainties. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, rising health care costs, negative prior period claims reserve developments, trends in medical care ratios, issues relating to provider contracts, litigation costs, 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 and subsequent Quarterly Reports on Form 10-Q filed 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.

#         #         #

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Health Net, Inc.

Condensed Consolidated Statements of Operations

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

	Fourth Quarter Ended December 31, 2005 (a)			Year Ended December 31, 2005 (a)			First Quarter Ended March 31, 2006 (a)			Second Quarter Ended June 30, 2006 (a)			Third Quarter Ended September 30, 2006 (a)			Fourth Quarter Ended December 31, 2006			Year Ended December 31, 2006
REVENUES:
Health plan services premiums	$	2,354,722		$	9,506,865		$	2,524,374		$	2,599,079		$	2,622,065		$	2,619,222		$	10,364,740
Government contracts		560,491			2,307,483			624,637			626,957			578,514			545,906			2,376,014
Net investment income		20,239			72,751			23,359			26,256			33,198			28,229			111,042
Administrative services fees and other income		14,706			53,434			14,260			13,830			13,648			14,816			56,554
Total revenues		2,950,158			11,940,533			3,186,630			3,266,122			3,247,425			3,208,173			12,908,350
EXPENSES:
Health plan services		1,952,309			8,013,017			2,105,214			2,181,975			2,174,191			2,139,063			8,600,443
Government contracts		535,800			2,211,253			595,126			590,117			538,215			511,077			2,234,535
General and administrative		266,043			956,840			287,253			288,670			287,463			301,927			1,165,313
Selling		53,200			221,555			56,538			59,630			62,783			66,353			245,304
Depreciation		4,220			30,250			4,753			4,950			5,622			6,216			21,541
Amortization		861			3,444			591			1,275			1,092			1,092			4,050
Interest		11,690			44,631			12,226			13,449			15,411			10,093			51,179
		2,824,123			11,480,990			3,061,701			3,140,066			3,084,777			3,035,821			12,322,365
Litigation and severance costs					83,279												37,093	(b)		37,093
Debt refinancing		—						—			—			70,095	(c)					70,095
Total expenses		2,824,123			11,564,269			3,061,701			3,140,066			3,154,872			3,072,914			12,429,553
Income from operations before income taxes		126,035			376,264			124,929			126,056			92,553			135,259			478,797
Income tax provision		49,366			146,479			48,336			49,023			1,651			50,474			149,484
Net income	$	76,669		$	229,785		$	76,593		$	77,033		$	90,902		$	84,785		$	329,313
Basic earnings per share	$	0.67		$	2.03		$	0.67		$	0.67		$	0.78		$	0.74		$	2.86
Diluted earnings per share	$	0.65		$	1.99		$	0.65		$	0.65		$	0.76		$	0.72		$	2.78
Weighted average shares outstanding:
Basic		114,276			112,918			114,594			115,213			115,867			114,841			115,128
Diluted		117,902			115,641			118,398			118,305			118,830			117,707			118,310
Pretax margin (Income from operations before income taxes / Total revenues)		4.3	%		3.2	%		3.9	%		3.9	%		2.9	%		4.2	%		3.7	%
Health plan services MCR		82.9	%		84.3	%		83.4	%		84.0	%		82.9	%		81.7	%		83.0	%
Government contracts cost ratio		95.6	%		95.8	%		95.3	%		94.1	%		93.0	%		93.6	%		94.0	%
Administrative ratio ((G&A+Dep) / (HP serv prem + admin serv fees and other income))		11.4	%		10.3	%		11.5	%		11.2	%		11.1	%		11.7	%		11.4	%
Selling costs ratio (Selling costs / HP serv prem)		2.3	%		2.3	%		2.2	%		2.3	%		2.4	%		2.5	%		2.4	%
Days claims payable (d)		49.4			50.3			43.3			40.9			42.5			44.8			44.3
Days claims payable - adjusted (d)		63.5			61.1			58.2			52.9			55.2			59.2			59.4
Effective tax rate		39.2	%		38.9	%		38.7	%		38.9	%		1.8	%(e)		37.3	%		31.2	%(e)
Health plan services premiums PMPM	$	239.88		$	235.80		$	244.78		$	241.75		$	244.49		$	243.82		$	243.70
Health plan services costs PMPM	$	198.88		$	198.75		$	204.14		$	202.95		$	202.73		$	199.12		$	202.22

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Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

	December 31, 2005			March 31, 2006 (a)			June 30, 2006 (a)			September 30, 2006 (a)			December 31, 2006
ASSETS
Current Assets
Cash and cash equivalents	$	742,485		$	870,224		$	825,925		$	825,369		$	704,806
Investments - available for sale		1,363,818			1,356,386			1,382,583			1,399,478			1,416,038
Premiums receivable, net		132,019			163,237			214,173			235,267			302,355
Amounts receivable under government contracts		122,796			152,365			150,393			152,731			199,569
Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract		265,517			295,800			318,827			299,878			272,961
Other receivables		79,572			84,414			116,258			101,161			106,135
Deferred taxes		93,899			99,866			57,141			33,379			54,702
Restricted assets for senior notes redemption		—			—			499,557			—			—
Other assets		111,512			147,600			159,662			138,850			161,280
Total current assets		2,911,618			3,169,892			3,724,519			3,186,113			3,217,846
Property and equipment, net		125,773			136,727			144,436			155,395			151,184
Goodwill, net		723,595			751,949			751,949			751,949			751,949
Other intangible assets, net		18,409			47,062			45,532			44,183			42,835
Deferred taxes		31,060			46,560			48,574			51,557			33,137
Other noncurrent assets		130,267			137,645			132,186			101,719			100,071
Total Assets	$	3,940,722		$	4,289,835		$	4,847,196		$	4,290,916		$	4,297,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements	$	1,040,171		$	986,117		$	975,383		$	1,035,374		$	1,048,796
Health care and other costs payable under government contracts		62,536			62,937			61,324			41,045			52,384
IBNR health care costs payable under TRICARE North contract		265,517			295,800			318,827			299,878			272,961
Unearned premiums		106,586			324,063			338,611			140,939			164,099
Bridge loan		—			—			200,000			200,000			200,000
Senior notes payable		—			—			376,052			—			—
Accounts payable and other liabilities		364,266			434,605			389,130			256,096			371,263
Total current liabilities		1,839,076			2,103,522			2,659,327			1,973,332			2,109,503
Senior notes payable		387,954			379,983			—			—			—
Term loan		—			—			300,000			300,000			300,000
Other noncurrent liabilities		124,617			129,507			108,222			106,897			108,554
Total Liabilities		2,351,647			2,613,012			3,067,549			2,380,229			2,518,057
Stockholders’ Equity
Common stock and additional paid-in capital		911,672			932,254			967,265			992,497			1,028,018
Treasury common stock, at cost		(633,375	)		(636,252	)		(640,623	)		(640,623	)		(891,294	)
Retained earnings		1,324,165			1,400,758			1,477,791			1,568,693			1,653,478
Accumulated other comprehensive loss		(13,387	)		(19,937	)		(24,786	)		(9,880	)		(11,237	)
Total Stockholders’ Equity		1,589,075			1,676,823			1,779,647			1,910,687			1,778,965
Total Liabilities and Stockholders’ Equity	$	3,940,722		$	4,289,835		$	4,847,196		$	4,290,916		$	4,297,022
Debt-to-Total Capital Ratio		19.6	%		18.5	%		33.0	%		20.7	%		21.9	%

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Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

	Fourth Quarter Ended December 31, 2005			Year Ended December 31, 2005			First Quarter Ended March 31, 2006 (a)			Second Quarter Ended June 30, 2006 (a)			Third Quarter Ended September 30, 2006 (a)			Fourth Quarter Ended December 31, 2006			Year Ended December 31, 2006 (a)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	76,669		$	229,785		$	76,593		$	77,033		$	90,902		$	84,785		$	329,313
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation		5,081			33,694			5,344			6,225			6,714			7,308			25,591
Debt refinancing charge		—						—			—			70,095			—			70,095
Share-based compensation expense		—						4,435			5,195			5,191			5,294			20,115
Other changes		3,032			12,550			4,349			4,007			3,685			1,583			13,624
Changes in assets and liabilities, net of the effects of dispositions:																				—
Premiums receivable and unearned premiums		(116,940	)		(46,678	)		186,259			(36,388	)		(218,766	)		(43,928	)		(112,823	)
Other receivables, deferred taxes and other assets		18,476			2,356			(41,899	)		(107	)		46,574			(6,904	)		(2,336	)
Amounts receivable/payable under government contracts		(743	)		(49,996	)		(29,168	)		359			(22,617	)		(35,499	)		(86,925	)
Reserves for claims and other settlements		(17,677	)		(129,126	)		(54,055	)		(10,734	)		59,991			13,422			8,624
Accounts payable and other liabilities		(35,706	)		138,809			34,046			(52,523	)		(92,052	)		123,188			12,659
Net cash (used in) provided by operating activities		(67,808	)		191,394			185,904			(6,933	)		(50,283	)		149,249			277,937
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments		179,102			399,958			228,995			44,374			47,397			144,021			464,787
Maturities of investments		41,037			113,682			15,770			30,248			29,683			37,424			113,125
Purchases of investments		(437,250	)		(833,593	)		(252,973	)		(110,683	)		(71,344	)		(200,611	)		(635,611	)
Proceeds from sale of property and equipment		—			79,845			—			—			4,242			—			4,242
Purchases of property and equipment		(17,738	)		(48,846	)		(15,730	)		(12,679	)		(20,420	)		(23,978	)		(72,807	)
Net cash paid for acquisition of business		—			1,949			(73,100	)		(494	)		(405	)		—			(73,999	)
Sales and purchases of restricted investments and other		9,093			42,959			(9,027	)		(496,943	)		523,336			(1,982	)		15,384
Net cash (used in) provided by investing activities		(225,756	)		(244,046	)		(106,065	)		(546,177	)		512,489			(45,126	)		(184,879	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases		8,423			73,484			10,380			20,895			15,136			23,883			70,294
Repurchases of common stock		(222	)		(449	)		(1,724	)		(1,107	)		—			(250,671	)		(253,502	)
Excess tax benefits from share-based compensation		—			—			3,099			2,221			2,688			3,881			11,889
Borrowings under term and bridge loan agreements		—			—			—			497,334			—			—			497,334
Senior notes redemption and interest rate swap settlement		—			—			—			—			(465,045	)		—			(465,045	)
Net Medicare Part D deposits (payments)		—			—			36,145			(10,532	)		(15,541	)		(1,779	)		8,293
Net cash provided by (used in) financing activities		8,201			73,035			47,900			508,811			(462,762	)		(224,686	)		(130,737	)
Net (decrease) increase in cash and cash equivalents		(285,363	)		20,383			127,739			(44,299	)		(556	)		(120,563	)		(37,679	)
Cash and cash equivalents, beginning of period		1,027,848			722,102			742,485			870,224			825,925			825,369			742,485
Cash and cash equivalents, end of period	$	742,485		$	742,485		$	870,224		$	825,925		$	825,369		$	704,806		$	704,806

13

Health Net, Inc.

Notes to Condensed Consolidated Financial Statements

Notes:

(a) 2005 and 2006 amounts reflect reclassification of ASO and behavioral health DoD businesses. All impacted prior period financial information reflect this reclassification change. This reclassification had no impact on net earnings, stockholders’ equity or cash flow from operating activities as previously reported.

(b) Estimated legal costs associated with the McCoy case.

(c) $59 million senior notes redemption and $11 million interest rate swap settlement costs.

(d) Management believes that days claims payable (excluding capitation, provider settlements and Medicare Part D), a non-GAAP financial measure, provides useful information to investors because, in excluding those health care costs for which no or minimal reserves are maintained, it is a more accurate reflection of days claims payable calculated from claims-based reserves than is days claims payable, which does not exclude such costs. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. The following table provides a reconciliation of the differences between days claims payable (excluding capitation, provider settlements and Medicare Part D) and days claims payable, the most directly comparable financial measure calculated and presented in accordance with GAAP:

	Q4 2005			FY 2005			Q1 2006			Q2 2006			Q3 2006			Q4 2006			FY 2006
	(Dollars in millions)
Reserve for Claims and Other Settlements	$	1,040.2		$	1,040.2		$	986.1		$	975.4		$	1,035.4		$	1,048.8		$	1,048.8
Less: Capitation Payable, Provider Settlements and Medicare Part D		(95.4	)		(95.4	)		(120.5	)		(110.3	)		(100.5	)		(85.3	)		(85.3	)
Adjusted Reserve for Claims and Other Settlements		944.8			944.8			865.6			865.1			934.9			963.5			963.5
(1) Average Reserve for Claims and Other Settlements		1,049.0			1,104.7			1,013.2			980.8			1,005.4			1,042.1			1,044.5
(2) Average Adjusted Reserve for Claims and Other Settlements		948.7			955.1			905.2			865.4			900.0			949.2			954.2
(3) Health Plan Services Cost		1,952.3			8,013.0			2,105.2			2,182.0			2,174.2			2,139.1			8,600.4
Less: Capitation Payments, Provider Settlements and Medicare Part D		(578.5	)		(2,307.3	)		(705.9	)		(692.6	)		(674.1	)		(662.8	)		(2,735.4	)
(4) Adjusted Health Plan Services Cost		1,373.8			5,705.7			1,399.3			1,489.4			1,500.1			1,476.3			5,865.0
(5) Number of Days in Period		92			365			90			91			92			92			365
= (1) / (3) * (5) Days Claims Payable		49.4			50.3			43.3			40.9			42.5			44.8			44.3
= (2) / (4) * (5) Days Claims Payable (Excl. Capitation, Provider Settlements and Medicare Part D)		63.5			61.1			58.2			52.9			55.2			59.2			59.4

(e) Impacted by sale of certain Pennsylvania subsidiaries.

14

HEALTH NET, INC.

Medical Covered Lives at December 31, 2006

(in Thousands)

	Commercial - Large Group*				Commercial - Small Group & Individual				Commercial Risk Subtotal				ASO				Commercial Subtotal
	12/06	9/06		12/05	12/06	9/06		12/05	12/06	9/06		12/05	12/06	9/06		12/05	12/06	9/06		12/05
Arizona	75	72		69	50	48		48	125	120		117	—	—		—	125	120		117
California	1,064	1,053		1,084	419	419		373	1,483	1,472		1,457	6	6		7	1,489	1,478		1,464
Connecticut	153	155		177	30	30		30	183	185		207	67	68		69	250	253		276
New Jersey	44	44		53	59	57		74	103	101		127	19	19		20	122	120		147
New York	122	121		116	102	96		102	224	217		218	17	17		20	241	234		238
Oregon	96	99		101	37	37		37	133	136		138	—	—		—	133	136		138
Total	1,554	1,544		1,600	697	687		664	2,251	2,231		2,264	109	110		116	2,360	2,341		2,380
Year over Year		(3	)%			5	%			(1	)%			(6	)%			(1	)%
Sequential		1	%			1	%			1	%			(1	)%			1	%

	Medicare Risk				Medicaid				Health Plan Total
	12/06	9/06		12/05	12/06	9/06		12/05	12/06	9/06		12/05
Arizona	35	34		31	—	—		—	160	154		148
California	104	104		93	710	717		698	2,303	2,299		2,255
Connecticut	34	33		27	84	83		88	368	369		391
New Jersey	—	—		—	46	47		44	168	167		191
New York	6	7		7	—	—		—	247	241		245
Oregon	20	19		16	—	—		—	153	155		154
Total	199	197		174	840	847		830	3,399	3,385		3,384
Year over Year		14	%			1	%			0	%
Sequential		1	%			(1	)%			0	%

	12/06	9/06	12/05
Medicare PDP (Stand-Alone)	300	294	—
	12/06	9/06	12/05
TRICARE
North Contract **	2,930	2,944	2,962

* Commercial Large Group includes Medicare Supplement

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

15

Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

(In millions)

	Health Plan Services
	Year 2006			Year 2005			Year 2004
Reserve for claims (a), beginning of period	$	768.7		$	794.6		$	777.1
Incurred claims related to:
Current Year		5,222.0			5,130.4			5,048.3
Prior Years (c)		(77.3	)		(114.5	)		8.7
Total Incurred (b)		5,144.7			5,015.9			5,057.0
Paid claims related to:
Current Year		4,485.7			4,401.3			4,286.9
Prior Years		673.5			640.5			752.6
Total Paid (b)		5,159.2			5,041.8			5,039.5
Reserve for claims (a), end of period		754.2			768.7			794.6
Add:
Claims Payable		203.9			177.2			288.3
Other (d)		90.7			94.3			86.4
Reserves for claims and other settlements, end of period	$	1,048.8		$	1,040.2		$	1,169.3

(a) Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses.

(b) Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included.

(c) This line represents the change in reserves attributable to the difference between the original estimate of incurred claims for prior years and the revised estimate. In developing the revised estimate, there have been no changes in the approach used to determine the key actuarial assumptions, which are the completion factor and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally accepted accounting principles. The majority of the reserve balance held at each quarter-end is associated with the most recent months’ incurred services because these are the services for which the fewest claims have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months’ incurred services. Revised estimates for prior years are determined in each quarter based on the most recent updates of paid claims for prior years.

(d) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

16