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 5, 2008

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))

Section 2- Financial Information

Item 2.02 Results of Operations and Financial Condition.

On February 5, 2008, Health Net, Inc. (the “Company”) issued a press release announcing its earnings for the quarter and year ended December 31, 2007. 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 presentation of non-GAAP financial information is useful to investors because it excludes certain expenses and other one-time items that are not indicative of our core operating results. Management refers to the various non-GAAP financial measures included in the press release 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 5, 2008 announcing results for the quarter and year ended December 31, 2007 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 5, 2008

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

Investor
Contacts:	David Olson	Angie McCabe
	818.676.6978	818.676.8692
	david.w.olson@healthnet.com	angeline.c.mccabe@healthnet.com
Media
Contact:	Margita Thompson
	818.676.7912
	margita.n.thompson@healthnet.com

HEALTH NET REPORTS FOURTH QUARTER NET INCOME

OF $123.4 MILLION, OR $1.10 PER DILUTED SHARE

SMALL GROUP AND INDIVIDUAL MEMBERSHIP INCREASES

10.5 PERCENT IN 2007 COMPARED TO 2006

COMPANY REPURCHASED 4.3 MILLION SHARES FOR $230 MILLION IN 2007

LOS ANGELES, February 5, 2008 – Health Net, Inc. (NYSE:HNT) today announced 2007 fourth quarter net income of $123.4 million, or $1.10 per diluted share, compared with 2006 fourth quarter net income of $84.8 million, or $0.72 per diluted share.

For the full year 2007, Health Net reported net income of $200.2 million, or $1.76 per diluted share. Included in the full year 2007 results is the full effect of $296.8 million pretax, or $216.0 million after-tax, charges incurred in the third quarter of 2007 as a result of Health Net reaching an agreement in principle to settle three class action lawsuits known as the McCoy, Wachtel and Scharfman lawsuits; the proposed resolution of regulatory issues with the New Jersey Department of Banking and Insurance; and other litigation matters.

The pretax charges are accounted for in two parts:

• $201.5 million is included in third quarter of 2007 health plan services expenses for claims-related matters, class disbursements and remediations; and

• $95.3 million is included in the third quarter of 2007 general and administrative (G&A) expenses related to attorneys’ fees, regulatory fines and estimated liability for litigation unrelated to the class action lawsuits.

A table outlining the allocation of the pretax charges in the third quarter of 2007 to the appropriate line items in the full year 2007 income statement is attached to this release.

Fourth Quarter and Full Year 2007 Highlights

Following are key highlights for the fourth quarter and full year of 2007:

• Small group and individual membership increased 10.5 percent to 770,000 members as of December 31, 2007 compared to December 31, 2006;

• Medicare Advantage enrollment increased 18.6 percent to 236,000 members as of December 31, 2007 compared to December 31, 2006;

• Medicare Part D enrollment increased 3.8 percent sequentially and 26.3 percent year-over-year to 379,000 members at December 31, 2007;

• Health Net repurchased 353,459 shares during the fourth quarter of 2007, bringing its total share repurchases for the full year 2007 to 4.3 million shares at an average price of $53.24. The company has approximately $346 million in remaining repurchase authority; and

• Operating cash flow was $257.0 million in the fourth quarter of 2007 compared to $147.5 million in the fourth quarter of 2006. For the full year 2007, operating cash flow was $605.5 million compared to $286.2 million for the full year 2006.

“We are very pleased with our performance in the fourth quarter and for the full year 2007,” said Jay Gellert, president and chief executive officer of Health Net, Inc. “Our results highlight our strategy of shifting our commercial business to the small and mid-markets, focusing on Medicare growth opportunities and managing expenses.”

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Membership

Total health plan enrollment as of December 31, 2007 was approximately 3.8 million members, an increase of 55,000 members, or 1.5 percent, compared to December 31, 2006, and a sequential increase of 8,000 members.

Commercial risk enrollment declined by 26,000 members, or 1.2 percent, to approximately 2.2 million members as of December 31, 2007 compared to December 31, 2006, and increased slightly compared to September 30, 2007. Administrative Services Only (ASO) membership decreased by 41,000 members, or 37.6 percent, to nearly 68,000 members as of December 31, 2007 compared to December 31, 2006. Sequentially, ASO membership decreased by 22,000 members, or 24.4 percent, primarily in the company’s Northeast region.

Enrollment in the company’s Medicare Advantage plans grew by 37,000 members, or 18.6 percent, to 236,000 members during the 12 months ended December 31, 2007. During the fourth quarter of 2007, Medicare Advantage membership decreased by 3,000 members, or 1.3 percent. Membership in the company’s Medicare Part D plans as of December 31, 2007 was 379,000, an increase of 79,000 members, or 26.3 percent, from December 31, 2006. Medicare Part D membership increased by 14,000 members, or 3.8 percent, during the fourth quarter of 2007.

“Enrollment growth in 2007 was consistent with our strategy of growing the smaller end of the market while maintaining pricing discipline,” said Gellert. “As a result, the small group and individual segment grew by 10.5 percent during the year. Commercial new sales in California exceeded 50,000 members for the seventh consecutive quarter. In addition, our Medicare Advantage and Medicare Part D membership both experienced excellent growth during the year.”

Medicaid enrollment at December 31, 2007 was 846,000 members, an increase of 6,000 members, or approximately 1.0 percent, since December 31, 2006. During the fourth quarter of 2007, Medicaid enrollment increased by 17,000 members, or 2.1 percent.

Revenues, Health Care Costs and G&A Expenses

Health Net’s total revenues increased 11.7 percent in the fourth quarter of 2007 to $3.6 billion from $3.2 billion in the fourth quarter of 2006. Health plan services premium

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revenues increased 11.4 percent to $2.9 billion in the fourth quarter of 2007 compared to $2.6 billion in the fourth quarter of 2006.

Health Net’s Government contracts revenues increased 13.5 percent in the fourth quarter of 2007 to $619.4 million from $545.9 million in the fourth quarter of 2006. The quarter-over-quarter increase was driven by higher revenues and health care costs in 2007 compared to the same period in 2006.

The health plan services medical care ratio (MCR) was 82.6 percent in the fourth quarter of 2007 compared to 81.7 percent in the fourth quarter of 2006. The MCR was 89.8 percent in the third quarter of 2007 including the impact of the $201.5 million health plan services expenses charge, and 82.9 percent in the third quarter of 2007 excluding the impact of the charge.

The commercial MCR of 81.8 percent in the fourth quarter of 2007 improved by 60 basis points compared to the fourth quarter of 2006. Including the impact of the charge, the commercial MCR was 93.2 percent in the third quarter of 2007. Excluding the impact of the charge, the commercial MCR was 82.7 percent in the third quarter of 2007.

In the fourth quarter of 2007, commercial premium yields on a per member per month (PMPM) basis increased by 11.8 percent compared to the 2006 fourth quarter.

Including the impact from the health plan services expenses charge, PMPM commercial health care costs for the full year 2007 increased by 12.5 percent compared to the full year 2006. Total PMPM commercial health care costs increased by 11.0 percent in the fourth quarter of 2007 compared to the fourth quarter of 2006.

“Compared to the full year 2006, commercial premium yields PMPM increased by 9.2 percent for the full year 2007 while commercial health care costs increased by 8.9 percent PMPM excluding the impact of the charges,” said Gellert.

The Government contracts cost ratio was 89.9 percent in the fourth quarter of 2007 compared to 93.6 percent in the fourth quarter of 2006. “Our Federal Services division, which consists of our Northern Region TRICARE Contract, Veterans Administration business and rapidly growing family counseling business with the Department of Defense, had another solid quarter,” said Jim Woys, Health Net’s chief operating officer and president of the Government and Specialty Services division. “We are honored to serve our military men and women and their families, and this year, we are celebrating our 20^th anniversary in providing the military access to quality health care in partnership with our military counterparts.”

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Total G&A expense was $307.1 million in the fourth quarter of 2007 compared with $301.9 million in the fourth quarter of 2006. “Our focus on expense management resulted in a 100 basis point improvement from 11.5 percent in the fourth quarter of 2006 to 10.5 percent in the fourth quarter of 2007 in our G&A expense ratio,” said Joseph C. Capezza, Health Net’s chief financial officer. “As we implement our G&A repositioning strategy in order to achieve greater cost savings and become more competitive, we expect the G&A ratio to decrease further in 2008.”

Health Net’s selling expenses of $90.3 million in the fourth quarter of 2007 increased by approximately $24.0 million compared to the fourth quarter of 2006. “As a result of our strategy of growing the individual and small and mid-size employer group segments and strengthening our relationships with the agents and brokers who sell our products, our selling expense ratio in the fourth quarter of 2007 increased 60 basis points,” said Capezza.

Balance Sheet

Cash and investments as of December 31, 2007 were $2.6 billion compared with $2.1 billion as of December 31, 2006.

Reserves for claims and other settlements increased by $251.6 million to $1.3 billion at December 31, 2007 from December 31, 2006, and include $201.5 million of reserves for the charges incurred in the third quarter of 2007 relating to class action litigation settlement, regulatory matters and other litigation expenses.

Days claims payable (DCP), including provider and other claim settlements, capitation payments and Medicare Part D expenses, increased by 5.1 days to 49.9 days in the fourth quarter of 2007 compared to 44.8 days in the fourth quarter of 2006 and increased by 8.0 days compared to the third quarter of 2007.

Excluding provider and other claim settlements, capitation payments and Medicare Part D, DCP in the fourth quarter of 2007 decreased by 4.3 days to 54.9 days compared to the 2006 fourth quarter and increased by 0.2 days sequentially (see footnote (a) in the Notes to Consolidated Financial Statements in the accompanying tables).

“The minor sequential change in DCP from the third quarter to the fourth quarter of 2007 reflects our reserves stability,” said Capezza. “We expect DCP to continue to remain stable in 2008 and beyond.”

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The company’s debt-to-total capital ratio was 22.5 percent as of December 31, 2007 compared to 21.9 percent as of December 31, 2006 and 18.5 percent on September 30, 2007.

Interest expense decreased by $2.4 million in the fourth quarter of 2007 compared to the fourth quarter of 2006 as a result of refinancing activities with lower interest rates during 2007.

Cash Flow

Operating cash flow in the 2007 fourth quarter, which includes an extra monthly payment of $56.0 million from the Department of Health Services (DHS) for California Medicaid that should have been received in September 2007, was approximately $257.0 million, or 1.9 times net income plus depreciation and amortization, compared to $147.5 million in the fourth quarter of 2006. Operating cash flow for the full year 2007 was $605.5 million compared to $286.2 million for the full year 2006. “Excluding the extra DHS monthly payment, operating cash flow during the fourth quarter of 2007 was approximately $201.0 million, which is 1.5 times net income plus depreciation and amortization,” said Capezza. “Our strong cash flow is another affirmation of the quality of our earnings.”

Outlook

Health Net expects full year 2008 earnings per diluted share of $4.14 to $4.17 based on expected diluted weighted average shares outstanding of 109 million shares, with 38 percent of earnings per diluted share occurring in the first half of 2008. Therefore, the company expects earnings per diluted share of $0.67 based on a share count of approximately 112 million shares in the first quarter of 2008 with an expected G&A ratio of 10. 7 percent. Health Net expects the G&A ratios in subsequent quarters in 2008 to average less than 10.0 percent.

Conference Call

As previously announced, Health Net will discuss the company’s fourth quarter and full year 2007 results during a conference call on Tuesday, February 5, 2008, beginning at approximately 11:00 a.m. Eastern time. To listen to the call, please dial 877.874.1565, code7064474. 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 5, 2008 through February 9, 2008, by dialing

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888.203.1112, code 7064474. 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, 2006, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007, and other reports filed by the company from time to time with the Securities and Exchange Commission.

About Health Net

Health Net, Inc. is among the nation’s largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company’s health plans and government contracts subsidiaries provide health benefits to approximately 6.6 million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net’s behavioral health subsidiary, MHN, provides mental health benefits to approximately 7.0 million individuals in all 50 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.

Cautionary Statements

Health Net, Inc. and its representatives may from time to time make written and oral forward-looking statements, including statements contained in news releases, in Health Net’s filings with the Securities and Exchange Commission, in the company’s reports to shareholders and in meetings with investors and analysts, 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

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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, regulatory fines, 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.

# # #

[Eight pages of tables follow]

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Health Net, Inc.

Consolidated Statements of Operations

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

	Quarter Ended December 31, 2006			Year Ended December 31, 2006			Quarter Ended September 30, 2007			Quarter Ended December 31, 2007			Year Ended December 31, 2007
REVENUES:
Health plan services premiums	$	2,619,222		$	10,364,740		$	2,930,151		$	2,916,718		$	11,435,314
Government contracts		545,906			2,376,014			660,394			619,423			2,501,677
Net investment income		28,229			111,042			29,298			31,630			120,176
Administrative services fees and other income		14,816			56,554			12,085			15,482			51,104
Total revenues		3,208,173			12,908,350			3,631,928			3,583,253			14,108,271
EXPENSES:
Health plan services		2,139,063			8,600,443			2,631,211			2,409,332			9,762,896
Government contracts		511,077			2,234,535			613,345			556,648			2,307,610
General and administrative		301,927			1,165,313			397,168			307,099			1,265,555
Selling		66,353			245,304			91,524			90,332			327,827
Depreciation		6,216			21,541			7,956			8,816			30,282
Amortization		1,092			4,050			4,782			4,782			12,700
Interest		10,093			51,179			7,401			7,712			32,497
		3,035,821			12,322,365			3,753,387			3,384,721			13,739,367
Litigation costs		37,093			37,093			—			—			—
Debt refinancing		—			70,095			—			—			—
		3,072,914			12,429,553			3,753,387			3,384,721			13,739,367
Income from operations before income taxes		135,259			478,797			(121,459	)		198,532			368,904
Income tax provision (benefit)		50,474			149,484			(17,614	)		75,149			168,751
Net income	$	84,785		$	329,313		$	(103,845	)	$	123,383		$	200,153
Basic earnings per share	$	0.74		$	2.86		$	(0.93	)	$	1.12		$	1.80
Diluted earnings per share	$	0.72		$	2.78		$	(0.93	)	$	1.10		$	1.76
Weighted average shares outstanding:
Basic		114,841			115,128			111,111			110,087			111,316
Diluted		117,707			118,310			111,111			112,255			113,829
Pretax margin		4.2	%		3.7	%		-3.3	%		5.5	%		2.6	%
Health plan services MCR		81.7	%		83.0	%		89.8	%		82.6	%		85.4	%
Government contracts cost ratio		93.6	%		94.0	%		92.9	%		89.9	%		92.2	%
G&A expense ratio		11.5	%		11.2	%		13.5	%		10.5	%		11.0	%
Selling costs ratio		2.5	%		2.4	%		3.1	%		3.1	%		2.9	%
Days claims payable (a)		44.8			44.3			41.9			49.9			43.9
Days claims payable - adjusted (a)		59.2			59.4			54.7			54.9			54.1
Effective tax rate		37.3	%		31.2	%		14.5	%		37.9	%		45.7	%
Health plan services premiums PMPM	$	243.82		$	243.70		$	267.64		$	266.88		$	263.54
Health plan services costs PMPM	$	199.12		$	202.22		$	240.33		$	220.45		$	225.00

Health Net, Inc.

Consolidated Statements of Operations

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

Note:

This table presents the company’s consolidated operations for the year ended December 31, 2007 and the charges recorded in the consolidated statement of operations for the quarter ended September 30, 2007. Management believes that the presentation of certain financial information in the attached press release (such as MCR, health care costs and G&A expenses), excluding the charges that were recorded in the third quarter of 2007, all of which is non-GAAP financial information, is important to investors as it excludes one-time items that are not indicative of our core operating results. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP.

	As Reported Year Ended December 31, 2007			Impact of Selected Costs Recorded in the Quarter Ended September 30, 2007			Excluding Impact of Selected Costs Recorded in the Quarter Ended September 30, 2007
REVENUES:
Health plan services premiums	$	11,435,314					$	11,435,314
Government contracts		2,501,677						2,501,677
Net investment income		120,176						120,176
Administrative services fees and other income		51,104						51,104
Total revenues		14,108,271						14,108,271
EXPENSES:
Health plan services		9,762,896		$	201,449			9,561,447
Government contracts		2,307,610						2,307,610
General and administrative		1,265,555			95,308			1,170,247
Selling		327,827						327,827
Depreciation		30,282						30,282
Amortization		12,700						12,700
Interest		32,497						32,497
		13,739,367			296,757			13,442,610
Income from operations before income taxes		368,904			(296,757	)		665,661
Income tax benefit		168,751	(a)		(80,777	)		249,528
Net income	$	200,153		$	(215,980	)	$	416,133
Basic earnings per share	$	1.80		$	(1.94	)	$	3.74
Diluted earnings per share	$	1.76		$	(1.90	)	$	3.66
Weighted average shares outstanding:
Basic		111,316						111,316
Diluted		113,829						113,829
Pretax margin		2.6	%		-2.1	%		4.7	%
Health plan services MCR		85.4	%		1.8	%		83.6	%
Government contracts cost ratio		92.2	%		—			92.2	%
G&A expense ratio		11.0	%		0.8	%		10.2	%
Selling costs ratio		2.9	%		—			2.9	%
Effective tax rate		45.7	%		8.3	%		37.5	%

Note

(a) Includes $26.2 million of tax asset write-off related to the charge.

Health Net, Inc.

Consolidated Balance Sheet

(Amounts in thousands, except ratio data)

	December 31, 2006			September 30, 2007			December 31, 2007
ASSETS
Current Assets
Cash and cash equivalents	$	704,806		$	698,889		$	1,007,017
Investments - available for sale		1,416,038			1,472,717			1,557,278
Premiums receivable, net		177,625			299,705			264,691
Amounts receivable under government contracts		199,569			174,647			189,976
Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract		272,961			295,241			266,767
Other receivables		230,865			100,528			72,518
Deferred taxes		54,702			148,990			132,818
Other assets		161,280			203,928			210,039
Total current assets		3,217,846			3,394,645			3,701,104
Property and equipment, net		151,184			170,353			178,758
Goodwill, net		751,949			751,949			751,949
Other intangible assets, net		42,835			114,424			109,386
Deferred taxes		33,137			45,223			47,765
Other noncurrent assets		100,071			143,639			144,093
Total Assets	$	4,297,022		$	4,620,233		$	4,933,055
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements	$	1,048,796		$	1,313,104		$	1,300,432
Health care and other costs payable under government contracts		52,384			52,472			69,014
IBNR health care costs payable under TRICARE North contract		272,961			295,241			266,767
Unearned premiums		164,099			187,958			176,981
Loans payable		200,000			—			35,000
Accounts payable and other liabilities		371,263			400,878			457,367
Total current liabilities		2,109,503			2,249,653			2,305,561
Senior notes payable		—			398,020			398,071
Loans payable		300,000			—			112,363
Other noncurrent liabilities		108,554			213,376			235,022
Total Liabilities		2,518,057			2,861,049			3,051,017
Stockholders’ Equity
Common stock and additional paid-in capital		1,028,018			1,141,432			1,151,395
Treasury common stock, at cost		(891,294	)		(1,104,904	)		(1,123,750	)
Retained earnings		1,653,478			1,732,170			1,855,553
Accumulated other comprehensive loss		(11,237	)		(9,514	)		(1,160	)
Total Stockholders’ Equity		1,778,965			1,759,184			1,882,038
Total Liabilities and Stockholders’ Equity	$	4,297,022		$	4,620,233		$	4,933,055
Debt-to-Total Capital Ratio		21.9	%		18.5	%		22.5	%

Health Net, Inc.

Consolidated Statements of Cash Flows

(Amounts in thousands)

	Quarter Ended December 31, 2006			Year Ended December 31, 2006			Quarter Ended September 30, 2007			Quarter Ended December 31, 2007			Year Ended December 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	84,785		$	329,313		$	(103,845	)	$	123,383		$	200,153
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization and depreciation		7,308			25,591			12,738			13,598			42,982
Debt refinancing charge		—			70,095			—			—			—
Share-based compensation expense		5,294			20,115			6,072			6,457			24,298
Other changes		1,583			13,624			120			(3,498	)		(7,955	)
Changes in assets and liabilities, net of the effects of dispositions/acquisitions:
Premiums receivable and unearned premiums		80,802			11,907			(320,490	)		24,037			(74,184	)
Other receivables, deferred taxes and other assets		(131,634	)		(127,066	)		(66,147	)		38,884			45,154
Amounts receivable/payable under government contracts		(35,499	)		(86,925	)		53,431			1,213			26,223
Reserves for claims and other settlements		13,422			8,624			228,643			(12,672	)		251,636
Accounts payable and other liabilities		121,409			20,952			58,310			65,565			97,175
Net cash provided by (used in) operating activities		147,470			286,230			(131,168	)		256,967			605,482
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments		144,021			464,787			94,682			242,421			807,649
Maturities of investments		37,424			113,125			41,493			65,606			213,833
Purchases of investments		(200,611	)		(635,611	)		(173,198	)		(397,611	)		(1,180,854	)
Proceeds from sale of property and equipment		—			4,242			—			—			96,748
Purchases of property and equipment		(23,978	)		(72,807	)		(14,485	)		(17,342	)		(64,850	)
Cash paid for acquisition of assets and businesses		—			(73,999	)		—			—			(80,277	)
Purchases and Sales of restricted investments and other		(1,982	)		15,384			9,991			7,127			(22,444	)
Net cash used in investing activities		(45,126	)		(184,879	)		(41,517	)		(99,799	)		(230,195	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases		23,883			70,294			27,496			2,525			72,622
Repurchases of common stock		(250,671	)		(253,502	)		(135,384	)		(27,052	)		(232,220	)
Excess tax benefits from share-based compensation		3,881			11,889			3,312			487			17,987
Borrowings under financing arrangements		—			497,334			—			175,000			668,535
Repayment of borrowings under financing arrangements		—			(465,045	)		—			—			(600,000	)
Net cash (used in) provided by financing activities		(222,907	)		(139,030	)		(104,576	)		150,960			(73,076	)
Net (decrease) increase in cash and cash equivalents		(120,563	)		(37,679	)		(277,261	)		308,128			302,211
Cash and cash equivalents, beginning of period		825,369			742,485			976,150			698,889			704,806
Cash and cash equivalents, end of period	$	704,806		$	704,806		$	698,889		$	1,007,017		$	1,007,017

Health Net, Inc.

Notes to Consolidated Financial Statements

Notes:

(a) Management believes that days claims payable (excluding capitation, provider and other claim 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 and other claim settlements and Medicare Part D) and days claims payable, the most directly comparable financial measure calculated and presented in accordance with GAAP:

	Q4 2006			FY 2006			Q3 2007			Q4 2007			FY 2007
	(Dollars in millions)
Reserve for Claims and Other Settlements	$	1,048.8		$	1,048.8		$	1,313.1		$	1,300.4		$	1,300.4
Less: Capitation Payable, Provider and Other Claim Settlements and Medicare Part D		(85.3	)		(85.3	)		(290.7	)		(299.3	)		(299.3	)
Adjusted Reserve for Claims and Other Settlements		963.5			963.5			1,022.4			1,001.1			1,001.1
(1) Average Reserve for Claims and Other Settlements		1,042.1			1,044.5			1,198.8			1,306.8			1,174.6
(2) Average Adjusted Reserve for Claims and Other Settlements		949.2			954.2			1,004.0			1,011.8			982.3
(3) Health Plan Services Cost		2,139.1			8,600.4			2,631.2			2,409.3			9,762.9
Less: Capitation Payable, Provider and Other Claim Settlements and Medicare Part D		(662.8	)		(2,735.4	)		(942.0	)		(715.2	)		(3,129.7	)
(4) Adjusted Health Plan Services Cost		1,476.3			5,865.0			1,689.2			1,694.1			6,633.2
(5) Number of Days in Period		92			365			92			92			365
= (1) / (3) * (5) Days Claims Payable		44.8			44.3			41.9			49.9			43.9
= (2) / (4) * (5) Days Claims Payable - Adjusted		59.2			59.4			54.7			54.9			54.1

Health Net, Inc.

Enrollment Data - By State

(In thousands)

				Change from
				September 30, 2007				December 31, 2006
	Dec 31, 2007	Sept 30, 2007	Dec 31, 2006	Increase/ (Decrease)		% Change		Increase/ (Decrease)		% Change
California
Large Group	991	992	1,064	(1	)	(0.1	)%	(73	)	(6.9	)%
Small Group and Individual	477	477	419	0		0.0	%	58		13.8	%
Commercial Risk	1,468	1,469	1,483	(1	)	(0.1	)%	(15	)	(1.0	)%
ASO	6	5	6	1		20.0	%	0		0.0	%
Total Commercial	1,474	1,474	1,489	0		0.0	%	(15	)	(1.0	)%
Medicare Advantage	112	112	104	0		0.0	%	8		7.7	%
Medi-Cal	712	698	710	14		2.0	%	2		0.3	%
Total California	2,298	2,284	2,303	14		0.6	%	(5	)	(0.2	)%
Connecticut
Large Group	136	138	153	(2	)	(1.4	)%	(17	)	(11.1	)%
Small Group and Individual	25	26	30	(1	)	(3.8	)%	(5	)	(16.7	)%
Commercial Risk	161	164	183	(3	)	(1.8	)%	(22	)	(12.0	)%
ASO	32	54	67	(22	)	(40.7	)%	(35	)	(52.2	)%
Total Commercial	193	218	250	(25	)	(11.5	)%	(57	)	(22.8	)%
Medicare Advantage	45	44	34	1		2.3	%	11		32.4	%
Medicaid	90	87	84	3		3.4	%	6		7.1	%
Total Connecticut	328	349	368	(21	)	(6.0	)%	(40	)	(10.9	)%
New York
Large Group	116	114	122	2		1.8	%	(6	)	(4.9	)%
Small Group and Individual	118	117	102	1		0.9	%	16		15.7	%
Commercial Risk	234	231	224	3		1.3	%	10		4.5	%
ASO	13	13	17	0		0.0	%	(4	)	(23.5	)%
Total Commercial	247	244	241	3		1.2	%	6		2.5	%
Medicare Advantage	3	9	6	(6	)	(66.7	)%	(3	)	(50.0	)%
Total New York	250	253	247	(3	)	(1.2	)%	3		1.2	%
New Jersey
Large Group	30	30	44	0		0.0	%	(14	)	(31.8	)%
Small Group and Individual	60	60	59	0		0.0	%	1		1.7	%
Commercial Risk	90	90	103	0		0.0	%	(13	)	(12.6	)%
ASO	17	18	19	(1	)	(5.6	)%	(2	)	(10.5	)%
Total Commercial	107	108	122	(1	)	(0.9	)%	(15	)	(12.3	)%
Medicaid	44	44	46	0		0.0	%	(2	)	(4.3	)%
Total New Jersey	151	152	168	(1	)	(0.7	)%	(17	)	(10.1	)%
Arizona
Large Group	81	81	75	0		0.0	%	6		8.0	%
Small Group and Individual	56	55	50	1		1.8	%	6		12.0	%
Commercial Risk	137	136	125	1		0.7	%	12		9.6	%
Medicare Advantage	51	49	35	2		4.1	%	16		45.7	%
Total Arizona	188	185	160	3		1.6	%	28		17.5	%
Oregon
Large Group	101	98	96	3		3.1	%	5		5.2	%
Small Group and Individual	34	35	37	(1	)	(2.9	)%	(3	)	(8.1	)%
Commercial Risk	135	133	133	2		1.5	%	2		1.5	%
Medicare Advantage	21	21	20	0		0.0	%	1		5.0	%
Total Oregon	156	154	153	2		1.3	%	3		2.0	%
Other States
Medicare Advantage	4	4	0	0		0.0	%	4		0.0	%
Medicare PDP (stand-alone)	379	365	300	14		3.8	%	79		26.3	%
Total Health Plan Enrollment
Large Group	1,455	1,453	1,554	2		0.1	%	(99	)	(6.4	)%
Small Group and Individual	770	770	697	0		0.0	%	73		10.5	%
Commercial Risk	2,225	2,223	2,251	2		0.1	%	(26	)	(1.2	)%
ASO	68	90	109	(22	)	(24.4	)%	(41	)	(37.6	)%
Total Commercial	2,293	2,313	2,360	(20	)	(0.9	)%	(67	)	(2.8	)%
Medicare Advantage	236	239	199	(3	)	(1.3	)%	37		18.6	%
Medicare PDP (stand-alone)	379	365	300	14		3.8	%	79		26.3	%
Medi-Cal/Medicaid	846	829	840	17		2.1	%	6		0.7	%
Total Health Plans	3,754	3,746	3,699	8		0.2	%	55		1.5	%
TRICARE - North Contract Eligibles	2,895	2,913	2,930	(18	)	(0.6	)%	(35	)	(1.2	)%

Health Net, Inc.

Enrollment Data - Line of Business

(In thousands)

				Change from
				September 30, 2007				December 31, 2006
	Dec 31, 2007	Sept 30, 2007	Dec 31, 2006	Increase/ (Decrease)		% Change		Increase/ (Decrease)		% Change
Large Group
California	991	992	1,064	(1	)	(0.1	)%	(73	)	(6.9	)%
Connecticut	136	138	153	(2	)	(1.4	)%	(17	)	(11.1	)%
New York	116	114	122	2		1.8	%	(6	)	(4.9	)%
New Jersey	30	30	44	0		0.0	%	(14	)	(31.8	)%
Arizona	81	81	75	0		0.0	%	6		8.0	%
Oregon	101	98	96	3		3.1	%	5		5.2	%
	1,455	1,453	1,554	2		0.1	%	(99	)	(6.4	)%
Small Group and Individual
California	477	477	419	0		0.0	%	58		13.8	%
Connecticut	25	26	30	(1	)	(3.8	)%	(5	)	(16.7	)%
New York	118	117	102	1		0.9	%	16		15.7	%
New Jersey	60	60	59	0		0.0	%	1		1.7	%
Arizona	56	55	50	1		1.8	%	6		12.0	%
Oregon	34	35	37	(1	)	(2.9	)%	(3	)	(8.1	)%
	770	770	697	0		0.0	%	73		10.5	%
Commercial Risk
California	1,468	1,469	1,483	(1	)	(0.1	)%	(15	)	(1.0	)%
Connecticut	161	164	183	(3	)	(1.8	)%	(22	)	(12.0	)%
New York	234	231	224	3		1.3	%	10		4.5	%
New Jersey	90	90	103	0		0.0	%	(13	)	(12.6	)%
Arizona	137	136	125	1		0.7	%	12		9.6	%
Oregon	135	133	133	2		1.5	%	2		1.5	%
	2,225	2,223	2,251	2		0.1	%	(26	)	(1.2	)%
ASO
California	6	5	6	1		20.0	%	0		0.0	%
Connecticut	32	54	67	(22	)	(40.7	)%	(35	)	(52.2	)%
New York	13	13	17	0		0.0	%	(4	)	(23.5	)%
New Jersey	17	18	19	(1	)	(5.6	)%	(2	)	(10.5	)%
	68	90	109	(22	)	(24.4	)%	(41	)	(37.6	)%
Total Commercial
California	1,474	1,474	1,489	0		0.0	%	(15	)	(1.0	)%
Connecticut	193	218	250	(25	)	(11.5	)%	(57	)	(22.8	)%
New York	247	244	241	3		1.2	%	6		2.5	%
New Jersey	107	108	122	(1	)	(0.9	)%	(15	)	(12.3	)%
Arizona	137	136	125	1		0.7	%	12		9.6	%
Oregon	135	133	133	2		1.5	%	2		1.5	%
	2,293	2,313	2,360	(20	)	(0.9	)%	(67	)	(2.8	)%
Medicare Advantage
California	112	112	104	0		0.0	%	8		7.7	%
Connecticut	45	44	34	1		2.3	%	11		32.4	%
New York	3	9	6	(6	)	(66.7	)%	(3	)	(50.0	)%
Arizona	51	49	35	2		4.1	%	16		45.7	%
Oregon	21	21	20	0		0.0	%	1		5.0	%
Other States	4	4	0	0		0.0	%	4		0.0	%
	236	239	199	(3	)	(1.3	)%	37		18.6	%
Medi-Cal/Medicaid
California	712	698	710	14		2.0	%	2		0.3	%
Connecticut	90	87	84	3		3.4	%	6		7.1	%
New Jersey	44	44	46	0		0.0	%	(2	)	(4.3	)%
	846	829	840	17		2.1	%	6		0.7	%
Medicare PDP (stand-alone)	379	365	300	14		3.8	%	79		26.3	%
Total Health Plan Enrollment
Large Group	1,455	1,453	1,554	2		0.1	%	(99	)	(6.4	)%
Small Group and Individual	770	770	697	0		0.0	%	73		10.5	%
Commercial Risk	2,225	2,223	2,251	2		0.1	%	(26	)	(1.2	)%
ASO	68	90	109	(22	)	(24.4	)%	(41	)	(37.6	)%
Total Commercial	2,293	2,313	2,360	(20	)	(0.9	)%	(67	)	(2.8	)%
Medicare Advantage	236	239	199	(3	)	(1.3	)%	37		18.6	%
Medicare PDP (stand-alone)	379	365	300	14		3.8	%	79		26.3	%
Medi-Cal/Medicaid	846	829	840	17		2.1	%	6		0.7	%
Total Health Plans	3,754	3,746	3,699	8		0.2	%	55		1.5	%
TRICARE - North Contract Eligibles	2,895	2,913	2,930	(18	)	(0.6	)%	(35	)	(1.2	)%

Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

(In millions)

	Health Plan Services
	Year 2007		Year 2006			Year 2005
Reserve for claims (a), beginning of period	$	754.2	$	768.7		$	794.6
Incurred claims related to:
Current Year		5,790.7		5,222.0			5,130.4
Prior Years (c)		0.6		(77.3	)		(114.5	)
Total Incurred (b)		5,791.3		5,144.7			5,015.9
Paid claims related to:
Current Year		4,972.3		4,485.7			4,401.3
Prior Years		734.5		673.5			640.5
Total Paid (b)		5,706.8		5,159.2			5,041.8
Reserve for claims (a), end of period		838.7		754.2			768.7
Add:
Claims Payable (d)		365.7		203.9			177.2
Other (e)		96.0		90.7			94.3
Reserves for claims and other settlements, end of period	$	1,300.4	$	1,048.8		$	1,040.2

(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 amount accrued for litigation and regulatory-related expenses.

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