Health Net, Inc. Presentation Slides for Annual Investor Conference

Cautionary Statement

All statements in this presentation, other than statements of historical information

provided herein, including but not limited to the guidance for future periods included

herein and the assumptions underlying such projections, may be deemed to be forward-

looking statements and as such are subject to a number of risks and uncertainties. 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 guidance as to expected future period results and

statements including 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,

additional investment portfolio impairment charges, changes in the economy, volatility in

the financial markets, trends in medical care ratios, unexpected

utilization patterns or

unexpectedly severe or widespread illnesses, membership declines, rate cuts affecting our

Medicare or Medicaid business, issues relating to provider contracts, litigation costs,

regulatory issues, operational issues, health care reform and general business and market

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.

Audience members are cautioned not to place undue reliance on these forward-looking

statements. The company undertakes no obligation to publicly revise its guidance, the

assessment of the underlying assumptions or any of its forward-looking statements to

reflect events or circumstances that arise after the date of these presentations.

Non-GAAP Measures

These presentations include quarterly and full-year income statement

measurements that are not calculated and presented in accordance

with

Generally Accepted Accounting Principles. Audience participants should

refer to the reconciliation table available in the company’s third quarter

2008 earnings press release, available on the company’s Web site at

www.healthnet.com, which reconciles certain non-GAAP financial

information to GAAP financial information.

These presentations also include underlying health care cost trend

metrics that reflect the impact of prior period incurred development

which has been included in the appropriate incurred period.

Management believes that the non-GAAP financial information discussed

in these presentations is useful as it provides the audience a basis to

better understand the company’s results by excluding items that are not

indicative of our core operating results for the periods presented. In

addition, the company believes that the underlying health care cost

metrics provide the audience with a more accurate assessment of these

trends which the company uses to appropriately price its products.

Registration & Continental Breakfast

7.30 a.m.

8.00 –

8.30 a.m.

Introduction & Strategic Review

Angie McCabe, Vice President, Investor Relations

Jay Gellert, President & Chief Executive Officer

8.30 –

10.00 a.m.

Review of Operations & Operations Strategy Update

Jim Woys, Chief Operating Officer

Federal Services / MHN

Steve Tough, President, Health Plans and Government Programs

Medicare Programs

Scott Kelly, Chief Government Programs Officer

California Market

Steve Sell, President, Health Net of California

10.00 –

10.30 a.m.

Financial Review

Joseph Capezza, Chief Financial Officer

10.30 –

11.00 a.m.

Q&A Panel

11.00 a.m.

Closing Remarks

Jay Gellert, President & Chief Executive Officer

Agenda

Northeast and Arizona:

Scale Issues

•

2009 combined revenues expected to be between $3.7 billion to

$3.8 billion

•

Combined year-end 2008 membership of:

–

580,000 Commercial members

–

131,000 Medicare members

–

46,000 Medicaid members

•

Operate G&A at approximately 12 percent of premium.

With scale, the marginal G&A of these businesses should be

approximately 7 percent of premium

•

Health care unit costs are higher than the median for the

competition by an average of at least 5 percent

•

Projected to operate on a breakeven basis in 2009 due to

Medicare improvements

•

Approximately $500 million of excess cash in these entities to

meet regulatory requirements

TRICARE/MHN, California/Northwest

and Senior Products

•

Combined revenues expected to be approximately

$12 billion in 2009

•

These operations have approximately:

–

1.5 million commercial members

–

165,000 MA members

–

760,000 Medicaid members

–

500,000 PD members

–

2.9 million TRICARE eligibles

–

5 million EAP members

•

Health

plan

G&A

expected

approximately

8.7%

2009

•

Health plan and HNFS health care costs are competitive

•

Expected to generate approximately $400 million of pretax

income in 2009

Profitable Growth

•

Unified sales, market,

product approach

•

Appropriate pricing structure

•

Clear, targeted growth in

identified markets and segments

•

Margin expansion and

profitable growth

Key Strategy

Attack and defend where clear value proposition exists

Key Commercial Markets

California, Oregon

Key Lines of Business

Commercial, Medicare, Medicaid, TRICARE, MHN

Expected Results

Actions Taken

Managing Trend

•

Results-oriented structure

•

Geographical review of hospital

and provider contracts

•

Care management programs

•

Predictable health care costs

Key Strategy

Predictability and proactive management

Key Management Tactics

•

Unit cost –

multi-year agreements,

administrative ease, billed charges

•

Utilization –

predictive modeling, high intensity care

management, appropriate hospitalization, analytics

and reporting

Expected Results

Actions Taken

Operational Excellence

•

Consolidated operation

management, analytics

and reporting

•

Reduced variation

•

Outsourcing transactional jobs

•

Driving electronic channel making

it easy to do business with HNT

•

Better Service –

less cost

Key Strategy

Great at the basics

Key Management Tactics

Consolidate and centralize

Predictable, stable core operations

Performance driven

Expected Results

Actions Taken

The Operations Team

•

Steven Tough

President, Health Plans and Government Programs

–

Steven Sell

President, Health Net of California

–

Scott Kelly

Chief Government Programs Officer

•

John Sivori

President, Regional Health Plans and Pharmacy

•

Dr. Jonathan Scheff

Chief Medical Officer

•

Scott Law

Chief Network Management Officer

•

Kathleen Richard

Customer Experience Officer

•

Duncan Rose

Chief Information Officer

Understanding the Underlying Trend

Conducted in-depth analyses of:

•

Underlying trends for all markets and all segments

for 2007, 2008 and expected 2009

•

Actual trends based on incurred dates after

adjusting for all prior period changes

•

Prior pricing actions and product and benefit designs

•

Current pricing actions for 2009

•

Current network contract status and effect of recent

and current contract negotiations on 2009 unit costs

•

Utilization management practices including current

and prospective initiatives

2008 and 2009 Commercial

Health Care Cost Trends

Underlying health care cost trend after adjusting for prior period development and effect of Guardian transaction

(1)

Commercial

'07 -

'08

'08 -

'09

Yield

8.3%

9.0% -

9.5%

Health Care Cost

Physician

Physician -

Claims

2.4%

4.4%

Physician -

Capitation

5.5%

7.4%

Physician Total

4.0%

6.2%

Hospital

Hospital -

Inpatient

10.1%

9.5%

Hospital -

Outpatient

8.5%

10.5%

Hospital -

Capitation

3.9%

12.0%

Hospital Total

9.0%

11.1%

Pharmacy

6.3%

4.2%

Other

7.3%

15.0%

Total

6.8%

9.1%

% Change

2008 Commercial Unit Cost

and Utilization Metrics

Underlying operational health care cost metrics after adjusting for prior period development

(1)

Unit Cost & Utilization

Hospital

Inpatient

Days/1,000

5.0%

4.1%

10.7%

Admits/1,000

1.3%

2.2%

6.6%

ALOS

3.6%

1.8%

3.8%

Cost/Day

-6.3%

-5.5%

8.3%

Outpatient Surgery

Cases/1,000

-0.4%

2.7%

5.9%

Cost/Case

7.1%

10.6%

7.2%

Cases/1,000

0.1%

-1.8%

1.3%

Cost/Case

9.6%

13.9%

10.5%

% Change (year-over-year)

2008

2007 to 2009 Medicare

Health Care Costs

Underlying health care cost trend after adjusting for prior period development and effect of Guardian transaction

(1)

Medicare Advanatage

'07 -

'08

'08 -

'09

Yield

2.6%

6.0%

Health

Care

Cost

Physician

Physician -

Claims

13.6%

14.1%

Physician -

Capitation

-2.1%

-6.1%

Physician Total

5.0%

3.7%

Hospital

Hospital -

Inpatient

15.4%

6.8%

Hospital -

Outpatient

3.6%

11.2%

Hospital -

Capitation

-15.7%

-12.2%

Hospital Total

6.4%

4.6%

Pharmacy

10.0%

5.3%

Other

35.3%

8.7%

Total

6.6%

4.4%

% Change

2008 Medicare Unit Cost

and Utilization

Underlying operational health care cost metrics after adjusting for prior period development; excludes Private Fee-for-Service

(1)

Medicare Advantage

Unit Cost & Utilization

Hospital

Inpatient

Days/1,000

5.0%

4.1%

10.7%

Admits/1,000

1.3%

2.2%

6.6%

ALOS

3.6%

1.8%

3.8%

Cost/Day

-6.3%

-5.5%

-4.3%

SNF

Days/1,000

-0.4%

1.0%

5.7%

Admits/1,000

0.8%

2.6%

-0.7%

ALOS

-1.2%

-1.5%

0.5%

Cost/Day

-9.1%

-0.4%

-5.2%

Outpatient Surgery

Cases/1,000

4.4%

4.1%

2.6%

Cost/Case

-4.9%

-3.5%

-2.5%

Cases/1,000

3.8%

7.2%

5.5%

Cost/Case

-12.9%

-7.4%

-5.4%

2008

2009 Underlying Health Care Cost Trend:

HNCA –

Commercial

Hospital trends reflect conversion of two hospitals from capitated to noncapitated arrangements

Underlying health care cost trend after adjusting for prior period development

(1)

(2)

(1)

(2)

'07 -

'08

'08 -

'09

Yield

6.5%

9.1%

Health Care Cost

Physician

Physician -

Claims

6.1%

5.3%

Physician -

Capitation

5.0%

7.2%

Physician Total

5.3%

6.8%

Hospital

Hospital -

Inpatient

12.9%

10.3%

Hospital -

Outpatient

9.9%

12.4%

Hospital -

Capitation

1.8%

9.8%

Hospital Total

10.5%

11.0%

Pharmacy

6.5%

3.4%

Other

-11.7%

11.2%

Total

7.8%

8.8%

% Change

2008 Financial Performance:

HNCA –

Commercial

Based on membership in noncapitated hospital arrangements (approximately 82% of total membership)

Underlying operational health care cost metrics after adjusting for prior period development

(1)

(2)

(1)

(2)

Unit Cost & Utilization

Hospital

Inpatient

Days/1,000

7.2%

1.0%

3.1%

Admits/1,000

-0.1%

-2.4%

0.6%

ALOS

7.3%

3.5%

2.5%

Cost/Day

6.2%

3.1%

5.5%

Outpatient Surgery

Cases/1,000

1.1%

4.0%

5.0%

Cost/Case

4.3%

9.4%

5.1%

Cases/1,000

-1.2%

-1.5%

1.1%

Cost/Case

7.7%

11.7%

5.3%

% Change (year-over-year)

2008

2009 Expectations:

HNCA –

Commercial

•

Focused, clear and simple plan

block-and-tackle

•

82% book is priced at a yield of 9.1%

–

99% of Special Accounts (1/3 membership) under contract

–

Assumes 1% higher rating compared to 2008 and a lower

impact from mix changes (geography, network, and account)

•

Baseline data for pricing is known

–

Professional: 74%

–

Institutional: 57%

–

Other: 62%

•

Conservative expectations on utilization improvement

Percent under contract

2009 Health Care Cost Trend Expectations:

Oregon -

Commercial

Underlying health care cost trend after adjusting for prior period development

(1)

'07 -

'08

'08 -

'09

Yield

5.7%

7.9%

Health Care Cost

Physician

Physician -

Claims

7.3%

6.6%

Physician -

Capitation

0.0%

Physician Total

7.3%

6.6%

Hospital

Hospital -

Inpatient

14.3%

4.5%

Hospital -

Outpatient

3.8%

2.9%

Hospital -

Capitation

0.0%

Hospital Total

8.9%

3.7%

Pharmacy

11.6%

4.9%

Other

9.4%

8.9%

Total

8.7%

5.1%

% Change

2009 Health Care Cost Trend Expectations:

Northeast -

Commercial

Underlying health care cost trend after adjusting for prior period development and effect of Guardian transaction

(1)

'07 -

'08

'08 -

'09

Yield

6.7%

5.3%

Health Care Cost

Physician

Physician -

Claims

2.3%

4.0%

Physician -

Capitation

3.2%

9.0%

Physician Total

2.5%

4.8%

Hospital

Hospital -

Inpatient

0.0%

6.3%

Hospital -

Outpatient

6.4%

6.8%

Hospital -

Capitation

56.7%

155.1%

Hospital Total

3.3%

7.5%

Pharmacy

7.6%

5.2%

Other

52.5%

19.6%

Total

5.0%

6.5%

% Change

2009 Health Care Cost Trend Expectations:

Arizona -

Commercial

Underlying health care cost trend after adjusting for prior period development

(1)

'07 -

'08

'08 -

'09

Yield

4.7%

8.0%

Health Care Cost

Physician

Physician -

Claims

9.7%

4.3%

Physician -

Capitation

11.4%

11.1%

Physician Total

9.7%

4.5%

Hospital

Hospital -

Inpatient

6.8%

14.9%

Hospital -

Outpatient

13.2%

9.6%

Hospital

Capitation

9.8%

4.9%

Hospital Total

9.3%

12.6%

Pharmacy

12.0%

9.8%

Other

13.3%

26.9%

Total

9.9%

9.4%

% Change

2008 Performance:

Oregon, Northeast, Arizona –

Commercial

•

Oregon

–

Continued solid performance

–

Membership = generally flat

•

Emerging strength in small group market (4Q08)

–

Revenue

•

Lower than necessary yield in mid-size and large groups

–

Health care costs

•

Higher than normal frequency of high cost cases

•

Northeast

–

Pricing discipline resulted in commercial membership losses

•

Lapsed less profitable large group business

–

Maintained competitive MCR’s

–

G&A level impacted pricing competitiveness

•

Arizona

–

Higher than expected commercial catastrophic claims and case-mix negatively

impacting 2008 run-rate

–

Overall care intensity driving higher than expected unit cost trends across all products

and segments

–

Increased physician trends driven solely by higher utilization and coding intensity

across all products and segments

–

Solid

Medicare

Advantage

growth,

but

lower

than

expected

margins

due

the

higher

than expected health care cost trends

2009 Expectations:

Oregon, Northeast, Arizona

•

Oregon

–

Continued positive performance

–

Expect some health care cost recovery by assuming normal frequency of

high cost cases

–

Positive yield on mid-size and large group business due to the pricing

corrections occurring in the market

•

Northeast

–

Stabilizing commercial membership losses

•

Implementing targeted pricing actions to improve risk selection and

stimulate middle market growth

–

Addressing expense levels to improve competitiveness

–

NJ small group margin deterioration due to minimum loss ratio regulatory

requirement of 80%

•

Arizona

–

Commercial book will be repositioned by 12/31/09

–

Pricing discipline will slow growth but improve performance

–

Provider unit cost trends expected to be single digit and the network is

expected to continue to grow

–

Continued medical management discipline seeking upside cost mitigation

opportunities with a focus on improving patient care

2009 Underlying Health Care Cost Trends:

Medicare

Underlying health care cost trend after adjusting for prior period development

(1)

Medicare Advantage

'07 -

'08

'08 -

'09

Yield

2.7%

6.2%

Health Care Cost

Physician

Physician -

Claims

13.6%

14.1%

Physician -

Capitation

-2.1%

-6.1%

Physician Total

5.0%

3.7%

Hospital

Hospital -

Inpatient

15.4%

6.8%

Hospital -

Outpatient

3.6%

11.2%

Hospital -

Capitation

-15.7%

-12.2%

Hospital Total

6.4%

4.6%

Pharmacy

10.0%

5.3%

Other

35.3%

8.7%

Total

6.6%

4.4%

% Change

Medicare: What Happened in 2008?

•

Benefit leader in 2008

•

Experienced substantial growth across MAPD

•

Early 2008 experience led to margin deterioration

–

Rich benefits and low member out-of-pocket costs

–

Higher utilization than planned

–

Lower RAF scores than industry

Revenue

HCC

Member Months

MCR (bps)

Total MA

29.5%

34.4%

-3.9%

26.1%

-331

PMPM change

2.6%

6.6%

-23.8%

2007-2008

•

Priced 2009 bids to address MCR concerns across

all products

–

Factored for higher-than-expected HCC in 2008

•

Adjusted premiums and benefit design (specialist

co-pay, hospital co-pay) to improve gross margin –

will result in membership deterioration in some plans

•

Contracted industry leading risk adjustment services

•

Targeted Medicare medical management practices

Revenue

HCC

Member Months

MCR (bps)

Total MA

7.4%

5.6%

24.8%

1.1%

154

PMPM change

6.0%

4.4%

23.5%

2009 Expectations: Medicare

2008-2009

2009 and Beyond

•

Relationships with our customers are very strong

•

Service and financial performance has been excellent

•

TRICARE, Military & Family Life Consultants (MFLC)

and EAP programs remain solid cornerstones

•

Base of operations provides a sound foundation for

the future

•

2009 and beyond plan is geared for growth through

diversification

•

Consolidated MHN and HNFS leadership into a

combined management structure

•

Focused on using a common infrastructure and gaining

efficiencies across both organizations

Current TRICARE Contract

•

Excellent performance—meeting or exceeding all contract

requirements and benchmarks

•

Top-to-bottom relationship with customer is solid

•

Financial results

–

Expect to reach $2.6 billion in total contract revenue in

2008 (8.5% increase over 2007)

–

Expect to achieve 95% government contract ratio for

the full year 2008

–

On track to achieve the health care cost target for

Option Period 5

Current TRICARE Contract

•

Confident of ability to deliver on 2009 plan

–

On track to meet Option Period 5 performance targets

–

Current TRICARE business model continues through

April 2010

–

Engaged in Option Period 6 discussions

–

Based on previous experience, we expect an increase in

revenue consistent with the increase in health care costs

–

Expect Government Contract Ratio to be in the

95.0% to 95.5% range

TRICARE Contract

Re-Procurement Overview

•

Proposal delivered at end of June 2008

–

Terms are valid for 270 days (through March 27, 2009)

•

Statement of work is nearly the same as current

TRICARE contract

•

Period of Performance, as currently stated in the RFP

–

Transition from June 1, 2009 to March 31, 2010

–

First Option Period (of five) from April 1, 2010 to

March 31, 2011

•

Well-positioned for award

–

Low-risk, best value solution

–

Strong past performance

–

High stakeholder satisfaction

TRICARE Contract

Re-Procurement Overview

•

Three factors in evaluating the proposals

–

Technical approach

–

Past performance

–

Price/cost

•

Extension of current contract

–

Re-procurement terms extended the period of

performance for the current contract through

March 31, 2010

–

Government has the authority to extend for two

additional 6-month periods

•

What will happen?

•

Customer remains our number one priority

•

TRICARE program continues to run extremely well

–

Ongoing partnership with the Government on innovative solutions

for military beneficiaries

–

Continued high satisfaction with the TRICARE benefit and

Health Net as a contractor

Recently achieved the highest satisfaction levels among all

stakeholders since the beginning of the contract and the

highest overall satisfaction level to-date in the award fee

process

98% satisfaction among military treatment

facility commanders

Exceptional beneficiary satisfaction (using multiple

measures) –

more than a 90% satisfaction rate

Not a single contractual deficiency during the entire term

of the contract

•

Metric performance and satisfaction are the primary basis on

which past performance is evaluated

Solid TRICARE Performance

MFLC: A Department of Defense Program

•

Short-term, situational non-medical counseling services

and outreach

•

Assists service members and their families through the

challenges of military life

•

5-year, $300 million contract awarded to MHN effective

April 1, 2007

–

Started as an MHN pilot program in 2004

–

Task order driven

•

More than 500 consultants at 186 locations worldwide seeing

over 300,000 people per month

•

Substantial year-over-year revenue growth:

$50 million in 2007, on target for $100 million in 2008 and

budgeting $140 million in 2009

•

Confident in achieving 2009 revenue:

–

Demand for base non-medical counseling services is increasing

–

Personal financial counseling added to scope of contract

Opportunities

•

Department of Veterans Affairs

–

Regional programs –

civilian network and

clinic support

–

Mental/behavioral health surge capacity

–

VetAdvisor

expansion (includes TBI and

PTSD screening)

•

Other government and commercial entities

–

Targeted commercial market segments (public

employers, labor & trust, student health)

–

Targeted Medicare and Medicaid opportunities

–

“CalPERS-like”

scenarios

–

Growing need to support veterans and wounded, ill

and injured service members with TBI and PTSD

Medicare Market View

Oregon

CCPs/PFFS/PDP

California

CCPs/PDP

PFFS/MedSup

Washington

PDP/PFFS

Arizona

CCPs/PDP

New Mexico

PDP/PFFS

Texas

PDP/PFFS

Connecticut

CCPs/PDP

PFFS

New York

PDP/PFFS

Hawaii

PDP/PFFS

CCPs & PDP

(may incl. PFFS)

PFFS & PDP

Note: PDP is offered in all 50 states

Massachusetts

PDP/PFFS

Virginia

PDP/ PFFS

North Carolina

PDP/ PFFS

Georgia

PDP/ PFFS

CCPs = Coordinated Care Plans

PFFS = Private Fee-for-Service

PDP = Prescription Drug Plan

Medicare Advantage Positioning

•

Health Net is now the seventh largest MA plan nationally

–

Limited core market footprint

HNT led growth in its core markets

–

Limited PFFS engagement nationally

•

Health Net grew by 25% nationally

–

Predominance of growth in network-based products (HMO/PPO)

Rank

Plan

Dec '07

Oct '08

% Share

Growth

% Growth

UnitedHealth Group, Inc.

1,430,280

1,524,600

15.6%

94,320

6.6%

Humana Inc.

1,188,862

1,371,646

14.0%

182,784

15.4%

Kaiser Foundation Health Plan, Inc.

823,189

837,367

8.6%

14,178

1.7%

WellPoint, Inc.

369,638

461,882

4.7%

92,244

25.0%

Coventry Health Care Inc.

282,824

376,827

3.8%

94,003

33.2%

Aetna Inc.

190,431

362,317

3.7%

171,886

90.3%

Health Net, Inc.

232,284

290,033

3.0%

57,749

24.9%

Blue Cross Blue Shield of Michigan

190,659

278,932

2.8%

88,273

46.3%

Highmark Inc.

233,477

266,390

2.7%

32,913

14.1%

Universal American Corporation

232,696

242,777

2.5%

10,081

4.3%

Top 10 Total

5,174,340

6,012,771

61.4%

838,431

16.2%

Total Market

8,468,465

9,791,401

100.0%

1,322,936

15.6%

Source: CMS Enrollment data

Medicare Part D Positioning

•

Health Net ranks eighth nationally among PDP plans

•

Health Net grew by 45% in 2008

•

Adjusted bids to address MCR concerns, resulting in 2009 projected

membership deterioration of approximately 98,000 members

–

Expected 2009 MCR improvement: 290 to 300 basis points

–

Expected 2009 gross margin improvement: $5 million to $7 million

Rank

Plan

Dec '07

Oct '08

%Share

Growth

%Growth

UnitedHealth Group, Inc.

4,891,231

4,095,869

23.5%

-795,362

-16.3%

Humana Inc.

3,458,903

3,094,310

17.7%

-364,593

-10.5%

Universal American Corporation

1,643,593

1,835,402

10.5%

191,809

11.7%

WellPoint, Inc.

1,229,432

1,394,592

8.0%

165,160

13.4%

WellCare Health Plans, Inc.

982,559

989,145

5.7%

6,586

0.7%

Coventry Health Care Inc.

722,046

912,261

5.2%

190,215

26.3%

CVS Caremark Corporation

361,484

561,486

3.2%

200,002

55.3%

Health Net, Inc.

368,121

534,671

3.1%

166,550

45.2%

Longs Drug Stores Corporation

249,433

464,188

2.7%

214,755

86.1%

Medco Health Solutions, Inc.

314,833

423,718

2.4%

108,885

34.6%

Top 10 Total

14,221,635

14,305,642

82.0%

84,007

0.6%

Market Total

17,239,108

17,438,708

100.0%

199,600

1.2%

Source: CMS Enrollment data

2008 Performance

•

Benefit leader in 2008

•

Experienced substantial growth across MAPD

•

Early 2008 experience led to margin deterioration

–

Rich benefits and low member out-of-pocket costs

–

Higher utilization than planned

–

Lower RAF scores than industry

2007 - 2008 (Percent Change)

Revenue

HCC

Member

MCR

(pmpm)

Months

(bps)

Total MA

>2%

>6%

~(24%)

~26%

~(330)

2009 Expectations

•

Priced 2009 bids to address MCR concerns across

all products

–

Factored for higher than expected HCC in 2008

•

Adjusted premiums and benefit design (specialist

co-pay, hospital co-pay) to improve gross margin –

will cause membership deterioration in some plans

•

Contracted industry-leading risk adjustment services

•

Targeted Medicare medical management practices

2008 - 2009 (Percent Change)

Revenue

HCC

Member

MCR

(pmpm)

Months

(bps)

Total MA

>6%

>4%

>23%

~1%

>150

Opportunities

•

Revenue enhancement through RAF score improvement

–

Continuation of industry-proven RAF initiatives

in all markets

–

Supplement RAF activity with network

management support

–

Data collection efforts expanded to pull directly from

source systems

•

Ensures complete retrieval of all diagnosis codes

impacting 2008 and 2009 revenue

–

Expansion of chart audits to include 100% of members

every other year

•

Execute on member retention strategy

–

Market differentiators such as Healthy Heart program

Action Plan

•

Focus on the basics

–

Sales and account management

–

Product and marketing

–

Underwriting discipline; population and account level

•

Build on strengths and key differentiators

–

Competitive HMO offering

–

HMO Portfolio (EOA, Silver, Salud, Optimizer)

–

Responsive and high touch service

–

Strong provider network and medical management

•

Play to our “sweet spot”

–

Targeted geographies

–

Segments within the segments

Focus on Sub-Segments

Segments/

Sub-Segments

2008

Revenue

Membership

(12/08

Projected)

Membership

(12/09

Forecast)

B/(W)

Total Commercial

$5.0 B

1,355 K

(54,000)

Large

–SPA

–L&T

–Mid

$3.5 B

1.7 B

0.3 B

1.5 B

908 K

448 K

74 K

386 K

(36,000)

(27,000)

(9,000)

Small/Individual

–Small

–Individual

$1.4 B

1.1 B

0.3 B

413 K

313 K

100 K

(16,000)

Action Plan

Market Segment

Health Net –

Sweet Spot

SPA/L&T

Focus:

Large CA-centric employers and unions

Need:

–

High-touch account management and service

–

Price-competitive HMO as slice offering

–

Low-cost offering without cost-shift

Mid-Market

Focus:

Public Entities (Municipalities, Schools, etc.)

Need:

–

Local touch with flexibility

–

Predictable rate increases

Small Groups

Focus:

Targeted Geographies and Brokers

Need:

–Solid standard product portfolio = “The wheel”

–Strong broker services

–Stable and predictable

Individual

Under strategic review

Opportunities

•

Well-positioned in California for 2009

–

Strong HMO presence (11% market share)

–

Over 30 years of history in California

–

Provides a low cost option in a strained economy

•

Provide differentiated value compared to competition

–

One of two dominant local HMO options

(excluding Kaiser)

–

Local presence enables strong account management

–

Strong managed care capabilities through network

partnerships and “whole-person health”

Achieving Operational Excellence

2007 to 2008

Recognize Opportunity

2008 to 2009

Year of Investment

2009 to 2011

Harvesting Benefits

•

Multiple systems

•

Manual processes

and workarounds

•

System

consolidation

planning

•

Sequencing of highest

benefit projects

•

Aging and inefficient

systems and technology

•

Application and

infrastructure

outsourcing

•

Best-in-class

outsourcing partners to

extend capabilities

•

High cost locations

and functions

•

Consolidation of

processes,

management,

footprint

•

Reduced headcount

•

Business process

outsourcing

•

Strategic sourcing

•

Multiple data warehouses

•

Inconsistent operational

metrics

•

Redundant analytical

functions

•

Consolidating

operations

•

Consistent metrics

and analytics

•

Performance-focused

operations

•

Improve service delivery while reducing costs

•

Economically replace aging technology

•

Outsource commoditized IT services

•

Improve quality and reliability of IT

development work products

•

Eliminate redundancies and variation and

increase performance

•

Improve customer service capabilities

•

Launch new electronic tools

•

Consolidate performance metrics

Capability Improvements

Sustainable Results

2008

2009

2010

2011

(in thousands except for percentages)

Guidance

Expected

Total Member Months (excl. PDP)

38,231

36,889

37,488

38,314

Total G&A*

1,088,614

1,113,718

1,127,526

1,118,698

G&A % change (year-over-year)

-1.1%

2.3%

1.2%

-0.8%

Effect of Operations Strategy and G&A Management

Change from 3.5% inflation

expectations and adjusted for

membership changes

(54,733)

(29,488)

(36,064)

(42,484)

Cumulative impact

(54,733)

(84,221)

(120,285)

(162,769)

Adjusted G&A Expense Ratio

9.2%

9.1%

8.4%

7.7%

*Excludes MIP, stock-based compensation, Medicare Part D-related G&A expense, and regulatory and operations strategy-related charges

2008 Performance

•

Commercial premium yields above original guidance

•

Lower commercial membership

•

Medicaid, Medicare Advantage and PDP membership grew

significantly during the year

•

Due to higher cost trends, primarily hospital unit cost and

utilization, year-over-year deterioration in MCR across all

lines of business

•

Strong G&A expense management

•

Negative cash flow due to legal and operations strategy charges

•

Strong, conservative balance sheet and investment portfolio

2009 Earnings Guidance

Year-end Membership

•

Commercial Risk -3 to -5%

•

Medicaid +2 to +3%

•

Medicare Advantage -1 to -2%

•

PDP -15 to –20%

Consolidated Revenues

$15.5 to $16 billion

Commercial Premium Yields

~ 9 to 9.5%

Commercial Health Care Cost Trends

~ 40 to 60 bps < yield

Selling Cost Ratio

~ 2.9%

Gov’t Contract Ratio

~ 95.0 to 95.5%

G&A Expense Ratio

~ 9.6 to 9.8%

Tax Rate

~ 38.5 to 38.7%

Shares Outstanding

104 –

105 million

EPS*

$2.25 to $2.40

* 2009 guidance excludes expected operations strategy-related charges of $70 million to $80 million

Key Drivers of 2009 EPS Improvement

* *2009 guidance excludes expected operations strategy-related charges of $70 million to $80 million

* Excludes nine months YTD 2008 litigation-related charges of $59 million, operations strategy-related charges of $53 million, investment

impairment of $15 million and expected 4Q08 operations strategy-related charges of $30 million to $35 million

EPS

Guidance

Midpoint

2008 Guidance*

$1.85-$1.89

1.87

Medicare MCR/membership

0.55

Commercial MCR/membership

0.25

Gov't & Specialty Services

0.07

Lower Weighted Average Share Count

0.03

SG&A/D&A

(0.25)

Medicaid Rate Reductions

(0.11)

Investment Income

(0.09)

Other P&L Items

0.00

2009 Guidance**

$2.25-$2.40

2.32

2009 Cash & Investments Guidance

•

Operating cash flow approximately 115% of net income

or $275 million to $295 million

•

Capital expenditures of approximately $50 million to

$55 million

•

No share repurchases

•

Maintain strong capital position with a total RBC of

approximately 350%

•

Solid balance sheet, keeping debt-to-total capitalization

under 30%

•

Financial flexibility and liquidity