10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

or

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

For the transition period from                  to                 

Commission File Number: 1-12718

HEALTH NET, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-4288333
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
21650 Oxnard Street, Woodland Hills, CA	91367
(Address of principal executive offices)	(Zip Code)

(818) 676-6000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

x  Large accelerated filer    ¨  Accelerated filer    ¨  Non-accelerated filer    ¨  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

The number of shares outstanding of the registrant’s Common Stock as of August 4, 2009 was 103,854,724 (excluding 40,144,264 shares held as treasury stock).

HEALTH NET, INC.

INDEX TO FORM 10-Q

	Page
Part I—FINANCIAL INFORMATION
Item 1—Financial Statements (Unaudited)	3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008	3
Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	4
Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2009 and 2008	5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008	6
Condensed Notes to Consolidated Financial Statements	7
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3—Quantitative and Qualitative Disclosures About Market Risk	49
Item 4—Controls and Procedures	49
Part II—OTHER INFORMATION
Item 1—Legal Proceedings	51
Item 1A—Risk Factors	51
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3—Defaults Upon Senior Securities	60
Item 4—Submission of Matters to a Vote of Security Holders	60
Item 5—Other Information	61
Item 6—Exhibits	61
Signatures	62

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
REVENUES
Health plan services premiums	$	3,152,783	$	3,114,168	$	6,292,034	$	6,237,156
Government contracts		832,088		694,885		1,591,427		1,359,334
Net investment income		20,432		20,931		44,753		56,302
Administrative services fees and other income		8,387		11,516		18,279		25,464
Total revenues		4,013,690		3,841,500		7,946,493		7,678,256
EXPENSES
Health plan services (excluding depreciation and amortization)		2,718,039		2,655,066		5,439,818		5,443,469
Government contracts		791,044		658,255		1,516,046		1,295,832
General and administrative		332,188		297,475		687,098		649,753
Selling		81,359		88,243		162,769		174,835
Depreciation and amortization		15,708		13,073		31,748		25,352
Interest		11,518		11,316		21,085		21,973
Total expenses		3,949,856		3,723,428		7,858,564		7,611,214
Income from operations before income taxes		63,834		118,072		87,929		67,042
Income tax provision		23,694		41,394		25,754		26,044
Net income	$	40,140	$	76,678	$	62,175	$	40,998
Net income per share:
Basic	$	0.39	$	0.71	$	0.60	$	0.38
Diluted	$	0.38	$	0.71	$	0.60	$	0.37
Weighted average shares outstanding:
Basic		103,854		107,308		103,810		108,276
Diluted		104,323		108,338		104,294		109,772

See accompanying condensed notes to consolidated financial statements.

3

HEALTH NET, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

	June 30, 2009			December 31, 2008
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	565,856		$	668,201
Investments—available for sale (amortized cost: 2009—$1,467,904; 2008—$1,516,316)		1,477,651			1,504,658
Premiums receivable, net of allowance for doubtful accounts (2009—$13,489; 2008—$13,567)		414,199			307,529
Amounts receivable under government contracts		279,290			241,269
Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract		334,104			302,022
Other receivables		181,563			254,026
Deferred taxes		77,600			87,712
Other assets		207,383			179,649
Total current assets		3,537,646			3,545,066
Property and equipment, net		169,925			202,356
Goodwill		751,949			751,949
Other intangible assets, net		82,698			91,289
Deferred taxes		67,247			81,771
Investments—available for sale—noncurrent (amortized cost: 2009—$74,064; 2008—$0)		60,047			—
Other noncurrent assets		133,501			143,919
Total Assets	$	4,803,013		$	4,816,350
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Reserves for claims and other settlements	$	1,243,517		$	1,338,149
Health care and other costs payable under government contracts		76,709			69,876
IBNR health care costs payable under TRICARE North contract		334,104			302,022
Unearned premiums		184,881			180,548
Borrowings under amortizing financing facility		117,999			27,335
Accounts payable and other liabilities		352,890			294,840
Total current liabilities		2,310,100			2,212,770
Senior notes payable		398,378			398,276
Borrowings under amortizing financing facility		—			103,992
Borrowings under revolving credit facility		100,000			150,000
Other noncurrent liabilities		167,993			199,186
Total Liabilities		2,976,471			3,064,224
Commitments and contingencies
Stockholders’ Equity:
Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding)		—			—
Common stock ($0.001 par value, 350,000 shares authorized; issued 2009—143,997 shares; 2008—143,753 shares)		144			144
Additional paid-in capital		1,190,877			1,182,067
Treasury common stock, at cost (2009—40,143 shares of common stock; 2008—40,045 shares of common stock)		(1,368,825	)		(1,367,319	)
Retained earnings		2,006,275			1,944,100
Accumulated other comprehensive loss		(1,929	)		(6,866	)
Total Stockholders’ Equity		1,826,542			1,752,126
Total Liabilities and Stockholders’ Equity	$	4,803,013		$	4,816,350

See accompanying condensed notes to consolidated financial statements.

4

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

	Common Stock			Additional Paid-In Capital			Common Stock Held in Treasury					Retained Earnings		Accumulated Other Comprehensive (Loss) Income			Total
	Shares	Amount					Shares		Amount
Balance as of January 1, 2008	143,477	$	144	$	1,151,251		(33,178	)	$	(1,123,750	)	$	1,849,097	$	(1,160	)	$	1,875,582
Comprehensive income:
Net income													40,998					40,998
Change in unrealized loss on investments, net of tax impact of $6,878															(10,931	)		(10,931	)
Defined benefit pension plans:
Prior service cost and net loss															147			147
Total comprehensive income																		30,214
Exercise of stock options and vesting of restricted stock units	240				6,447													6,447
Share-based compensation expense					14,558													14,558
Tax benefit related to equity compensation plans					732													732
Repurchases of common stock and accelerated stock repurchase settlement							(3,212	)		(143,442	)							(143,442	)
Balance as of June 30, 2008	143,717	$	144	$	1,172,988		(36,390	)	$	(1,267,192	)	$	1,890,095	$	(11,944	)	$	1,784,091
Balance as of January 1, 2009	143,753	$	144	$	1,182,067		(40,045	)	$	(1,367,319	)	$	1,944,100	$	(6,866	)	$	1,752,126
Comprehensive income:
Net income													62,175					62,175
Change in unrealized loss on investments, net of tax impact of $2,633															4,756			4,756
Defined benefit pension plans:
Prior service cost and net loss															181			181
Total comprehensive income																		67,112
Exercise of stock options and vesting of restricted stock units	244																	—
Share-based compensation expense					11,825													11,825
Net tax detriment related to equity compensation plans					(3,015	)												(3,015	)
Repurchases of common stock							(98	)		(1,506	)							(1,506	)
Balance as of June 30, 2009	143,997	$	144	$	1,190,877		(40,143	)	$	(1,368,825	)	$	2,006,275	$	(1,929	)	$	1,826,542

See accompanying condensed notes to consolidated financial statements.

5

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	62,175		$	40,998
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation		31,748			25,352
Share-based compensation expense		11,825			14,555
Deferred income taxes		22,003			(24,887	)
Excess tax benefit on share-based compensation		—			(780	)
Asset and investment impairment charges		12,384			4,241
Other changes		(1,579	)		(320	)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Premiums receivable and unearned premiums		(102,337	)		(123,004	)
Other current assets, receivables and noncurrent assets		74,269			18,987
Amounts receivable/payable under government contracts		(31,188	)		(63,574	)
Reserves for claims and other settlements		(94,632	)		57,324
Accounts payable and other liabilities		(44,660	)		(146,717	)
Net cash used in operating activities		(59,992	)		(197,825	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments		639,333			550,766
Maturities of investments		106,048			136,632
Purchases of investments		(713,219	)		(674,626	)
Sales of property and equipment		3,835			4
Purchases of property and equipment		(9,863	)		(74,843	)
Sales (purchases) of restricted investments and other		463			13,109
Net cash provided by (used in) investing activities		26,597			(48,958	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases		—			6,401
Excess tax benefit on share-based compensation		—			780
Repurchases of common stock		(1,506	)		(143,045	)
Borrowings under revolving credit facility		25,000			145,000
Repayment of borrowings		(92,444	)		(8,722	)
Net cash (used in) provided by financing activities		(68,950	)		414
Net decrease in cash and cash equivalents		(102,345	)		(246,369	)
Cash and cash equivalents, beginning of year		668,201			1,007,017
Cash and cash equivalents, end of period	$	565,856		$	760,648
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid	$	13,084		$	15,277
Income taxes paid		23,699			56,416
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Imputed interest discount and deferred revenue	$	13,294		$	22,266
Securities purchased in the period, paid for in the third quarter		67,656			—
Securities sold during the period, funds received in the third quarter		27,591			—

See accompanying condensed notes to consolidated financial statements.

6

HEALTH NET, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    BASIS OF PRESENTATION

Health Net, Inc. (referred to herein as Health Net, the Company, we, us or our) prepared the accompanying unaudited consolidated financial statements following the rules and regulations of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain notes or other financial information that are normally required by accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted if they substantially duplicate the disclosures contained in the annual audited financial statements. The accompanying unaudited consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008 (Form 10-K).

We are responsible for the accompanying unaudited consolidated financial statements. These consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results in accordance with GAAP. In accordance with GAAP, we make certain estimates and assumptions that affect the reported amounts. Actual results could differ from those estimates and assumptions.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for the full year.

Certain items presented in the operating cash flow section of the consolidated statements of cash flows for the six months ended June 30, 2008 have been reclassified within the operating cash flow section. This reclassification had no impact on our operating cash flows, net earnings or balance sheets as previously reported.

2.    SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with maturity of three months or less when purchased.

Investments

Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method and realized gains and losses are included in net investment income. The Company analyzes all impairments of debt investments in accordance with FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). In accordance with FSP FAS 115-2 and FAS 124-2, management assesses intent to sell such securities. If such intent exists, securities are considered other-than-temporarily impaired. Management also assesses if the Company may be required to sell the debt investments prior to the recovery of amortized cost, which may also trigger such a charge. If securities are considered other-than-temporarily impaired based on intent or ability, management assesses if the amortized costs of the securities can be recovered. If management anticipates to recover an amount less than its amortized cost, an impairment charge is calculated based on the expected discounted cash flows of the securities. Any deficit between the amortized cost and the expected cash flows is recorded though earnings as charge. All other temporary impairment changes are recorded through other comprehensive income. (See Note 4 to our consolidated financial statements for additional disclosures).

7

Fair Value of Financial Instruments

The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and notes receivable and notes payable have been determined by us using available market information and appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the short maturity of those instruments. Fair values for debt and equity securities are generally based upon quoted market prices. Where quoted market prices were not readily available, fair values were estimated using valuation methodologies based on available and observable market information. Such valuation methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The carrying value of trade receivables, long-term notes receivable and nonmarketable securities approximates the fair value of such financial instruments. The fair value of notes payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt with the same remaining maturities. The fair value of our fixed rate borrowings, including our Senior Notes and our amortizing financing facility, was $421.0 million and $291.3 million as of June 30, 2009 and December 31, 2008, respectively. The fair value of our variable rate borrowings under our revolving credit facility was $100.0 million and $150.0 million as of June 30, 2009 and December 31, 2008, respectively, which was equal to the carrying value because the interest rates paid on these borrowings were based on prevailing market rates. See Note 7 to our consolidated financial statements for additional information regarding our financing arrangements.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments and premiums receivable. All cash equivalents and investments are managed within established guidelines, which provide us diversity among issuers. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising our customer base. The federal government is the only customer of our Government Contracts segment, with premiums and fees accounting for 100% of our Government Contracts revenue. In addition, the federal government is a significant customer of the Company’s Health Plan Services segment as a result of its contract with CMS for coverage of Medicare-eligible individuals.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity (except those arising from transactions with stockholders) and includes net income, net unrealized appreciation (depreciation), after tax, on investments available-for-sale and prior service cost and net loss related to our defined benefit pension plan.

Accumulated other comprehensive losses are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Dollars in millions)
Investments:
Unrealized (losses) gains on investments available-for-sale as of April 1 and January 1	$	(8.2	)	$	1.6		$	(7.3	)	$	(0.1	)
Net change in unrealized gains on investments available-for-sale		9.6			(11.6	)		14.8			(8.3	)
Reclassification of unrealized gains to earnings		(3.9	)		(1.0	)		(10.0	)		(2.6	)
Unrealized losses on investments available for sale as of June 30		(2.5	)		(11.0	)		(2.5	)		(11.0	)
Defined benefit pension plans:
Prior service cost and net loss amortization as of April 1 and January 1		0.5			(1.0	)		0.4			(1.1	)
Net change in prior service cost and net loss amortization		0.1			0.1			0.2			0.2
Prior service cost and net loss amortization as of June 30		0.6			(0.9	)		0.6			(0.9	)
Accumulated other comprehensive loss	$	(1.9	)	$	(11.9	)	$	(1.9	)	$	(11.9	)

8

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings per share is based upon the weighted average shares of common stock and dilutive common stock equivalents (this reflects the potential dilution that could occur if stock options were exercised and restricted stock units (RSUs) and restricted shares were vested) outstanding during the periods presented.

Common stock equivalents arising from dilutive stock options, restricted common stock and RSUs are computed using the treasury stock method. For the three and six months ended June 30, 2009, these amounted to 469,000 and 484,000, shares, respectively, which included 416,000 and 432,000 common stock equivalents from dilutive RSUs. There were 1,030,000 and 1,496,000 shares of common stock equivalents, respectively, including 239,000 and 286,000 RSUs and restricted common stock equivalents, for the three and six months ended June 30, 2008, respectively.

Options to purchase an aggregate of 5,701,000 and 5,732,000 shares of common stock, during the three and six months ended June 30, 2009, respectively, and 3,120,000 and 1,573,000, during the three and six months ending June 30, 2008, respectively, were considered antidilutive and were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common stock for each respective period. Outstanding options expire at various times through June 2019.

We have a $700 million stock repurchase program authorized by our Board of Directors. The remaining authorization under our stock repurchase program as of June 30, 2009 was $103.3 million (see Note 6 to our consolidated financial statements). On November 4, 2008, we announced that our stock repurchase program was on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, was undertaking a review of the Company’s strategic direction. On July 20, 2009, we announced the completion of our strategic review, which included entering into a Stock Purchase Agreement with Oxford Health Plans, LLC (Buyer) and solely for the purpose of guaranteeing Buyer’s obligations thereunder, UnitedHealth Group Inc. (collectively, “UnitedHealth”) for the sale of our Northeast operations. For a detailed description of the pending sale of our Northeast operations, see Note 10 to our consolidated financial statements. At this time, Health Net’s Board of Directors has made no determination with regard to the future of the Company’s stock repurchase program.

Goodwill and Other Intangible Assets

The carrying amount of goodwill by reporting unit is as follows:

	Health Plan Services		Total
	(Dollars in millions)
Balance as of June 30, 2009 and December 31, 2008	$	752.0	$	752.0

9

The intangible assets that continue to be subject to amortization using the straight-line method over their estimated lives are as follows:

	Gross Carrying Amount		Accumulated Amortization			Net Balance		Weighted Average Life (in years)
	(Dollars in millions)
As of June 30, 2009:
Provider networks	$	40.5	$	(30.8	)	$	9.7	19.4
Employer groups		76.8		(24.3	)		52.5	6.5
Customer relationships and other		29.5		(9.0	)		20.5	11.1
Trade name		3.2		(3.2	)		—	1.5
Covenant not-to-compete		2.2		(2.2	)		—	2.0
	$	152.2	$	(69.5	)	$	82.7
As of December 31, 2008:
Provider networks	$	40.5	$	(30.1	)	$	10.4	19.4
Employer groups		76.8		(18.3	)		58.5	6.5
Customer relationships and other		29.5		(7.6	)		21.9	11.1
Trade name		3.2		(3.2	)		—	1.5
Covenant not-to-compete		2.2		(1.7	)		0.5	2.0
	$	152.2	$	(60.9	)	$	91.3

We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2009 for our health plan services reporting unit and also re-evaluated the useful lives of our other intangible assets. No goodwill impairment was identified in our health plan services reporting unit. We also determined that the estimated useful lives of our other intangible assets properly reflected the current estimated useful lives. See Note 10 to our consolidated financial statements for information regarding the pending sale of our Northeast business.

Estimated annual pretax amortization expense for other intangible assets for the current year and each of the next four years ending December 31 are as follows (dollars in millions):

Year	Amount
2009	$	16.3
2010		15.8
2011		15.5
2012		15.4
2013		14.0

Restricted Assets

We and our consolidated subsidiaries are required to set aside certain funds which may only be used for certain purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such funds in cash and cash equivalents or other investments. As of June 30, 2009 and December 31, 2008, our restricted cash and cash equivalents balances totaled $59.2 million and $63.5 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $61.4 million and $55.3 million as of June 30, 2009 and December 31, 2008, respectively, and are included in current investments available-for-sale.

In connection with our purchase of The Guardian Life Insurance Company of America’s interest in the HealthCare Solutions business in 2007, we established escrowed funds to secure the payment of projected run-out claims for the purchased block of business. As of June 30, 2009 and December 31, 2008, this restricted cash balance amounted to $2.9 million and $5.9 million, respectively, and is included in other noncurrent assets on the accompanying consolidated balance sheets.

10

Interest Rate Swap Contracts

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of SFAS No. 133. This statement expands the disclosure requirements for derivative instruments and hedging activities. We adopted SFAS No. 161 as of January 1, 2009. The adoption of SFAS No. 161 did not have an impact on our consolidated financial position and results of operations.

We are exposed to certain risks relating to our ongoing business operations. Some of those risks can be managed by using derivative instruments. We enter into interest rate swaps from time to time to help manage interest rate risk associated with our variable rate borrowings. On December 19, 2007, we entered into a five-year, $175 million amortizing financing facility with a non-U.S. lender (see Note 7 to our consolidated financial statements). In connection with the financing facility, we entered into an interest rate swap agreement (2007 Swap) under which we pay an amount equal to LIBOR times a notional principal amount and receive in return an amount equal to 4.294% times the same notional principal amount. The 2007 Swap does not qualify for hedge accounting. Accordingly, the 2007 Swap is reflected at fair value of $6.4 million in other current assets in our consolidated balance sheet with an offset included in net investment income in our consolidated statement of operations of $(0.8) million and $(0.3) million which reflect the interest and change in value during the three and six months ended June 30, 2009, respectively.

On March 12, 2009, we entered into an interest rate swap agreement (2009 Swap) under which we pay an amount equal to 2.245% times a notional principal amount and in return we receive an amount equal to LIBOR times the same notional principal amount. The 2009 Swap is designed to reduce variability in our net income due to changes in variable interest rates. The 2009 Swap does not qualify for hedge accounting. Accordingly, the 2009 Swap is reflected at a fair value of $(0.5) million in other noncurrent liabilities in our consolidated balance sheet with an offset included in net investment income in our consolidated statement of operations of $0.5 million and $(0.9) million which reflect the interest and change in value during the three and six months ended June 30, 2009, respectively.

CMS Risk Factor Adjustments

We have an arrangement with the Centers for Medicare & Medicaid Services (CMS) for certain of our Medicare products whereby periodic changes in our risk factor adjustment scores for certain diagnostic codes result in changes to our health plan services premium revenues. We recognize such changes when the amounts become determinable, supportable and collectibility is reasonably assured.

We recognized $59.5 million and $114.5 million of Medicare risk factor estimates in our health plan services premium revenues for the three and six months ended June 30, 2009, respectively. Of these amounts, $0.5 million and $7.0 million for the three and six months ended June 30, 2009, respectively, were for the 2008 and prior payment years. We also recognized $17.4 million and $32.4 million of capitation expense related to the Medicare risk factor estimates in our health plan services costs for the three and six months ended June 30, 2009, respectively. Of these amounts, $0.2 million and $3.5 million for the three and six months ended June 30, 2009, respectively, were for the 2008 and prior payment years.

We recognized $48.4 million and $89.3 million of Medicare risk factor estimates in our health plan services premium revenues for the three and six months ended June 30, 2008, respectively. Of these amounts, $0 and $4.4 million for the three and six months ended June 30, 2008, respectively, were for 2007 and prior payment years. We also recognized $10.9 million and $23.5 million of capitation expense related to the Medicare risk factor estimates, in our health plan services costs for the three and six months ended June 30, 2008, respectively. Of these amounts, $(0.4) million and $3.6 million for the three and six months ended June 30, 2008, respectively, were for the 2007 and prior payment years.

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TRICARE Contract Target Costs

Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs, which are negotiated annually during the term of the contract with underruns and overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting with the federal government, we recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable, and the collectibility is reasonably assured. As a result of changes in the estimate during the three and six months ended June 30, 2009, we recognized increases in revenues of $25.5 million and $32.1 million, respectively, compared to increases in revenues of $4.2 million and $0.2 million in the three and six months ended June 30, 2008, respectively. As a result of changes in the estimate during the three and six months ended June 30, 2009, we recognized increases in costs of $34.7 million and $42.9 million, respectively, compared to an increase in costs of $5.2 million and a decrease in costs of $0.3 million in the three and six months ended June 30, 2008, respectively. The administrative price is paid on a monthly basis, one month in arrears and certain components of the administrative price are subject to volume-based adjustments.

Recently Issued Accounting Pronouncements

In June 2009, Financial Accounting Standards Board (FASB) issued SFAS No. 166, Accounting for Transfers of Financial Assets- Amendment of FAS No. 140, (SFAS No. 166). This statement modifies the financial-components approach used in SFAS No. 140 and limits the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity and when the transferor has continuing involvement with the transferred financial asset. This statement requires that a transferor recognize and initially measure at fair value all assets and liabilities incurred as a result of transfer of financial assets accounted for as a sale. SFAS No. 166 is effective for financial statements issued for annual reporting periods beginning after November 15, 2009. We are currently assessing the impact of adopting SFAS No. 166 on our consolidated financial statements.

In June 2009, FASB issued SFAS No.167, Amendments to FASB Interpretation No. 46(R), (SFAS No. 167). This statement amends FIN 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest gives it a controlling financial interest in a variable interest entity (VIE). This statement amends FIN No. 46 (R) to eliminate the quantitative approach previously required. It also requires enhanced disclosures that will provide the users of financial statements with more transparent information about an enterprise’s involvement with a VIE. SFAS No. 167 is effective for financial statements issued for annual reporting periods beginning after November 15, 2009. We are currently assessing the impact of adopting SFAS No. 167 on our consolidated financial statements.

In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of GAAP- a replacement of SFAS No. 162, (SFAS No. 168). This codification will become the source of authoritative U.S. GAAP recognized by FASB. The codification will supersede all then-existing non-SEC accounting and reporting standards. Following SFAS No. 168, FASB will not issue any new standards in the form of Statements, FASB Staff Positions (FSPs) and Emerging Issues Task Force (EITF) consensuses. Instead, it will issue Accounting Standards Updates. SFAS No. 168 is effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009 and has no impact on our financial statements.

3.    SEGMENT INFORMATION

We operate within two reportable segments: Health Plan Services and Government Contracts. Our Health Plan Services reportable segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. Our Government Contracts reportable segment includes government-sponsored managed care plans through the TRICARE program and other health care-related government contracts. Our Government Contracts segment administers one large, multi-year managed health care government contract and other health care-related government contracts.

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We evaluate performance and allocate resources based on segment pretax income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 2 to the consolidated financial statements included in our Form 10-K, except that intersegment transactions are not eliminated. We include investment income, administrative services fees and other income and expenses associated with our corporate shared services and other costs in determining our Health Plan Services segment’s pretax income to reflect the fact that these revenues and expenses are primarily used to support our Health Plan Services reportable segment.

Our segment information is as follows:

	Health Plan Services		Government Contracts		Eliminations			Total
	(Dollars in millions)
Three Months Ended June 30, 2009
Revenues from external sources	$	3,152.8	$	832.1	$	—		$	3,984.9
Intersegment revenues		5.5		—		(5.5	)		—
Segment pretax income		22.8		41.0		—			63.8
Three Months Ended June 30, 2008
Revenues from external sources	$	3,114.2	$	694.9	$	—		$	3,809.1
Intersegment revenues		12.9		—		(12.9	)		—
Segment pretax income		81.5		36.6		—			118.1
Six Months Ended June 30, 2009
Revenues from external sources	$	6,292.0	$	1,591.4	$	—		$	7,883.4
Intersegment revenues		12.7		—		(12.7	)		—
Segment pretax income		12.5		75.4		—			87.9
Six Months Ended June 30, 2008
Revenues from external sources	$	6,237.2	$	1,359.3	$	—		$	7,596.5
Intersegment revenues		28.2		—		(28.2	)		—
Segment pretax income		3.5		63.5		—			67.0

Our health plan services premium revenues by line of business is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(Dollars in millions)
Commercial premium revenue	$	1,916.8	$	1,950.8	$	3,841.3	$	3,922.3
Medicare premium revenue		946.1		899.5		1,880.4		1,792.2
Medicaid premium revenue		289.9		263.9		570.3		522.7
Total Health Plan Services premiums	$	3,152.8	$	3,114.2	$	6,292.0	$	6,237.2

4.    INVESTMENTS

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary guidance for debt securities by requiring an entity to evaluate whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. Additional disclosures are required for interim and annual periods about securities in unrealized loss positions for which an other-than-temporary impairment has or has not been recognized. During the second quarter ended June 30, 2009, we adopted FSP FAS 115-2 and FAS 124-2.

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Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method, and realized gains and losses are included in net investment income. We periodically assess our available-for-sale investments for other-than-temporary impairment. Any such other-than-temporary impairment loss is recognized as a realized loss, which is recorded through earnings, if related to credit losses. During the second quarter of 2009, we adopted FSP FAS 115-2 and FAS 124-2, noting that one of our prime residential mortgage-backed securities may suffer losses under certain stressed scenarios. As a result, we recognized an impairment related to the credit loss in the amount of $60,000. This amount represents the difference between the present value of the company’s best estimate of future cash flows using the latest performance indicators and the amortized cost basis.

During the year ended December 31, 2008, we recognized a $14.6 million loss from other-than-temporary impairments of our cash equivalents and available-for-sale investments. Such other-than-temporary impairments primarily were as a result of investments in corporate debt from Lehman Brothers, money market funds from The Reserve Primary Institutional Fund (The Reserve) and preferred stock from Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). In September 2008, The Reserve announced its intention to liquidate its money market fund and froze all redemptions until an orderly liquidation process could be implemented. As a result, in the third quarter of 2008, we reclassified $372 million in estimated net asset value we had invested in The Reserve money market funds from cash equivalents to investments available-for-sale. As of December 31, 2008, we held $50.4 million in The Reserve Primary Institutional Fund and $69.2 million in The Reserve U.S. Government Fund. On January 16, 2009, The Reserve paid out in full the balance in the U.S. Government Fund. As of June 30, 2009, we held $21.7 million in the Primary Institutional Fund.

We reclassified $60.1 million from current investments available-for-sale to investments available-for-sale-noncurrent because we do not intend to sell and we believe it may take longer than a year for such impaired securities to recover. The reclassification does not affect the marketability or the valuation of the investments, which are reflected at their market value as of June 30, 2009.

As of June 30, 2009, the amortized cost, gross unrealized holding gains and losses, and fair value of our available-for-sale investments-current and our available-for-sale investments-noncurrent, after giving effect to other-than-temporary impairments were as follows:

	June 30, 2009
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Current:
Asset-backed securities	$	475.3	$	7.7	$	(2.9	)	$	480.1
U.S. government and agencies		90.5		0.5		(0.5	)		90.5
Obligations of states and other political subdivisions		486.9		5.4		(5.5	)		486.8
Corporate debt securities		415.0		6.9		(1.9	)		420.0
Other securities		0.2		0.1		—			0.3
	$	1,467.9	$	20.6	$	(10.8	)	$	1,477.7

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	June 30, 2009
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Noncurrent:
Asset-backed securities	$	59.6	$	—	$	(12.2	)	$	47.4
U.S. government and agencies		—		—		—			—
Obligations of states and other political subdivisions		5.5		—		(0.7	)		4.8
Corporate debt securities		9.0		—		(1.1	)		7.9
Other securities		—		—		—			—
	$	74.1	$	—	$	(14.0	)	$	60.1

As of December 31, 2008, the amortized cost, gross unrealized holding gains and losses, and fair value of our available-for-sale investments after giving effect to other-than-temporary impairments were as follows:

	December 31, 2008
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Asset-backed securities	$	527.4	$	9.8	$	(17.2	)	$	520.0
U.S. government and agencies		69.5		0.5		—			70.0
Obligations of states and other political subdivisions		577.9		7.3		(9.8	)		575.4
Corporate debt securities		341.1		3.4		(5.8	)		338.7
Other securities		0.4		0.2		—			0.6
	$	1,516.3	$	21.2	$	(32.8	)	$	1,504.7

As of June 30, 2009, the contractual maturities of our available-for-sale investments-current were as follows:

	Amortized Cost		Estimated Fair Value
	(Dollars in millions)
Due in one year or less	$	83.3	$	83.4
Due after one year through five years		368.2		372.3
Due after five years through ten years		299.6		300.2
Due after ten years		241.3		241.4
Asset-backed securities		475.3		480.1
Other securities		0.2		0.3
Total available-for-sale	$	1,467.9	$	1,477.7

As of June 30, 2009, the contractual maturities of our available-for-sale investments—noncurrent were as follows:

	Amortized Cost		Estimated Fair Value
	(Dollars in millions)
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		14.5		12.7
Due after ten years		—		—
Asset-backed securities		59.6		47.4
Other securities		—		—
Total available-for-sale	$	74.1	$	60.1

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Proceeds from sales of investments available-for-sale during the three and six months ended June 30, 2009 were $307.4 million and $639.3 million, respectively, resulting in gross realized gains and losses of $7.4 million and $1.4 million, respectively, for the three months ended June 30, 2009, and $18.3 million and $3.0 million, respectively, for the six months ended June 30, 2009. Included in the gross realized losses of $1.4 million and $3.0 million for the three and six months ended June 30, 2009, respectively, is an other-than-temporary impairment write-down of $60,000. Proceeds from sales of investments available-for-sale during the three and six months ended June 30, 2008 were $209.6 million and $550.8 million, respectively, resulting in gross realized gains and losses of $1.9 million and $0.3 million, respectively for the three months ended June 30, 2008, and $5.7 million and $1.7 million, respectively, for the six months ended June 30, 2008.

The following table shows our current investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through June 30, 2009:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed securities	$	151.4	$	(1.8	)	$	31.9	$	(1.1	)	$	183.3	$	(2.9	)
U.S. government and agencies		22.2		(0.5	)		—		—			22.2		(0.5	)
Obligation of states and other political subdivisions		136.0		(2.4	)		53.5		(3.1	)		189.5		(5.5	)
Corporate debt securities		118.6		(0.9	)		26.9		(1.0	)		145.5		(1.9	)
Other securities		0.2		—			—		—			0.2		—
	$	428.4	$	(5.6	)	$	112.3	$	(5.2	)	$	540.7	$	(10.8	)

The following table shows our noncurrent investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through June 30, 2009:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed securities	$	1.6	$	(0.6	)	$	45.8	$	(11.6	)	$	47.4	$	(12.2	)
U.S. government and agencies		—		—			—		—			—		—
Obligation of states and other political subdivisions		1.4		(0.2	)		3.4		(0.5	)		4.8		(0.7	)
Corporate debt securities		5.3		(0.6	)		2.6		(0.5	)		7.9		(1.1	)
Other securities		—		—			—		—			—		—
	$	8.3	$	(1.4	)	$	51.8	$	(12.6	)	$	60.1	$	(14.0	)

The following table shows the number of our individual securities-current that have been in a continuous loss position at June 30, 2009:

	Less than 12 Months	12 Months or More	Total
Asset-backed securities	20	10	30
U.S. government and agencies	1	—	1
Obligation of states and other political subdivisions	52	17	69
Corporate debt securities	36	15	51
Other securities	1	—	1
	110	42	152

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The following table shows the number of our individual securities-noncurrent that have been in a continuous loss position at June 30, 2009:

	Less than 12 Months	12 Months or More	Total
Asset-backed securities	3	16	19
U.S. government and agencies	—	—	—
Obligation of states and other political subdivisions	1	5	6
Corporate debt securities	1	2	3
Other securities	—	—	—
	5	23	28

The following table shows our investments’ fair values and gross unrealized losses for individual securities that have been in a continuous loss position through December 31, 2008:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed securities	$	91.4	$	(10.7	)	$	40.7	$	(6.5	)	$	132.1	$	(17.2	)
Obligation of states and other political subdivisions		141.4		(4.9	)		52.3		(4.9	)		193.7		(9.8	)
Corporate debt securities		111.0		(4.7	)		16.0		(1.1	)		127.0		(5.8	)
Other securities		0.4		—			—		—			0.4		—
	$	344.2	$	(20.3	)	$	109.0	$	(12.5	)	$	453.2	$	(32.8	)

The above referenced investments are interest-yielding debt securities of varying maturities. The unrealized loss position for these securities is due to market volatility. Generally, in a rising interest rate environment, the estimated fair value of fixed income securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of fixed income securities would be expected to increase. However, these securities may be negatively impacted by illiquidity in the market.

The investments listed above have an average rating of “AA” and “Aa1” as rated by Standard & Poor’s Ratings Services and/or Moody’s Investors Services, Inc., respectively. At this time, there is no indication of default on interest and/or principal payments. We do not intend to sell and it is not more likely than not that we will be required to sell any security in an unrealized loss position before recovery of its amortized cost basis.

5.    SALE OF EQUIPMENT

In connection with our information technology (IT) infrastructure outsourcing, on February 15, 2009 we sold a significant portion of our data center equipment to International Business Machines Corporation, our third-party vendor for IT infrastructure management services, for $3.8 million resulting in a pretax loss of $9.5 million in the six months ended June 30, 2009.

6.    STOCK REPURCHASE PROGRAM

We have a $700 million stock repurchase program authorized by our Board of Directors. Subject to Board approval, additional amounts are added to the repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from employee stock options. The remaining authorization under our stock repurchase program as of June 30, 2009 was $103.3 million. As of June 30, 2009, we had repurchased a cumulative aggregate of 36,623,347 shares of our common stock under our stock repurchase program at an

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average price of $34.40 per share for aggregate consideration of $1,259.8 million (which amount includes exercise proceeds and tax benefits the Company had received from the exercise of employee stock options). We used net free cash available to fund the share repurchases.

On November 4, 2008, we announced that our stock repurchase program was on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, was undertaking a review of the Company’s strategic direction. We did not repurchase shares during the three and six months ended June 30, 2009. On July 20, 2009, we announced the completion of our strategic review, which included entering into a Stock Purchase Agreement with UnitedHealth for the sale of our Northeast operations. For a detailed description of the pending sale of our Northeast operations, see Note 10 to our consolidated financial statements. At this time, Health Net’s Board of Directors has made no determination with regard to the future of the Company’s stock repurchase program.

7.    FINANCING ARRANGEMENTS

Amortizing Financing Facility

On December 19, 2007, we entered into a five-year, non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender, and on April 29, 2008, and November 10, 2008, we entered into amendments to the financing facility, which were administrative in nature. On March 9, 2009, we amended certain terms of the documentation relating to the financing facility to, among other things, (i) eliminate the requirement that we maintain certain minimum public debt ratings throughout the term of the financing facility and (ii) provide that the financing facility may be terminated at any time at the option of one of our wholly-owned subsidiaries or the non-U.S. lender.

As amended, the financing facility requires one of our subsidiaries to pay semi-annual distributions, in the amount of $17.5 million, to a participant in the financing facility. Unless terminated earlier, the final payment under the facility is scheduled to be made on December 19, 2012.

In conjunction with this financing arrangement, we formed certain entities for the purpose of facilitating this financing. We act as managing general partner of these entities. As of June 30, 2009, our net investment in these entities totaled $1.2 billion. The entities’ net obligations are not required to be collateralized. In connection with the financing facility, we guaranteed the payment of the semi-annual distributions and any other amounts payable by one of our subsidiaries to the financing facility participants under certain circumstances. The creditors of the entities have no recourse to our general credit, and the assets of the entities are not available to satisfy any obligations to our general creditors. We consolidated these entities in accordance with FASB Interpretation No. 46 (revised December 23, 2003), Consolidation of Variable Interest Entities, since they are variable interest entities and we are their primary beneficiary.

The financing facility includes limitations (subject to specified exclusions) on certain of our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; engage in transactions with affiliates; enter into agreements which will restrict the ability of our subsidiaries to pay dividends or other distributions with respect to any shares of capital stock or the ability to make or repay loans or advances; make dividends; and alter the character of the business we and our subsidiaries conducted on the closing date of the financing facility. In addition, the financing facility also requires that we maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the financing facility. As of June 30, 2009, we were in compliance with all of the covenants under the financing facility.

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The financing facility provides that it may be terminated through a series of put and call transactions (1) at the option of one of our wholly-owned subsidiaries or the non-U.S. lender at any time, or (2) upon the occurrence of certain defined early termination events. These early termination events, include, but are not limited to:

• nonpayment of certain amounts due by us or certain of our subsidiaries under the financing facility (if not cured within the related time period set forth therein);

• a change of control (as defined in the financing facility);

• cross-acceleration and cross-default to other indebtedness of the Company in excess of $50 million, including our revolving credit facility;

• certain ERISA-related events;

• noncompliance by the Company with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the financing facility);

• events in bankruptcy, insolvency or reorganization of the Company;

• undischarged, uninsured judgments in the amount of $50 million or more against the Company; or

• certain changes in law that could adversely affect a participant in the financing facility.

In addition, in connection with the financing facility, we entered into the 2007 Swap with a non-U.S. bank affiliated with one of the financing facility participants (see Note 2 to our consolidated financial statements).

As of June 30, 2009, our entire $118.0 million amortizing financing facility payable was classified as a current liability on our consolidated balance sheet. As of December 31, 2008, our amortizing financing facility payables were classified as current and noncurrent in the amount of $27.3 million and $104.0 million, respectively.

Senior Notes

On May 18, 2007, we issued $300 million in aggregate principal amount of 6.375% Senior Notes due 2017. On May 31, 2007, we issued an additional $100 million of 6.375% Senior Notes due 2017 which were consolidated with, and constitute the same series as, the Senior Notes issued on May 18, 2007 (collectively, Senior Notes). The aggregate net proceeds from the issuance of the Senior Notes were $393.5 million and were used to repay outstanding debt.

The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of June 30, 2009, no default or event of default had occurred under the indenture governing the Senior Notes.

The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:

• 100% of the principal amount of the Senior Notes then outstanding to be redeemed; or

• the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

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Each of the following will be an Event of Default under the indenture governing the Senior Notes:

• failure to pay interest for 30 days after the date payment is due and payable; provided that an extension of an interest payment period by us in accordance with the terms of the Senior Notes shall not constitute a failure to pay interest;

• failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise;

• failure to perform any other covenant or agreement in the notes or indenture for a period of 60 days after notice that performance was required;

• (A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, if that acceleration results from a default under the instrument giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; or

• events in bankruptcy, insolvency or reorganization of our Company.

Our Senior Notes payable balances were $398.4 million and $398.3 million as of June 30, 2009 and December 31, 2008, respectively.

Revolving Credit Facility

On June 25, 2007, we entered into a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. We entered into an amendment to the credit facility on April 29, 2008, which was administrative in nature. As of June 30, 2009, $100.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $478.7 million (see “—Letters of Credit” below).

Amounts outstanding under our revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.

Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.

Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the Health Maintenance Organization (HMO) Regulations or Insurance Regulations (as each such term is defined in

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the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the revolving credit facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.

Letters of Credit

We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2009 and December 31, 2008, we had outstanding letters of credit for $321.3 million and $322.9 million, respectively, resulting in the maximum amount available for borrowing under the revolving credit facility of $478.7 million and $427.1 million, respectively. As of June 30, 2009 and December 31, 2008, no amounts have been drawn on any of these letters of credit.

8. FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which we adopted on January 1, 2008. SFAS No. 157 does not require any new fair value measurements, but it defines fair value, establishes a framework for measuring fair value in accordance with existing GAAP, and expands disclosures about fair value measurements. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value and the level of market price observability.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity of the Assets or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP particularly relates to Level 2 and Level 3 estimates. In the second quarter of 2009, we adopted FSP FAS 157-4. The adoption of this FSP did not have an impact on our consolidated financial position and results of operations.

Investments measured and reported at fair value using Level inputs, as defined by SFAS No. 157, are classified and disclosed in one of the following categories:

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include U.S. treasury securities and listed equities. As required by SFAS No. 157, we do not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include asset-backed securities, corporate bonds and loans, municipal bonds, auction rate securities and interest rate swap asset.

Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

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The following table presents information about our assets and liabilities measured at fair value on a recurring basis at June 30, 2009, and indicate the fair value hierarchy of the valuation techniques utilized by us to determine such fair value (dollars in millions):

	Level 1		Level 2- current		Level 2- noncurrent		Level 3		Total
Assets:
Investments—available-for-sale
Asset-backed securities	$	—	$	480.1	$	47.4	$	—	$	527.5
U.S. government and agencies		66.0		24.5		—		—		90.5
Obligations of states and other political subdivisions		—		476.6		4.8		10.2		491.6
Corporate debt securities		—		420.0		7.9		—		427.9
Other securities		0.3		—		—		—		0.3
	$	66.3	$	1,401.2		60.1	$	10.2	$	1,537.8
Interest rate swap asset		—		6.4		—		—		6.4
Total assets at fair value	$	66.3	$	1,407.6	$	60.1	$	10.2	$	1,544.2

The changes in the balances of Level 3 financial assets for the three and six months ended June 30, 2009 were as follows (dollars in millions):

	Three Months Ended		Six Months Ended
	June 30, 2009
Beginning balance	$	10.2	$	10.2
Total gains and losses
Realized in net income		—		—
Unrealized in accumulated other comprehensive income		—		—
Purchases, sales, issuances and settlements		—		—
Transfers into Level 3		—		—
Ending balance	$	10.2	$	10.2
Change in unrealized gains (losses) included in net income related to assets still held	$	—	$	—

During the three and six months ended June 30, 2009, certain auction rate securities experienced “failed” auctions. As a result, these securities’ fair values were determined to be equal to their par values due to the short time periods between coupon resets and the issuers’ credit worthiness.

9.    LEGAL PROCEEDINGS

Litigation Related to the Sale of Businesses

AmCareco Litigation

We are a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of which relate to claims asserted by three separate state receivers overseeing the liquidation of three health plans in Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001. In 1999, FHC sold its interest in these plans to AmCareco, Inc. (AmCareco). We retained a minority interest in the three plans after the sale. Thereafter, the three plans became known as AmCare of Louisiana (AmCare-LA), AmCare of Oklahoma (AmCare-OK) and AmCare of Texas (AmCare-TX). In 2002, three years after the sale of the plans to AmCareco, each of the AmCare plans was placed under state oversight and ultimately into receivership. The receivers for each of the

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AmCare plans filed suit against us contending that, among other things, we were responsible as a “controlling shareholder” of AmCareco following the sale of the plans for post-acquisition misconduct by AmCareco and others that caused the three health plans to fail and ultimately be placed into receivership.

On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million and $45.5 million, respectively, and entered judgments against us in those amounts.

The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims that awarded $9.5 million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK, respectively. The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive damages. We thereafter appealed both judgments, and the receivers for AmCare-LA and AmCare-OK each appealed the orders denying them attorneys’ fees and punitive damages.

On December 30, 2008, the Court of Appeal issued its judgment on each of the appeals. It reversed in their entirety the trial court’s judgments in favor of the AmCare-TX and AmCare-OK receivers, and entered judgment in our favor against those receivers, finding that the receivers’ claims failed as a matter of law. As a result, those receivers’ cross appeals were rendered moot. The Court of Appeal also reversed the trial court judgment in favor of the AmCare-LA receiver, with the exception of a single breach of contract claim, on which it entered judgment in favor of the AmCare-LA receiver in the amount of $2 million. On January 14, 2009, the three receivers filed a request for rehearing by the Court of Appeal. On February 13, 2009, the Court of Appeal denied the request for a rehearing. Following the Court of Appeal’s denial of the requests for rehearing, each of the receivers filed applications for a writ with the Louisiana Supreme Court, which remain pending.

In light of the original trial court judgments against us, on November 3, 2006, we filed a complaint in the U.S. District Court for the Middle District of Louisiana and simultaneously filed an identical suit in the 19th Judicial District Court in East Baton Rouge Parish seeking to nullify the three judgments that were rendered against us on the grounds of ill practice which resulted in the judgments entered. We have alleged that the judgments and other prejudicial rulings rendered in these cases were the result of impermissible ex parté contacts between the receivers, their counsel and the trial court during the course of the litigation. Preliminary motions and exceptions have been filed by the receivers for AmCare-TX, AmCare-OK and AmCare-LA seeking dismissal of our claim for nullification on various grounds. The federal judge dismissed Health Net’s federal complaint and Health Net appealed to the U.S. Fifth Circuit Court of Appeals. On July 8, 2008, the Fifth Circuit issued an opinion affirming the district court’s dismissal of the federal complaint, albeit on different legal grounds from those relied upon by the district court. The state court nullity action has been stayed pending the resolution of Health Net’s jurisdictional appeal in the federal action and has remained stayed during the pendency of the appeal of the underlying judgments.

These proceedings are subject to many uncertainties, and, given their complexity and scope, their outcome, including the outcome of any appeal, cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations, cash flow and/or liquidity could be materially affected by an ultimate unfavorable resolution of these proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of these proceedings should not have a material adverse effect on our financial condition.

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Litigation Relating to Rescission of Policies

In recent years, there has been growing public attention, especially in California, to the practices of health plans and health insurers involving the rescission of members’ policies for misrepresenting their health status on applications for coverage. On October 23, 2007, the California Department of Managed Health Care (DMHC) and the California Department of Insurance (DOI) announced their intention to issue joint regulations limiting the rights of health plans and insurers to rescind coverage. To date, the DMHC has not promulgated any regulations. On June 3, 2009, the DOI issued proposed regulations. In addition, effective January 1, 2008, California law requires health plans and insurers to pay health care providers who, under certain circumstances, have rendered services to members whose policies are subsequently rescinded. The issue of rescissions has also attracted increasing media attention, and both the DMHC and the DOI have conducted surveys of the rescission practices of health plans, including ours. Other government agencies, including the Attorney General of California, are investigating, or have indicated that they may be interested in investigating, rescissions and related activities.

On October 16, 2007, the DMHC initiated a survey of Health Net of California’s activities regarding the rescission of policies for the period January 1, 2004 through June 30, 2006. Following completion of the survey, on May 15, 2008, Health Net of California entered into a settlement agreement with the DMHC. The settlement agreement requires Health Net of California to (1) pay a $300,000 administrative fine, (2) offer future coverage to all 85 HMO enrollees who had coverage rescinded from January 1, 2004 through May 15, 2008, (3) offer those enrollees an opportunity to participate in an expedited review process where the enrollee could seek to resolve claims for out-of-pocket medical expenses and other damages incurred as a result of the rescission, and (4) file a corrective action plan for various internal procedural changes by June 30, 2008. Health Net of California filed the corrective action plan by the due date and has commenced implementation of the corrective action plan. Failure to substantially implement the actions set forth in the corrective action plan will subject Health Net of California to a potential penalty of up to $3 million.

On April 7, 2008, the DOI commenced an audit of Health Net Life Insurance Company’s rescission practices and related claims settlement practices for the period January 1, 2004 through February 29, 2008. On September 12, 2008, Health Net Life entered into a settlement agreement with the DOI, which resolves all DOI matters regarding Health Net Life’s rescission practices from January 2004 to date. Under the settlement agreement, Health Net Life paid a $3.6 million penalty and agreed to certain corrective actions, including offering future coverage to all 926 rescinded PPO insureds and offering an opportunity to participate in an expedited review process that allows former insureds to seek to resolve their claims for damages incurred as a result of their rescission. On October 7, 2008, Health Net Life filed a corrective action proposal for various procedure changes. Failure to substantially comply with the settlement agreement subjects Health Net Life to a potential additional monetary penalty of up to $3.6 million.

We have also been party to arbitrations and litigation, including a putative class action lawsuit filed in April 2008 in Los Angeles Superior Court, in which rescinded members alleged that we unlawfully rescinded their coverage. The lawsuits generally sought to recover the cost of medical services that were not paid for as a result of the rescission, and in some cases they also sought damages for emotional distress, attorneys’ fees and punitive damages. On February 20, 2008, the Los Angeles City Attorney filed a complaint against Health Net in the Los Angeles Superior Court relating to our underwriting practices and rescission of certain individual policies. The complaint sought equitable relief and civil penalties for, among other things, alleged false advertising, violations of unfair competition laws and violations of the California Penal Code. On February 10, 2009, we entered into settlement agreements that resolved both the putative class action and the Los Angeles City Attorney’s lawsuit. Those settlement agreements were amended pursuant to stipulation on March 23, 2009. Under the terms of the settlement agreements, we agreed to pay a total of $6.65 million to class members (individuals rescinded between February 20, 2004 and February 10, 2009), in accordance with an agreed upon distribution formula. The class action settlement agreement also provides that we will reimburse class members for certain out-of-pocket expenses related to covered medical services that occurred between the time of their original enrollment and the

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date of their rescission, and we will also hold them harmless for certain unpaid bills for such services. Under the agreement, our reimbursement and hold harmless obligations are capped at a total of $3 million in the aggregate. We will also pay attorneys’ fees of approximately $2 million. Under the terms of the two agreements, we also agreed that we would not engage in any rescissions in California until January 31, 2010, unless legislation or regulations governing the process for rescissions is enacted, or we implement a third party independent review process that is not objected to by the DMHC or the DOI. The agreement with the City Attorney also provides that we will pay a $1.865 million civil penalty, as well as contribute $500,000 as cy pres payments to specified non-profit organizations that support childrens’ healthcare. We also agreed as part of the settlements to offer coverage to class members on a going forward basis without medical underwriting, similar to the offer we agreed to make as part of our settlements with the DMHC and DOI. On May 26, 2009, the court gave final approval to the settlement agreements, and we have been implementing their terms. In addition, on May 22, 2009, we entered into a settlement agreement with the California Hospital Association (CHA) regarding our rescission activities. As a result of that agreement, we resolved a threatened class action and secured the withdrawal of objections filed by the CHA to our class action settlement with members. Under the terms of the agreement, which is scheduled for a final approval hearing on September 9, 2009, we will pay up to a total of $1.95 million to hospitals that were not paid for certain services rendered to rescinded members. That amount includes an award of attorney fees of $195,000 to CHA’s counsel. In addition, under the terms of that settlement, we agreed that to the extent we receive hold harmless claims under the member settlement agreement relating to hospital services, we would make the hold harmless payments directly to the affected hospital. All of the settlement amounts for the settlement agreements described above were fully accrued for as of June 30, 2009.

We cannot predict the outcome of the anticipated regulatory proposals described above, nor the extent to which we may be affected by the enactment of those or other regulatory or legislative activities relating to rescissions. Such legislation or regulation, including measures that would cause us to change our current manner of operation or increase our exposure to liability, could have a material adverse effect on our results of operations, financial condition and ability to compete in our industry. Similarly, given the complexity and scope of rescission lawsuits, their final outcome cannot be predicted with any certainty.

Proceedings Relating to Claims Payment Practices

On March 13, 2008, we entered into a final settlement agreement with the plaintiffs in the McCoy, Wachtel and Scharfman lawsuits, which were nationwide class actions principally relating to our out-of-network claims payment practices. We are currently in the process of implementing the terms of the settlement agreement. We were also the subject of a regulatory investigation conducted by the New Jersey Department of Banking and Insurance (DOBI) related principally to the timeliness and accuracy of our claims payment practices for services rendered by out-of-network providers in New Jersey. On August 26, 2008, we entered into a consent order with DOBI and agreed to remediate certain claims and pay a $13 million fine. We completed the remediation of the claims as of August 1, 2008. In the third quarter of 2007, we recorded a $296.8 million charge relating to the settlement of the McCoy, Wachtel and Scharfman cases, including the $13 million fine arising from the consent order with DOBI.

On February 13, 2008, the New York Attorney General (NYAG) announced that his office was conducting an industry-wide investigation into the manner in which health insurers calculate “usual, customary and reasonable” charges for purposes of reimbursing members for out-of-network medical services. The NYAG’s office issued subpoenas to 16 health insurance companies, including us, in connection with this investigation. On January 13, 2009, the NYAG announced that, as a result of his investigation, his office had entered into a settlement agreement with UnitedHealth, which owns and operates Ingenix, the company that supplied the database used by many health insurers, including us, to determine certain out-of-network reimbursements. Under the terms of the settlement, UnitedHealth will discontinue its ownership and operation of those databases, and will pay $50 million towards creation of a new database to be owned and operated by a non-profit organization in New York. Since the announcement of the agreement with United, the NYAG has reached agreements with

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several other health plans, under which they agreed to make payments towards the creation of the database and, in some instances, agree to utilize the database if certain conditions are satisfied. On June 18, 2009, we entered into an Assurance of Discontinuance with the NYAG which was generally similar in terms to those entered into by the other health plans that utilized the Ingenix database. Under the agreement, we will eventually terminate our use of the Ingenix database for purposes of determining out-of-network reimbursements, and will provide enhanced information to members regarding our out-of-network reimbursement practices. We also agreed to pay a total of $1.6 million towards the creation of the new database, in exchange for which we will receive free use of the database for a five year period. Finally, we agreed that, to the extent we continue to use a reimbursement methodology based on “usual, customary and reasonable” charges, we will utilize the new database. In the meantime, the Connecticut Attorney General has also been investigating health plans’ reimbursement of out-of-network services. On March 28, 2008, we received a request for voluntary production from the Connecticut Attorney General that sought information similar to that subpoenaed by the NYAG. We have responded to that request and are cooperating with the Connecticut Attorney General as appropriate in his investigation.

Miscellaneous Proceedings

In the ordinary course of our business operations, we are also subject to periodic reviews by various regulatory agencies with respect to our compliance with a wide variety of rules and regulations applicable to our business, including, without limitation, rules relating to pre-authorization penalties, payment of out-of-network claims and timely review of grievances and appeals, which may result in remediation of certain claims and the assessment of regulatory fines or penalties.

In addition, in the ordinary course of our business operations, we are also party to various other legal proceedings, including, without limitation, litigation arising out of our general business activities, such as contract disputes, employment litigation, wage and hour claims, real estate and intellectual property claims, claims brought by members seeking coverage or additional reimbursement for services allegedly rendered to our members, but which allegedly were either denied, underpaid or not paid, and claims arising out of the acquisition or divestiture of various business units or other assets. We are also subject to claims relating to the performance of contractual obligations to providers, members, employer groups and others, including the alleged failure to properly pay claims and challenges to the manner in which we process claims. In addition, we are subject to claims relating to the insurance industry in general, such as claims relating to reinsurance agreements and rescission of coverage and other types of insurance coverage obligations.

These other regulatory and legal proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of any or all of these other regulatory and legal proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of all of these other regulatory and legal proceedings that are pending, after consideration of applicable reserves and potentially available insurance coverage benefits, should not have a material adverse effect on our financial condition and liquidity.

Potential Settlements

We regularly evaluate litigation matters pending against us, including those described above, to determine if settlement of such matters would be in the best interests of the Company and its stockholders. The costs associated with any such settlement could be substantial and, in certain cases, could result in a significant earnings charge in any particular quarter in which we enter into a settlement agreement. We have recorded reserves and accrued costs for future legal costs for certain significant matters described above. These reserves and accrued costs represent our best estimate of probable loss, including related future legal costs for such

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matters, both known and incurred but not reported, although our recorded amounts might ultimately be inadequate to cover such costs. Therefore, the costs associated with the various litigation matters to which we are subject and any earnings charge recorded in connection with a settlement agreement could have a material adverse effect on our financial condition or results of operations.

10.    SUBSEQUENT EVENTS

On May 28, 2009, the FASB issued SFAS No.165, Subsequent Events, (SFAS No. 165). The statement’s objective is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Entities are required to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This statement is effective for financial statements issued for fiscal years or interim periods ending after June 15, 2009. The adoption of SFAS No. 165 had no impact on our financial statements.

We evaluated subsequent events through August 4, 2009, which represents the date the financial statements were available to be issued.

TRICARE Contract

Health care operations under our TRICARE North contract are scheduled to conclude on March 31, 2010. The TRICARE program in the North Region is part of our Government Contracts segment. We submitted our final proposal to the Department of Defense (DoD) for the third generation of TRICARE Managed Care Support contracts (referred to as “T3”) on January 2, 2009, and on July 13, 2009 we were notified by DoD that we were not selected to be the Managed Care Support Contractor under the T3 contract for the North Region. On July 20, 2009 we filed a protest with the Government Accountability Office (GAO) in connection with the T3 award decision citing a Procurement Integrity Act violation by DoD in releasing Health Net’s initial proposed price to the public, including through its website. On July 23, 2009, DoD conducted a debriefing of the proposal evaluation and the basis for the award decision. On July 28, 2009, we filed a second protest with the GAO in connection with the T3 award decision, citing flaws in the proposal evaluation and award decision and other grounds for protest. The GAO is required to render a decision within 100 days after a protest is filed. Accordingly, our protest filed on July 20, 2009 currently is scheduled to be decided by the GAO no later than October 28, 2009, and our protest filed on July 28, 2009 currently is scheduled to be decided by the GAO no later than November 5, 2009.

The filing of our timely protest triggered an automatic suspension of the performance of the T3 North Region contract until the protest is decided by the GAO. Though it has not done so to date, DoD can override this automatic suspension if it makes a written finding that either (1) performance of the contract is in the best interests of the United States or (2) urgent and compelling circumstances that significantly affect interests of the United States will not permit waiting for the GAO protest decision.

We were informed by DoD that they have stopped performance on the implementation of the T3 North contract, and we have been instructed by DoD to stop work on transition-out activities under our existing TRICARE North contract. Also, we were informed by DoD that, if transition work is resumed, the T3 North contractor will be given a ten month transition period prior to the start of health care delivery under the T3 North contract. Once the GAO decisions are rendered, if DoD does not shorten the transition period to less than ten months, health care operations under our current TRICARE North contract may be extended beyond March 31, 2010.

For the six months ended June 30, 2009, Government Contract revenues, consisting primarily of revenues from our TRICARE North contract, were $1.6 billion, or 20% of our total revenues. We are currently evaluating the impact of the TRICARE developments on our operations, including potential asset impairment and exit costs, as well as potential strategic alternatives relating to this business such as possible asset sales.

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Pending Sale of Northeast Business

On July 20, 2009, Health Net, Inc. entered into a Stock Purchase Agreement with Oxford Health Plans, LLC (Buyer) and, solely for the purposes of guaranteeing Buyer’s obligations thereunder, UnitedHealth Group Incorporated (collectively, “UnitedHealth”) to sell all of the outstanding shares of capital stock of our New York, New Jersey, Connecticut and Bermuda HMO and insurance subsidiaries, which conduct the Company’s Northeast business (the “Acquired Companies”). At the closing of the transaction, affiliates of UnitedHealth also will acquire membership renewal rights for the Health Net Life Insurance Company health care business in the states of Connecticut and New Jersey. At the closing, we will receive up to $350 million, consisting of a $60 million minimum payment for the commercial membership of the acquired business and the Medicare and Medicaid businesses of the Acquired Companies and up to an additional $290 million representing a portion of the adjusted tangible net equity of the Acquired Companies at closing. Under the Stock Purchase Agreement, we will also receive one-half of the remaining amount of the adjusted tangible net equity at closing on the first anniversary of closing and the other half on the second anniversary, subject to certain adjustments. After closing, UnitedHealth could pay Health Net additional consideration on a per member basis as our Northeast commercial members and/or Medicare and/or Medicaid businesses transition to other UnitedHealth products to the extent such amounts exceed the initial minimum payment of $60 million. Our subsidiary, Health Net of the Northeast, Inc. (HNNE) will continue to serve the members of the Acquired Companies under Administrative Services Agreements with UnitedHealth or its affiliates following the close of the transaction until all members are either transitioned to UnitedHealth or non-renewed. We expect the Administrative Services Agreements to be in effect for approximately two years following the closing of the transaction. The sale is subject to regulatory approvals and is expected to close within twelve months after the date of the Stock Purchase Agreement. As of June 30, 2009, the Company did not meet the paragraph 30 criteria of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset and therefore did not classify the Northeast plans as held-for-sale. Additionally, as of June 30, 2009, the Company did not consider that the sale of the Northeast plans was more-likely-than-not to occur.

The Acquired Companies had approximately $660 million and $1,295 million of premium revenues in the three and six months ended June 30, 2009, respectively, which represent 21% and 21% of our health plan services premiums for the three and six months ended June 30, 2009, respectively. The Acquired Companies had approximately $671 million and $1,342 million of premium revenues in the three and six months ended June 30, 2008, respectively, which represent 22% and 22% of our health plan services premiums for the three and six months ended June 30, 2008, respectively. The Acquired Companies had a combined pre-tax loss of $26 million and $29 million for the three and six months ended June 30, 2009, respectively, and a combined pre-tax income of $20 million and $0.4 million for the three and six months ended June 30, 2008, respectively. As of June 30, 2009 and 2008, we had approximately 577,000 and 586,000 total health plan members, respectively, in the Acquired Companies. We are currently evaluating the impact of the pending sale on our 2009 financial results, including potential impairment of goodwill and other intangibles, tax benefits, severance costs, other transaction-related costs and operating costs that will be incurred during the transition period following the close of the transaction.

The pending sale of our Northeast business will meet the primary goal of our strategic review, which was to realize the value in our Northeast health plans. Additionally as a result of our strategic review, we have determined to retain our Arizona health plan and focus our resources on our health plans in the Western United States.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENTS

The following discussion and other portions of this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended, regarding our business, financial condition and results of operations. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. These forward-looking statements involve risks and uncertainties. All statements other than statements of historical information provided or incorporated by reference herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate” and “intend” and other similar expressions are intended to identify forward-looking statements. Managed health care companies operate in a highly competitive, constantly changing environment that is significantly influenced by, among other things, aggressive marketing and pricing practices of competitors and regulatory oversight. Factors that could cause our actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, the factors set forth under the heading “Risk Factors” in our Form 10-K and the risks discussed in our other filings from time to time with the SEC.

Any or all forward-looking statements in this Form 10-Q and in any other public filings or statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many of the factors discussed in our filings with the SEC will be important in determining future results. These factors should be considered in conjunction with any discussion of operations or results by us or our representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors or other communications by us. You should not place undue reliance on any forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date thereof. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that arise after the date of this report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, together with the consolidated financial statements included elsewhere in this report, should be read in their entirety since they contain detailed information that is important to understanding Health Net, Inc. and its subsidiaries’ results of operations and financial condition.

OVERVIEW

General

We are an integrated managed care organization that delivers managed health care services through health plans and government sponsored managed care plans. We are among the nation’s largest publicly traded managed health care companies. Our mission is to help people be healthy, secure and comfortable. We provide health benefits to approximately 6.7 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, TRICARE and Veterans Affairs programs. Our behavioral health services subsidiary, MHN, provides behavioral health, substance abuse and employee assistance programs to approximately 6.6 million individuals, including our own health plan members. Our 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.

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Summary of Key Financial Results

Net income decreased for the three months ended June 30, 2009 to $40.1 million from $76.7 million for the same period in 2008 and increased for the six months ended June 30, 2009 to $62.2 million from $41.0 million for the same period in 2008. Our diluted earnings per share for the three and six months ended June 30, 2009 were $0.38 and $0.60, respectively, compared with $0.71 and $0.37 for the three and six months ended June 30, 2008, respectively. Our pretax margin was 1.6% for the three months ended June 30, 2009, compared with 3.1% for the same period in 2008, and was 1.1% for the six months ended June 30, 2009 compared with 0.9% for the same period in 2008. Our operating results for the three and six months ended June 30, 2009 included $17.6 million and $62.3 million, respectively, in pretax charges related to our operations strategy and reductions from litigation reserve true-ups. Our operating results for the three and six months ended June 30, 2008 included a $13.0 million pretax charge related to our operations strategy and a $95.5 million pretax charge related to litigation and regulatory-related matters and our operations strategy, respectively. Also included in the operating results for the six months ended June 30, 2008 is $94 million of unfavorable prior period reserve development and higher than expected health care costs.

Our total health plan enrollment decreased to 3,619,000 members at June 30, 2009 from 3,777,000 members at June 30, 2008, primarily due to an 8% decrease in our commercial health plans membership (mainly from large groups) and a 13% decrease in our Medicare Part D membership. Our TRICARE membership increased to 3,040,000 beneficiaries at June 30, 2009 from 2,951,000 beneficiaries at June 30, 2008.

Total revenues increased by $172.2 million, or 4%, for the three months ended June 30, 2009 and by $268.2 million, or 3%, for the six months ended June 30, 2009 as compared to the same periods in 2008. Health plan services premium revenues increased 1% for the three months ended June 30, 2009 and by 1% for the six months ended June 30, 2009 as compared to the same periods in 2008. The health plan services medical care ratio (MCR) was 86.2% and 86.5% for the three and six months ended June 30, 2009, respectively, compared to 85.3% and 87.3% for the three and six months ended June 30, 2008, respectively. Our Government contracts revenues increased 20% and 17% for the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008.

Our cash flows used in operations decreased to $(60.0) million for the six months ended June 30, 2009 from $(197.8) million for the same period in 2008 primarily due to the $160 million settlement payment made in connection with the McCoy, Wachtel and Scharfman lawsuits in the three months ended March 31, 2008, offset by $43 million in payments for operations strategy and litigation matters in the three months ended June 30, 2009. See Note 9 to our consolidated financial statements for a discussion of the McCoy, Wachtel and Scharfman lawsuits.

How We Report Our Results

We currently operate within two reportable segments, Health Plan Services and Government Contracts, each of which is described below.

Our Health Plan Services reportable segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies, and our behavioral health and pharmaceutical services subsidiaries. We have approximately 3.6 million members, including Medicare Part D members and administrative services only (ASO) members in our Health Plan Services segment.

Our Government Contracts segment includes our government-sponsored managed care federal contract with the U.S. Department of Defense (the Department of Defense or DoD) under the TRICARE program in the North Region and other health care related government contracts. Under the TRICARE contract for the North Region, we provide health care services to approximately 3.0 million Military Health System (MHS) eligible

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beneficiaries (active duty personnel and TRICARE/Medicare dual eligible beneficiaries), including 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.2 million other MHS-eligible beneficiaries for whom we provide ASO. We also provide behavioral health services to military families under the Department of Defense Military Family Life Counseling contract.

How We Measure Our Profitability

Our profitability depends in large part on our ability to, among other things, effectively price our health care products; manage health care costs, including reserve estimates and pharmacy costs; contract with health care providers; attract and retain members; and manage our general and administrative (G&A) and selling expenses. In addition, factors such as regulation, competition and general economic conditions affect our operations and profitability. The effect of escalating health care costs, as well as any changes in our ability to negotiate competitive rates with our providers, may impose further risks to our ability to profitably underwrite our business, and may have a material impact on our business, financial condition or results of operations.

We measure our Health Plan Services segment profitability based on medical care ratio (MCR) and pretax income. The MCR is calculated as health plan services expense (excluding depreciation and amortization) divided by health plan services premiums. The pretax income is calculated as health plan services premiums and administrative services fees and other income less health plan services expense and G&A and other net expenses. See “—Results of Operations—Table of Summary Financial Information” for a calculation of our MCR and “—Results of Operations—Health Plan Services Segment Results” for a calculation of our pretax income.

Health plan services premiums include health maintenance organization (HMO), point of service (POS) and preferred provider organization (PPO) premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage (which premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk contracts, including Medicare Part D, to provide care to enrolled Medicare recipients. Medicare revenue can also include amounts for risk factor adjustments and additional premiums that we charge in some places to members who purchase our Medicare risk plans (see Note 2 to our consolidated financial statements). The amount of premiums we earn in a given year is driven by the rates we charge and enrollment levels. Administrative services fees and other income primarily include revenue for administrative services such as claims processing, customer service, medical management, provider network access and other administrative services. Health plan services expense includes medical and related costs for health services provided to our members, including physician services, hospital and related professional services, outpatient care, and pharmacy benefit costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care cost per visit, and the utilization rates represent the volume of health care consumption by our members.

G&A expenses include those costs related to employees and benefits, consulting and professional fees, marketing, premium taxes and assessments, occupancy costs, and litigation and regulatory-related costs. Such costs are driven by membership levels, introduction of new products, system consolidations, outsourcing activities and compliance requirements for changing regulations. These expenses also include expenses associated with corporate shared services and other costs to reflect the fact that such expenses are incurred primarily to support the Health Plan Services segment. Selling expenses consist of external broker commission expenses and generally vary with premium volume.

We measure our Government Contracts segment profitability based on government contracts cost ratio and pretax income. The government contracts cost ratio is calculated as government contracts cost divided by government contracts revenue. The pretax income is calculated as government contracts revenue less government contracts cost. See “—Results of Operations—Table of Summary Financial Information” for a calculation of our government contracts cost ratio and “—Results of Operations—Government Contracts Segment Results” for a calculation of our pretax income.

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Government Contracts revenue is made up of two major components: health care and administrative services. The health care component includes revenue recorded for health care costs for the provision of services to our members, including paid claims and estimated incurred but not reported claims (IBNR) expenses for which we are at risk, and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care. The administrative services component encompasses fees received for all other services provided to both the government customer and to beneficiaries, including services such as medical management, claims processing, enrollment, customer services and other services unique to the managed care support contract with the government. Government Contracts revenue and expenses include the impact from underruns and overruns relative to our target cost under the applicable contracts (see Note 2 to our consolidated financial statements).

Recent Developments

TRICARE Contract

Health care operations under our TRICARE North contract are scheduled to conclude on March 31, 2010. The TRICARE program in the North Region is part of our Government Contracts segment. We submitted our final proposal to DoD for the T3 contract on January 2, 2009, and on July 13, 2009 we were notified by DoD that we were not selected to be the Managed Care Support Contractor under the T3 contract for the North Region. On July 20, 2009 we filed a protest with the GAO in connection with the T3 award decision citing a Procurement Integrity Act violation by DoD in releasing Health Net’s initial proposed price to the public, including through its website. On July 23, 2009, DoD conducted a debriefing of the proposal evaluation and the basis for the award decision. On July 28, 2009, we filed a second protest with the GAO in connection with the T3 award decision, citing flaws in the proposal evaluation and award decision and other grounds for protest. The GAO is required to render a decision within 100 days after a protest is filed. Accordingly, our protest filed on July 20, 2009 currently is scheduled to be decided by the GAO no later than October 28, 2009, and our protest filed on July 28, 2009 currently is scheduled to be decided by the GAO no later than November 5, 2009.

The filing of our timely protest triggered an automatic suspension of the performance of the T3 North Region contract until the protest is decided by the GAO. Though it has not done so to date, DoD can override this automatic suspension if it makes a written finding that either (1) performance of the contract is in the best interests of the United States or (2) urgent and compelling circumstances that significantly affect interests of the United States will not permit waiting for the GAO protest decision.

We were informed by DoD that they have stopped performance on the implementation of the T3 North contract, and we have been instructed by DoD to stop work on transition-out activities under our existing TRICARE North contract. Also, we were informed by DoD that, if transition work is resumed, the T3 North contractor will be given a ten month transition period prior to the start of health care delivery under the T3 North contract. Once the GAO decisions are rendered, if DoD does not shorten the transition period to less than ten months, health care operations under our current TRICARE North contract may be extended beyond March 31, 2010.

For the six months ended June 30, 2009, Government Contract revenues, consisting primarily of revenues from our TRICARE North contract, were $1.6 billion, or 20% of our total revenues. We are currently evaluating the impact of the TRICARE developments on our operations, including potential asset impairment and exit costs, as well as potential strategic alternatives relating to this business such as possible asset sales.

Pending Sale of Northeast Business

On July 20, 2009, Health Net, Inc. entered into a Stock Purchase Agreement with UnitedHealth to sell all of the outstanding shares of capital stock of the Acquired Companies, which conduct the Company’s Northeast business. At the closing of the transaction, affiliates of UnitedHealth also will acquire membership renewal rights

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for the Health Net Life Insurance Company health care business in the states of Connecticut and New Jersey. At the closing, we will receive up to $350 million, consisting of a $60 million minimum payment for the commercial membership of the acquired business and the Medicare and Medicaid businesses of the Acquired Companies and up to an additional $290 million representing a portion of the adjusted tangible net equity of the Acquired Companies at closing. Under the Stock Purchase Agreement, we will also receive one-half of the remaining amount of the adjusted tangible net equity at closing on the first anniversary of closing and the other half on the second anniversary, subject to certain adjustments. After closing, UnitedHealth could pay Health Net additional consideration on a per member basis as our Northeast commercial members and/or Medicare and/or Medicaid businesses transition to other UnitedHealth products to the extent such amounts exceed the initial minimum payment of $60 million. HNNE will continue to serve the members of the Acquired Companies under Administrative Services Agreements with UnitedHealth or its affiliates following the close of the transaction until all members are either transitioned to UnitedHealth or non-renewed. We expect the Administrative Services Agreements to be in effect for approximately two years following the closing of the transaction. The sale is subject to regulatory approvals and is expected to close within twelve months after the date of the Stock Purchase Agreement. As of June 30, 2009, the Company did not meet the paragraph 30 criteria of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset and therefore did not classify the Northeast plans as held-for-sale. Additionally, as of June 30, 2009, the Company did not consider that the sale of the Northeast plans was more-likely-than-not to occur.

The Acquired Companies had approximately $660 million and $1,295 million of premium revenues in the three and six months ended June 30, 2009, respectively, which represent 21% and 21% of our health plan services premiums for the three and six months ended June 30, 2009, respectively. The Acquired Companies had approximately $671 million and $1,342 million of premium revenues in the three and six months ended June 30, 2008, respectively, which represent 22% and 22% of our health plan services premiums for the three and six months ended June 30, 2008, respectively. The Acquired Companies had a combined pre-tax loss of $26 million and $29 million for the three and six months ended June 30, 2009, respectively, and a combined pre-tax income of $20 million and $0.4 million for the three and six months ended June 30, 2008, respectively. As of June 30, 2009 and 2008, we had approximately 577,000 and 586,000 total health plan members, respectively, in the Acquired Companies. We are currently evaluating the impact of the pending sale on our 2009 financial results, including potential impairment of goodwill and other intangibles, tax benefits, severance costs, other transaction-related costs and operating costs that will be incurred during the transition period following the close of the transaction.

The pending sale of our Northeast business will meet the primary goal of our strategic review, which was to realize the value in our Northeast health plans. Additionally as a result of our strategic review, we have determined to retain our Arizona health plan and focus our resources on our health plans in the Western United States.

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RESULTS OF OPERATIONS

Table of Summary Financial Information

The table below and the discussion that follows summarize our results of operations for the three and six months ended June 30, 2009 and 2008.

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Dollars in thousands, except per share and PMPM data)
REVENUES
Health plan services premiums	$	3,152,783		$	3,114,168		$	6,292,034		$	6,237,156
Government contracts		832,088			694,885			1,591,427			1,359,334
Net investment income		20,432			20,931			44,753			56,302
Administrative services fees and other income		8,387			11,516			18,279			25,464
Total revenues		4,013,690			3,841,500			7,946,493			7,678,256
EXPENSES
Health plan services (excluding depreciation and amortization)		2,718,039			2,655,066			5,439,818			5,443,469
Government contracts		791,044			658,255			1,516,046			1,295,832
General and administrative		332,188			297,475			687,098			649,753
Selling		81,359			88,243			162,769			174,835
Depreciation		11,614			8,328			23,442			15,886
Amortization		4,094			4,745			8,306			9,466
Interest		11,518			11,316			21,085			21,973
Total expenses		3,949,856			3,723,428			7,858,564			7,611,214
Income from operations before income taxes		63,834			118,072			87,929			67,042
Income tax provision		23,694			41,394			25,754			26,044
Net income	$	40,140		$	76,678		$	62,175		$	40,998
Net income per share:
Basic	$	0.39		$	0.71		$	0.60		$	0.38
Diluted	$	0.38		$	0.71		$	0.60		$	0.37
Pretax margin		1.6	%		3.1	%		1.1	%		0.9	%
Health plan services medical care ratio (MCR) (a)		86.2	%		85.3	%		86.5	%		87.3	%
Government contracts cost ratio (b)		95.1	%		94.7	%		95.3	%		95.3	%
G&A expense ratio (c)		10.5	%		9.5	%		10.9	%		10.4	%
Selling costs ratio (d)		2.6	%		2.8	%		2.6	%		2.8	%
Health plan services premiums per member per month (PMPM) (e)	$	295.11		$	278.25		$	295.51		$	277.71
Health plan services costs PMPM (e)	$	254.41		$	237.23		$	255.48		$	242.37

(a) MCR is calculated as health plan services cost divided by health plan services premiums revenue.

(b) Government contracts cost ratio is calculated as government contracts cost divided by government contracts revenue.

(c) The G&A expense ratio is computed as G&A expenses divided by the sum of health plan services premiums and administrative services fees and other income.

(d) The selling costs ratio is computed as selling expenses divided by health plan services premiums revenue.

(e) PMPM is calculated based on total at-risk member months and excludes ASO member months.

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Consolidated Segment Results

The following table summarizes the operating results of our reportable segments for the three and six months ended June 30, 2009 and 2008:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(Dollars in millions)
Pretax income:
Health Plan Services segment	$	22.8	$	81.5	$	12.5	$	3.5
Government Contracts segment		41.0		36.6		75.4		63.5
Income from operations before income taxes	$	63.8	$	118.1	$	87.9	$	67.0

Health Plan Services Segment Membership

The following table below summarizes our health plan membership information by program and by state at June 30, 2009 and 2008:

	Commercial		ASO		Medicare		Medicaid		Health Plan Total
	2009	2008	2009	2008	2009	2008	2009	2008	2009	2008
	(Membership in thousands)
Arizona	103	138	—	—	65	64	—	—	168	202
California	1,288	1,424	3	5	134	126	827	737	2,252	2,292
Connecticut	115	149	26	25	52	57	—	—	193	231
New Jersey	80	78	2	3	—	—	51	44	133	125
New York	242	213	7	11	2	6	—	—	251	230
Oregon	133	139	—	—	24	22	—	—	157	161
Other states	—	—	—	—	7	10	—	—	7	10
	1,961	2,141	38	44	284	285	878	781	3,161	3,251
Medicare Part D	—	—	—	—	458	526	—	—	458	526
Total	1,961	2,141	38	44	742	811	878	781	3,619	3,777

Our total health plan membership decreased by 158,000, or 4%, from June 30, 2008 to June 30, 2009. The decrease in membership was primarily driven by a decline of 180,000 commercial members, 68,000 Medicare Part D members and 6,000 ASO members, partially offset by the addition of 97,000 Medicaid members.

Membership in our commercial health plans decreased by 180,000 members, or 8%, at June 30, 2009 compared to June 30, 2008. This decrease was primarily attributable to our California plan, which experienced a decline of 136,000 commercial members, and our Arizona plan, which experienced a loss of 35,000 commercial members. Our ASO enrollment declined by 6,000 members, or 14%, at June 30, 2009 compared to June 30, 2008 primarily due to membership losses in our Northeast plans. Declines in our commercial membership are driven by the current economic environment.

Membership in our Medicare Advantage program decreased by 1,000 members, or less than 1%, at June 30, 2009 compared to June 30, 2008 due to a decline in membership primarily in the Northeast plans of 9,000 members, partially offset by an increase of 8,000 members in the California plan. Our Medicare Part D membership decreased by 68,000 members, or 13%, at June 30, 2009 compared to June 30, 2008.

We participate in state Medicaid programs in California and New Jersey. California membership, where the program is known as Medi-Cal, represented 94% of our Medicaid membership at June 30, 2009. Membership in our Medicaid programs increased by 97,000 members at June 30, 2009 compared to June 30, 2008 due to a gain of 90,000 members in California as a result of higher enrollment in Fresno and Los Angeles counties and in the Healthy Families program and a gain of 7,000 members in New Jersey.

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Health Plan Services Segment Results

The following table summarizes the operating results for our health plan services segment for the three and six months ended June 30, 2009 and June 30, 2008.

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Dollars in millions, except PMPM data)
Health Plan Services segment:
Commercial premium revenue	$	1,916.8		$	1,950.8		$	3,841.3		$	3,922.3
Medicare premium revenue		946.1			899.5			1,880.4			1,792.2
Medicaid premium revenue		289.9			263.9			570.3			522.7
Health plan services premium revenues	$	3,152.8		$	3,114.2		$	6,292.0		$	6,237.2
Health plan services costs		(2,718.0	)		(2,655.1	)		(5,439.8	)		(5,443.5	)
Net investment income		20.4			20.9			44.8			56.3
Administrative services fees and other income		8.4			11.5			18.3			25.5
G&A		(332.2	)		(297.5	)		(687.1	)		(649.8	)
Selling		(81.4	)		(88.2	)		(162.8	)		(174.8	)
Amortization and depreciation		(15.7	)		(13.0	)		(31.8	)		(25.4	)
Interest		(11.5	)		(11.3	)		(21.1	)		(22.0	)
Pretax income	$	22.8		$	81.5		$	12.5		$	3.5
MCR:		86.2	%		85.3	%		86.5	%		87.3	%
Commercial		86.1	%		84.2	%		85.6	%		86.3	%
Medicare		85.5	%		89.0	%		87.6	%		90.7	%
Medicaid		89.0	%		80.5	%		88.0	%		82.6	%
Health plan services premium PMPM	$	295.11		$	278.25		$	295.51		$	277.71
Health plan services costs PMPM	$	254.41		$	237.23		$	255.48		$	242.37
G&A expense ratio		10.5	%		9.5	%		10.9	%		10.4	%
Selling costs ratio		2.6	%		2.8	%		2.6	%		2.8	%

Health Plan Services Premiums

Total health plan services premiums increased by $38.6 million, or 1%, for the three months ended June 30, 2009 and by $54.8 million, or 1%, for the six months ended June 30, 2009 as compared to the same periods in 2008. On a PMPM basis, premiums increased by 6% for the three months ended June 30, 2009 and by 6% for the six months ended June 30, 2009 as compared to the same periods in 2008.

Commercial premium revenues decreased by $34.0 million, or 2%, for the three months ended June 30, 2009 and by $81.0 million, or 2%, for the six months ended June 30, 2009 as compared to the same periods in 2008. This decrease is primarily attributable to a decrease in our commercial risk membership. The commercial premium PMPM increased by 8% and by 8% for the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008.

Medicare premiums increased by $46.6 million, or 5%, for the three months ended June 30, 2009 and by $88.2 million, or 5% for the six months ended June 30, 2009 as compared to the same periods in 2008. These increases were primarily attributable to premium rate increases, partially offset by Medicare Part D membership declines. In addition, we recognized $59.5 million and $48.4 million of Medicare risk factor estimates in our health plan services premium revenues in the three months ended June 30, 2009 and 2008, respectively, and $114.5 million and $89.3 million of Medicare risk factor estimates in our health plan services premium revenues in the six months ended June 30, 2009, and 2008, respectively.

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Medicaid premiums increased by $26.0 million, or 10%, for the three months ended June 30, 2009 and by $47.6 million, or 9%, for the six months ended June 30, 2009 as compared to the same periods in 2008. These increases were primarily attributable to an increase in our Medicaid membership.

Health Plan Services Costs

Health plan services costs increased by $62.9 million, or 2%, for the three months ended June 30, 2009 and decreased by $3.7 million, or less than 1%, for the six months ended June 30, 2009 as compared to the same periods in 2008. Health plan MCR was 86.2% for the three months ended June 30, 2009 and 86.5% for the six months ended June 30, 2009 as compared to 85.3% and 87.3% for the same periods in 2008, respectively. On a PMPM basis, health care costs increased by 7% for the three months ended June 30, 2009 and by 5% for the six months ended June 30, 2009 as compared to the same periods in 2008.

Our commercial MCR for the three months ended June 30, 2009 increased to 86.1% from 84.2% for the same period in 2008, primarily due to decreases in premium revenues mainly in California and the Northeast and increases in health care costs mainly in the Northeast. Our commercial MCR for the six months ended June 30, 2009 decreased to 85.6% from 86.3% for the same period in 2008. Our commercial MCR for the six months ended June 30, 2008 was impacted by a $43.2 million charge recorded in health care costs in connection with litigation and regulatory matters and negative prior period reserve development of $40.0 million. The increase in the commercial health care cost trend on a PMPM basis was 11% and 7% for the three and six months ended June 30, 2009, respectively, over the same periods in 2008. On a PMPM basis, physician and hospital costs rose 13% and 11%, respectively, and pharmacy costs rose 7% for the three months ended June 30, 2009 over the same period in 2008. Physician and hospital costs increased by 9% and 10%, respectively, and pharmacy costs increased by 7% on a PMPM basis for the six months ended June 30, 2009 over the same period in 2008.

Our Medicare MCR, including Medicare Advantage and Part D, decreased to 85.5% and 87.6% for the three and six months ended June 30, 2009, respectively, from 89.0% and 90.7% for the three and six months ended June 30, 2008, respectively. These decreases were primarily due to the increase in the premium yield outpacing the increase in the health care cost trend. Medicare Advantage health care cost PMPM increased by 3% for the three months ended June 30, 2009 and by 4% for the six months ended June 30, 2009 as compared to the same periods in 2008. Medicare Part D health care cost PMPM increased by 4% for the three months ended June 30, 2009 and decreased by 8% for the six months ended June 30, 2009 as compared to the same periods in 2008. We also recognized $17.4 million and $10.9 million of capitation expense related to the Medicare risk factor estimates in our health plan services costs in the three months ended June 30, 2009 and 2008, respectively, and $32.4 million and $23.5 million of capitation expense in the six months ended June 30, 2009 and 2008, respectively.

Our Medicaid MCR increased to 89.0% and 88.0% for the three and six months ended June 30, 2009, respectively, from 80.5% and 82.6% for the three and six months ended June 30, 2008, respectively, primarily due to the increases in the health care cost trends and decreases in the premium yields. Medicaid health care cost PMPM increased by 9% and 5% in the three and six months ended June 30, 2009, respectively, over the same periods in 2008.

Administrative Services Fees and Other Income

Administrative services fees and other income decreased by $3.1 million, or 27%, and by $7.2 million, or 28%, for the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008. The decrease in the three months ended June 30, 2009 was primarily due to membership losses in our behavioral health services. The decrease in the six months ended June 30, 2009 was primarily due to ASO membership declines in the Northeast, partially offset by a $3.4 million estimated loss on sale related to a small, non-core subsidiary recorded in the first quarter of 2008.

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Net Investment Income

Net investment income decreased by $0.5 million, or 2%, for the three months ended June 30, 2009 compared to the same period in 2008, and by $11.5 million, or 20%, for the six months ended June 30, 2009 compared to the same period in 2008, primarily due to the lower current yields.

General, Administrative and Other Costs

G&A expense increased by $34.7 million, or 12%, for the three months ended June 30, 2009 and by $37.3 million, or 6%, for the six months ended June 30, 2009 as compared to the same periods in 2008. The increases in G&A costs in the three and six months ended June 30, 2009 were primarily due to increases in regulatory and assessment fees and in our operations strategy-related charges as compared to the same periods in 2008. Our G&A expense ratio increased to 10.5% from 9.5% for the three months ended June 30, 2009 compared to the same period in 2008, and increased to 10.9% from 10.4% for the six months ended June 30, 2009 compared to the same period in 2008.

The selling costs ratio decreased to 2.6% for both the three and six months ended June 30, 2009 from 2.8% for each of the same periods in 2008 and was primarily driven by lower sales commissions for our Medicare products on renewing groups. These decreases are also consistent with the growth of our Medi-Cal business, which generally has lower broker and sales commissions.

Amortization and depreciation expense increased by $2.7 million and by $6.4 million for the three and six months ended June 30, 2009 as compared to the same periods in 2008. The increases were primarily due to property and equipment purchased during the year and the addition of new assets placed in production related to various information technology system projects, partially offset by a reduction in depreciation for assets that were retired in 2009.

Interest expense increased by $0.2 million, or 2%, for the three months ended June 30, 2009 and decreased by $0.9 million, or 4% for the six months ended June 30, 2009 as compared to the same periods in 2008. The increase in interest expense for the three months ended June 30, 2009 was primarily due to a reduction in the benefits received from our interest rate swaps. The decrease in the six months ended June 30, 2009 was primarily due to lower interest rates and benefits realized from our interest rate swaps.

Government Contracts Segment Membership

Under our TRICARE contract for the North Region, we provided health care services to approximately 3.0 million eligible beneficiaries in the Military Health System (MHS) as of June 30, 2009, and approximately 3.0 million eligible beneficiaries as of June 30, 2008. Included in the 3.0 million eligibles as of June 30, 2009 were 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.2 million other MHS-eligible beneficiaries for whom we provide administrative services only. As of June 30, 2009 and 2008, there were approximately 1.5 million and 1.5 million, respectively, TRICARE eligibles enrolled in TRICARE Prime under our North Region contract.

In addition to the 3.0 million eligible beneficiaries that we service under the TRICARE contract for the North Region, we administer contracts with the U.S. Department of Veterans Affairs to manage community based outpatient clinics in 8 states covering approximately 21,000 enrollees.

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Government Contracts Segment Results

The following table summarizes the operating results for the Government Contracts segment for the three and six months ended June 30, 2009 and 2008:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Dollars in millions)
Government Contracts segment:
Revenues	$	832.1		$	694.9		$	1,591.4		$	1,359.3
Costs		791.1			658.3			1,516.0			1,295.8
Pretax income	$	41.0		$	36.6		$	75.4		$	63.5
Government Contracts Ratio		95.1	%		94.7	%		95.3	%		95.3	%

Government contracts revenues increased by $137.2 million, or 20%, for the three months ended June 30, 2009 and by $232.1 million, or 17%, for the six months ended June 30, 2009 as compared to the same periods in 2008. Government contracts costs increased by $132.8 million or 20% for the three months ended June 30, 2009 and by $220.2 million, or 17%, for the six months ended June 30, 2009 as compared to the same periods in 2008. The increases were primarily due to an increase in health care services provided under a new option year in the TRICARE contract, Option Period 6, and growth in the family counseling business with the Department of Defense.

Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs, which are negotiated annually during the term of the contract with underruns and overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting with the federal government, we recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable, and the collectibility is reasonably assured. As a result of changes in the estimate during the three and six months ended June 30, 2009, we recognized increases in revenues of $25.5 million and $32.1 million, respectively, compared to increases in revenues of $4.2 million and $0.2 million in the three and six months ended June 30, 2008, respectively. As a result of changes in the estimate during the three and six months ended June 30, 2009, we recognized increases in costs of $34.7 million and $42.9 million, respectively, compared to an increase in costs of $5.2 million and a decrease in costs of $0.3 million in the three and six months ended June 30, 2008, respectively. The administrative price is paid on a monthly basis, one month in arrears and certain components of the administrative price are subject to volume-based adjustments.

The Government contracts ratio increased by 40 basis points for the three months ended June 30, 2009 compared to the same period in 2008 primarily due to favorable healthcare trends experienced in the three months ended June 30, 2008. There was no change in the Government contracts ratio for the six months ended June 30, 2009 as compared to the same period in 2008.

Income Tax Provision

Our income tax expense and the effective income tax rate for the three and six months ended June 30, 2009 and 2008 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Dollars in millions)
Income tax expense	$	23.7		$	41.4		$	25.8		$	26.0
Effective income tax rate		37.1	%		35.1	%		29.3	%		38.8	%

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The effective income tax rate differs from the statutory federal tax rate of 35% for the three and six months ended June 30, 2009 and June 30, 2008 due primarily to state income taxes and tax-exempt investment income. Additionally, the three and six months ended June 30, 2008 included a favorable tax impact of expenses associated with litigation matters. The three and six months ended June 30, 2009 included favorable outcomes of examination settlements.

The effective income tax rate for the six months ended June 30, 2009 is lower compared to the same period in 2008 due primarily to favorable examination settlement results in both the first and second quarters of 2009. In contrast, the effective income tax rate for the three months ended June 30, 2009 is higher compared to the same period in 2008 as a result of the favorable tax impact of expenses associated with litigation matters in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Market and Economic Conditions

The recent market disruptions and global economic downturn continue to be challenging with increased unemployment, diminished business and consumer confidence, and increased volatility in both U.S. and international capital and credit markets. Concern about the stability of the markets generally and the strength of counterparties specifically continue to be a cause for many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. While we have not experienced a reduction in the capital and funding available to us at this time, continued turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition. Market conditions could limit our ability to timely replace maturing liabilities and access the capital markets to meet liquidity needs, which could adversely affect our financial condition and results of operations. Furthermore, if our customer base experiences cash flow problems and other financial difficulties, it could, in turn, adversely impact membership in our plans. For example, our customers may modify, delay or cancel plans to purchase our products, may reduce the number of individuals to whom they provide coverage, or may make changes in the mix or products purchased from us. In addition, if our customers experience financial issues, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Further, our customers or potential customers may force us to compete more vigorously on factors such as price and service to retain or obtain their business. A significant decline in membership in our plans and the inability of current and/or potential customers to pay their premiums as a result of unfavorable conditions may adversely affect our business, including our revenues, profitability and cash flow.

Cash and Investments

As of June 30, 2009, the fair value of the investment securities available for sale was $1.5 billion, which includes both current and noncurrent investments. Such amount includes noncurrent investments of $60.1 million, or 3.9% of the total investments available for sale. We hold high-quality fixed income securities primarily comprised of corporate bonds, mortgage-backed bonds and municipals bonds. We evaluate and determine the classification of our investments based on management’s intent. We have currently classified our investments as available-for-sale. We also closely monitor the fair values of our investment holdings and regularly evaluate them for other-than-temporary impairments.

Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by investing in a diversified mix of high-quality, investment grade securities while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements while attaining the highest total return on invested funds.

Our investment portfolio includes $527.5 million, or 34.3% of our portfolio holdings, of mortgage-backed and asset-backed securities. Such amount includes current and noncurrent mortgage-backed and asset-backed securities of $480.1 million, or 91% of the total mortgage-backed and asset-backed securities, and $47.4 million,

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or 9.0% of the total mortgage-backed and asset-backed securities, respectively. The majority of our mortgage-backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our asset-backed securities is AA/Aa1. However, any failure by Fannie Mae or Freddie Mac to honor the obligations under the securities they have issued or guaranteed could cause a significant decline in the value or cash flow of our mortgage-backed securities. Our investment portfolio also includes $10.2 million, or 0.7% of our portfolio holdings, of auction rate securities (ARS). These ARS have long-term nominal maturities for which the interest rates are reset through a dutch auction process every 7, 28 or 35 days. At June 30, 2009, these ARS had at one point or are continuing to experience “failed” auctions. These securities are entirely municipal issues and rates are set at the maximum allowable rate as stipulated in the applicable bond indentures. We continue to receive income on all ARS. If all or any portion of the ARS continue to experience failed auctions, it could take an extended amount of time for us to realize our investments’ recorded value.

We had gross unrealized losses of $24.8 million as of June 30, 2009, and $32.8 million as of December 31, 2008. Included in the gross unrealized losses as of June 30, 2009 are $14.0 million related to noncurrent investments available for sale. We believe that these impairments are temporary and we do not intend to sell these investments. It is not likely that we will be required to sell any security in an unrealized loss position before recovery of its amortized cost basis. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be recorded in future periods. During the second quarter of 2009, we adopted FSP FAS 115-2 and FAS 124-2, noting that one of our prime residential mortgage-backed securities may suffer losses under certain stressed scenarios. As a result, we recognized an impairment related to the credit loss in the amount of $60,000. This amount represents the difference between the present value of the company’s best estimate of future cash flows using the latest performance indicators and the amortized cost basis.

During the year ended December 31, 2008, we recognized a $14.6 million loss from other-than-temporary impairments of our cash equivalents and available-for-sale investments. Such other-than-temporary impairments primarily were as a result of investments in corporate debt from Lehman Brothers, money market funds from The Reserve and preferred stock from Fannie Mae and Freddie Mac. In September 2008, The Reserve announced its intention to liquidate its money market fund and froze all redemptions until an orderly liquidation process could be implemented. As a result, in the third quarter of 2008, we reclassified $372 million in estimated net asset value we had invested in The Reserve money market funds from cash equivalents to investments available-for-sale. As of December 31, 2008, we held $50.4 million in the Reserve Primary Institutional Fund and $69.2 million in the Reserve U.S. Government Fund. On January 16, 2009, The Reserve paid out in full the balance in the U.S. Government Fund. As of June 30, 2009, we held $21.7 million in the Primary Institutional Fund.

Liquidity

We believe that cash flow from operating activities, existing working capital, lines of credit and cash reserves are adequate to allow us to fund existing obligations, repurchase shares under our stock repurchase program, introduce new products and services, and continue to develop health care-related businesses. We regularly evaluate cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. Assuming that we can access the capital markets on acceptable terms, or at all, we may elect to raise additional funds for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. Based on the composition and quality of our investment portfolio, our expected ability to liquidate our investment portfolio as needed, and our expected operating and financing cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment. However, continued turbulence in U.S. and international markets could adversely affect our liquidity.

We are currently evaluating the impact of the pending sale of our Northeast operations on our financial results, including, among other things, the impact of the transaction on our cash flow and liquidity. For additional detail regarding the transaction and its potential impact on our operations, see Note 10 to our consolidated financial statements. For the six months ended June 30, 2009, Government Contracts revenues, consisting

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primarily of revenues from our TRICARE North contract, were $1.6 billion, or 20% of our total revenues. If our protest of the T3 North contract award is not successful, the loss of our TRICARE North operations would significantly reduce our cash flow and liquidity as early as March 31, 2010. Please see Note 10 to our consolidated financial statements for a description of our protest of the T3 North contract award and its potential impact on our operations.

Although all of our $118.0 million amortizing financing facility balance as of June 30, 2009 has been classified as a current liability, the final payment under the facility is scheduled to be made in December 2012, and it is our current expectation to pay down this debt in accordance with its terms.

Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from our TRICARE contract for the North Region. Health care receivables related to TRICARE are best estimates of payments that are ultimately collectible or payable. The timing of collection of such receivables is impacted by government audit and negotiation and can extend for periods beyond a year. Amounts receivable under government contracts were $279.3 million and $241.3 million as of June 30, 2009 and December 31, 2008, respectively.

Our cash flow from operating activities is also impacted by the timing of collections on our amounts receivable from CMS. Our receivable related to our Medicare business was $348.8 million as of June 30, 2009, and $315.5 million as of December 31, 2008, including about $150 million expected to be settled in the fourth quarter of 2009.

Operating Cash Flows

Our net cash flow used in operating activities for the six months ended June 30, 2009 compared to the same period in 2008 is as follows:

	June 30, 2009			June 30, 2008			Change 2009 over 2008
	(Dollars in millions)
Net cash used in operating activities	$	(60.0	)	$	(197.8	)	$	137.8

This increase of $137.8 million in operating cash flow is primarily the result of a $160 million settlement payment made in connection with the McCoy, Wachtel and Scharfman lawsuits in the first quarter of 2008, reduced payments for operations strategy and litigation charges, partially offset by an increase in claim payments in the six months ended June 30, 2009.

Investing Activities

Our net cash flow provided by (used in) investing activities for the six months ended June 30, 2009 compared to the same period in 2008 is as follows:

	June 30, 2009		June 30, 2008			Change 2009 over 2008
	(Dollars in millions)
Net cash provided by (used in) investing activities	$	26.6	$	(49.0	)	$	75.6

Net cash provided by investing activities increased during the six months ended June 30, 2009, primarily due to a decrease in net cash used to purchase property and equipment of $69 million.

Financing Activities

Our net cash flow (used in) provided by financing activities for the six months ended June 30, 2009 compared to the same period in 2008 is as follows:

	June 30, 2009			June 30, 2008		Change 2009 over 2008
	(Dollars in millions)
Net cash (used in) provided by financing activities	$	(69.0	)	$	0.4	$	(69.4	)

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Net cash used in financing activities increased during the six months ended June 30, 2009, primarily due to $120 million decrease in borrowings and $84 million increase in repayment of loans, partially offset by $142 million decrease in share repurchases.

See “—Capital Structure” below for additional information regarding our stock repurchase program, our Senior Notes and our revolving credit facility.

Capital Structure

Share Repurchases. We have a $700 million stock repurchase program authorized by our Board of Directors. Subject to Board approval, additional amounts are added to the repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from the employee stock options. On November 4, 2008, we announced that our stock repurchase program was on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, was undertaking a review of the Company’s strategic direction. As a result, we did not repurchase shares of our common stock during the six months ended June 30, 2009. On July 20, 2009, we announced the completion of our strategic review, which included entering into a Stock Purchase Agreement with UnitedHealth for the sale of our Northeast operations. For a detailed description of the pending sale of our Northeast operations, see Note 10 to our consolidated financial statements. At this time, Health Net’s Board of Directors has made no determination with regard to the future of the Company’s stock repurchase program. As of June 30, 2009, the remaining authorization under our stock repurchase program was $103.3 million and, since its inception, we have repurchased an aggregate of 36,623,347 shares of common stock at an average price of $34.40 for aggregate consideration of approximately $1,259.8 million (which amount includes exercise proceeds and tax benefits the Company had received from the exercise of employee stock options).

Under the Company’s various stock option and long-term incentive plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and/or exercise price obligations, as applicable, arising from the exercise of stock options. For certain other equity awards, the Company has the right to withhold shares to satisfy any tax obligations that may be required to be withheld or paid in connection with such equity award, including any tax obligation arising on the vesting date. These repurchases were not part of our stock repurchase program.

The following table presents monthly information related to repurchases of our common stock, including shares withheld by the Company to satisfy tax withholdings and exercise price obligations as of June 30, 2009:

Period	Total Number of Shares Purchased (a)		Average Price Paid per Share		Total Average Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Programs (b) (c)	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Programs (c) (d)
January 1—January 31	—			—		—	—	$	103,349,478
February 1—February 28	95,183	(e)	$	15.41	$	1,466,885	—	$	103,349,478
March 1—March 31	2,683	(e)		14.39		38,666	—	$	103,349,478
April 1—April 30	2	(e)		—		—	—	$	103,349,478
May 1—May 31	—			—		—	—	$	103,349,478
June 1—June 30	2	(e)		—		—	—	$	103,349,478
	97,870		$	15.38	$	1,505,551	—

(a) We did not repurchase any shares of our common stock during the three months ended June 30, 2009 outside our publicly announced stock repurchase program, except shares withheld in connection with our various stock option and long-term incentive plans.

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(b) Our stock repurchase program was announced in April 2002. We announced additional repurchase authorization in August 2003, October 2006 and October 2007.

(c) A total of $700 million of our common stock can be repurchased under our stock repurchase program. Additional amounts may be added to the program based on exercise proceeds and tax benefits the Company receives from the exercise of employee stock options, but only upon further approval by the Board of Directors. The remaining authority under our repurchase program includes proceeds received from option exercises and tax benefits the Company received from exercise of employee stock options, which have been approved for inclusion in the program by the Board.

(d) Our stock repurchase program does not have an expiration date. During the six months ended June 30, 2009, we did not have any repurchase program that expired, and we did not terminate any repurchase program prior to its expiration date.

(e) Represents shares withheld by the Company to satisfy tax withholding and/or exercise price obligations arising from the vesting and/or exercise of restricted stock units, stock options and other equity awards.

Amortizing Financing Facility. On December 19, 2007, we entered into a five-year, non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender and we entered into amendments to the financing facility on April 29, 2008 and November 10, 2008, which were administrative in nature. On March 9, 2009, we amended certain terms of the documentation relating to the financing facility to, among other things, (i) eliminate the requirement that we maintain certain minimum public debt ratings throughout the term of the financing facility and (ii) provide that the financing facility may be terminated at any time at the option of one of our wholly-owned subsidiaries or the non-U.S. lender. The proceeds from the financing facility were used for general corporate purposes.

As amended, the financing facility requires one of our subsidiaries to pay semi-annual distributions, in the amount of $17.5 million, to a participant in the financing facility. Unless terminated earlier, the final payment under the facility is scheduled to be made on December 19, 2012.

The financing facility includes limitations (subject to specified exclusions) on certain of our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; engage in transactions with affiliates; enter into agreements which will restrict the ability of our subsidiaries to pay dividends or other distributions with respect to any shares of capital stock or the ability to make or repay loans or advances; make dividends; and alter the character of the business we and our subsidiaries conducted on the closing date of the financing facility. In addition, the financing facility also requires that we maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the financing facility. As of June 30, 2009, we were in compliance with all of the covenants under the financing facility.

The financing facility provides that it may be terminated through a series of put and call transactions (1) at the option of one of our wholly-owned subsidiaries or the non-U.S. lender at any time, or (2) upon the occurrence of certain defined early termination events. These early termination events, include, but are not limited to:

• nonpayment of certain amounts due by us or certain of our subsidiaries under the financing facility (if not cured within the related time period set forth therein);

• a change of control (as defined in the financing facility);

• cross-acceleration and cross-default to other indebtedness of the Company in excess of $50 million, including our revolving credit facility;

• certain ERISA-related events;

• noncompliance by the Company with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the financing facility);

• events in bankruptcy, insolvency or reorganization of the Company;

• undischarged, uninsured judgments in the amount of $50 million or more against the Company; or

• certain changes in law that could adversely affect a participant in the financing facility.

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In addition, in connection with the financing facility, we guaranteed the payment of the semi-annual distributions and any other amounts payable by one of our subsidiaries to the financing facility participants under certain circumstances provided under the financing facility. Also in connection with the financing facility, we entered into the 2007 Swap with a non-U.S. bank affiliated with one of the financing facility participants (see Note 2 to our consolidated financial statements). Under the 2007 Swap agreement, we pay a floating payment in an amount equal to LIBOR times a notional principal amount and receive a fixed payment in an amount equal to 4.294% times the same notional principal amount from the non-U.S. bank counterparty in return in accordance with a schedule set forth in the 2007 Swap agreement.

Senior Notes. On May 18, 2007, we issued $300 million in aggregate principal amount of 6.375% Senior Notes due 2017. On May 31, 2007, we issued an additional $100 million of 6.375% Senior Notes due 2017 which were consolidated with, and constitute the same series as, the Senior Notes issued on May 18, 2007 (collectively, the “Senior Notes”). The aggregate net proceeds from the issuance of the Senior Notes were $393.5 million and were used to repay outstanding debt.

The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of June 30, 2009, no default or event of default had occurred under the indenture governing the Senior Notes.

The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:

• 100% of the principal amount of the Senior Notes then outstanding to be redeemed; or

• the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

Each of the following will be an Event of Default under the indenture governing the Senior Notes:

• failure to pay interest for 30 days after the date payment is due and payable; provided that an extension of an interest payment period by us in accordance with the terms of the Senior Notes shall not constitute a failure to pay interest;

• failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise;

• failure to perform any other covenant or agreement in the notes or indenture for a period of 60 days after notice that performance was required;

• (A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, if that acceleration results from a default under the instrument giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; or

• events in bankruptcy, insolvency or reorganization of our Company.

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Revolving Credit Facility. On June 25, 2007, we entered into a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. We entered into an amendment to the credit facility on April 29, 2008, which was administrative in nature. Our revolving credit facility provides for aggregate borrowings in the amount of $900 million, which includes a $400 million sub-limit for the issuance of standby letters of credit and a $50 million sub-limit for swing line loans. In addition, we have the ability from time to time to increase the facility by up to an additional $250 million in the aggregate, subject to the receipt of additional commitments. The revolving credit facility matures on June 25, 2012.

Amounts outstanding under the new revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.

Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.

Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.

As of June 30, 2009, we were in compliance with all covenants under our revolving credit facility.

We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of June 30, 2009, we had outstanding an aggregate of $321.3 million in letters of credit, none of which had been drawn upon, and outstanding borrowings under the revolving credit facility of $100 million. As a result, the maximum amount available for borrowing under the revolving credit facility was $478.7 million as of June 30, 2009.

Statutory Capital Requirements

Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable state laws and regulations, and must have adequate reserves for claims. Management believes that as of June 30, 2009 all of our health plans and insurance subsidiaries met their respective regulatory requirements in all material respects, except Health Net Services (Bermuda) Ltd, which was undercapitalized by approximately $2.2 million and Health Net Insurance of New York, Inc., which was undercapitalized by $2.1 million. We expect to make a capital contribution to Health Net Services (Bermuda) Ltd. and Health Net Insurance of New York, Inc. in the third quarter of 2009, in order to satisfy applicable minimum capital and surplus requirements.

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By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our regulated subsidiaries, are required to maintain minimum levels of statutory net worth. The minimum statutory net worth requirements differ by state and are generally based on balances established by statute, a percentage of annualized premium revenue, a percentage of annualized health care costs, or risk-based capital (RBC) requirements. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level (ACL), which represents the minimum amount of net worth believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as 200% of the ACL, or the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. Because our regulated subsidiaries are also subject to their state regulators’ overall oversight authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of the RBC requirement, even though RBC has been adopted in their states of domicile. We generally manage our aggregate regulated subsidiary capital above 300% of ACL, although RBC standards are not yet applicable to all of our regulated subsidiaries. At June 30, 2009, we had sufficient capital to exceed this level.

As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations. During the six months ended June 30, 2009, we made capital contributions of $15.0 million to various subsidiaries to maintain RBC or other statutory capital requirements. Health Net, Inc. did not make any capital contributions to its subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations thereafter through August 4, 2009.

Legislation has been or may be enacted in certain states in which our subsidiaries operate imposing substantially increased minimum capital and/or statutory deposit requirements for HMOs in such states. Such statutory deposits may only be drawn upon under limited circumstances relating to the protection of policyholders.

As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.

CONTRACTUAL OBLIGATIONS

Pursuant to Item 303(a)(5) of Regulation S-K, we identified our known contractual obligations as of December 31, 2008 in our Form 10-K. During the six months ended June 30, 2009, there were no significant changes to our contractual obligations as previously disclosed in our Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2009, we did not have any off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K.

CRITICAL ACCOUNTING ESTIMATES

In our Form 10-K, we identified the critical accounting policies, which affect the more significant estimates and assumptions used in preparing our consolidated financial statements. Those policies include revenue recognition, health plan services, reserves for contingent liabilities, amounts receivable or payable under

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government contracts, goodwill and recoverability of long-lived assets and investments. Other than the adoption of FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (see Note 2 to our consolidated financial statements for additional information), we have not changed these policies from those previously disclosed in our Form 10-K. Our critical accounting policy on estimating reserves for claims and other settlements and the quantification of the sensitivity of financial results to reasonably possible changes in the underlying assumptions used in such estimation as of June 30, 2009 is discussed below. There were no other significant changes to the critical accounting estimates as disclosed in our Form 10-K.

Reserves for claims and other settlements include reserves for claims (IBNR and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Health Plan Services reporting segment.

We estimate the amount of our reserves for claims primarily by using standard actuarial developmental methodologies. This method is also known as the chain-ladder or completion factor method. The developmental method estimates reserves for claims based upon the historical lag between the month when services are rendered and the month claims are paid while taking into consideration, among other things, expected medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key component of the developmental method is the completion factor which is a measure of how complete the claims paid to date are relative to the estimate of the claims for services rendered for a given period. While the completion factors are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods since a large portion of health care claims are not submitted to us until several months after services have been rendered. Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member per month claims trends developed from the experience in preceding months. This method is applied consistently year over year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership.

An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns and medical cost trends. As such, the completion factors and the claims per member per month trend factor are the most significant factors used in estimating our reserves for claims. Since a large portion of the reserves for claims is attributed to the most recent months, the estimated reserves for claims are highly sensitive to these factors. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by these factors:

Completion Factor (a) Percentage-point Increase (Decrease) in Factor	Health Plan Services (Decrease) Increase in Reserves for Claims
2%	$	(58.6) million
1%	$	(29.8) million
(1)%	$	30.8 million
(2)%	$	62.8 million
Medical Cost Trend (b) Percentage-point Increase (Decrease) in Factor	Health Plan Services Increase (Decrease) in Reserves for Claims
2%	$	32.5 million
1%	$	16.2 million
(1)%	$	(16.2) million
(2)%	$	(32.5) million

(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an increase in the completion factor percent results in a decrease in the remaining estimated reserves for claims.

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(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the most recent three months.

Other relevant factors include exceptional situations that might require judgmental adjustments in setting the reserves for claims, such as system conversions, processing interruptions or changes, environmental changes or other factors. All of these factors are used in estimating reserves for claims and are important to our reserve methodology in trending the claims per member per month for purposes of estimating the reserves for the most recent months. In developing our best estimate of reserves for claims, we consistently apply the principles and methodology described above from year to year, while also giving due consideration to the potential variability of these factors. Because reserves for claims include various actuarially developed estimates, our actual health care services expense may be more or less than our previously developed estimates. Claims processing expenses are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are continually monitored and reviewed, with any adjustments reflected in current operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate and market risk primarily due to our investing and borrowing activities. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and/or market conditions and in equity prices. Interest rate risk is a consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed income investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, we are exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer’s credit rating or credit perception may affect the value of financial instruments. No material changes to any of these risks have occurred since December 31, 2008.

For a more detailed discussion of our market risks relating to these activities, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our Form 10-K.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of such period.

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Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as indicated below.

During the second quarter of 2009, the Company completed the transition it began in the first quarter of 2009 related to the outsourcing to a third party of its software applications development and management activities for certain applications significant to the Company’s financial reporting practices, including application development, testing and monitoring services, application maintenance and support services, project management services and cross functional services. During the first quarter of 2009, the Company also outsourced its internal information technology (IT) environment, including mainframe services, server services, help desk services, end user services, data network services, voice network services and cross functional services, to a third party. This IT infrastructure outsourcing was completed in February 2009, except for the data center migration, which is scheduled for completion in the fourth quarter of 2009.

While outsourcing these activities, the Company adopted a detailed transition model involving extensive transition planning activities and relevant training, guided support, evaluation of quality measures and increased oversight activities. We are not currently aware of any material adverse impacts on our internal control over financial reporting as a result of these changes; however, the new control environment has not been completely tested. Management will be performing an evaluation of the effectiveness of our internal control over financial reporting, including with respect to the new control environment, as of the year ended December 31, 2009. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. There have been no other significant changes in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

A description of the legal proceedings to which the Company and its subsidiaries are a party is contained in Note 9 to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” of the Form 10-K, which could materially affect our business, financial condition or future results. The risks described in the Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition and/or operating results. The risk factors set forth below update, and should be read together with, the risk factors disclosed in Part I, Item 1A of the Company’s Form 10-K.

A significant reduction in revenues from the government programs in which we participate could have an adverse effect on our business, financial condition or results of operations.

Approximately 52% of our revenues in the second quarter of 2009 relate to federal, state and local government health care coverage programs, such as Medicare, Medicaid and TRICARE. All of the revenues included in our Government Contracts segment come from the federal government. Under government-funded health programs, the government payor typically determines premium and reimbursement levels. If the government payor reduces premium or reimbursement levels or increases them by less than our costs increase, and we are unable to make offsetting adjustments through supplemental premiums and changes in benefit plans, we could be adversely affected. Contracts under these programs are generally subject to frequent change, including changes that may reduce the number of persons enrolled or eligible, reduce the revenue received by us or increase our administrative or health care costs under such programs. Changes of this nature could have a material adverse effect on our business, financial condition or results of operations. Changes to government health care coverage programs in the future may also affect our willingness to participate in these programs.

States periodically consider reducing or reallocating the amount of money they spend for Medicaid, the Healthy Families program or similar programs in which we participate. Currently, many states are experiencing budget deficits, and some states have reduced or have begun to reduce, or have proposed reductions in, payments to Medicaid managed care providers. For example, in July 2008, the State of California implemented a 10% reduction in the state’s Medi-Cal reimbursement rates. This rate reduction had an adverse impact on our pretax income for 2008 and was one of the factors contributing to our lowered full-year earnings per share guidance for 2008. Additionally, in late July 2009, the Governor of California signed a revised budget package that eliminated a significant portion of the funding for the Healthy Families program. Alternative sources of funds are being sought, but an enrollment freeze has been implemented and the cuts could result in the disenrollment of members from the Healthy Families program. Any enrollment freeze or additional significant reduction in payments received in connection with Medicaid, the Healthy Families program or similar programs could adversely affect our business, financial condition or results of operations.

In addition, states can impose requirements on Medicaid programs that make continued operations not feasible. For example, in early 2008 we completed our transition out of the Medicaid program in Connecticut due to the state requiring Medicaid contractors to publicly disclose certain proprietary and trade secret information and persistent underfunding of the program.

The amount of government receivables set forth in our consolidated financial statements represents our best estimate of the government’s liability to us under TRICARE and other federal government contracts. In general, government receivables are estimates and subject to government audit and negotiation. In addition, inherent in

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government contracts are an uncertainty of and vulnerability to disagreements with the government. Final amounts we ultimately receive under government contracts may be significantly greater or less than the amounts we initially recognize on our financial statements.

Health care operations under our TRICARE North contract are scheduled to conclude on March 31, 2010. We submitted our final proposal to DoD for the T3 North Region contract on January 2, 2009, and on July 13, 2009 we were notified by DoD that we were not selected to be the Managed Care Support Contractor under the T3 contract for the North Region. On July 20 and July 28, 2009 we filed protests with the GAO in connection with the T3 award decision. The GAO is required to render a decision within 100 days after a protest is filed. Accordingly, our protest filed on July 20, 2009 currently is scheduled to be decided by the GAO no later than October 28, 2009 and our protest filed on July 28, 2009 currently is scheduled to be decided by the GAO no later than November 5, 2009.

The filing of our timely protest triggered an automatic suspension of the performance of the T3 North Region contract until the protest is decided by the GAO. Though it has not done so to date, DoD can override this automatic suspension under certain circumstances.

DoD has instructed us to stop work on transition-out activities under our existing TRICARE North contract, and has informed us that if transition work is resumed, the T3 North contractor will be given a ten month transition period prior to implementation of the T3 North contract. Once the GAO decisions are rendered, if DoD does not shorten the transition period to less than ten months, health care operations under our current TRICARE North contract may be extended beyond March 31, 2010. For additional details regarding our protest of the T3 North contract award, see Note 10 to our consolidated financial statements.

There are no assurances that our protest will be successful, or that DoD will not issue an override of the automatic suspension of the performance of the T3 North contract during the protest period, or that DoD will not shorten the transition period to less than ten months. In the event that our protest is unsuccessful or DoD issues an override or shortens the transition period to less than 10 months, our health care operations under our existing TRICARE North contract would conclude as early as March 31, 2010. In addition, if our protest is unsuccessful, we may wind-down our TRICARE North operations after our existing contract concludes. For additional information on our evaluation of the impact of the TRICARE developments on our operations, see Note 10 to our consolidated financial statements. As a result of the winding-down process, among other things, we could incur a significant impairment charge, unless mitigated, due to severance and other costs incurred to terminate the operations that are in excess of transition-out payments received from DoD pursuant to our existing TRICARE North contract. In addition, the loss of our TRICARE North operations would cause our business to become more regionally concentrated. See “Item 1A. Risk Factors—Our business is regionally concentrated and, in the event of the discontinuation of our TRICARE North operations and/or the consummation of the sale of our Northeast operations, we expect our business to become more regionally concentrated.”

The consummation of the sale of our Northeast operations is subject to risks and uncertainties, including the satisfaction of specified closing conditions by both parties.

On July 20, 2009, we entered into a Stock Purchase Agreement with UnitedHealth pursuant to which, subject to certain terms and conditions, we have agreed to sell to Buyer all of the outstanding shares of capital stock of our New York, New Jersey, Connecticut and Bermuda HMO and insurance subsidiaries, which conduct our Northeast operations. At the closing of the transaction, affiliates of the Buyer also will acquire membership renewal rights for the Health Net Life Insurance Company health care business in the states of Connecticut and New Jersey. The transaction is subject to certain closing conditions, including the receipt of required regulatory approvals and other customary closing conditions. For a detailed description of the pending sale of our Northeast operations, see Note 10 to our consolidated financial statements. We expect the transaction to close within twelve months after the date of the Stock Purchase Agreement. However, it is possible that factors outside of our control could require the parties to complete the proposed transaction at a later time or not to complete it at all. In addition, the announcement of the proposed transaction may have a negative impact on us due to:

• risks that the proposed transaction disrupts current plans and operations;

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• the effect of the announcement of the proposed transaction on our relationships with our employees, vendors, providers, brokers, employer groups and other current and prospective customers in the Northeast; and

• the amount of the costs, fees, expenses and charges related to the proposed transaction.

Failure to complete the proposed transaction or to execute another strategic alternative following our announcement of a proposed transaction could adversely impact our ability to operate the Northeast business profitably. In the event that the proposed transaction is not completed, this could have a material adverse effect on the Company and on the price of our common stock.

After the consummation of the sale of our Northeast operations, we will be obligated to provide administrative services in connection with the wind-down and run-off of the acquired business, which will expose us to operational and financial risks.

Pursuant to the Stock Purchase Agreement, at the closing of the transactions contemplated by the agreement, we will be obligated to enter into Administrative Services Agreements with affiliates of the Buyer pursuant to which our subsidiary, HNNE, will provide administrative services to the HMO and insurance subsidiaries currently engaged in our Northeast business that will be acquired by Buyer. The scope of these administrative services will include substantially all of the day-to-day operational functions of these entities, including (i) claims payment services and operations, (ii) medical management services, (iii) financial planning and analysis, (iv) actuarial and underwriting services, (v) corporate finance services, (vi) regulatory relations services, (vii) organization effectiveness (human resources) services, (viii) legal services, (ix) customer care operations, (x) information technology services, (xi) premium tax filing services, (xii) administration of governmental assessments, (xiii) broker commissions payment services, and (xiv) other administrative services. For additional information on the Administrative Services Agreements, see Note 10 to our consolidated financial statements. The Administrative Services Agreements will require HNNE to perform the administrative services in accordance with specified service standards and other requirements. Subject to certain terms and conditions, if HNNE fails to comply with the service standards, among other things, it will be required to pay specified penalties in accordance with the Administrative Services Agreements. We could fail to comply with the service standards for various reasons, some of which are not within our control. For example, in the event that personnel needed to provide the administrative services after the closing terminate their employment with us, we could be unable to provide the administrative services in accordance with the service standards. The amount of the penalties for violating the service standards could be substantial. Furthermore, if HNNE is unable to perform all or a material part of the services required under the Administrative Services Agreements, and is unable to obtain an alternative means to provide such services, or if HNNE materially breaches the Administrative Services Agreements, the service recipients may terminate the Administrative Services Agreements. If such a termination occurs prior to the second anniversary of the closing date of the transaction, we and HNNE may be required to establish (and will be required to pay to Buyer) a loss reserve, which, depending on when the Administrative Services Agreements are terminated, could be substantial and could have a material adverse effect on our business, financial condition or results of operations. See “Item 1A. Risk Factors—After the consummation of the sale of our Northeast operations, we will retain responsibility for certain liabilities of the acquired business, which could be substantial” for additional detail on when the loss reserve is required to be established and paid.

After the consummation of the sale of our Northeast operations, we will retain responsibility for certain liabilities of the acquired business, which could be substantial.

Under the Stock Purchase Agreement, we will be required to indemnify Buyer and its affiliates for all pre-closing liabilities of the acquired business and for a broad range of excluded liabilities, including liabilities arising out of the acquired business incurred through the winding-up and running-out period of the acquired business. These liabilities could exceed the amount of profits that will be payable to us by Buyer in connection with the operations of the acquired business. The Stock Purchase Agreement does not limit the amount or duration of our obligations to the Buyer and its affiliates with respect to these indemnities. As a result, in the

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event that the amount of these liabilities was to exceed our expectations, we could be responsible to the Buyer and its affiliates for substantial indemnification obligations.

In addition, under the Stock Purchase Agreement, the purchase price for the acquired HMO and insurance subsidiaries is subject to adjustment upward or downward by the amount of profits or losses, subject to specified adjustments, of these subsidiaries for the period beginning on the closing date and ending on the earlier of (i) the second anniversary of the closing date (the “Transition Date”) and (ii) the date that all of the Administrative Service Agreements are terminated (the “ASA Termination Date”). As a result, even though we will not own these subsidiaries after the closing, to the extent that they incur losses, we and HNNE generally will be financially responsible to the Buyer for the amount of such losses. Subject to certain terms and conditions, Buyer will be permitted to exercise control rights over the subsidiaries after the closing without our or HNNE’s consent. The exercise of such rights by Buyer, or other events or circumstances beyond our or HNNE’s control, could result in substantial losses for which HNNE will responsible to Buyer.

Furthermore, in the event that the ASA Termination Date occurs prior to the Transition Date, among other things, we and HNNE will be required to establish (and will be required to pay to Buyer) a loss reserve in an amount equal to an actuarially determined provision for medical costs and loss adjustment expenses as of the ASA Termination Date for all claims of the subsidiaries through the winding-up and running-out period of the acquired business (excluding certain unreserved claims). Depending on when the ASA Termination Date occurs, the amount of such loss reserve could be substantial.

As a result of the provisions described above, although we will have sold to Buyer all of the outstanding shares of capital stock of our HMO and insurance subsidiaries that conduct our Northeast operations, we will continue to have significant potential financial obligations to the Buyer and its affiliates with respect to the acquired business after the closing. In the event that the amount of these financial obligations exceed our expectations, our responsibilities to the Buyer and its affiliates with respect to these obligations could have an adverse effect on our business, financial condition or results of operations.

At the closing of the sale of our Northeast operations, we will be obligated to enter into a Non-Competition Agreement with the Buyer that will contain prohibitions which could negatively impact our prospects, business, financial condition or results of operations.

Under the Stock Purchase Agreement, at the closing of the transactions contemplated by the agreement, we will be required to enter into a Non-Competition Agreement with Buyer, pursuant to which we generally will be prohibited from competing with the acquired business in the States of New York, New Jersey, Connecticut and Rhode Island for a period of five years, and from engaging in certain other restricted activities. Although we currently do not have any intention to engage in such prohibited activities during the term of the Non-Competition Agreement, circumstances could change and it may become in our best interests to engage in a business that is prohibited by the agreement. If this were to occur, in order to engage in the business we would be required to obtain the Buyer’s consent under the Non-Competition Agreement, which the Buyer could withhold in its discretion. In the event that we are unable to engage in a business due to the terms of the Non-Competition Agreement, this could have an adverse effect on our prospects, business, financial condition or results of operations.

Our business is regionally concentrated and, in the event of the discontinuation of our TRICARE North operations and/or the consummation of the sale of our Northeast operations, we expect our business to become more regionally concentrated.

Our current business operations are concentrated in the Northeast (in the states of Connecticut, New York and New Jersey) and in the states of California, Arizona and Oregon. Our California operations represented approximately 42% of our total revenue in the second quarter of 2009. On July 13, 2009, we were notified by

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DoD that we were not selected to be the Managed Care Support Contractor under the T3 North Region contract. Although we are challenging this determination, if our challenge is unsuccessful, health care operations under our TRICARE North contract are scheduled to conclude as early as March 31, 2010. See Note 10 to our consolidated financial statements for additional detail regarding our protest of the T3 North Region award. In addition, on July 20, 2009, as discussed above, we entered into a definitive agreement to sell all of the outstanding shares of capital stock of our HMO and insurance subsidiaries that conduct our Northeast operations and to provide membership renewal rights for the Health Net Life Insurance Company health care business in Connecticut and New Jersey, subject to the satisfaction of certain terms and conditions. See “Item 1A. Risk Factors—The consummation of the sale of our Northeast operations is subject to risks and uncertainties, including the satisfaction of specified closing conditions by both parties” for additional detail regarding the risks associated with the sale of our Northeast operations.

Once we stop receiving the profits generated by the Northeast operations from the Buyer (if the sale of the Northeast operations is consummated and/or our TRICARE North operations are concluded), such events will increase the geographic concentration of our remaining business operations. Due to this concentration in a small number of states, and, in particular, California, we are exposed to the risk of a deterioration in our financial results arising from a significant economic downturn in one or more of these states. On July 29, 2009, Governor Schwarzenegger signed a plan to close California’s $24 billion budget deficit caused by the national economic recession and rising unemployment. In total, the state will see approximately $15.6 billion in spending cuts for services. If economic conditions in any of these states significantly worsen, we may experience a reduction in existing and new business, which may have a material adverse effect on our business, financial condition and results of operations. In addition, if any one of our health plans experiences significant losses, our consolidated results of operations may be materially and adversely affected. Losses of accounts or deterioration in margins in any one of the states in which we operate could have an adverse effect on our financial condition or results of operations.

Downgrades in our debt ratings may adversely affect our business, financial condition and results of operations.

Claims paying ability, financial strength, and debt ratings by nationally recognized rating agencies are increasingly important factors in establishing the competitive position of insurance companies and health benefits companies. Ratings information by nationally recognized rating agencies is broadly disseminated and generally used throughout the industry. We believe our claims paying ability and financial strength ratings are important factors in marketing our products to certain of our customers. In addition, our debt ratings impact both the cost and availability of future borrowings and, accordingly, our cost of capital. On July 15, 2009, in light of our announcement that we were not selected by DoD to be the Managed Care Support Contractor under the T3 North Region contract, Fitch Ratings announced that the outlook for the Company remained negative and downgraded the Company’s default issuer rating to “BB-” (speculative) from “BBB-” (lower medium grade), downgraded our senior debt rating to “B+” (highly speculative) from “BB+” (non-investment) and downgraded our insurer financial strength rating to “BBB-” from “BBB+,” both of which are lower medium grade ratings. On the same day, Standard & Poor’s Rating Services (S&P) announced that the outlook for the Company remained negative and lowered its counterparty credit rating of the Company to “BB-” from “BB” and, at the same time, affirmed the “BBB-” financial strength and counterparty credit ratings of our core operating subsidiaries, Health Net of California and Health Net Life Insurance Company. Moody’s Investors Service also announced on the same day that it had placed the Company’s Ba3 senior debt ratings under review for possible downgrade, also due to the loss of the T3 North Region contract. For additional detail regarding our protest of the T3 North Region contract award, please see Note 10 to our consolidated financial statements. Each of the rating agencies reviews our ratings periodically and there can be no assurance that current ratings will be maintained in the future. Our ratings reflect each rating agency’s independent opinion of our financial strength, operating performance, ability to meet our debt obligations or obligations to policyholders and other factors. The downgrades in our ratings from Fitch Ratings and S&P, and potential further downgrades from ratings agencies, should they occur, may adversely affect our business, financial condition and results of operations.

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Acquisitions, divestitures and other significant transactions may adversely affect our business.

We continue to evaluate the profitability realized or likely to be realized by our existing businesses and operations. From time to time we review, from a strategic standpoint, potential acquisitions and divestitures in light of our core businesses and growth strategies. The success of any such acquisition or divestiture depends, in part, upon our ability to identify suitable buyers or sellers, negotiate favorable contractual terms and, in many cases, obtain governmental approval. For acquisitions, success is also dependent upon efficiently integrating the acquired business into the Company’s existing operations. If we are unable to consummate, successfully integrate and grow these acquisitions and to realize contemplated revenue synergies and cost savings, our financial results could be adversely affected. In addition, we may, from time to time, divest businesses that are less of a strategic fit for the company or do not produce an adequate return. For example, as noted above, on July 20, 2009, we entered into a definitive agreement to sell of all of the outstanding shares of capital stock of our HMO and insurance subsidiaries that conduct our Northeast operations and certain related membership renewal rights, subject to the satisfaction of certain terms and conditions. See Note 10 to our consolidated financial statements for a detailed description of the pending sale of our Northeast operations and “Item 1A. Risk Factors—The consummation of the sale of our Northeast operations is subject to risks and uncertainties, including the satisfaction of specified closing conditions by both parties” for additional detail regarding the risks associated with the pending sale of our Northeast operations.

Potential acquisitions or divestitures present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities, indemnities and potential disputes with the buyers or sellers. Further, in the event the structure of the transaction results in continuing obligations by the buyer to us or our customers, a buyer’s inability to fulfill these obligations could lead to future financial loss on our part. In addition, any divestiture could result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations.

If we are unable to manage our general and administrative expenses, our business, financial condition or results of operations could be harmed.

The level of our administrative expenses can affect our profitability, and our ability to manage administrative expense increases is difficult to predict. While we attempt to effectively manage such expenses, including through the development of online functionalities and other projects designed to create administrative efficiencies, increases in staff-related and other administrative expenses may occur from time to time due to business or product start-ups or expansions, growth, membership declines or changes in business, difficulties or delays in projects designed to create administrative efficiencies, acquisitions, reliance on outsourced services, regulatory requirements, including compliance with HIPAA regulations, or other reasons. For example, in November 2007, we announced a reorganization plan to enhance efficiency and achieve general and administrative cost savings. The reorganization is ongoing and is intended to enable us to streamline our operations, including consolidating technology platforms, combining duplicative administrative and operational functions and outsourcing certain operations where appropriate. However, there can be no assurance that the reorganization will produce the anticipated savings or that the reorganization will not significantly disrupt operations thereby negatively impacting our financial performance. In addition, there can be no assurance that we will be able to successfully manage our administrative expenses, which could have an adverse effect on our business, financial condition or results of operations.

In addition to managing increases in administrative expenditures, our profitability is also affected by our ability to effectively and quickly respond to events that require significant reductions and changes to the allocation of the Company’s administrative expenditures. After we close the sale of our Northeast operations and stop receiving the profits generated by the Northeast operations from the Buyer and /or our TRICARE North operations are concluded, such events will render redundant many of the management, administrative and operational functions previously required to maintain those operations. See “Item 1A. Risk Factors—The consummation of the sale of our Northeast operations is subject to risks and uncertainties, including the

56

satisfaction of specified closing conditions by both parties” for additional detail regarding the sale of the Northeast operations, and “—A significant reduction in revenues from the government programs in which we participate could have an adverse effect on our business, financial condition or results of operations” for additional detail regarding our protest of the T3 North Region award. While we will need to significantly reduce, reallocate or eliminate these redundant administrative expenses, we cannot guarantee you that we will be successful in making these cuts and adjustments at a pace that will maintain or increase our profitability. In addition, we would expect to incur significant impairment charges due to severance and other costs if we terminate our TRICARE North operations and / or consummate the sale of our Northeast operations. Failure to adjust our overhead and other administrative expenses in proportion to these events could have a material adverse effect on our business, financial condition or results of operations.

Federal and state audits, review and investigations of us and our subsidiaries could have a material adverse effect on our operations.

We have been and, in some cases, currently are, involved in various federal and state governmental audits, reviews and investigations. These include routine, regular and special investigations, audits and reviews by CMS, state insurance and health and welfare departments and others pertaining to financial performance, market conduct and regulatory compliance issues. Such audits, reviews and investigations could result in the loss of licensure or the right to participate in certain programs, or the imposition of civil or criminal fines, penalties and other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our reputation in various markets and make it more difficult for us to sell our products and services. We have entered into consent agreements relating to, and in some instances have agreed to pay fines in connection with, several recent audits and investigations.

Many regulatory audits, reviews and investigations in recent years have focused on the timeliness and accuracy of claims payments by managed care companies and health insurers. Our subsidiaries have been the subject of audits, reviews and investigations of this nature. Depending on the circumstances and the specific matters reviewed, regulatory findings could require remediation of claims payment errors and payment of penalties of material amounts that could have a material adverse effect on our results of operations.

Beginning in November 2008, CMS performed routine audits of certain of our Medicare Advantage, PFFS and PDP products, and found deficiencies in many of the business areas included in the review. On February 2, 2009, we received the audit report and corrective action request from CMS. On March 19, 2009, we responded to CMS with a proposed corrective action plan. On April 17, 2009, CMS responded by noting its acceptance of certain elements of the corrective action plan while also identifying certain deficiencies. After a subsequent submission of a revised corrective action plan on May 15, 2009, we submitted a final proposed corrective action plan to CMS on July 10, 2009. On August 6, 2009, CMS accepted our final corrective action plan. If CMS is not satisfied with the implementation of our corrective action plan, or discovers repeat deficiencies in a subsequent audit(s), it could levy enforcement actions, including financial penalties and/or the suspension of marketing and enrollment into our Medicare products. If CMS were to impose substantial financial penalties and/or suspend the marketing of and enrollment into our Medicare products for a significant period of time in the future, it could have a material adverse effect on our Medicare business.

On February 13, 2008, the New York Attorney General (NYAG) announced that his office was conducting an industry-wide investigation into the manner in which health insurers calculate “usual, customary and reasonable” charges for purposes of reimbursing members for out-of-network medical services. The NYAG’s office issued subpoenas to sixteen health insurance companies, including us, in connection with this investigation. See Note 9 to our consolidated financial statements for additional detail regarding the NYAG’s investigation. On January 13, 2009, the NYAG announced that, as a result of his investigation, his office had entered into a settlement agreement with UnitedHealth, which owns and operates the Ingenix database used by most health plans, including us, to price out-of-network claims. At the time of the announcement of the settlement with UnitedHealth, the NYAG

57

indicated his intent to continue his investigation with respect to other health insurers and has subsequently reached agreements with several other health plans. Subsequently, the NYAG entered into agreements with a number of health insurers. On June 18, 2009, we entered into an agreement with the NYAG similar in form to those entered into with other insurers. See Note 9 to our consolidated financial statements for information regarding the settlement agreement.

In the meantime, the Connecticut Attorney General has also been investigating health plans’ reimbursement of out-of-network services. On March 28, 2008, we received a request for voluntary production from the Connecticut Attorney General that seeks information similar to that subpoenaed by the NYAG. We have responded to the request and are cooperating with the Connecticut Attorney General as appropriate in his investigation. There can be no assurance that other state attorneys’ general will not take actions similar to those taken by the NYAG and the Connecticut Attorney General.

In addition, from time to time, agencies of the U.S. government investigate whether our operations are being conducted in accordance with regulations applicable to government contractors. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting, which could have a material adverse effect on our financial condition and results of operations.

Regulatory activities and litigation relating to the rescission of coverage, if resolved unfavorably, could adversely affect us.

In our individual business in certain states, persons applying for insurance policies are required to provide information about their medical history as well as that of family members for whom they are seeking coverage. These applications are subjected to a formal underwriting process to determine whether the applicants present an acceptable risk. If coverage is issued and the health plan or insurer subsequently discovers that the applicant materially misrepresented their or their family members’ medical history, the health plan or insurer has the legal right to rescind the policy in accordance with applicable legal standards. Although rescission has long been a legally authorized practice, the decisions of health plans to rescind coverage and decline payment to treating providers, as well as the procedures used to do so, have recently generated public attention, particularly in California. As a result, there have been both legislative and regulatory actions, as well as significant litigation, in connection with this issue.

On October 23, 2007, the California Department of Managed Health Care (DMHC) and the California Department of Insurance (DOI) announced that they would be issuing joint regulations that would restrict the ability of health plans and insurers to rescind a member’s coverage and deny payment to treating providers. The DMHC has issued draft proposed regulations but has not formally promulgated any regulations to date. On June 3, 2009, the DOI published proposed regulations governing underwriting and rescission practices. As of January 1, 2008, health plans and insurers in California, under certain defined circumstances, are obligated to pay providers for services they have rendered despite the rescission of a member’s policy.

In October 2007, the DMHC initiated a survey of Health Net of California’s activities regarding the rescission of policies for the period January 1, 2004 through June 30, 2006. Following completion of the survey, on May 15, 2008, Health Net of California entered into a settlement agreement with the DMHC. See Note 9 to our consolidated financial statements for information regarding the details of the settlement agreement. Failure to substantially implement the actions set forth in the corrective action plan will subject Health Net of California to a potential additional penalty of up to $3 million.

In April 2008, the DOI commenced an audit of Health Net Life Insurance Company’s rescission practices and related claims settlement practices for the period January 1, 2004 through February 29, 2008. On September 12, 2008, Health Net Life entered into a settlement agreement with the DOI which resolves all DOI matters regarding Health Net Life’s rescission practices from January 2004 to date. See Note 9 to our consolidated financial statements for information regarding the details of the settlement agreement. Failure to

58

substantially comply with the settlement agreement subjects Health Net Life to a potential additional monetary penalty of up to $3.6 million.

We have also been party to arbitrations and litigation, including a putative class action, in which rescinded members allege that we unlawfully rescinded their coverage. The lawsuits generally seek reimbursement for the cost of medical services that were not paid as a result of the rescission, and also seek to recover for emotional distress, attorneys’ fees and punitive damages. One of these arbitrations was decided in 2008 and resulted in an award paid to the claimant of approximately $9.4 million. Recent court of appeal decisions in California adverse to health plans and insurers have increased the risks associated with rescissions of policies based on applications containing material misrepresentations of medical history, and may make it more difficult to rescind policies in the future. On February 20, 2008, the Los Angeles City Attorney filed a complaint against us relating to our underwriting practices and rescission of certain individual policies. The complaint sought equitable relief and civil penalties for, among other things, alleged false advertising, violations of unfair competition laws and violations of the California Penal Code. On February 10, 2009, Health Net entered into settlement agreements resolving both the putative class action and the action filed by the Los Angeles City Attorney. See Note 9 to our consolidated financial statements for additional information regarding these settlement agreements. Other government agencies, including the Attorney General of California, have indicated that they are investigating, or may be interested in investigating, rescissions and related activities.

We cannot predict the outcome of the anticipated regulatory proposals described above, nor the extent to which we may be affected by the enactment of those or other regulatory or legislative activities relating to rescissions. Such legislation or regulation, including measures that would cause us to change our current manner of operation or increase our exposure to liability, could have a material adverse effect on our results of operations, financial condition and ability to compete in our industry. Similarly, given the complexity and scope of rescission lawsuits, their final outcome cannot be predicted with any certainty. It is possible that in a particular quarter or annual period our results of operations could be adversely affected by an ultimate unfavorable resolution of any such cases.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Purchases of Equity Securities by the Issuer

Our Board of Directors has authorized a $700 million stock repurchase program. As of June 30, 2009, the remaining authorization under our stock repurchase program was $103.3 million. On November 4, 2008 we announced that our stock repurchase program was on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, was undertaking a review of the Company’s strategic direction. On July 20, 2009, we announced the completion of our strategic review, which included entering into a Stock Purchase Agreement with UnitedHealth for the sale of our Northeast operations. For a detailed description of the pending sale of our Northeast operations, see Note 10 to our consolidated financial statements. At this time, Health Net’s Board of Directors has made no determination with regard to the future of the Company’s stock repurchase program. Under the Company’s various stock option and long-term incentive plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and/or exercise price obligations, as applicable, arising from the exercise of stock options. For certain other equity awards, the Company has the right to withhold shares to satisfy any tax obligations that may be required to be withheld or paid in connection with such equity award, including any tax obligation arising on the vesting date.

A description of the Company’s stock repurchase program and tabular disclosure of the information required under this Item 2 is contained in Part I—“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure—Share Repurchases.”

59

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

On May 21, 2009, we held our 2009 Annual Meeting of Stockholders (Annual Meeting). At the Annual Meeting, our stockholders voted upon proposals to (i) elect nine directors to serve for a term of one year or until the 2010 Annual Meeting of Stockholders (Proposal 1), (ii) approve the Company’s Amended and Restated Executive Officer Incentive Plan (Proposal 2), (iii) approve an amendment to the 2006 Long-Term Incentive Plan (Proposal 3), and (iv) ratify the Board’s selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for 2009 (Proposal 4).

The following provides voting information for all matters voted upon at the Annual Meeting, and includes a separate tabulation with respect to each nominee for director:

Proposal 1

Election of Directors:	Votes For:	Votes Against:	Votes Withheld:	Broker Non Votes:
Theodore F. Craver, Jr.	84,888,328	0	8,815,990	0
Vicki B. Escarra	79,705,979	0	13,998,339	0
Thomas T. Farley	84,067,936	0	9,636,382	0
Gale S. Fitzgerald	79,657,013	0	14,047,305	0
Patrick Foley	78,886,595	0	14,817,723	0
Jay M. Gellert	84,014,156	0	9,690,162	0
Roger F. Greaves	83,977,670	0	9,726,648	0
Bruce G. Willison	79,429,135	0	14,275,183	0
Frederick C. Yeager	79,709,513	0	13,994,805	0

Since each of the nominees received a plurality of the votes cast, each of the nominees was elected as a director for an additional term at the Annual Meeting.

Proposal 2

With respect to the approval of the Company’s Amended and Restated Executive Officer Incentive Plan, 83,574,766 votes were cast for and 10,059,667 votes were cast against and there were 69,885 abstentions and no broker non-votes. Since Proposal 2 received the affirmative vote of a majority of the votes cast on that proposal, and over 50% in interest of all of the outstanding shares of the Company’s Common Stock entitled to vote on Proposal 2 voted on such proposal, the Company’s Amended and Restated Executive Officer Incentive Plan was approved.

Proposal 3

With respect to the approval of an amendment to the Company’s 2006 Long-Term Incentive Plan, 64,363,569 votes were cast for and 21,910,048 votes were cast against and there were 51,203 abstentions and 7,379,498 broker non-votes. Since Proposal 3 received the affirmative vote of a majority of the votes cast on that proposal, and over 50% in interest of all of the outstanding shares of the Company’s Common Stock entitled to vote on Proposal 3 voted on such proposal, the amendment to the Company’s 2006 Long-Term Incentive Plan was approved.

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Proposal 4

With respect to the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2009, 87,091,479 votes were cast for and 6,566,250 votes were cast against and there were 46,589 abstentions and no broker non-votes. Since Proposal 4 received the affirmative vote of a majority of the votes cast on that proposal, the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2009 was ratified.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

Exhibit Number	Description
†^2.1	Stock Purchase Agreement, dated as of July 20, 2009, by and among Health Net Inc., Health Net of the Northeast, Inc., Oxford Health Plans, LLC and solely with respect to section 8.16 thereof, UnitedHealth Group Incorporated, a copy of which is filed herewith.
*10.1	Addendum A to Health Net, Inc. Management Incentive Plan, adopted July 20, 2009, a copy of which is filed herewith.
*10.2	Form of Nonqualified Stock Option Agreement utilized for eligible employees of Health Net, Inc. under the 2006 Long-Term Incentive Plan, as amended.
*10.3	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the 2006 Long-Term Incentive Plan, as amended.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates management contracts or compensatory plans or arrangements.

^ This exhibit has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

† Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.

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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 thereunto duly authorized.

		HEALTH NET, INC. (REGISTRANT)
Date: August 7, 2009	By:	/S/    JOSEPH C. CAPEZZA
		Joseph C. Capezza
		Chief Financial Officer
Date: August 7, 2009	By:	/S/    BRET A. MORRIS
		Bret A. Morris
		Senior Vice President and Corporate Controller (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
†^2.1	Stock Purchase Agreement, dated as of July 20, 2009, by and among Health Net Inc., Health Net of the Northeast, Inc., Oxford Health Plans, LLC and solely with respect to section 8.16 thereof, UnitedHealth Group Incorporated, a copy of which is filed herewith.
*10.1	Addendum A to Health Net, Inc. Management Incentive Plan, adopted July 20, 2009, a copy of which is filed herewith.
*10.2	Form of Nonqualified Stock Option Agreement utilized for eligible employees of Health Net, Inc. under the 2006 Long-Term Incentive Plan, as amended.
*10.3	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the 2006 Long-Term Incentive Plan, as amended.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates management contracts or compensatory plans or arrangements.

^ This exhibit has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

† Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.

EX-2.1

Exhibit 2.1

“***” = Confidential portions of this document have been omitted and have been separately filed with the Securities and Exchange Commission pursuant to an application for confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

STOCK PURCHASE AGREEMENT

BY AND AMONG

HEALTH NET, INC.,

HEALTH NET OF THE NORTHEAST, INC.,

OXFORD HEALTH PLANS, LLC

AND

UNITEDHEALTH GROUP INCORPORATED,

SOLELY WITH RESPECT TO SECTION 8.16, AS GUARANTOR

DATED AS OF

JULY 20, 2009

TABLE OF CONTENTS

ARTICLE I. PURCHASE AND SALE OF THE SHARES		1
Section 1.1	Purchase and Sale	1
Section 1.2	Closing	1
Section 1.3	Closing Obligations	2
Section 1.4	Post-Closing Payments	4
Section 1.5	Dispute of Payment Amounts	32
Section 1.6	Closing Costs; Transfer Taxes and Fees	35
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER		35
Section 2.1	Organization	35
Section 2.2	Capitalization	36
Section 2.3	Authorization; Binding Agreement	37
Section 2.4	Noncontravention	37
Section 2.5	Approvals	37
Section 2.6	Absence of Material Adverse Effect	38
Section 2.7	Absence of Certain Changes or Events	38
Section 2.8	Contracts and Commitments	39
Section 2.9	Litigation, Judgments, No Default	41
Section 2.10	Finders and Investment Bankers	41
Section 2.11	Insurance	42
Section 2.12	Intellectual Property Rights	42
Section 2.13	Compliance with Law	43
Section 2.14	Real Property	43
Section 2.15	Licenses and Permits	43
Section 2.16	Environmental Matters	43
Section 2.17	Tax Returns and Tax Payments	44
Section 2.18	Regulatory Matters	46
Section 2.19	Financial Matters	47
Section 2.20	Customers, Health Care Providers and Vendors; Intercompany Agreements	49
Section 2.21	Employment and Employee Benefit Matters	49
Section 2.22	Officers and Directors; Bank Accounts	49
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER		50
Section 3.1	Organization	50
Section 3.2	Authorization; Binding Agreement	50
Section 3.3	Noncontravention	50
Section 3.4	Approvals	51
Section 3.5	Finders and Investment Bankers	51
Section 3.6	Compliance with Law	51

i

Section 3.7	Regulatory Matters	51
Section 3.8	Financing	52
Section 3.9	Investment Intent	52
ARTICLE IV. COVENANTS		52
Section 4.1	Conduct of the Acquired Business	52
Section 4.2	Access and Information	56
Section 4.3	Reasonable Best Efforts	57
Section 4.4	Notification of Certain Matters	60
Section 4.5	Public Announcements	61
Section 4.6	Tax Matters	61
Section 4.7	Consents	66
Section 4.8	Intercompany Obligations	66
Section 4.9	Dissolution; Names.	67
Section 4.10	Certain Employee Matters	67
Section 4.11	No Negotiations	69
Section 4.12	Assignment of Certain ASO Contracts; Delivery of Intercompany Agreement Amendments	70
Section 4.13	Effective Date Membership Statement	71
Section 4.14	Provider Access	71
Section 4.15	Change in Status	72
Section 4.16	Implementation of Certain Undertakings	73
ARTICLE V. CONDITIONS		73
Section 5.1	Conditions to Each Party’s Obligations	73
Section 5.2	Conditions to Obligation of Buyer	74
Section 5.3	Conditions to Obligation of Parent and Seller	75
ARTICLE VI. TERMINATION		76
Section 6.1	Termination	76
Section 6.2	Procedure for and Effect of Termination	77
ARTICLE VII. INDEMNIFICATION		77
Section 7.1	Indemnification by Parent and Seller	77
Section 7.2	Indemnification by Buyer and the Acquired Companies	78
Section 7.3	Right of Offset; Limitations on Indemnity	78
Section 7.4	Indemnification Procedures	80
Section 7.5	Survival	82
Section 7.6	Sole and Exclusive Remedy	82
Section 7.7	Compliance with Express Negligence Rule	82
Section 7.8	Treatment of Indemnification Payments	83
ARTICLE VIII. MISCELLANEOUS		83

ii

Section 8.1	Amendment and Modification	83
Section 8.2	Waiver of Compliance; Consents	83
Section 8.3	Notices	83
Section 8.4	Assignment	84
Section 8.5	Expenses	84
Section 8.6	Governing Law; Consent to Jurisdiction; Waiver of Jury Trial	85
Section 8.7	Counterparts	85
Section 8.8	Interpretation	85
Section 8.9	Equitable Relief and Specific Performance	85
Section 8.10	Entire Agreement; Further Assurances	85
Section 8.11	Schedules; Exhibits	85
Section 8.12	No Third Party Beneficiaries	86
Section 8.13	No Implied Representation	86
Section 8.14	Confidentiality Agreement	86
Section 8.15	Severability	86
Section 8.16	Guarantee	87
Section 8.17	No Investigation by Buyer	87
ARTICLE IX. DEFINITIONS		87
Section 9.1	Definitions	87
Section 9.2	Construction	103

iii

EXHIBITS

Exhibit	Description
Exhibit A	Form of Administrative Services Agreement
Exhibit B	Form of Transitional Trademark License Agreement
Exhibit C	Form of Business Transition Agreement
Exhibit D	Form of Non-Competition Agreement
SCHEDULES TO THE AGREEMENT
Schedule	Description
Schedule A	Acquired Companies
Schedule B	Knowledge Persons
Schedule 4.1(a)	Conduct of the Acquired Business
Schedule 4.3(c)	Reasonable Best Efforts
Schedule 4.5	Buyer and Seller Representatives
Schedule 4.6(b)	Purchase Price and Tangible Net Equity Payment Allocation
Schedule 4.6(c)	IRS Form 8023
Schedule 4.8	Intercompany Obligations
Schedule 4.10	Business Employees
Schedule 5.1(b)	Conditions to Each Party’s Obligations
SELLER DISCLOSURE SCHEDULES
Section	Description
2.1(a)	Organization
2.1(b)	Jurisdiction of Formation
2.2(a)	Capitalization
2.2(c)	Shares Reserved for Issuance
2.4	Noncontravention
2.5	Approvals
2.5(b)	HMO and Insurance Approvals
2.5(d)	State Agency Approvals
2.5(e)	Other Approvals
2.7	Absence of Certain Changes or Events
2.8(a)	Specified Contracts
2.8(b)	Performance of Certain Contracts
2.9	Litigation, Judgments, No Default
2.11	Insurance Claims
2.12(a)	Intellectual Property Rights and Trademarks
2.12(b)	Right to Transfer Intellectual Property
2.12(d)	IP Disputes
2.13	Compliance with Law
2.14	Real Property Leases
2.15	Licenses and Permits
2.16	Environmental Matters
2.17	Tax Returns and Tax Payments
2.18	Regulatory Matters
2.18(b)	Examination Reports
2.18(c)	Regulatory Permits
2.18(e)	Healthcare Disciplinary Actions
2.18(f)	Insurance Subsidiaries
2.19(a)	Financial Statements
2.19(b)	Statutory Statements
2.20(a)(i)	Customers

iv

Section	Description
2.20(a)(ii)	Health Care Providers
2.20(a)(iii)	Shared Services Vendors
2.20(b)	Intercompany Agreements
2.22	Officers and Directors; Bank Accounts

v

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this “Agreement”), dated as of July 20, 2009 (the “Effective Date”), is by and among Health Net, Inc., a Delaware corporation (“Parent”), Health Net of the Northeast, Inc., a Delaware corporation (“Seller”), Oxford Health Plans, LLC, a Delaware limited liability company (“Buyer”), and, solely with respect to Section 8.16, UnitedHealth Group Incorporated, a Minnesota corporation (“Guarantor”) (each a “party” and together, the “parties”).

WHEREAS, the Subsidiaries of Seller identified on Schedule A (each an “Acquired Company” and together, the “Acquired Companies”) and Health Net Life Insurance Company, a California corporation (“HN Life”), are engaged in the Acquired Business.

WHEREAS, Buyer desires to directly purchase all of the issued and outstanding capital stock of the Acquired Companies (other than that of Health Net of New Jersey, Inc., which is a wholly-owned subsidiary of FOHP, Inc. (which is also an Acquired Company)) as of the Closing Date (collectively, the “Shares”), subject to the terms and conditions set forth in this Agreement.

WHEREAS, subject to the terms and conditions contained herein, on the Closing Date, Buyer or its designated Affiliates shall enter into, and Seller or its designated Affiliates shall enter into, the Business Transition Agreement and the Administrative Services Agreements.

NOW THEREFORE, in consideration of the representations, warranties, covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I.

PURCHASE AND SALE OF THE SHARES

Section 1.1 Purchase and Sale. At the Closing, on the terms and subject to the conditions set forth in this Agreement, Seller hereby sells, assigns, transfers, conveys and delivers to Buyer, and Buyer hereby purchases, all of the Shares, free and clear of all Liens, except for restrictions on transfer imposed by the Securities Act and state securities laws.

Section 1.2 Closing. Subject to the provisions of ARTICLE VI, the closing of the purchase and sale contemplated by this Agreement (the “Closing”) shall take place in Los Angeles, California at the offices of Latham & Watkins LLP, at 10:00 a.m. Pacific time on the second Business Day after the date on which each of the conditions set forth in ARTICLE V (other than conditions that are satisfied by the delivery of documents or the payment of money at the Closing) have been satisfied or waived by the party or parties entitled to the benefit of such conditions. Notwithstanding the foregoing, the Closing may occur at such other place, at such other time or on such other date as Parent and Buyer may mutually agree. The date on which the Closing actually occurs or is deemed to have occurred is hereinafter referred to as the “Closing Date.” Subject to the provisions of ARTICLE VI, a party’s failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 1.2 will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement.

Section 1.3 Closing Obligations.

(a) At the Closing, Parent and Seller shall deliver, or cause its applicable Subsidiary to deliver, to Buyer:

(i) certificates representing the Shares, duly endorsed (or accompanied by duly executed stock powers) for transfer of the Shares to Buyer;

(ii) an Administrative Services Agreement (Bermuda), an Administrative Services Agreement (Connecticut), an Administrative Services Agreement (New York HMO), an Administrative Services Agreement (New York Insurance) and an Administrative Services Agreement (New Jersey), each substantially in the form attached hereto as Exhibit A, with such changes as may be required by applicable Law (in each case, as amended, modified or supplemented from time to time, the “Administrative Services Agreements”);

(iii) a certificate, in form and substance reasonably satisfactory to Buyer, certifying that the transactions contemplated by this Agreement are exempt from withholding under Section 1445 of the Code;

(iv) a Transitional Trademark License Agreement, substantially in the form attached hereto as Exhibit B (the “Transitional Trademark License Agreement”);

(v) a Business Transition Agreement, substantially in the form attached hereto as Exhibit C (the “Business Transition Agreement”);

(vi) a Non-Competition Agreement, substantially in the form attached hereto as Exhibit D (the “Non-Competition Agreement”);

(vii) good standing certificates or the equivalent from the appropriate Governmental Entity in each jurisdiction in which each Acquired Company is formed or qualified to do business;

(viii) certified copies of the articles of incorporation and bylaws (or other equivalent organizational documents) of each Acquired Company;

(ix) a copy of the text of the resolutions adopted by the boards of directors of Parent and Seller authorizing the execution, delivery and performance of this Agreement, certified by an appropriate executive officer of Parent and Seller;

(x) an executed Resignation and Release from each of the officers and directors of each Acquired Company; provided, however, that such resignations shall not terminate such individuals’ status as employees of Parent, Seller or their respective Subsidiaries;

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(xi) evidence, reasonably satisfactory to Buyer, that, subject to Section 4.8, the Terminated Agreements have been terminated and all claims against any Acquired Company or its Subsidiaries thereunder have been released;

(xii) a certificate of the Chief Financial Officer of Parent, certifying that (except as otherwise provided under Section 4.8) all indebtedness or guarantees of indebtedness for borrowed money of the Acquired Companies owed to financial institutions, Parent, Seller or other Persons has been paid in full and all Liens on assets of the Acquired Companies securing such borrowed money have been released prior to the Closing;

(xiii) an executed officer’s certificate as required in Section 5.2(c) herein; and

(xiv) a customary incumbency certificate, certified by an appropriate executive officer of Parent and Seller, attesting to the authority of the signatory on behalf of Parent and Seller of this Agreement and each other Transaction Document to which Parent or Seller is a party.

(b) At the Closing, Buyer shall deliver, or cause its applicable Affiliates to deliver, to Seller:

(i) An amount equal to (A) sixty million dollars ($60,000,000) (the “Initial Business Payment”), plus (B) the difference of two hundred ninety million dollars ($290,000,000) minus the amount, if any, of the Estimated Closing Adjusted Tangible Net Equity Deficit (such difference, the “Estimated Adjusted Tangible Net Equity Payment” and, together with the Initial Business Payment, the “Closing Payment”), by wire transfer of immediately available funds to an account designated by Seller in writing;

(ii) the Administrative Services Agreements;

(iii) the Transitional Trademark License Agreement;

(iv) the Business Transition Agreement;

(v) the Non-Competition Agreement;

(vi) certified copies of the articles of incorporation and bylaws (or other equivalent organizational documents) of Buyer;

(vii) a copy of the text of the resolutions adopted by the board of directors of Buyer authorizing its execution, delivery and performance of this Agreement, certified by an appropriate officer of Buyer;

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(viii) a customary incumbency certificate, certified by an appropriate officer of Buyer, attesting to the authority of the signatory on behalf of Buyer of this Agreement and each other Transaction Document to which Buyer is a party; and

(ix) an executed officer’s certificate as required in Section 5.3(c) herein.

Section 1.4 Post-Closing Payments. The procedures for settlement of any disputes relating to this Section 1.4 are set forth in Section 1.5 hereof.

(a) Commercial Business Renewal Payments.

(i) No later than ten (10) Business Days following the Closing Date, Seller shall prepare and deliver to Buyer a schedule (the “Initial Membership Statement”) of Employer Groups (listing the name and tax identification number of each Employer Group and listing covered individuals and dependents (including covered and enrolled spouses, domestic partners and other dependents)), as of (x) the earlier of the date that is ninety (90) days prior to the Closing Date and December 31, 2009 and (y) as of the Closing Date, covered under: (A) commercial Fully Insured Contracts to which any of the Acquired Companies or HN Life (with respect to the Acquired Business) is a party, and (B) commercial ASO Contracts to which any of the Acquired Companies or HN Life (with respect to the Acquired Business) is a party, in both cases (A) and (B), other than contracts with CMS or any Governmental Entity for the provision of benefits to Medicare and Medicaid beneficiaries. The Initial Membership Statement shall also separately list the Employer Groups for which an Acquired Company or HN Life (with respect to the Acquired Business) has proposed to provide coverage or services under Fully Insured Contracts or ASO Contracts pursuant to outstanding quotations (the “Outstanding Quotes”) made by such entities as of the Closing Date. Seller may provide Buyer with an updated list of Outstanding Quotes, reflecting all Outstanding Quotes as of the Closing Date, within thirty (30) days following the Closing Date (the “Outstanding Quote Statement”). Seller shall include, with the Initial Membership Statement or any Outstanding Quote Statement, documents reasonably necessary to verify such quotations and the terms thereof. For purposes of this Section 1.4(a), to the extent that an Employer Group listed on the Outstanding Quote Statement accepts an Outstanding Quote and enters into a Fully Insured Contract or ASO Contract with an Acquired Company or HN Life (with respect to the Acquired Business) within ninety (90) days following the Closing Date or, if such Outstanding Quote is irrevocable, within the period during which the Outstanding Quote is outstanding, such Employer Group and each individual that is a Commercial Member of such Employer Group (such Employer Groups, “Additional Quoted Group(s)”) shall be listed on a Membership Renewal Statement and taken into consideration in calculating the Membership Renewal Amounts to be paid to Seller hereunder. Notwithstanding the foregoing, any Employer Group with fewer than fifty-one (51) eligible employees (under

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applicable Law) that accepts an Outstanding Quote within ninety (90) days following the Closing Date shall also be considered an Additional Quoted Group, regardless of whether Seller listed the applicable Outstanding Quote on the Initial Membership Statement or an Outstanding Quote Statement or whether Seller provides documents reasonably necessary to verify such quotations and the terms thereof. For the avoidance of doubt, employees of Seller and its Affiliates and their dependents shall not count as Commercial Members, nor shall any individuals covered through the exercise of a COBRA or state continuation coverage option or any individual covered pursuant to an individual conversion option count as Commercial Members.

(ii) After the Closing Date and for all periods prior to and including the second anniversary of the Closing Date (the “Transition Date”), Buyer shall deliver to Seller, on each January 31 and July 31 and on the date that is thirty (30) days after the Transition Date, a Membership Renewal Statement. Each Membership Renewal Statement shall contain a calculation of the Membership Renewal Amount as of the preceding December 31 or June 30 or as of the Transition Date (each such date, a “Membership Renewal Statement Date”), as the case may be. To the extent that payment of a Membership Renewal Amount causes the Net Business Payment Amount to exceed the amount of the Initial Business Payment, Buyer shall pay such excess to Seller.

(iii) For purposes of this Section 1.4(a):

(A) “Commercial ASO Members” means covered individuals and dependents under (1) commercial ASO Contracts to which any of the Acquired Companies or HN Life (with respect to the Acquired Business) is party or (2) any Transferred ASO Contract.

(B) “Commercial Insured Members” means covered individuals and dependents under Fully Insured Contracts to which any of the Acquired Companies or HN Life (with respect to the Acquired Business) is party.

(C) “Commercial Members” means Commercial ASO Members and Commercial Insured Members.

(D) “Fully Insured Contract” means a contract for the provision of a broad spectrum of medical health benefits to an individual or group under which the risk of loss is borne by the insurer (including contracts pursuant to which the insured bears a portion of the risk through deductibles, co-payments or other member cost-sharing features). For the avoidance of doubt, a contract for the provision of secondary medical health benefits pursuant to a “MedPrime” plan shall be considered to be a “Fully Insured Contract.”

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(E) “Membership Renewal Statement” means an itemized list (by Employer Group, listing covered individuals and dependents and their status as a Commercial Insured Member or Commercial ASO Member), prepared as of the applicable Membership Renewal Statement Date, of the cumulative number of Commercial Members that meet all of the following criteria: (1) their Employer Group was reflected on the Initial Membership Statement (including as updated to include any Additional Quoted Groups); (2) they were not listed on a previous Membership Renewal Statement; and (3) Buyer has directly Renewed coverage for their Employer Group on a Legacy United Entity Plan.

(F) “Membership Renewal Amount” means the sum of (1) $350 per Commercial Member Renewed on a commercial Legacy United Entity Plan pursuant to a Fully Insured Contract and (2) $50 per Commercial Member Renewed on a commercial Legacy United Entity Plan pursuant to an ASO contract.

(G) “Net Business Payment Amount” means (1) all Membership Renewal Amounts previously paid (or calculated and not paid) by Buyer to Seller pursuant to Section 1.4(a)(iii), plus (2) the 2010 Estimated Medicare Revenue-Based Payment Amount paid (or calculated and not paid) by Buyer to Seller pursuant to Section 1.4(b)(iii)(A), if any, plus (3) the 2010 Buyer Medicare Revenue True-Up Payment made (or calculated and not made) by Buyer to Seller pursuant to Section 1.4(b)(iii)(C)(1), if any, minus (4) the 2010 Seller Medicare Revenue True-Up Payment made (or calculated and not made) by Seller to Buyer pursuant to Section 1.4(b)(iii)(C)(2), if any, plus (5) the 2011 Estimated Medicare Revenue-Based Payment Amount made (or calculated and not made) by Buyer to Seller pursuant to Section 1.4(b)(iv)(A), if any, plus (6) the 2011 Buyer Medicare Revenue True-Up Payment made (or calculated and not made) by Buyer to Seller pursuant to Section 1.4(b)(iv)(C)(1), if any, minus (7) the 2011 Seller Medicare Revenue True-Up Payment made (or calculated and not made) by Seller to Buyer pursuant to Section 1.4(b)(iv)(C)(2), if any, minus (8) the 2012 Estimated United Product Difference Amount made (or calculated and not made) by Seller to Buyer pursuant to Section 1.4(b)(iv)(D)(2), plus (9) the 2012 Estimated United Product Difference Amount made (or calculated and not made) by Buyer to Seller pursuant to Section 1.4(b)(iv)(D)(2), plus (10) the 2012 Buyer Opt-In True Up Payment made (or calculated and not made) by Buyer to Seller pursuant to Section 1.4(b)(iv)(D)(3)(I), if any, minus (11) the 2012 Seller Opt-In True Up Payment made (or calculated and not made) by Seller to Buyer pursuant to Section 1.4(b)(iv)(D)(3)(II), if any, plus (12) the 2012 Estimated Medicare Revenue-Based Payment Amount paid (or

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calculated and not paid) by Buyer to Seller pursuant to Section 1.4(b)(v)(E), if any, plus (13) the 2012 Buyer Medicare Revenue True-Up Payment made (or calculated and not made) by Buyer to Seller pursuant to Section 1.4(b)(v)(G)(1), if any, minus (14) the 2012 Seller Medicare Revenue True-Up Payment made (or calculated and not made) by Seller to Buyer pursuant to Section 1.4(b)(v)(G)(2), if any, plus (15) the Medicaid Revenue-Based Payment Amount paid (or calculated and not paid) by Buyer to Seller pursuant to Section 1.4(c)(iv), if any.

(H) “Renew” or “Renewed” means the enrollment (directly), in a commercial Legacy United Entity Plan, of a Commercial Member of an Employer Group that is listed on the Initial Membership Statement or is an Additional Quoted Group (in each case, without regard to whether such Commercial Member was listed on such Initial Membership Statement or an Outstanding Quote Statement); provided, however, that, with respect to any such Employer Group which, as of the date of the Initial Membership Statement, is enrolled for the provision of health plan medical benefits pursuant to client contracts with both Seller or its Affiliates, on one hand, and Buyer or its Affiliates, on the other hand, “Renew” or “Renewed” means the enrollment, in a commercial Legacy United Entity Plan, by a covered individual and his or her enrolled dependents reflected on the Initial Membership Statement; provided, further, that, in the event any Employer Group that was not listed on the Initial Membership Statement pursuant to Section 1.4(a)(i)(x) or as an Additional Quoted Group, and, immediately prior to enrollment with Seller or its Affiliates, such Employer Group was enrolled for the provision of health plan medical benefits pursuant to a client contract with Buyer or its Affiliates, such Employer Group shall not be considered “Renewed” for purposes of this Section 1.4(a).

(b) Medicare-Based Payments.

(i) Certain Definitions. For purposes of this Section 1.4(b):

(A) “2010 Actual Medicare GAAP Revenues” means the GAAP revenues for 2010 Medicare Revenue Period attributable to the Medicare Revenue Contract, as reflected on the 2010 Medicare Actual Income Statement.

(B) “2010 Actual Medicare Profit/Loss Amount” means an amount equal to 50% of the pre-tax income or loss for the 2010 Medicare Revenue Period attributable to the Medicare Revenue Contract (up to a maximum pre-tax income or loss of *** such that the amount under this subparagraph (B) shall not be greater than

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*** of pre-tax income or loss) as reflected on the 2010 Medicare Actual Income Statement; provided that, such amounts shall be pro-rated based on the actual number of days commencing on the day after the Closing Date and ending on December 31, 2010 (up to 365). Notwithstanding the foregoing, 2010 Actual Medicare Profit/Loss Amount shall not include any favorable or unfavorable prior period development, risk adjustment factor developments or similar adjustments with respect to the Medicare Revenue Contract relating to any pre-Closing period.

(C) “2010 Actual Medicare Revenue-Based Payment Amount” means an amount equal to 6.75% of the 2010 Actual Medicare GAAP Revenues.

(D) “2010 Estimated Medicare GAAP Revenues” means the GAAP revenues for 2010 Medicare Revenue Period attributable to the Medicare Revenue Contract, as reflected on the 2010 Medicare Estimated Income Statement.

(E) “2010 Estimated Medicare Profit/Loss Amount” means an amount equal to 50% of the pre-tax income or loss for the 2010 Medicare Revenue Period attributable to the Medicare Revenue Contract (up to a maximum pre-tax income or loss of *** such that the amount under this subparagraph (E) shall not be greater than *** of pre-tax income or loss) as reflected on the 2010 Medicare Estimated Income Statement; provided that, such amounts shall be pro-rated based on the actual number of days commencing on the day after the Closing Date and ending on December 31, 2010 (up to 365). Notwithstanding the foregoing, 2010 Estimated Medicare Profit/Loss Amount shall not include any favorable or unfavorable prior period development, risk adjustment factor developments or similar adjustments with respect to the Medicare Revenue Contract relating to any pre-Closing period.

(F) “2010 Estimated Medicare Revenue-Based Payment Amount” shall mean an amount equal to 6.75% of the 2010 Estimated Medicare GAAP Revenues.

(G) “2010 Medicare Actual Income Statement” means an income statement, including actual GAAP revenues, medical costs, 2010 Operating Costs and the corresponding pre-tax income or loss for the 2010 Medicare Revenue Period attributable to the Medicare Revenue Contract.

(H) “2010 Medicare Estimated Income Statement” means an income statement, including projected GAAP revenues, medical costs, 2010 Operating Costs and the corresponding pre-tax income or loss for the 2010 Medicare Revenue Period attributable to the Medicare Revenue Contract.

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(I) “2010 Medicare Revenue Period” means the 12 month period ending on December 31, 2010.

(J) “2010 Operating Costs” means an amount equal to the product of (1) the 2010 PMPM Amount, multiplied by (2) the average number of members under the Medicare Revenue Contract for the 2010 Medicare Revenue Period, multiplied by (3) twelve (12).

(K) “2010 PMPM Amount” means *** per member per month of selling, general and administrative costs, which amount includes *** per member per month for product development, marketing and sales during 2010 for the 2011 fiscal year.

(L) “2011 Actual Medicare GAAP Revenues” means the GAAP revenues of the applicable Acquired Company (or, if the 2011 Novation has occurred, of the Buyer Medicare Affiliate) for 2011 Medicare Revenue Period attributable to the Medicare Revenue Contract, as reflected on the 2011 Medicare Actual Income Statement.

(M) “2011 Actual Medicare Revenue-Based Payment Amount” shall mean an amount equal to 6.75% of the 2011 Actual Medicare GAAP Revenues.

(N) “2011 Estimated Medicare GAAP Revenues” means the GAAP revenues of the applicable Acquired Company (or, if the 2011 Novation has occurred, of the Buyer Medicare Affiliate) for 2011 Medicare Revenue Period attributable to the Medicare Revenue Contract, as reflected on the 2011 Medicare Estimated Income Statement.

(O) “2011 Estimated Medicare Revenue-Based Payment Amount” shall mean an amount equal to 6.75% of the 2011 Estimated Medicare GAAP Revenues.

(P) “2011 Medicare Actual Income Statement” means an income statement, including actual GAAP revenues, medical costs, 2011 Operating Costs and imputed taxes (assuming a tax rate of thirty-five percent (35%)) and the corresponding net income or loss for the 2011 Medicare Revenue Period attributable to the Medicare Revenue Contract.

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(Q) “2011 Medicare Bid” means the bid submitted by Seller (or its Affiliates) to renew the Medicare Revenue Contract for the 2011 calendar year.

(R) “2011 Medicare Estimated Income Statement” means an income statement, including projected GAAP revenues, medical costs, 2011 Operating Costs and imputed taxes (assuming a tax rate of thirty-five percent (35%)) and the corresponding net income or loss for the 2011 Medicare Revenue Period attributable to the Medicare Revenue Contract. Projected GAAP revenues for this purpose shall be consistent with the 2011 Medicare Bid.

(S) “2011 Medicare Revenue Period” means the 12-month period ending on December 31, 2011.

(T) “2011 Operating Costs” means an amount equal to the product of (1) the 2011 PMPM Amount, multiplied by (2) the average number of members under the Medicare Revenue Contract for the 2011 Medicare Revenue Period, multiplied by (3) twelve (12).

(U) “2011 Opt-Out Percentage” means a percentage to be reasonably agreed by Buyer and Seller, but in no event more than eighty (80) percent.

(V) “2011 PMPM Amount” means the amount per member per month of selling, general and administrative costs set forth in the 2011 Medicare Bid (including, for the avoidance of doubt, allocated overhead of Parent and its Subsidiaries to the extent the amount thereof has been calculated in a manner consistent with the cost allocation methodology of Parent, on an enterprise-wide basis, as of the date of submission of the 2011 Medicare Bid). The 2011 PMPM Amount shall be agreed upon in good faith by the parties based on the parameters set forth in this definition.

(W) “2012 Actual Medicare Revenue-Based Payment Amount” means (1) in the event a 2011 Novation or a 2012 Novation has occurred, an amount equal to 6.75% of the 2012 Actual Medicare GAAP Revenues or (2) in the event that a 2012 Novation has not occurred, an amount equal to 6.75% of the difference between (x) the actual GAAP revenues attributable to the United Product for the 2012 Medicare Revenue Period, minus (y) the actual GAAP revenues attributable to the United Product for the 2011 Medicare Revenue Period. For the avoidance of doubt, for purposes of clause (2) GAAP revenues shall be calculated after giving effect to any retroactive enrollments of members under the Medicare Revenue Contract in the United Product during 2012.

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(X) “2012 Actual Medicare GAAP Revenues” means, in the event the 2012 Novation has occurred, the GAAP revenues of the Buyer Medicare Affiliate for the 2012 Medicare Revenue Period attributable to the Medicare Revenue Contract, as reflected on the 2012 Medicare Actual Statement of Revenues.

(Y) “2012 Estimated Medicare GAAP Revenues” means, in the event the 2012 Novation has occurred, the GAAP revenues of the Buyer Medicare Affiliate for the 2012 Medicare Revenue Period attributable to the Medicare Revenue Contract, as reflected on the 2012 Medicare Estimated Statement of Revenues.

(Z) “2012 Estimated Medicare Revenue-Based Payment Amount” means (1) in the event a 2011 Novation or a 2012 Novation has occurred, an amount equal to 6.75% of the 2012 Estimated Medicare GAAP Revenues or (2) in the event that the 2012 Novation has not occurred, an amount equal to 6.75% of the difference between (x) the estimated GAAP revenues attributable to the United Product for the 2012 Medicare Revenue Period, minus (y) the estimated GAAP revenues attributable to the United Product for the 2011 Medicare Revenue Period. For the avoidance of doubt, for purposes of clause (2) GAAP revenues shall be calculated after giving effect to any retroactive enrollments of members under the Medicare Revenue Contract in the United Product during 2012.

(AA) “2012 Estimated United Product Difference Amount” shall be equal to the difference between the 2011 Estimated Medicare Revenue-Based Payment Amount and the 2012 Estimated Medicare Revenue-Based Payment Amount.

(BB) “2012 Medicare Actual Statement of Revenues” means (1) in the event a 2012 Novation has occurred, a statement of actual GAAP revenues for the 2012 Medicare Revenue Period attributable to the Medicare Revenue Contract or (2) in the event that the 2012 Novation has not occurred, a statement of actual GAAP revenues for the 2012 Medicare Revenue Period attributable to the United Product.

(CC) “2012 Medicare Estimated Statement of Revenues” means (1) in the event a 2012 Novation has occurred, a statement of projected GAAP revenues for the 2012 Medicare Revenue Period attributable to the Medicare Revenue Contract or (2) in the event that the 2012 Novation has not occurred, a statement of projected GAAP revenues for the 2012 Medicare Revenue Period attributable to the United Product.

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(DD) “2012 Medicare Revenue Period” means the 12-month period ending on December 31, 2012.

(EE) “Medicare Revenue Contract” means the Contract H0755, effective as of October 6, 2005, by and between CMS and Health Net of Connecticut (or any successor contracts thereto as the same may have been renewed prior to, in connection with or after the Closing).

(FF) “United Product” means all of the Medicare Advantage products provided by Buyer or its Affiliates in the State of Connecticut, excluding any revenue for such products attributable to Medicare Part D.

(ii) Closing Deliveries.

(A) No later than three (3) Business Days prior to the Closing Date, Seller shall deliver to Buyer:

(1) if the Closing occurs prior to May 1, 2010, the 2010 Medicare Estimated Income Statement and the calculations of the 2010 Estimated Medicare Revenue-Based Payment Amount and the 2010 Estimated Medicare Profit/Loss Amount, or

(2) if the Closing occurs on or after May 1, 2010, the 2010 Medicare Estimated Income Statement and the calculation of the 2010 Estimated Medicare Profit/Loss Amount, and the 2011 Medicare Estimated Income Statement along with the calculation of the 2011 Estimated Medicare Revenue-Based Payment Amount; and

(B) Seller shall deliver to Buyer a certificate of a duly authorized officer of Seller certifying that the deliveries in clause (A) above have been prepared in good faith.

(iii) Closing Date is prior to May 1, 2010. If the Closing Date is prior to May 1, 2010, then:

(A) On the Closing Date, Buyer shall pay to Seller an amount equal to the sum of (x) subject to clause (E) below, the 2010 Estimated Medicare Revenue-Based Payment Amount, plus (y) the 2010 Estimated Medicare Profit/Loss Amount.

(B) No later than January 31, 2011, Seller shall deliver to Buyer the 2010 Medicare Actual Income Statement along with a calculation of the 2010 Actual Medicare Revenue-Based Payment Amount and the 2010 Actual Medicare Profit/Loss Amount and a certificate of a duly authorized officer of Seller certifying that such deliveries have been prepared in good faith.

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(C) With respect to the 2010 Actual Medicare Revenue-Based Payment Amount:

(1) Subject to clause (E) below, if the 2010 Actual Medicare Revenue-Based Payment Amount is greater than the 2010 Estimated Medicare Revenue-Based Payment Amount, then Buyer will pay the difference between the two amounts to Seller (such amount, the “2010 Buyer Medicare Revenue True-Up Payment”).

(2) Subject to clause (E) below, if the 2010 Estimated Medicare Revenue-Based Payment Amount is greater than the 2010 Actual Medicare Revenue-Based Payment Amount, then Seller will pay the difference between the two amounts to Buyer (such amount, the “2010 Seller Medicare Revenue True-Up Payment”).

(D) With respect to the 2010 Actual Medicare Profit/Loss Amount:

(1) If the 2010 Actual Medicare Profit/Loss Amount is greater than the 2010 Estimated Medicare Profit/Loss Amount, Buyer will pay the difference between the two amounts to Seller.

(2) If the 2010 Estimated Medicare Profit/Loss Amount is greater than the 2010 Actual Medicare Profit/Loss Amount, then Seller will pay the difference between the two amounts to Buyer.

(E) Any 2010 Estimated Medicare Revenue-Based Payment Amount or 2010 Buyer Medicare Revenue True-Up Payment to be paid by Buyer to Seller pursuant to Section 1.4(b)(iii)(A) or Section 1.4(b)(iii)(C)(1) will be paid only to the extent that such payment would cause the Net Business Payment Amount to exceed the amount of the Initial Business Payment. Any 2010 Seller Medicare Revenue True-Up Payment to be paid by Seller to Buyer pursuant to Section 1.4(b)(iii)(C)(2) shall not be paid to the extent that such payment would cause the Net Business Payment Amount to be less than the amount of the Initial Business Payment.

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(iv) Closing Date is on or after May 1, 2010 and Buyer Opts-In to the 2011 Medicare Bid. If the Closing Date is on or after May 1, 2010 and Buyer, in its sole discretion, opts-in to the terms and pricing of the 2011 Medicare Bid, then:

(A) On the Closing Date, Buyer shall pay to Seller an amount equal to the sum of (x) the 2010 Estimated Medicare Profit/Loss Amount, if any, plus (y) subject to clause (E) below, the 2011 Estimated Medicare Revenue-Based Payment Amount.

(B) No later than January 31, 2011, Seller shall deliver to Buyer the 2010 Medicare Actual Income Statement along with a calculation of the 2010 Actual Medicare Profit/Loss Amount and a certificate of a duly authorized officer of Seller certifying that such statements and calculations have been prepared in good faith. With respect to the 2010 Actual Medicare Profit/Loss Amount:

(1) If the 2010 Actual Medicare Profit/Loss Amount is greater than the 2010 Estimated Medicare Profit/Loss Amount, then Buyer will pay the difference between the two amounts to Seller.

(2) If the 2010 Estimated Medicare Profit/Loss Amount is greater than the 2010 Actual Medicare Profit/Loss Amount, then Seller will pay the difference between the two amounts to Buyer.

(C) If the 2011 Novation or the 2012 Novation has occurred, no later than January 31, 2012, Buyer shall deliver to Seller the 2011 Medicare Actual Income Statement along with a calculation of the 2011 Actual Medicare Revenue-Based Payment Amount and a certificate of a duly authorized officer of Buyer certifying that such deliveries have been prepared in good faith. With respect to the 2011 Actual Medicare Revenue-Based Payment Amount:

(1) Subject to clause (E) below, if the 2011 Actual Medicare Revenue-Based Payment Amount is greater than the 2011 Estimated Medicare Revenue-Based Payment Amount, then Buyer will pay the difference between the two amounts to Seller (such amount, the “2011 Buyer Medicare Revenue True-Up Payment”).

(2) Subject to clause (E) below, if the 2011 Estimated Medicare Revenue-Based Payment Amount is greater than the 2011 Actual Medicare Revenue-Based Payment Amount, then Seller will pay the difference between the two amounts to Buyer (such amount, the “2011 Seller Medicare Revenue True-Up Payment”).

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(D) In the event that, after the Closing Date, Buyer receives notice that CMS will not approve the 2012 Novation (the “CMS Notice”), then:

(1) No later than three (3) Business Days prior to September 30, 2011, Buyer shall deliver to Seller the 2012 Medicare Estimated Statement of Revenues (as if the 2012 Novation had not occurred), along with a calculation of the 2012 Estimated Medicare Revenue-Based Amount (as if the 2012 Novation had not occurred) and the 2012 Estimated United Product Difference Amount and a certificate of a duly authorized officer of Buyer certifying that such statement has been prepared in good faith;

(2) On September 30, 2011, subject to clause (E) below, Buyer shall pay to Seller, or Seller shall pay to Buyer, as applicable, the 2012 Estimated United Product Difference Amount; and

(3) No later than January 31, 2013, Buyer shall deliver to Seller the 2012 Medicare Actual Statement of Revenues (as if the 2012 Novation had not occurred) along with a calculation of the 2012 Actual Medicare Revenue-Based Payment Amount (as if the 2012 Novation had not occurred) and a certificate of a duly authorized officer of Buyer certifying that such deliveries have been prepared in good faith. With respect to the 2012 Medicare Actual Statement of Revenues:

(I) If the 2012 Actual Medicare Revenue-Based Payment Amount is greater than the 2012 Estimated Medicare Revenue-Based Payment Amount, then Buyer will pay the difference between the two amounts to Seller (the “2012 Opt-In Buyer True Up Payment”).

(II) If the 2012 Estimated Medicare Revenue-Based Payment Amount is greater than the 2012 Actual Medicare Revenue-Based Payment Amount, then Seller will pay the difference between the two amounts to Buyer (the “2012 Opt-In Seller True Up Payment”).

(E) Any 2011 Estimated Medicare Revenue-Based Payment Amount, 2011 Buyer Medicare Revenue True-Up Payment, 2012 Estimated United Product Difference Amount or 2012 Opt-In Buyer True Up Payment to be paid by Buyer to Seller pursuant to Section 1.4(b)(iv)(A), Section 1.4(b)(iv)(C)(1), Section

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1.4(b)(iv)(D)(2) or Section 1.4(b)(iv)(D)(3)(I) will be paid only to the extent that such payment would cause the Net Business Payment Amount to exceed the amount of the Initial Business Payment. Any 2011 Seller Medicare Revenue True-Up Payment, 2012 Estimated United Product Difference Amount or 2012 Opt-In Seller True Up Payment to be paid by Seller to Buyer pursuant to Section 1.4(b)(iv)(C)(2), Section 1.4(b)(iv)(D)(2) or Section 1.4(b)(iv)(D)(3)(II) shall not be paid to the extent that such payment would cause the Net Business Payment Amount to be less than the amount of the Initial Business Payment.

(v) Closing Date is on or after May 1, 2010 and Buyer Opts-Out of the 2011 Medicare Bid. If the Closing Date is on or after May 1, 2010 and Buyer, in its sole discretion, opts-out of the terms and pricing of the 2011 Medicare Bid, then:

(A) On the Closing Date, Buyer shall pay to Seller an amount equal to the 2010 Estimated Medicare Profit/Loss Amount, if any.

(B) Seller shall assume the profits and losses for the Medicare Revenue Contract for the 2011 Medicare Revenue Period to the extent of the 2011 Opt-Out Percentage of the net income or loss for the 2011 Medicare Revenue Period attributable to the Medicare Revenue Contract. Such profits and losses shall be settled by the parties through the Quarterly Net Payments in accordance with Section 1.4(e).

(C) Seller shall deliver to Buyer no later than January 31, 2011, the 2010 Medicare Actual Income Statement along with a calculation of the 2010 Actual Medicare Profit/Loss Amount and a certificate of a duly authorized officer of Seller certifying that such statements and calculations have been prepared in good faith.

(D) With respect to the 2010 Actual Medicare Profit/Loss Amount:

(1) If the 2010 Actual Medicare Profit/Loss Amount is greater than the 2010 Estimated Medicare Profit/Loss Amount, then Buyer will pay the difference between the two amounts to Seller.

(2) If the 2010 Estimated Medicare Profit/Loss Amount is greater than the 2010 Actual Medicare Profit/Loss Amount, then Seller will pay the difference between the two amounts to Buyer.

(E) No later than three (3) Business Days prior to September 30, 2011, Buyer shall deliver to Seller (1) the 2012 Medicare

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Estimated Statement of Revenues and the calculation of the 2012 Estimated Medicare Revenue-Based Payment Amount, and (2) a certificate of a duly authorized officer of Buyer certifying that such delivery has been prepared in good faith. On September 30, 2011, subject to clause (H), Buyer shall pay to Seller the 2012 Estimated Medicare Revenue-Based Payment Amount.

(F) No later than January 31, 2013, Buyer shall deliver to Seller the 2012 Medicare Actual Statement of Revenues along with a calculation of the 2012 Actual Medicare Revenue-Based Payment Amount and a certificate of a duly authorized officer of Buyer certifying that such deliveries have been prepared in good faith.

(G) With respect to the 2012 Actual Medicare Revenue-Based Payment Amount set forth above:

(1) Subject to clause (H), if the 2012 Actual Medicare Revenue-Based Payment Amount is greater than the 2012 Estimated Medicare Revenue-Based Payment Amount, then Buyer will pay the difference between the two amounts to Seller (such amount, the “2012 Buyer Medicare Revenue True-Up Payment”).

(2) Subject to clause (H), if the 2012 Estimated Medicare Revenue-Based Payment Amount is greater than the 2012 Actual Medicare Revenue-Based Payment Amount, then Seller will pay the difference between the two amounts to Buyer (such amount, the “2012 Seller Medicare Revenue True-Up Payment”).

(H) Any 2012 Estimated Medicare Revenue-Based Payment Amount or 2012 Buyer Medicare Revenue True-Up Payment to be paid by Buyer to Seller pursuant to Section 1.4(b)(v)(E) or Section 1.4(b)(v)(G)(1) will be paid only to the extent that such payment would cause the Net Business Payment Amount to exceed the amount of the Initial Business Payment. Any 2012 Seller Medicare Revenue True-Up Payment to be paid by Seller to Buyer pursuant to Section 1.4(b)(v)(G)(2) shall not be paid to the extent that such payment would cause the Net Business Payment Amount to be less than the amount of the Initial Business Payment.

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(vi) Buyer Opt-In/Opt-Out.

(A) Seller agrees to provide Buyer with a copy of the 2011 Medicare Bid after its submission to CMS. If the Closing occurs on or after May 1, 2010, within 45 days of Buyer’s receipt of the 2011 Medicare Bid, Buyer shall provide Seller with written notice as to whether Buyer opts out of the 2011 Medicare Bid otherwise Buyer shall be deemed to have opted in to the terms and pricing of the 2011 Medicare Bid.

(B) If the Closing occurs on or after May 1, 2010 and prior to the expiration of the 45 day period referred to in clause (A) above, then the parties agree that Buyer shall not be required to opt-in or opt-out of the 2011 Medicare Bid until the expiration of such 45 day period and the Closing shall take place in accordance with Section 1.4(b)(iv). If following the Closing, Buyer opts-out of the 2011 Medicare Bid, then Seller shall promptly refund to Buyer the 2011 Estimated Medicare Revenue-Based Payment Amount and the parties agree that the Closing shall then take place in accordance with Section 1.4(b)(v).

(vii) Novation. Buyer shall use its best efforts to novate, assign or otherwise transfer the business operated under the Medicare Revenue Contract to a Legacy United Entity as of January 1, 2011 (a “2011 Novation”). In the event that a 2011 Novation does not occur, Buyer shall use its best efforts to novate, assign or otherwise transfer such business as of January 1, 2012 (a “2012 Novation”). In the event that a 2012 Novation has not occurred or, in the reasonable determination of Buyer as of May 1, 2011, is not expected to occur as of January 1, 2012, then Buyer (or one of its Affiliates) shall, commencing November 15, 2011 and during 2012, use its best efforts to market to and recruit, in accordance with Law and its historical practices, Medicare members to the United Product. Unless the business operated under the Medicare Revenue Contract has been novated, assigned or otherwise transferred to a Legacy United Entity, Buyer shall not, and shall cause its Affiliates (including the Acquired Companies) not to, renew the Medicare Revenue Contract for any period commencing on or after January 1, 2012.

(c) Medicaid Revenue-Based Payment.

(i) In the event that the Closing occurs prior to March 3, 2010 (the “Medicaid Renewal Deadline”), and the NJ Medicaid Contract has not been assigned or otherwise transferred in accordance with Section 1.4(c)(ii) as of such time, unless Buyer delivers written notice to Parent and Seller that it elects to assume financial responsibility for the NJ Medicaid Contract for the period after June 30, 2010 in accordance with Section 1.4(e)(ix)(C)(7) and (8) (the “Buyer Medicaid Election”) at least five (5) Business Days prior the Medicaid Renewal Deadline, Parent or Seller may elect for the NJ Medicaid Contract not to be

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renewed for any periods after June 30, 2010 by delivering written notice of such election to Buyer prior to the Medicaid Renewal Deadline. If Parent or Seller delivers such written notice, Buyer shall cause the applicable Acquired Company not to renew the NJ Medicaid Contract for such periods. In the event that the Closing has not occurred prior to the Medicaid Renewal Deadline, Parent or Seller may give Buyer written notice at least five (5) Business Days prior to the Medicaid Renewal Deadline that it elects for the NJ Medicaid Contract not to be renewed for any period after June 30, 2010. If Parent or Seller deliver such written notice, either of them may cause the applicable Acquired Company not to renew the NJ Medicaid Contract for any period after June 30, 2010.

(ii) Unless Parent or Seller has elected to cause the applicable Acquired Company to terminate the NJ Medicaid Contract as provided above, Buyer shall cause the applicable Acquired Company to assign the NJ Medicaid Contract to a Legacy United Entity (1) on the Closing Date or (2) on or before the date that the NJ Medicaid Contract is first renewed after the Closing Date (in the case of either clause (1) or (2), the “Medicaid Transfer Date”), subject to obtaining all necessary regulatory approvals, consents and authorizations related to such assignment.

(iii) No later than ten (10) Business Days following the Medicaid Transfer Date, Seller shall deliver to Buyer a statement of the GAAP revenues for the 12 month period ending on the day prior to the Medicaid Transfer Date attributable to the NJ Medicaid Contract (the “Medicaid Statement of Revenues”) and a certificate of a duly authorized officer of Seller certifying that such Medicaid Statement of Revenues has been prepared in good faith.

(iv) Buyer shall pay to Seller the Medicaid Revenue-Based Payment Amount. “Medicaid Revenue-Based Payment Amount” means an amount equal to 7.0% of the GAAP revenues for the 12 month period ending on the day prior to the Medicaid Transfer Date attributable to the NJ Medicaid Contract.

(v) For the avoidance of doubt, the Medicaid Revenue-Based Payment Amount will be paid only (1) to the extent that such payment would cause the Net Business Payment Amount to exceed the amount of the Initial Business Payment and (2) if the NJ Medicaid Contract is assigned or otherwise transferred to a Legacy United Entity.

(d) Adjusted Tangible Net Equity Payments.

(i) No later than three (3) Business Days prior to the Closing Date, Seller shall prepare or cause to be prepared in good faith an unaudited combined estimated balance sheet for all of the Acquired Companies as of the close of business on the Closing Date (the “Estimated Closing Date Combined Balance Sheet”), and shall deliver a copy of the Estimated Closing Date Combined Balance Sheet to Buyer. Seller shall also prepare a calculation of the estimated Adjusted Tangible Net Equity based on the Estimated Closing Date Combined

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Balance Sheet (the “Estimated Closing Adjusted Tangible Net Equity”). If the Estimated Closing Adjusted Tangible Net Equity is less than four hundred fifty million dollars ($450,000,000), the amount of such deficit shall be the “Estimated Closing Adjusted Tangible Net Equity Deficit.”

(ii) No later than sixty (60) days after the Closing Date, Seller, with the cooperation and assistance of Buyer, shall prepare or cause to be prepared an unaudited combined actual balance sheet for all of the Acquired Companies as of the close of business on the Closing Date (the “Closing Date Combined Balance Sheet”), and shall cause a copy of the Closing Date Combined Balance Sheet to be delivered to Buyer. The Closing Date Combined Balance Sheet shall be prepared in accordance with GAAP, consistently applied in accordance with the accounting policies and practices used to prepare the unaudited combined balance sheet of the Acquired Companies as of December 31, 2008, insofar as such accounting policies and practices are consistent with GAAP, and as adjusted to fair value. Seller shall also prepare a calculation of actual Adjusted Tangible Net Equity based on the Closing Date Combined Balance Sheet (the “Closing Adjusted Tangible Net Equity”) and the Closing Adjusted Tangible Net Equity Amount. The “Closing Adjusted Tangible Net Equity Amount” means the difference of (A) $290,000,000 minus (B) the difference of $450,000,000 less Closing Adjusted Tangible Net Equity; provided, however, that if the Closing Adjusted Tangible Net Equity is greater than $450,000,000, then the Closing Adjusted Tangible Net Equity Amount shall be $290,000,000. If the Estimated Adjusted Tangible Net Equity Payment is greater than the Closing Adjusted Tangible Net Equity Amount, then Seller shall pay to Buyer an amount equal to the Estimated Adjusted Tangible Net Equity Payment less the Closing Adjusted Tangible Net Equity Amount. If the Closing Adjusted Tangible Net Equity Amount is greater than the Estimated Adjusted Tangible Net Equity Payment, then Buyer shall pay to Seller an amount equal to the Closing Adjusted Tangible Net Equity Amount less the Estimated Adjusted Tangible Net Equity Payment.

(iii) On the first anniversary of the Closing Date, Buyer shall deliver to Seller, an amount (the “First Anniversary Adjusted Tangible Net Equity Payment”) equal to:

0.5 multiplied by ((A) Closing Adjusted Tangible Net Equity less (B) the Closing Adjusted Tangible Net Equity Amount less (C) any preceding Excess Adjusted Tangible Net Equity Payments).

(iv) Subject to Section 1.4(e)(ii), no later than five (5) Business Days prior to the Transition Date, Seller, with the cooperation and assistance of Buyer, shall prepare or cause to be prepared in good faith an unaudited combined estimated income statement and estimated balance sheet for all of the Acquired Companies as of and for the twelve (12) month period ended on the Transition Date (the “Estimated Final Combined Financial Statement”). The Estimated

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Final Combined Financial Statement shall be for the same period used for the Actual Final Combined Financial Statement, and shall include an estimated Loss Reserve as provided in Section 1.4(h). Seller shall promptly cause a copy of the Estimated Final Combined Financial Statement to be delivered to Buyer. Seller shall also deliver to Buyer, together with the Estimated Final Combined Financial Statement, a calculation of the estimated Quarterly Net Payment due from Buyer to Seller or from Seller to Buyer with respect to the stub period beginning on the first day of the quarter in which the Transition Date occurs and ending on the Transition Date, calculated in accordance with Section 1.4(e) (the “Estimated Final Net Payment”). Each of the Estimated Final Combined Financial Statement or Estimated Final Net Payment shall be final and binding on the parties, and shall not be subject to any dispute resolution process (including, without limitation, the provisions of Section 1.5).

(v) On the Transition Date, Buyer shall deliver to Seller, an amount (the “Second Anniversary Adjusted Tangible Net Equity Payment”) equal to:

(A) Closing Adjusted Tangible Net Equity less (B) the Closing Adjusted Tangible Net Equity Amount less (C) the First Anniversary Adjusted Tangible Net Equity Payment less (D) any preceding Excess Adjusted Tangible Net Equity Payment plus (E) if the Estimated Final Net Payment is a positive number, the amount of such Estimated Final Net Payment less (F) if the amount of the Estimated Final Net Payment is a negative number, the absolute value of such Estimated Final Net Payment plus (G) if Parent has satisfied a Capital and Surplus Deficiency pursuant to Section 1.4(i), the amount of such Capital and Surplus Deficiency paid by Parent.

(vi) If, at any time prior to the Transition Date, Buyer, as permitted by applicable Law and Governmental Entities, withdraws an amount of cash or other assets from any of the Acquired Companies with a value greater than the cumulative Adjusted Tangible Net Equity Payments made by Buyer as of the date of any such withdrawal, Buyer shall pay to Seller the amount of any such excess (any such payments, “Excess Adjusted Tangible Net Equity Payments”).

(e) Profit and Loss Payments.

(i) Subject to Section 1.4(e)(ii), for the period beginning on the Closing Date and ending on the Transition Date, no later than thirty (30) days following the end of each quarter, Seller, with the cooperation and assistance of Buyer, shall prepare or cause to be prepared an unaudited combined income statement and balance sheet for all of the Acquired Companies as of and for such quarter (each, a “Quarterly Combined Financial Statement”). The first Quarterly Combined Financial Statement shall be based on the stub period beginning on the day after the Closing Date and ending on the last day of the quarter in which

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the Closing occurs. In addition to the Quarterly Combined Financial Statement for the final period, Seller, with the cooperation and assistance of Buyer, shall prepare or cause to be prepared an unaudited combined actual income statement and balance sheet for all of the Acquired Companies for the twelve (12) month period ending on the Transition Date (the “Actual Final Combined Financial Statement”), and the Quarterly Net Payment reflected thereon (which shall be for the stub period beginning on the first day of the quarter in which the Transition Date occurs and ending on the Transition Date) (the “Actual Final Net Payment”) shall include an actual Loss Reserve as provided in Section 1.4(h). Seller shall promptly cause a copy of each such Quarterly Combined Financial Statement and Actual Final Combined Financial Statement to be delivered to Buyer along with a certificate of a duly authorized officer of Parent certifying that such statement has been prepared in good faith. The Quarterly Combined Financial Statements and the Actual Final Combined Financial Statement shall be prepared in accordance with GAAP, consistently applied in accordance with the accounting policies and practices used to prepare the unaudited combined financial statements of the Acquired Companies as of and for the year ended December 31, 2008 insofar as such accounting policies and practices are consistent with GAAP (except, for the avoidance of doubt, the Quarterly Net Payments derived therefrom shall not include any provisions or reserves for loss adjustment expenses in accordance with Section 1.4(h). Seller shall also deliver to Buyer, together with each Quarterly Combined Financial Statement, a calculation of the Quarterly Net Payment with respect to such period. Notwithstanding any requirements of GAAP or any other provision of this Agreement, for the purpose of the Quarterly Net Payment, the Actual Final Net Payment, and the Termination Date Net Payment, it is the intent of the parties that net income and net loss as reflected on the Quarterly Combined Financial Statements and the Actual Final Combined Financial Statement shall: (A) include Fully Insured Contracts, ASO Contracts, Medicare Revenue Contract (subject to the provisions of Section 1.4(b) regarding profit and loss sharing, if applicable), and the NJ Medicaid Contract (unless Buyer has made the Buyer Medicaid Election), (B) in the case of net income, reflect any liabilities for Taxes of the Acquired Companies during the period beginning on the Closing Date and ending on the Transition Date and (C) in the case of net loss, reflect the U.S. federal and Connecticut income Tax benefit of any net losses incurred by the Acquired Companies (excluding net losses incurred by Health Net Services (Bermuda) Ltd.) during the period beginning on the Closing Date and ending on the Transition Date, in each case with such liabilities for Taxes or net losses determined on a hypothetical basis by reference to the separate results of each of the Acquired Companies.

(ii) Notwithstanding Sections 1.4(d)(v) and 1.4(e)(i), in the event that all of the Administrative Services Agreements are terminated pursuant to their terms prior to the Transition Date (the date of such termination, the “ASA Termination Date”), (A) the Estimated Final Net Payment shall be equal to zero (0) for purposes of Section 1.4(d)(v)(E) and (F) and (B) neither Seller nor Buyer shall be obligated to make any remaining payments under Section 1.4(e)(i). In

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lieu thereof, however, no later than thirty (30) days after the ASA Termination Date, Seller, with the cooperation and assistance of Buyer, shall prepare or cause to be prepared an unaudited combined estimated income statement and estimated balance sheet for all of the Acquired Companies (the “Termination Date Combined Financial Statement”). The Termination Date Combined Financial Statement shall be for the period commencing on the first day following the last day of the period covered by any preceding Quarterly Combined Financial Statement for which a Quarterly Net Payment has been made (or, if no such payment has been made, the Closing Date) and ending on the ASA Termination Date. The Termination Date Combined Financial Statement shall be prepared based on the historical administrative costs of the Acquired Companies, as adjusted to take into consideration the wind-down of the Acquired Business as contemplated by the Transaction Documents. The Termination Date Combined Financial Statement shall include an actuarially determined provision for medical costs and loss adjustment expenses as of the ASA Termination Date for all claims through the winding up and running out period of the Acquired Business; provided, however, that the Termination Date Combined Financial Statement shall not include any reserves for Unreserved Claims or loss adjustment expenses related to such Unreserved Claims (“Termination Date Loss Reserves”). The amount of such Termination Date Loss Reserves shall be calculated in accordance with GAAP, consistently applied in accordance with the accounting policies and practices used to prepare the unaudited combined financial statements of the Acquired Companies as of and for the year ended December 31, 2008, insofar as such accounting policies and practices are consistent with GAAP. Net income and net loss as reflected on the Termination Date Combined Financial Statement shall be determined in accordance with the last sentence of Section 1.4(e)(i). Seller shall promptly cause a copy of the Termination Date Combined Financial Statement to be delivered to Buyer within such thirty-day period, together with a calculation of the Quarterly Net Payment with respect to such period due from Buyer to Seller or from Seller to Buyer (the “Termination Date Net Payment”).

(iii) In the event that the 2011 Novation has occurred and Buyer has opted-out of the 2011 Medicare Bid, no later than thirty (30) days following the end of each quarter during the year ended December 31, 2011, Buyer shall prepare or cause to be prepared an unaudited income statement for the Buyer Medicare Affiliate, including actual GAAP revenues, medical costs, 2011 Operating Costs and the corresponding net income or loss for the 2011 Medicare Revenue Period attributable to the Medicare Revenue Contract (each, a “2011 Buyer Medicare Income Statement”). Buyer shall promptly cause a copy of each such 2011 Buyer Medicare Income Statement to be delivered to Seller along with a certificate of a duly authorized officer of Buyer certifying that such statement has been prepared in good faith. The 2011 Buyer Medicare Income Statement shall be prepared in accordance with GAAP, consistently applied in accordance with the accounting policies and practices used to prepare the unaudited combined financial statements of the Acquired Companies as of and for the year ended December 31, 2008 insofar as such accounting policies and practices are

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consistent with GAAP. Buyer shall also deliver to Seller, together with each 2011 Buyer Medicare Income Statement, a calculation of the 2011 Seller Novated Medicare Profit (Loss) Portion with respect to such period.

(iv) From and after the Closing, Buyer shall cause the Acquired Companies to segregate the cash and securities held by such entities into notional accounts as set forth in this Section 1.4(e)(iv). The Acquired Companies shall administer and manage all of the cash and securities deemed to be included in the notional accounts described below pursuant to Section 2.7 of the Administrative Services Agreements and in accordance with the investment policy attached as Schedule 2.7 of the Administrative Services Agreements.

(A) Prior to the Closing, Parent or Seller shall have caused the Acquired Companies to have an amount equal to the Estimated Adjusted Tangible Net Equity Payment in cash or cash equivalents. As of the Closing Date, the Acquired Companies shall be deemed to have deposited into a notional account of Buyer an amount of cash and cash equivalents held by the Acquired Companies as of such date equal to the Estimated Adjusted Tangible Net Equity Payment (the “Buyer TNE Account”). After the Closing Date, each time that Buyer makes an Adjusted Tangible Net Equity Payment, funds a Capital and Surplus Deficiency or makes a payment under the last sentence of Section 1.4(d)(ii), an additional amount of cash and cash equivalents held by the Acquired Companies as of such date (as determined by Seller) equal to such Adjusted Tangible Net Equity Payment, Capital and Surplus Deficiency funded by Buyer or payment under the last sentence of Section 1.4(d)(ii) shall be deemed to be deposited into such Buyer TNE Account, and such amount shall be deemed to be debited from the Seller Commercial Account. All interest income, dividend income and realized capital gains or losses attributable to the securities deemed to be held in the Buyer TNE Account shall be added to or deducted from (as applicable) the amount deemed to be held in the Buyer TNE Account.

(B) All of the other cash, cash equivalents and securities of the Acquired Companies (i.e., other than the cash and cash equivalents deemed to be included in the Buyer TNE Account) shall be segregated into the “Seller Commercial Account” which shall be adjusted for each Adjusted Tangible Net Equity Payment made by Buyer as described above. All interest income, dividend income and realized capital gains or losses attributable to the securities deemed to be held in the Seller Commercial Account until the Transition Date shall be held for the benefit of Seller and thereafter for the benefit of Buyer. In addition, after the Closing Date, each time that Parent funds a Capital and Surplus Deficiency, an amount of cash, cash equivalents and securities held by the Acquired Companies shall be deemed to be deposited into the Seller Commercial Account.

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(C) Prior to the first anniversary of the Closing Date, Parent or Seller shall have caused the Acquired Companies to have, in cash or cash equivalents, an amount equal to the First Anniversary Adjusted Tangible Net Equity Payment in the Seller Commercial Account. Prior to the Transition Date, Parent or Seller shall have caused the Acquired Companies to have, in cash or cash equivalents, an amount equal to the Second Anniversary Adjusted Tangible Net Equity Payment in the Seller Commercial Account. For the avoidance of doubt, any realized capital gains or losses based on the actions described in this subparagraph shall be attributable to the Seller Commercial Account.

(v) With respect to the Quarterly Net Payments other than the Actual Final Net Payment:

(A) If the amount of the Quarterly Net Payment is a positive number, Buyer will pay such amount to Seller.

(B) If the amount of the Quarterly Net Payment is a negative number, Seller will pay the absolute value of such amount to Buyer.

(vi) With respect to the Actual Final Net Payment:

(A) If the Actual Final Net Payment is greater than the Estimated Final Net Payment, then Buyer will pay the difference between the two amounts to Seller. For the avoidance of doubt, such payment will not be based on the absolute value of such amounts.

(B) If the Estimated Final Net Payment is greater than the Actual Final Net Payment, then Seller will pay the difference between the two amounts to Buyer. For the avoidance of doubt, such payment will not be based on the absolute value of such amounts.

(vii) With respect to the Termination Date Net Payment:

(A) If the amount of the Termination Date Net Payment is a positive number, Buyer will pay such amount to Seller.

(B) If the amount of the Termination Date Net Payment is a negative number, Seller will pay the absolute value of such amount to Buyer.

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(viii) If the sum of the Quarterly Net Payments, the Actual Final Net Payment and the Termination Date Net Payment that are allocated to the Shares of the Election Companies pursuant to Section 4.6(b) and Schedule F of this Agreement is a negative number and thereby results in a net reduction to the purchase price for the Shares of either of the Election Companies (as defined in Section 4.6(c)) pursuant to Section 4.6(b) and Schedule F of this Agreement (the “Net P&L Purchase Price Reduction”), then to the extent the Election Companies’ basis in the Commercial Members for federal income tax purposes, adjusted as provided in Section 4.6(c) to reflect the Net P&L Purchase Price Reduction (the “Actual Member Tax Basis”), is less than the federal income tax basis the Election Companies would have had in the Commercial Members if the Buyer had only paid the greater of (i) the portion of the Initial Business Payment allocated to the Election Companies or (ii) the Membership Renewal Amount for each Commercial Member of the Election Companies that Renewed (the “Target Member Tax Basis”), Seller shall pay to Buyer an amount equal to the net present value of: (1) 35% multiplied by (2) the difference between (A) the Target Member Tax Basis and (B) the Actual Member Tax Basis; provided, however, Seller shall not be required to pay more than $5,000,000 (the “Gross-Up Cap”) under this Section 1.4(e)(vii). The net present value of the amount calculated in the previous sentence shall be determined using a 10% discount rate and assuming that the calculated amount would have been amortizable by Buyer over a period of 15 years beginning on the Closing Date. Subject to the Gross-Up Cap, Buyer shall be paid on a fully grossed up basis in order to reflect the additional adjustments to the Actual Member Tax Basis caused by the payment of any amounts pursuant to this Section 1.4(e)(vii). Buyer and Seller shall work together in good faith to calculate the Actual Member Tax Basis, the Target Member Tax Basis and any amount required to be paid by Seller to Buyer pursuant to this Section 1.4(e)(vii). Seller shall pay Buyer any amount required to be paid pursuant this Section 1.4(e)(vii) as soon as practicable following the Transition Date.

(ix) For purposes of this Section 1.4(e):

(A) “Buyer’s Allocable Investment Income (Loss)” means an amount equal to Net Investment Income (Loss) for the relevant period attributable to the securities deemed to be included in the Buyer TNE Account.

(B) “Net Investment Income (Loss)” means the sum of all income or loss attributable to the interest income, dividend income and realized capital gains or losses on the securities of the Acquired Companies, for the relevant period, as reflected on the Quarterly Combined Financial Statements, and as adjusted for income Taxes.

(C) “Quarterly Net Payment” means an amount equal to (without duplication): (1) net income or loss for the relevant

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period as reflected on the Quarterly Combined Financial Statements for the relevant period, minus (2) Buyer’s Allocable Investment Income for the relevant period (if any), plus (3) Buyer’s Allocable Investment Loss for the relevant period (if any), plus (4) the amount of Buyer Costs for the relevant period, minus (5) the amount, if any, retained by an Acquired Company as penalties pursuant to the applicable Administrative Services Agreement for the relevant period, minus (6) the amount, if any, of any Losses of any Acquired Company actually recovered under ARTICLE VII of this Agreement (other than to the extent such recovered amount is reflected in the applicable Quarterly Combined Financial Statements), minus (7) in the event that Buyer makes the Buyer Medicaid Election, the amount of Buyer Medicaid Net Income for the relevant period (if any), plus (8) in the event that Buyer makes the Buyer Medicaid Election, the amount of Buyer Medicaid Net Loss for the relevant period (if any), minus (9) if applicable, the amount of the 2010 Medicare Profit for the relevant period (if any), plus (10) if applicable, the amount of the 2010 Medicare Loss for the relevant period (if any), minus (11) if applicable, the amount of the 2011 Buyer Non-Novated Medicare Profit for the relevant period, plus (12) if applicable, the amount of the 2011 Buyer Non-Novated Medicare Loss for the relevant period, plus (13) if applicable, the amount of the 2011 Seller Novated Medicare Profit for the relevant period, minus (14) if applicable, the amount of the 2011 Seller Novated Medicare Loss, minus (15) to the extent reflected in the applicable Quarterly Combined Financial Statements, any amount received by HNNY under the Touchstone Agreements during the relevant period, plus (16) to the extent reflected in the applicable Quarterly Combined Financial Statements, any amount actually paid by Buyer or its Affiliates to Seller pursuant to Section 4.7(b), plus (17) the amount of any non-cash charges or expenses attributable to the amortization of goodwill or intangible assets or the depreciation of property, plant and equipment. Notwithstanding the foregoing, except for the amounts referenced in clauses (1), (2), (3), (9), (10), (11), (12), (13) and (14), each of the amounts referenced in the foregoing sentence shall be calculated on an after tax basis assuming a tax rate of thirty-five percent (35%) per annum.

(D) “Buyer Costs” means, for any period, the amount of any net loss (or reduction in net income) as reflected on the Quarterly Combined Financial Statements with respect to such period (unless Quarterly Combined Financial Statements are no longer prepared hereunder, in which case “Buyer Costs” shall mean costs and expenses) attributable to (1) any action or omission taken or not taken by an Acquired Company at the written direction of Buyer or

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its Affiliates unless such action or omission was (x) required to comply with applicable Law or contract or (y) consistent with Seller and its Affiliates’ historical practices prior to the Closing Date (unless such historical practices are materially inconsistent with the intent of winding down the Acquired Business); (2) any action or omission taken or not taken by the Administrator under the applicable Administrative Services Agreement or Claims Servicing Agreement at the written direction of Buyer or its Affiliates (including the Acquired Companies) unless such action or omission was (x) required to comply with applicable Law or contract (including the applicable Administrative Services Agreement or Claims Servicing Agreement) or (y) consistent with Seller and its Affiliates’ historical practices prior to the Closing Date (unless such historical practices are materially inconsistent with the intent of winding down the Acquired Business); (3) any exercise by an Acquired Company of its right under the applicable Administrative Services Agreement or Claims Servicing Agreement to concede or settle a Dispute without providing Seller written notice thereof at least five (5) Business Days prior to such concession or settlement (unless a reserve for such Dispute is related to medical expenses and is included in the Loss Reserve then Buyer will bear the financial risk as to the adequacy of such reserve); (4) any exercise by an Acquired Company of its right under the applicable Administrative Service Agreement or Claims Servicing Agreement to concede or settle a Dispute, after giving written notice thereof to Seller at least five (5) Business Days prior to such concession or settlement, but only to the extent the amount of such settlement exceeds Seller’s good faith estimate of the settlement value of such Dispute as communicated in writing to Buyer within five (5) Business Days after Buyer’s notice of such concession or settlement and unless (x) such estimate has been finally determined to be unreasonable by a third-party arbitrator under Section 1.4(f) (in which case, for the avoidance of doubt, such settlement amount will not be a Buyer Cost), (y) the Administrator consents to concede or settle such Dispute (not to be unreasonably withheld, delayed or conditioned) or (z) a reserve for such Dispute is related to medical expenses and is included in the Loss Reserve then Buyer will bear the financial risk as to the adequacy of such reserve; or (5) any administrative fees or other costs and expenses charged by Buyer or its Affiliates (other than the Acquired Companies) to an Acquired Company as an overhead allocation or for administrative services, other than costs and expenses (x) that are required by applicable Law or contract, or (y) that relate to any services (including administration of Provider Contracts, investment management services or any other services) provided by Buyer or its applicable Affiliates to which Parent or the Administrator have consented in writing.

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(E) “Dispute” means (1) any complaints, inquiries, investigations or proceedings by Governmental Entities related to the Acquired Companies, (2) any claims, grievances or appeals relating to the Acquired Companies or (3) any Legal Proceedings related to the Acquired Companies.

(F) “Buyer Medicaid Net Income (Loss)” means, with respect to periods after June 30, 2010, the amount of net income or net loss of the Acquired Companies for such period attributable to the business conducted under the NJ Medicaid Contract and as reflected on the Quarterly Combined Financial Statements for the relevant period.

(G) “2010 Medicare Profit (Loss)” means, with respect to the period after the Closing Date up to and including December 31, 2010, the amount of pre-tax income or pre-tax loss (calculated as revenues, less medical costs, less operating costs) of the Acquired Companies for such period attributable to the business conducted under the Medicare Revenue Contract, if any, and as reflected on the Quarterly Combined Financial Statements for the relevant period. For purposes of the foregoing, the operating costs corresponding to any pre-tax income or loss for a period during the 2010 Medicare Revenue Period shall equal the product of (x) the 2010 PMPM Amount, multiplied by (y) the average number of members under the Medicare Revenue Contract for the 2010 Medicare Revenue Period, multiplied by (z) the number of months (or portions thereof) during the relevant period (up to twelve (12)). Notwithstanding the foregoing, 2010 Medicare Profit (Loss) shall not include any favorable or unfavorable prior period development, risk adjustment factor developments or similar adjustments with respect to the Medicare Revenue Contract relating to any pre-Closing period.

(H) “2011 Buyer Non-Novated Medicare Profit (Loss)” means, with respect to calendar year 2011, either (1) if Buyer opts in to the terms and pricing of the 2011 Medicare Bid, the full amount of net income or loss (calculated as revenues, less medical costs, less operating costs, less imputed taxes (assuming a tax rate of thirty-five percent (35%)) of the Acquired Companies for such period attributable to the business conducted under the Medicare Revenue Contract, if any, and as reflected on the Quarterly Combined Financial Statements for the relevant period, or (2) if Buyer opts out of the terms and pricing of the 2011 Medicare Bid, then the product of (a) the amount of net income or loss (calculated as

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revenues, less medical costs, less operating costs, less imputed taxes (assuming a tax rate of thirty-five percent (35%)) of the Acquired Companies for such period attributable to the business conducted under the Medicare Revenue Contract, if any, and as reflected on the Quarterly Combined Financial Statements for the relevant period multiplied by (b) the Buyer 2011 Medicare Percentage. For purposes of the foregoing, operating costs during the 2011 Medicare Revenue Period shall equal the product of (x) the 2011 PMPM Amount, multiplied by (y) the average number of members under the Medicare Revenue Contract for the 2011 Medicare Revenue Period, multiplied by (z) the number of months (or portions thereof) during the relevant period (up to twelve (12)). Notwithstanding the foregoing, 2011 Buyer Non-Novated Medicare Profit (Loss) shall not include any favorable or unfavorable prior period development, risk adjustment factor developments or similar adjustments with respect to the Medicare Revenue Contract relating to any pre-Closing period.

(I) “2011 Seller Novated Medicare Profit (Loss)” means, with respect to calendar year 2011, the product of (a) the amount of net income or loss (calculated as revenues, less medical costs, less operating costs, less imputed taxes (assuming a tax rate of thirty-five percent (35%)) of the Buyer Medicare Affiliate for such period attributable to the business conducted under the Medicare Revenue Contract, if any, and as reflected on the 2011 Buyer Medicare Income Statement for the relevant period multiplied by (b) the 2011 Opt-Out Percentage. For purposes of the foregoing, operating costs during the 2011 Medicare Revenue Period shall equal the product of (x) the 2011 PMPM Amount, multiplied by (y) the average number of members under the Medicare Revenue Contract for the 2011 Medicare Revenue Period, multiplied by (z) the number of months (or portions thereof) during the relevant period (up to twelve (12)). Notwithstanding the foregoing, 2011 Seller Novated Medicare Profit (Loss) shall not include any favorable or unfavorable prior period development, risk adjustment factor developments or similar adjustments with respect to the Medicare Revenue Contract relating to any pre-Closing period.

(J) “Buyer Medicare Affiliate” means for the Legacy United Entity to which the Medicare Revenue Contract has been novated, transferred or assigned pursuant to a 2011 Novation.

(K) “Buyer 2011 Medicare Percentage” means 100% minus the 2011 Opt-Out Percentage.

(f) No Duplication. Notwithstanding anything to the contrary in Section 1.4(e), in calculating the amount of any Quarterly Net Payment, the amount of any

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item that is included in such calculation of the Quarterly Net Payment shall be determined without duplication of the amount included in any other item that is included in such calculation of the Quarterly Net Payment.

(g) Dispute Resolution. In the event that Buyer or its Affiliates intend to cause an Acquired Company to settle any Dispute in accordance with the applicable Administrative Services Agreement, it may deliver to the Administrator written notice of such intention, along with reasonable background information regarding such Dispute. Within ten (10) Business Days of receiving such notice, the Administrator shall deliver to Buyer or its applicable Affiliate its good faith written estimate of the settlement value of such Dispute. If Buyer or such Affiliate disagrees with the Administrator’s estimate of the settlement value of such Dispute, the disagreement shall be submitted before the New York, New York offices of JAMS in accordance with the then existing JAMS Arbitration Rules, as modified by this Section 1.4(f). Buyer or such Affiliate and the Administrator shall select a mutually acceptable neutral arbitrator from the panel of arbitrators serving with any of JAMS’s offices, but in the event that the parties cannot agree on an arbitrator, the administrator of JAMS shall appoint an arbitrator from such panel. Arbitration pursuant to this Section 1.4(f) shall be limited to the sole question of determining whether the Administrator’s estimate of the settlement value of such Dispute was unreasonable. Each party shall bear its own fees and expenses with respect to this dispute resolution process and any disputes related thereto and each party shall bear fifty percent (50%) of the fees and expenses of JAMS and the arbitrator. From the time of delivery by Buyer or its Affiliate of any notice of its intention to settle any Dispute until any settlement of such Dispute, the parties shall provide the Administrator reasonable access to all information related to, and all personnel with information regarding, such Dispute.

(h) Loss Reserve. The Estimated Final Combined Financial Statement and Actual Final Combined Financial Statement shall include an actuarially determined provision for medical costs as of the Transition Date for all claims through the winding up and running out period of the Acquired Business, excluding any Unreserved Claims, including a customary provision for adverse deviation (“Loss Reserves”). The amount of such Loss Reserves shall not include any provisions or reserves for loss adjustment expenses. The amount of such Loss Reserves shall be calculated in accordance with GAAP, consistently applied in accordance with the accounting policies and practices used to prepare the unaudited combined financial statements of the Acquired Companies as of and for the year ended December 31, 2008 insofar as such accounting policies and practices are consistent with GAAP.

(i) Statutory Minimum Payments. If, at any time between the Closing Date and the earlier of the Transition Date and the ASA Termination Date, the capital and surplus of any Acquired Company is less than the statutory minimum required under any applicable Laws or an applicable Governmental Entity notifies an Acquired Company in writing that it has determined that such Acquired Company has a capital and surplus deficiency (such deficiency, a “Capital and Surplus Deficiency”), Buyer shall provide written notice of such Capital and Surplus Deficiency to Parent.

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Promptly after Parent’s receipt of any written notice of a Capital and Surplus Deficiency from Buyer, but in no event later than the earliest of the dates that are (i) twenty (20) Business Days after the date of such notice, (ii) five (5) Business Days prior to the end of the applicable quarter or (iii) five (5) Business Days prior to the date upon which such Capital and Surplus Deficiency must be cured under applicable Law (as applicable, the “Contribution Date”), Parent shall deliver to Buyer an amount (the “Capital and Surplus Contribution Amount”) equal to (A) the amount of such Capital and Surplus Deficiency, minus (B) the Buyer Contribution Amount (as defined below). By the Contribution Date, Buyer shall also contribute to the applicable Acquired Company an amount (not to exceed the Capital and Surplus Deficiency) equal to the aggregate amount of cash or other assets withdrawn from the applicable Acquired Company by Buyer or its Affiliates in excess of the Adjusted Tangible Net Equity Payments made by Buyer at such date. In the event that Parent does not deliver such Capital and Surplus Contribution Amount to Buyer within such time period, Buyer may, at its sole option, advance such Capital and Surplus Contribution Amount to the applicable Acquired Company and provide written notice of such advance to Parent, and Parent shall be liable to Buyer for the full Capital and Surplus Contribution Amount actually funded by Buyer.

(j) Timing of Payments. Any payments pursuant to this Section 1.4 that may be disputed pursuant to Section 1.5 below shall be made promptly by the party required to pay such amount, but in no event later than five (5) Business Days following the final determination of such payment amount pursuant to Section 1.5, by wire transfer of immediately available funds to an account designated by the recipient in writing.

Section 1.5 Dispute of Payment Amounts. Except with respect to disputes governed under Section 1.4(f), this Section 1.5 shall govern the resolution of any disputes between the parties with respect to (i) the preparation of the Initial Membership Statement, any Membership Renewal Statement, the 2010 Medicare Actual Income Statement, the 2011 Medicare Actual Income Statement, the 2012 Medicare Actual Statement of Revenues, the Medicaid Statement of Revenues, the Closing Date Combined Balance Sheet, any Quarterly Combined Financial Statement, the Actual Final Combined Financial Statement, or the Termination Date Combined Financial Statement delivered pursuant to Section 1.4 and (ii) the calculations of the Membership Renewal Amount, the 2010 Actual Medicare Profit/Loss Amount, the 2010 Actual Medicare Revenue-Based Payment Amount, the 2011 Actual Medicare Revenue-Based Payment Amount, the 2012 Actual Medicare Revenue-Based Payment Amount, the Medicaid Revenue-Based Payment Amount, the Closing Adjusted Tangible Net Equity, the Second Anniversary Adjusted Tangible Net Equity Payment, the Quarterly Net Payments, the Actual Final Net Payment and the Termination Date Net Payment pursuant to Section 1.4 (each item under (i) or (ii), a “Calculation Statement”).

(a) The receiving party (the “Recipient”) shall have forty-five (45) days following delivery of each applicable Calculation Statement to it (the “Objection Period”) to provide written notice (the “Objection Notice”) to the other party (the “Preparer”) of any good faith objection to the Calculation Statement, which objection shall be set forth with reasonable detail in such Objection Notice; provided, however,

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that, the Objection Period shall be sixty (60) days following delivery of the Closing Date Combined Balance Sheet (i) with respect to the calculation of the Closing Adjusted Tangible Net Equity and (ii) with respect to the Actual Final Combined Financial Statement and the Termination Date Combined Financial Statement; and provided, further, that, following the final determination of Closing Adjusted Tangible Net Equity, neither the First Anniversary Adjusted Tangible Net Equity Payment nor the Second Anniversary Tangible Net Equity Payment may be objected to absent mathematical error. The Preparer shall reasonably cooperate with the Recipient and shall provide the work papers used by the Preparer or its representatives in preparing the applicable Calculation Statement, as reasonably requested by the Recipient. Unless the Recipient timely delivers an Objection Notice before the expiration of the applicable Objection Period, the Calculation Statement shall be deemed to have been accepted and approved by the Recipient and shall thereafter be final and binding upon the Recipient for purposes of this Section 1.5 (and any amounts to be paid pursuant to Section 1.4 hereof shall thereupon be paid within five (5) Business Days). To the extent any portion of a Calculation Statement shall not be expressly objected to, such matters shall be deemed to have been accepted and approved by the Recipient and shall be final and binding upon the Recipient for purposes hereof, and the undisputed portion of any payments to be made with respect to such Calculation Statement shall be made within five (5) Business Days in accordance with Section 1.4. If the Recipient timely delivers an Objection Notice before the expiration of the Objection Period, then those aspects of the applicable Calculation Statement objected to in the Objection Notice shall not thereafter be final and binding until resolved in accordance with this Section 1.5.

(b) Following receipt of any Objection Notice, the parties shall discuss in good faith the applicable objections set forth therein for a period of thirty (30) days thereafter and shall, during such period, attempt to resolve the matter or matters in dispute by mutual written agreement. If the parties reach such an agreement, such agreement shall be confirmed in writing and the applicable Calculation Statement prepared solely for purposes of this Agreement shall be revised to reflect such agreement, which agreement (and Calculation Statement, as so revised) shall thereafter be final and binding upon the parties for purposes of this Section 1.5 (and any amounts to be paid pursuant to Section 1.4 hereof shall thereupon be paid within five (5) Business Days).

(c) If the parties are unable to reach a mutual agreement in accordance with Section 1.5(b) hereof during the thirty (30) day period referred to therein, then the parties shall jointly select an office of PricewaterhouseCoopers, LLP, Ernst & Young LLP or KPMG LLP or, with respect to any dispute regarding the calculation of (i) Loss Reserves, Reden & Anders, Ltd. or (ii) Termination Date Loss Reserves, Milliman, Inc. or another independent, nationally recognized actuarial firm mutually acceptable to the parties (as applicable, the “Independent Expert”), who, acting as an expert and not as an arbitrator, shall resolve those matters still in dispute with respect to the applicable Calculation Statement in accordance with this Section 1.5. If the parties fail to agree on an Independent Expert within five (5) Business Days after the expiration of the thirty (30) day period, either party may request the American

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Arbitration Association to appoint such an Independent Expert (or another accounting firm if any of the accounting firms named above decline to or are disqualified from accepting the dispute), and such appointment shall be conclusive and binding upon the parties. The Independent Expert’s resolution of the matters in dispute, including any adjustments to the applicable Calculation Statement made by the Independent Expert, shall be final and binding on the parties (and any amounts to be paid pursuant to Section 1.4 hereof shall thereupon be paid within five (5) Business Days). Within twenty (20) days of the appointment of the Independent Expert, each party shall deliver a written presentation of its position to the Independent Expert and the other party, and the parties will then have fifteen (15) days to prepare a written response to the other party’s presentation. The Independent Expert may also request written responses from the parties to specific questions at any time, which shall be delivered to the Independent Expert and the other party. The Independent Expert shall make a determination as soon as practicable and in any event within sixty (60) days (or such other time as the parties shall agree in writing) after its engagement. Notwithstanding anything set forth in this Section 1.5, the scope of any dispute to be resolved by the Independent Expert pursuant to this Section 1.5 shall be limited to whether the applicable Calculation Statement was prepared in accordance with the policies and practices required under Section 1.4, or whether there were mathematical errors in the applicable Calculation Statement or the calculation of any measures therein, and, except for the foregoing matters, the Independent Expert shall not make any further determination. In resolving any disputed item, the Independent Expert may not assign a value to any particular item greater than the greatest value for such item claimed by any party or less than the smallest value for such item claimed by any party, in each case as presented to the Independent Expert. Each party agrees to cooperate with the other parties and with the Independent Expert to resolve any dispute.

(d) Notwithstanding any other provision of this Agreement, including without limitation any provision stating that remedies shall be cumulative and not exclusive and any provisions for indemnification, this Section 1.5 provides the sole and exclusive method for resolving any and all disputes of each and every nature whatever that may arise between or among the parties with respect to the Calculation Statements or any amount reflected thereon or calculated therefrom or required to be reflected thereon or calculated therefrom (other than the calculation of Buyer Costs under Section 1.4(e)). As between the parties, Seller and Buyer hereby irrevocably waive, relinquish and surrender on their own behalf and on behalf of their respective Affiliates and representatives all rights to, and agree that they will not attempt, and shall cause their Affiliates and representatives not to attempt, to, resolve any such dispute or disputes in any manner other than as set forth in this Section 1.5, including without limitation through an indemnification claim or litigation. Seller and Buyer further agree on their own behalf and on behalf of their respective Affiliates and representatives that if one or more of them should initiate any attempt to resolve any such dispute or disputes in any manner other than the sole and exclusive manner set forth in this Section 1.5, such initiators shall pay and reimburse all fees, costs and expenses incurred by any other party as a result of, in connection with or related to such attempt or attempts. For the avoidance of doubt, in the event that the

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Independent Expert declines to resolve any disputes regarding the calculation of Buyer Costs under Section 1.4(e), such disputes may be resolved in accordance with Section 8.6. Nothing in this Section 1.5(d) shall prohibit Buyer from exercising its right of offset in Section 7.3.

(e) Each party shall bear the fees and expenses of its respective independent certified public accountants incurred in performing services pursuant to this Section 1.5. If the Independent Expert is selected to resolve differences between the parties in accordance with Section 1.5, Buyer, on the one hand, and Seller and Parent, on the other hand, shall each pay one-half of the fees and expenses, including any retainers, of such firm in performing services pursuant to this Section 1.5.

Section 1.6 Closing Costs; Transfer Taxes and Fees. Parent shall be responsible for and shall pay (a) all documentary, sales, use, stamp and transfer Taxes and any other Taxes or fees imposed by reason of the transfer of the Shares provided hereunder (and any deficiency, interest or penalty asserted with respect thereto) and, at its expense, file any associated Tax Returns; and (b) all recording, filing, title and registration fees or other charges in connection with or as a direct result of the transfer of the Shares. Each party shall be responsible for its own costs incurred in connection with applying for new Permits and obtaining the transfer of existing Permits which may be lawfully transferred.

ARTICLE II.

REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER

Except as set forth in the disclosure schedule delivered by Seller to Buyer (the “Seller Disclosure Schedule”), Parent and Seller, jointly and severally, represent and warrant to Buyer as follows:

Section 2.1 Organization.

(a) Each of Parent, Seller, HN Life and the Acquired Companies has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Except as set forth on Section 2.1(a) of the Seller Disclosure Schedule, each of the Acquired Companies is duly qualified to do business and is in good standing in each jurisdiction in which the property owned, leased or operated by it, or the nature of the business conducted by it makes such qualification necessary, except for such failure to be so duly qualified and in good standing that would, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. The copies of the articles of incorporation, bylaws and other organizational documents of the Acquired Companies previously made available by Seller to Buyer are true, correct and complete. Except as set forth in Section 2.1(a) of the Seller Disclosure Schedule, none of the Acquired Companies is in material violation of its certificate of incorporation or bylaws (or equivalent organizational documents).

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(b) Section 2.1(b) of the Seller Disclosure Schedule lists, for each Acquired Company, the jurisdiction of its organization, its form of legal entity and each jurisdiction in which it is qualified to do business.

Section 2.2 Capitalization.

(a) Section 2.2(a) of the Seller Disclosure Schedule sets forth the authorized and outstanding shares of capital stock of each of the Acquired Companies and the applicable owner thereof. There are no Equity Interests of the Acquired Companies issued and outstanding except as so set forth on Section 2.2(a) of the Seller Disclosure Schedule. Seller is the owner of record and the beneficial owner, directly or indirectly, of all the issued and outstanding shares of capital stock of each of the Acquired Companies, free and clear of Liens, except for restrictions on transfer imposed by the Securities Act or state securities laws. FOHP, Inc. is the owner of record and the beneficial owner of all of the issued and outstanding shares of capital stock of Health Net of New Jersey, Inc., free and clear of all Liens, except for restrictions on transfer imposed by the Securities Act or state securities laws. Other than as provided in the foregoing sentence and investments held in the ordinary course of business, none of the Acquired Companies has an Equity Interest in any other Person.

(b) All of the outstanding shares of capital stock of the Acquired Companies have been duly authorized and are validly issued, fully paid, and nonassessable.

(c) None of the Acquired Companies has any other preferred stock, voting common stock, non-voting common stock, or other shares of capital stock reserved for or otherwise subject to issuance under existing plans or contractual commitments, other than as disclosed on Section 2.2(c) of the Seller Disclosure Schedule. None of the Acquired Companies has any outstanding bonds, debentures, notes or other debt obligations having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which holders of any Acquired Company’s capital stock may vote.

(d) Other than this Agreement, none of Parent, Seller or the Acquired Companies has any option, warrant, call, subscription, convertible security, right (including preemptive right), commitment or agreement providing for the issuance of additional shares of capital stock of any Acquired Company, the sale of additional shares, the sale of treasury shares, or the repurchase, redemption, transfer or voting of shares of capital stock of any Acquired Company, or any agreements of any kind which may obligate Parent, Seller or any Acquired Company to sell, issue, transfer, purchase, register for sale, redeem or otherwise acquire any of the capital stock of the Acquired Companies.

(e) Assuming the representations set forth in Section 3.9 are accurate, the sale of the Shares as contemplated herein will be exempt from registration under the Securities Act. Upon delivery to Buyer by Seller of the certificates representing the

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Shares and payment therefor by Buyer as provided in Section 1.3, Buyer will acquire valid and marketable title to the Shares free and clear of any Liens, except for restrictions on transfer imposed by the Securities Act and state securities laws.

Section 2.3 Authorization; Binding Agreement. Each of Parent, Seller and their applicable Subsidiaries has the full corporate power and authority to execute and deliver this Agreement and the Transaction Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Transaction Documents to which Parent, Seller or their applicable Subsidiaries is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of Parent, Seller and such Subsidiaries. This Agreement and the Transaction Documents to which Parent, Seller or their applicable Subsidiaries is a party have been duly and validly executed and delivered by Parent, Seller and such Subsidiaries and (assuming the accuracy of the representations and warranties in Section 3.2) constitute legally valid and binding agreements of Parent, Seller and such Subsidiaries, enforceable against Parent, Seller and such Subsidiaries in accordance with their terms, subject to (a) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium and similar Laws relating to or affecting creditors’ rights and remedies generally, and (b) the effect of equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at Law).

Section 2.4 Noncontravention. Except as set forth on Section 2.4 of the Seller Disclosure Schedule, neither the execution and delivery of this Agreement or the Transaction Documents to which Parent, Seller or their applicable Subsidiaries is a party nor the consummation of the transactions contemplated hereby or thereby will (a) conflict with or result in any breach of any provision of the articles of incorporation or bylaws (or equivalent governing instruments) of Parent, Seller or such Subsidiaries, (b) subject to the receipt of the consents and approvals described in Section 2.5, require any consent or approval (the failure of which to obtain would be material to the Acquired Business) under, or materially conflict with or result in a material violation or breach of, or constitute (with or without notice or lapse of time or both) a material default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any written contract, note, bond, mortgage, indenture, license, agreement or other instrument or obligation (collectively, “Contracts and Other Agreements”) that is material to the Acquired Business and to which Parent, Seller or such Subsidiaries is a party or by which any of them or any portion of their properties or assets may be bound or (c) subject to the receipt of the consents and approvals described in Section 2.5, violate, in any material respect, any Laws applicable to Parent, Seller or such Subsidiaries or any portion of their properties or assets.

Section 2.5 Approvals. No material consent, approval or authorization of or declaration or filing with any foreign, federal, state, municipal or other governmental department, commission, board, bureau, agency, instrumentality or similar governmental body or entity (each, a “Governmental Entity”) on the part of Parent, Seller or their applicable Subsidiaries that has not been obtained or made is required in connection with the execution or delivery by Parent, Seller or their applicable Subsidiaries of this Agreement or the Transaction Documents to which Parent, Seller or such Subsidiaries are a party or the consummation by Parent, Seller or such Subsidiaries of the transactions contemplated hereby and thereby, other

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than (a) to the extent required, filings and other applicable requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (b) approvals, filings and/or notices required under any applicable Laws related to insurance companies, HMOs or third party administration of health benefits, each of which is listed on Section 2.5(b) of the Seller Disclosure Schedule, (c) to the extent required, consents or approvals required from the CMS and other federal agencies administering federal healthcare programs relating to the transfer of Medicare associated government contracts, (d) to the extent required, approvals, filings and/or notices required by DMAHS or other state agencies required to transfer contracts with state agencies, including but not limited to Medicaid contracts, each of which is listed on Section 2.5(d) of the Seller Disclosure Schedule, and (e) as set forth on Section 2.5(e) of the Seller Disclosure Schedule.

Section 2.6 Absence of Material Adverse Effect. Except as set forth on Section 2.6 of the Seller Disclosure Schedule, during the period from December 31, 2008 to the Effective Date, there have been no changes, events, circumstances, developments or effects which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect.

Section 2.7 Absence of Certain Changes or Events. Since December 31, 2008, the Acquired Companies have conducted their respective businesses, and the Acquired Business has been conducted, only in the ordinary course (except in connection with the transactions contemplated hereby) and, without limiting the generality of the foregoing during such period (but except as set forth on Section 2.7 of the Seller Disclosure Schedule):

(a) none of the Acquired Companies has sold, assigned, transferred or conveyed any material Intellectual Property Right or any tangible assets with a value in excess of $150,000, or cancelled any indebtedness for borrowed money, in each case, except in the ordinary course of business;

(b) none of the Acquired Companies has effected any amendment or modification to its articles of incorporation or bylaws (or equivalent governing documents);

(c) none of the Acquired Companies has made any change in accounting methods or principles used for GAAP or SAP purposes, other than as required by GAAP or SAP, applicable Law or a Governmental Entity;

(d) no Insurance Subsidiary has forfeited, abandoned, modified, waived, terminated or otherwise changed (including any changes, such as limitations or restrictions imposed by any Governmental Entity) any of its insurance licenses, or HMO licenses, certifications or authorizations;

(e) none of the Acquired Companies has incurred any indebtedness for borrowed money, except for borrowings under existing loan agreements and refinancings of existing indebtedness;

(f) neither Parent, Seller, in each case to the extent related to the business of the Acquired Companies, nor the Acquired Companies has changed any Tax accounting methods, made or changed any material Tax election, or entered into any settlement or compromise with respect to any material Tax liability;

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(g) neither Parent, Seller nor the Acquired Companies have subjected any of the assets of the Acquired Companies to any material Lien, except Permitted Liens;

(h) neither Parent, Seller nor the Acquired Companies have, with respect to the Acquired Business, (i) waived or cancelled any claims against third parties with a value in excess of $150,000 (other than as a result of a collection loss) or (ii) suffered any collection losses in excess of $150,000 or material adverse changes in collection loss experience, in each case, that are not consistent with the past practice of the business of the Acquired Companies;

(i) none of the Acquired Companies has issued, sold or transferred any of its Equity Interests, securities convertible or exchangeable for its Equity Interests or warrants, options or other rights to acquire its Equity Interests, or any of its bonds or debt securities; and

(j) there has been no agreement by Seller or the Acquired Companies to do any of the foregoing.

Section 2.8 Contracts and Commitments.

(a) Section 2.8(a) of the Seller Disclosure Schedule sets forth, as of the Effective Date, a complete and accurate list of contracts of the types described in clauses (i) to (vi) below to which any of the Acquired Companies is a party or by which any of their assets are bound (each a “Specified Contract”). “Specified Contracts” shall not include intercompany agreements between or among Parent, Seller, the Acquired Companies or any of Parent’s other Subsidiaries, any shared services agreements to which none of the Acquired Companies is a party, the Caremark Agreement or any Rental Network Contracts, Provider Contracts, Client Contracts or contracts with general agents, brokers or agents.

(i) Any contract that obligates any of the Acquired Companies to pay an amount in excess of $100,000 during the fiscal year ended December 31, 2008, and which remains in effect during the fiscal year ending December 31, 2009.

(ii) Any contract including a provision which prohibits the Acquired Companies from freely engaging in any line of business, including, without limitation, any contract containing exclusivity provisions binding the Acquired Companies, or which prohibits the Acquired Companies from soliciting customers or any other business, anywhere in the world (but, in each case, excluding confidentiality provisions).

(iii) Any contract that involves an obligation for borrowed money in excess of $100,000 or provides for a guaranty or surety by any of the Acquired Companies in an amount in excess of $100,000 in respect of any Person other than any of the Acquired Companies.

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(iv) Any contract that creates a partnership, limited liability company or joint venture (but excluding risk-sharing arrangements with health care providers) to which the Acquired Companies is a party.

(v) Any contract with any Governmental Entity (other than Client Contracts and Orders) that is material to the Acquired Business.

(vi) Any reinsurance, coinsurance or retrocession treaties, or other similar material agreements, slips, binders, cover notes or similar arrangements of any kind (the “Reinsurance Agreements”) to which any of the Acquired Companies is a party as a cedent, and any terminated or expired Reinsurance Agreement under which there remains any outstanding liability, other than any intercompany agreements.

(b) Except as set forth on Section 2.8(b) of the Seller Disclosure Schedule, as of the date hereof, all of the Specified Contracts, Broker Contracts, Rental Network Contracts, Provider Contracts, Client Contracts, Vendor Contracts and the Caremark Agreement are, with respect to the Parent, Seller or its Subsidiaries (as applicable) and, to the knowledge of Seller, with respect to all other parties thereto, legally valid and binding, in full force and effect and enforceable in accordance with their terms, except (i) as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium and similar Laws relating to or affecting creditors’ rights and remedies generally and by the effect of equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at Law) or (ii) as would not be material, individually or in the aggregate, to any Acquired Company in its individual capacity. Except as set forth on Section 2.8(b) of the Seller Disclosure Schedule, as of the date hereof, the Acquired Companies have performed their obligations in all material respects under the Specified Contracts, Broker Contracts, Rental Network Contracts, Provider Contracts, Client Contracts and Vendor Contracts to the extent those obligations to perform have accrued or are being contested in good faith in the ordinary course of business.

(c) Since December 31, 2008, none of Parent, Seller or their Subsidiaries party to such contracts has received any written notice asserting a breach, default or violation under any Specified Contract or Rental Network Contract outside of the ordinary course of business, by Parent, Seller or such Subsidiary and, to the knowledge of Seller, each of the other parties thereto are not in material breach, default or violation of such Specified Contract or Rental Network Contract.

(d) Prior to the Effective Date, Seller has made available to Buyer true and, except for redactions thereto by Seller in its sole discretion made in order to ensure compliance with federal and state antitrust laws, complete copies of all contracts in existence as of the date hereof which are included in the following categories:

(i) Specified Contracts,

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(ii) Provider Contracts representing at least 50% of calendar year 2008 incurred claims cost (excluding pharmaceutical cost) for the Acquired Business as a whole,

(iii) top twenty five (25) Client Contracts, measured by membership, as of December 31, 2008 and as of June 30, 2009, for the Acquired Business taken as a whole,

(iv) contracts with the top twenty five (25) general agents, brokers and agents, measured by commissions and bonuses paid to each such general agent, broker or agent for the twelve (12) month period ended December 31, 2008, with respect to the Acquired Business (“Broker Contracts”), and

(v) contracts providing for the lease or other use of a third party’s physician or health care provider network that are material to the Acquired Business (“Rental Network Contracts”).

(e) Prior to the Effective Date, Seller has made available to Buyer a list of all contracts with the top ten (10) shared services vendors, based on estimated expenditures for the Acquired Business for the twelve (12) month period ended December 31, 2008 (“Vendor Contracts”).

Section 2.9 Litigation, Judgments, No Default. Except (i) as set forth on Section 2.9 of the Seller Disclosure Schedule or (ii) for Actions arising under the Company Forms, Client Contracts and Provider Contracts in the ordinary course of business, there is no:

(a) material Action pending or, to the knowledge of Seller, threatened during the last two (2) years, before any federal or state court or arbitrator to which any of the Acquired Companies is a party; and

(b) judgment, decree, injunction, settlement agreement with ongoing commitments, ruling or order (collectively, “Orders”) of any court, arbitrator or Governmental Entity outstanding against any of the Acquired Companies that is material to the applicable Acquired Company, in its individual capacity.

Section 2.10 Finders and Investment Bankers. Neither Parent, Seller or any of the Acquired Companies nor any of their respective officers or directors has employed any investment banker, financial advisor, broker or finder in connection with the transactions contemplated by this Agreement, except for J.P. Morgan Securities, Inc. (“JP Morgan”) and Banc of America Securities LLC (“Banc of America”), or incurred any liability for any investment banking, business consultancy, financial advisory, brokerage or finders’ fees or commissions in connection with the transactions contemplated hereby, except for fees payable to JP Morgan and Banc of America, all of which fees have been or will be paid by Seller in accordance with the agreements between Parent and JP Morgan and Parent and Banc of America.

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Section 2.11 Insurance. The Acquired Companies and their Subsidiaries carry insurance with insurers that, to the knowledge of Seller, are solvent, in amount and types of coverage which are customary in the industry and against risks and losses which are usually insured against by persons holding or operating similar properties and similar businesses. Except as disclosed on Section 2.11 of the Seller Disclosure Schedule, no material claims have been submitted for payment and not paid under any of such insurance policies relating to the properties, assets or operations of the Acquired Companies or the Acquired Business since December 31, 2007.

Section 2.12 Intellectual Property Rights.

(a) Section 2.12(a) of the Seller Disclosure Schedule sets forth a list of all Intellectual Property Rights and Trademarks owned by the Acquired Companies that are used exclusively in the business of the Acquired Companies and that are registered, filed or issued under the authority of any Governmental Entity (“Seller Registered IP”), including (A) for each registered Trademark (excluding domain names), the application serial number or registration number thereof; (B) for each Patent or registered Copyright, the number and date of registration or application thereof for each jurisdiction in which a Patent or Copyright has been registered or applied for; and (C) for any URL or domain name, the registration date, any renewal date and name of registry. The Acquired Companies have in a timely manner made all filings, payments, and recordations and taken all other actions reasonably required to obtain and maintain ownership of all Seller IP in and to each material item of Seller Registered IP.

(b) Except as set forth on Section 2.12(b) of the Seller Disclosure Schedule, the Acquired Companies exclusively own or have the right to irrevocably assign and transfer all right, title, and interest in and to the Seller IP (including the right to seek past and future damages with respect thereto) to Buyer, free and clear of any Liens, claims or encumbrances other than Permitted Liens and non-exclusive licenses granted in the ordinary course of business.

(c) To the knowledge of Seller, the business of the Acquired Companies as currently conducted does not infringe upon or otherwise violate any Intellectual Property Rights owned or controlled by a third party. No Actions have been instituted or are pending against any of the Acquired Companies, or, to the knowledge of Seller, are threatened, that challenge the right of the Acquired Companies with respect to the use licensed Seller IP or use or ownership of owned Seller IP.

(d) Except as set forth on Section 2.12(d) of the Seller Disclosure Schedule, no Actions have been instituted or are pending against any of the Acquired Companies, or, to the knowledge of Seller, are threatened, that allege infringement, misappropriation, or other violation of any Intellectual Property Right of another Person. Except as set forth on Section 2.12(d) of the Seller Disclosure Schedule, none of the Acquired Companies has received any written notice or other communication relating to any actual, alleged, or suspected infringement, misappropriation, or violation of any Intellectual Property Right of another Person.

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Section 2.13 Compliance with Law. Except as set forth on Section 2.13 of the Seller Disclosure Schedule or with respect to matters covered by Section 2.15 (Licenses and Permits), Section 2.16 (Environmental Matters), Section 2.17 (Tax Returns and Tax Payments) and Section 2.18 (Regulatory Matters), the Acquired Companies have conducted their businesses in compliance, in all material respects, with all applicable Laws. Since December 31, 2006, except as set forth on Section 2.13 of the Seller Disclosure Schedule, none of the Acquired Companies or their Subsidiaries has received any written notice of alleged material violations of the foregoing, other than written notices which have been cured, settled, dismissed or otherwise fully remedied or closed due to inactivity, and there are no pending or, to the knowledge of Seller, threatened hearings or investigations with respect to any of the foregoing.

Section 2.14 Real Property. Section 2.14 of the Seller Disclosure Schedule lists all of the real property leases of the Acquired Companies (the “Property Leases”). None of the Acquired Companies owns any real property. Except as set forth on Section 2.14 of the Seller Disclosure Schedule, there are no leases, subleases, licenses, occupancy agreements, options, rights, concessions or other agreements or arrangements, granting to any Person the right to purchase, or the exclusive right to use or occupy any of the real property leased pursuant to the Property Leases (the “Leased Real Property”). Except as set forth on Section 2.14 of the Seller Disclosure Schedule, there are no pending or threatened condemnation proceedings with respect to any of the Leased Real Property. Except as set forth on Section 2.14 of the Seller Disclosure Schedule, none of the Acquired Companies has received any communications from any lessor of the Leased Real Property notifying them of any intention of any such lessor to terminate or fail to renew the Property Lease.

Section 2.15 Licenses and Permits. Except as set forth on Section 2.15 of the Seller Disclosure Schedule or with respect to matters covered by Section 2.16 (Environmental Matters) and Section 2.18 (Regulatory Matters), each of the Acquired Companies has obtained, and is in compliance in all material respects with, all Permits material to the conduct of the businesses and operations of the Acquired Companies as now conducted. Except as set forth on Section 2.15 of the Seller Disclosure Schedule, Parent and Seller have all material Permits necessary in order for Parent and/or Seller to perform their obligations under the Administrative Service Agreements and Business Transition Agreement in the States of New York, New Jersey, Connecticut and Rhode Island.

Section 2.16 Environmental Matters. Except as set forth on Section 2.16 of the Seller Disclosure Schedule, there are no legal, administrative, arbitral or other proceedings seeking to impose, or that reasonably could be expected to result in the imposition on the Acquired Companies of any liability or obligations arising under common law standards relating to environmental protection, human health or safety, or under any local, state or federal environmental statute, regulation or ordinance relating to pollution or protection of the environment, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (collectively, “Environmental Laws”), pending or, to the knowledge of Seller, threatened in writing, against the Acquired Companies, which liability or obligation would reasonably be expected to have a Material Adverse Effect. Except as set forth

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on Section 2.16 of the Seller Disclosure Schedule, to the knowledge of Seller, during the period of (a) the ownership or operation by the Acquired Companies of any of their current properties or (b) the holding by the Acquired Companies of a leasehold interest or other interest in any property, there has been no release of hazardous, toxic or radioactive materials regulated under Environmental Laws in, on, under or affecting any such property, which release would reasonably be expected to have a Material Adverse Effect. Except as set forth on Section 2.16 of the Seller Disclosure Schedule, to the knowledge of Seller, none of the Acquired Companies is subject to any agreement, order, judgment or decree by or with any Governmental Entity or third party imposing any material liability or obligations pursuant to or under any Environmental Law that would reasonably be expected to have a Material Adverse Effect.

Section 2.17 Tax Returns and Tax Payments. Except as set forth in Section 2.17 of the Seller Disclosure Schedule:

(a) Parent has caused each of the Acquired Companies to timely file all material Tax Returns required to be filed by them for taxable periods prior to the Closing Date. All such Tax Returns are complete, correct and accurate in all material respects. Each Acquired Company has paid all Taxes (whether or not shown to be due on any Tax Return), except any such Taxes for which appropriate reserves have been established in accordance with GAAP or SAP.

(b) The Acquired Companies have timely and properly withheld and paid all material Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

(c) There are no Liens for Taxes (other than Permitted Liens) upon any of the assets of any Acquired Company.

(d) To the knowledge of Parent or Seller, no material claim has ever been made by a taxing authority in a jurisdiction where any Acquired Company does not file Tax Returns that any Acquired Company is or may be subject to taxation by that jurisdiction.

(e) No material deficiencies for any Taxes of an Acquired Company have been claimed, proposed or assessed by any taxing authority. There are no audits, examinations, assessments or other actions pending or currently being conducted or, to the knowledge of Seller, threatened for or relating to any material liability in respect of any Taxes of an Acquired Company. None of the Acquired Companies has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, nor is any request for any such waiver or consent pending. None of the Acquired Companies has granted any power of attorney with respect to Taxes that is currently in force.

(f) None of the Acquired Companies will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change

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in method of accounting for a taxable period ending on or prior to the Closing Date or (ii) “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Tax Law) executed on or prior to the Closing Date.

(g) None of the Acquired Companies has, since December 31, 2005, distributed stock of another Person, or has had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or part by Section 355 or Section 361 of the Code.

(h) The Acquired Companies are members of an affiliated group of corporations within the meaning of Section 1504 of the Code (the “Affiliated Group”), the common parent of which is Parent. Since the date acquired by Parent, none of the Acquired Companies (i) has been a member of an affiliated group other than the Affiliated Group or (ii) has any liability for the Taxes of any Person (other than Parent or any Subsidiary of Parent) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign Law), as a transferee or successor, by contract, or otherwise.

(i) The Acquired Companies have not participated in any listed transaction as defined under Code Section 6011 and the Treasury regulations thereunder.

(j) No Acquired Company is party to any contract that would result, separately or in the aggregate, in the payment of any “excess parachute payments” within the meaning of Section 280G of the Code to any Person who is a “disqualified individual” (as defined in Treasury Regulation Section 1.280G-1) with respect to the Acquired Companies, and the consummation of the transactions contemplated by this Agreement will not be a factor causing payments to be made by the Acquired Companies that are not deductible (in whole or in part) as a result of the application of Section 280G of the Code.

(k) None of the Acquired Companies, to the extent they are “controlled foreign corporations” within the meaning of Section 957 of the Code, has had “subpart F income” within the meaning of Section 952 of the Code since the date of formation of such Acquired Company.

(l) No Acquired Company has an “overall foreign loss” within the meaning of Section 904 of the Code or a “dual consolidated loss” within the meaning of Treasury Regulations Section 1.1503-2.

(m) No Acquired Company is a “passive foreign investment corporation” as defined in Section 1297 of the Code.

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Section 2.18 Regulatory Matters. Except as set forth on Section 2.18 of the Seller Disclosure Schedule:

(a) Each of the Acquired Companies (i) is conducting and at all times since December 31, 2006, has conducted its business in compliance, in all material respects, with all applicable health care and insurance Laws, including, without limitation, ERISA, the administrative simplification provisions of HIPAA, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Pub. L. No. 108-173), the Medicare Improvements for Patients and Providers Act of 2008 (Pub. L. No. 110-275), Medicare (Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq.), Medicaid (Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq.), the regulations promulgated pursuant to such laws, and any other Law, contract with CMS or a Governmental Entity, manual provision, program memorandum, opinion letter, or other issuance which regulates recordkeeping, the hiring of employees or acquisition of services or supplies from those who have been excluded from government health care programs, quality, safety, privacy, security, licensure, accreditation, prompt payment of claims, contracting with providers or others for the provision of health care services, financial reserve or surplus requirements, managed care, the regulation of HMOs or the payment for or provision of health insurance and health care, the payment of premium Taxes, surcharges or other assessments on health care insurance, HMO or health care administrative services businesses or payments (including shared risk pools), or the marketing of health insurance or HMO products, including but not limited to arrangements with brokers, agents and producers (hereinafter collectively referred to as the “Health Care Laws”), and (ii) have not during the last three (3) years received any notice from any Governmental Entity alleging any material non-compliance with such Health Care Laws.

(b) Buyer has been provided with true and complete copies of all final examination reports and a listing of currently active examinations, including both financial and market conduct examinations, of any Governmental Entity during the last three (3) years relating to the Acquired Companies and the Acquired Business. Except as otherwise set forth on Section 2.18(b) of the Seller Disclosure Schedule, there are no asserted deficiencies in any such examination report material to the Acquired Companies or their Subsidiaries, which are not being or have not been addressed through the timely submission of a corrective action plan to the appropriate Governmental Entity or by other means permitted under applicable Law.

(c) All Permits material to the conduct of the Acquired Companies and the Acquired Business and required pursuant to any Health Care Law have been obtained by the Acquired Companies and are listed on Section 2.18(c) of the Seller Disclosure Schedule. To the knowledge of Seller, each of the Acquired Companies are, and at all times during the last three (3) years, have been in compliance, in all material respects, with all such Permits. There are no Actions pending or threatened that seek the revocation, cancellation, suspension or adverse modification of any such Permit.

(d) All material reports, financial statements, documents (including, but not limited to, marketing, enrollment and health benefit plan materials and member communications), submissions (including, but not limited to, submissions of cost and expense data and rating proposals), notices and responses to audit or examination

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findings, and notices required to be filed, maintained, or furnished to any Governmental Entity pursuant to any Health Care Law by any of the Acquired Companies during the last three (3) years have been so filed, maintained or furnished, and there are no outstanding material deficiencies which any Governmental Entity has asserted with respect to such material reports, financial statements, documents, submissions, notices and responses. All such reports, financial statements, documents, submissions, notices and responses were complete and correct, in all material respects, on the date filed (or were corrected in or supplemented by a subsequent filing).

(e) During the last three (3) years, except as set forth on Section 2.18(e) of the Seller Disclosure Schedule, none of the Acquired Companies nor, to the knowledge of Seller, any of their respective officers, directors or employees is currently, or has at any time been, debarred, suspended, or otherwise excluded from participating in any federal healthcare programs.

(f) Section 2.18(f) of the Seller Disclosure Schedule sets forth the names of HN Life and each Acquired Company that is an insurance company or HMO (the “Insurance Subsidiaries”), and the insurance and HMO licenses and certificates held by such entity. Except as set forth on Section 2.18(f) of the Seller Disclosure Schedules, each of the Insurance Subsidiaries is (i) duly licensed or authorized as an insurance company, or is duly licensed or certified as an HMO, in its jurisdiction of incorporation, (ii) duly licensed, authorized, or certified to carry on an insurance or HMO business in each other jurisdiction where it is required to be so licensed, certified or authorized in all material respects, and (iii) duly authorized in its jurisdiction of incorporation and duly authorized in all material respects in each other applicable jurisdiction, to write its lines of business as required by Law. The Insurance Subsidiaries have filed all material reports, data and other information required to be filed with respect to the business conducted by the Acquired Companies under applicable statutes and regulations relating to reports of insurance companies and HMOs. Section 2.18(f) of the Seller Disclosure Schedule sets forth the states where the Insurance Subsidiaries are domiciled for insurance regulatory purposes, and, if applicable, where they are regulated as HMOs.

Section 2.19 Financial Matters.

(a) Parent or Seller has delivered to Buyer true, correct and complete copies of (i) the unaudited balance sheets, as of March 31, 2009 of the Acquired Companies and their Subsidiaries (the “Latest Balance Sheets”) and the unaudited consolidated statements of income of the Acquired Companies and their Subsidiaries for the three-month period then ended (such statement of income and the Latest Balance Sheet being hereinafter referred to as the “Latest Financial Statements”) and (ii) the unaudited balance sheets as of December 31st of each of 2008, 2007 and 2006 of the Acquired Companies and the unaudited consolidated statements of income of the Acquired Companies for each of the fiscal years then ended (collectively, the “Annual Financial Statements”). The Latest Financial Statements and the Annual Financial Statements are based upon the information contained in the books and

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records of Parent, Seller and the Acquired Companies and fairly present in all material respects the financial position of the Acquired Companies as of the dates thereof and results of operations for the periods referred to therein. Except as set forth on Section 2.19(a) of the Seller Disclosure Schedule, (i) the Annual Financial Statements have been prepared in accordance with GAAP applicable to unaudited annual financial statements, consistently applied in accordance with Parent’s historical practices insofar as such practices are consistent with GAAP; and (ii) the Latest Financial Statements have been prepared in accordance with GAAP applicable to unaudited interim financial statements (and thus may not contain all notes and may not contain prior period comparative data which are required for compliance with GAAP), consistent with the Annual Financial Statements, and reflect all adjustments necessary to a fair statement in all material respects of the financial condition and results of operations for the interim periods presented.

(b) Except as set forth on Section 2.19(b) of the Seller Disclosure Schedule, Parent or Seller has delivered to Buyer the following statutory financial statements, including all notes, exhibits, schedules and certifications, of each Insurance Subsidiary which are required to be filed with applicable regulatory authorities (the “Statutory Statements”): (i) the quarterly Statutory Statement for the quarter ended March 31, 2009, as filed with applicable regulatory authorities, and (ii) the annual Statutory Statements for each of the years ended December 31, 2008, 2007, and 2006 as filed with the applicable regulatory authorities. The Statutory Statements (A) fairly present in all material respects the financial position of each Insurance Subsidiary and the results of its operations as of the dates thereof and periods then ended, and (B) were prepared in accordance with applicable accounting principles prescribed or permitted at the date of such financial statements by the applicable regulatory authority, consistently applied in all material respects and (C) were timely filed with the applicable regulatory authority in which they were required to be filed.

(c) Complete and correct copies of all material reports submitted by or on behalf of any Insurance Subsidiary to any Governmental Entity relating to risk-based capital calculations in the two-year period ending on the Effective Date have been provided to Buyer prior to the Effective Date. The Acquired Companies are not required, under applicable Law, to submit any analyses, reports or other data relating to Insurance Regulatory Information Systems to any Governmental Entity or the NAIC.

(d) The reserves and other liability amounts with respect to the Client Contracts and Reinsurance Agreements to which the Acquired Companies or their Subsidiaries is a party (each, an “Insurance Contract”) established or reflected in the Statutory Statements were determined in accordance with generally accepted actuarial standards consistently applied, were based on actuarial assumptions in accordance with those called for in the provisions of the related Insurance Contracts, were determined in accordance with the requirements of all applicable Laws, were determined in accordance with statutory accounting principles, consistently applied in accordance with the Company’s historical practices, and are computed on the basis of assumptions consistently applied.

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Section 2.20 Customers, Health Care Providers and Vendors; Intercompany Agreements.

(a) Section 2.20(a)(i) of the Seller Disclosure Schedule lists (on a no names basis), for the twelve (12) month period ending on December 31, 2008 and for the six (6) month period ending on June 30, 2009, the (i) top twenty (20) Employer Groups that are fully insured groups, by State, based on aggregate revenue, and (ii) top five (5) Employer Groups that are ASO groups, by State, based on aggregate revenue. Section 2.20(a)(ii) of the Seller Disclosure Schedule lists, for the twelve (12) month period ending on December 31, 2008 and for the five (5) month period ending on May 31, 2009, the top twenty (20) health care providers (excluding drug suppliers) based on incurred claims cost. Section 2.20(a)(iii) of the Seller Disclosure Schedule lists, for the twelve (12) month period ending on December 31, 2008, the top ten (10) shared services vendors based on estimated expenditures for the Acquired Business for such period. Section 2.20(a)(i), (ii) and (iii) of the Seller Disclosure Schedule sets forth opposite the name of each such Employer Group, ASO group, health care provider and vendor the approximate percentage and dollar amount of revenues or purchases by the Acquired Business attributable to such Employer Group, ASO group, health care provider or vendor for the applicable period(s). Parent or Seller has provided or will provide Buyer with written notice of any Employer Group, ASO Group, health care provider or vendor required to be listed on Section 2.20(a)(i), (ii) or (iii) of the Seller Disclosure Schedule that, since December 31, 2008, (x) has indicated in writing that it will terminate its business with the Acquired Business or (y) has asserted an Action in writing against Parent, Seller or the Acquired Companies with respect to the Acquired Business.

(b) Section 2.20(b) lists as of the Effective Date all material intercompany Contracts and Other Agreements to which any of the Acquired Companies is a party or which are material to the operation of the Acquired Business as it is currently conducted, and which will be, as determined in good faith by Parent and Seller, necessary after the Closing in order for Parent and/or Seller to perform their obligations under the Administrative Service Agreements and Business Transition Agreement (such Contracts and Other Agreements, the “Intercompany Agreements”).

Section 2.21 Employment and Employee Benefit Matters. All of the Business Employees are employed by Parent or an Affiliate of Parent other than the Acquired Companies. None of the Acquired Companies sponsors or maintains any Benefit Programs. All Benefit Programs for the benefit of Business Employees are sponsored and maintained by Parent or an Affiliate of Parent other than the Acquired Companies.

Section 2.22 Officers and Directors; Bank Accounts. Section 2.22 of the Seller Disclosure Schedule sets forth as of the hereof (a) a list of all officers and directors of the Acquired Companies and (b) a full and complete list of all bank accounts and safe deposit boxes of the Acquired Companies, the number of each such account or box, and the names of the persons authorized to draw on such accounts or to access such boxes. All cash in such accounts is held in demand deposits and is not subject to any restriction as to withdrawal.

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ARTICLE III.

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller, as follows:

Section 3.1 Organization. Buyer has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Buyer is duly qualified to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it make such qualification necessary, except for such failures to be so duly qualified and in good standing that, individually or in the aggregate, would not reasonably be expected to result in a material adverse effect on Buyer’s ability to consummate the transactions contemplated hereby. Buyer is not in material violation of its certificate of incorporation or bylaws (or equivalent organizational documents).

Section 3.2 Authorization; Binding Agreement. Buyer has the corporate power and authority to execute and deliver this Agreement and the Transaction Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Transaction Documents to which Buyer is a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of Buyer. This Agreement and the Transaction Documents to which Buyer is a party have been duly and validly executed and delivered by Buyer and (assuming the accuracy of the representations and warranties in Section 2.3) constitute legally valid and binding agreements of Buyer, enforceable against Buyer in accordance with their terms, subject to (a) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium and similar Laws relating to or affecting creditors’ rights and remedies generally, and (b) the effect of equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at Law).

Section 3.3 Noncontravention. Neither the execution and delivery of this Agreement or the Transaction Documents to which Buyer is a party nor the consummation of the transactions contemplated hereby or thereby will (a) conflict with or result in any breach of any provision of Buyer’s organizational documents or bylaws, (b) subject to the receipt of the consents and approvals described in Section 3.4, require any consent or approval (the failure of which to obtain would be material to Buyer’s business) under, or materially conflict with or result in a material violation or breach of, or constitute (with or without notice or lapse of time or both) a material default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contracts and Other Agreements to which Buyer is a party or by which Buyer or any portion of its properties or assets may be bound or (c) subject to the receipt of the consents and approvals described in Section 3.4, violate, in any material respect, any Laws applicable to Buyer or any material portion of its properties or assets; provided that no representation or warranty is made in the foregoing clause (b) or (c) except to the extent such matters, individually or in the aggregate, would reasonably be expected to result in a material adverse effect on Buyer’s ability to consummate the transactions contemplated hereby or thereby.

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Section 3.4 Approvals. No consent, approval or authorization of, or declaration or filing with, any Governmental Entity on the part of Buyer that has not been obtained or made is required in connection with the execution or delivery by Buyer of this Agreement or the Transaction Documents to which Buyer is a party or the consummation by Buyer of the transactions contemplated hereby or thereby, other than (a) to the extent required, filings and other applicable requirements under the HSR Act, (b) approvals, filings and/or notices required under any applicable Laws related to insurance companies, HMOs or third party administration of health benefits, (c) to the extent required, consents or approvals required from the CMS and other federal agencies administering healthcare programs relating to the transfer of Medicare associated government contracts, (d) to the extent required, approvals, filings and/or notices required by DMAHS or other state agencies required to transfer contracts with state agencies, including but not limited to Medicaid contracts, and (e) consents, approvals, authorizations, declarations or filings that, if not obtained or made, would not, individually or in the aggregate, reasonably be expected to result in a material adverse effect on Buyer’s ability to consummate the transactions contemplated hereby or thereby.

Section 3.5 Finders and Investment Bankers. None of Buyer or any of its respective officers or directors has employed any investment banker, financial advisor, broker or finder in connection with the transactions contemplated by this Agreement or the Transaction Documents to which Buyer is a party, or incurred any liability for any investment banking, business consultancy, financial advisory, brokerage or finders’ fees or commissions in connection with the transactions contemplated hereby.

Section 3.6 Compliance with Law.

(a) Except with respect to matters covered by Section 3.7 (Regulatory Matters), since December 31, 2007, Buyer and its Affiliates that are parties to the Transaction Documents have been in compliance with all applicable Laws, except where the failure to be in compliance would not, individually or in the aggregate, have a material adverse effect on Buyer’s ability to consummate the transactions contemplated by this Agreement or the Transaction Documents to which Buyer or any of its Affiliates is a party.

(b) Since December 31, 2008, neither Buyer nor its Affiliates that are parties to the Transaction Documents have received any written notice of alleged violations of Law, other than as would not reasonably be expected to prevent Buyer and its Affiliates that are parties to the Transaction Documents from consummating the transactions contemplated by this Agreement and the Transaction Documents to which they are a party.

Section 3.7 Regulatory Matters.

(a) Buyer or its Affiliates that are parties to the Transaction Documents are (i) duly licensed or authorized as insurance companies, and are duly licensed or

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certified as HMOs, in the jurisdictions where the Acquired Business is conducted as of the Effective Date, and (ii) duly authorized in each jurisdiction where the Acquired Business is conducted as of the Effective Date to write their lines of business as required by Law, in each case, except for such failures to be duly licensed or authorized as would not, individually or in the aggregate with all such failures, be material to Buyer’s ability to consummate the transactions contemplated by this Agreement or the Transaction Documents to which Buyer or such Affiliates is a party.

(b) Buyer or its Affiliates that are parties to the Transaction Documents are in compliance, in all material respects, with all state capitalization requirements necessary to carry on an insurance or HMO business in the jurisdictions where the Acquired Business is conducted as of the Effective Date.

Section 3.8 Financing. Buyer represents that as of the Closing Date it will have sufficient funds to deliver the Closing Payment to Seller in accordance with Section 1.3(b)(i).

Section 3.9 Investment Intent. The Shares will be acquired by Buyer for its own account and not for the purpose of a distribution. Buyer will refrain from transferring or otherwise disposing of any of the Shares acquired by it, or any interest therein, in such manner as to violate any registration provision of the Securities Act, or any applicable state securities law regulating the disposition thereof. Buyer agrees that the certificates representing the Shares may bear legends to the effect that the Shares have not been registered under the Securities Act, or such other state securities laws, and that no interest therein may be transferred or otherwise disposed of in violation of the provisions thereof.

ARTICLE IV.

COVENANTS

Section 4.1 Conduct of the Acquired Business.

(a) Except as contemplated by this Agreement or as required by applicable Law, during the period commencing on the Effective Date and ending on the Closing Date, each of Parent and Seller shall cause the Acquired Companies to conduct the operations of their respective businesses in the ordinary course of business, consistent with past practice, and each of Parent and Seller shall use commercially reasonable efforts to cause the Acquired Business to preserve intact its business and to maintain satisfactory relationships with the customers, members, enrollees, providers, suppliers, Governmental Entities and others having business relationships with the Acquired Business. Without limiting the generality of the foregoing, and except as otherwise contemplated by this Agreement or as required by applicable Law (including antitrust Laws) (provided that Parent or Seller shall promptly provide notice to Buyer of any action taken or not taken under this Section 4.1(a) due to a requirement of Law), prior to Closing, each of Parent and Seller shall cause the

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Acquired Companies not to without the prior written consent of Buyer (which shall not be unreasonably withheld):

(i) amend or propose to amend the articles of incorporation or bylaws (or equivalent governing instruments) of the Acquired Companies;

(ii) authorize for issuance, issue, sell, pledge, deliver or agree or commit to issue, sell, pledge or deliver (whether through the issuance or granting of any options, warrants, calls, subscriptions, stock appreciation rights or other rights or other agreements) any capital stock of any class or any securities convertible into or exchangeable for shares of capital stock of any class of the Acquired Companies;

(iii) permit any of the Acquired Companies to enter into or terminate, or materially amend or materially modify, any Specified Contract other than (A) in the ordinary course of business consistent with past practice, or (B) any novation of the NY Medicare Part D Contract in connection with the transfer of the related business to a third party that (x) releases the Acquired Company party thereto from any continuing obligations thereunder and (y) does not materially and adversely impact the receipt of any required approval of the transactions contemplated hereby by CMS;

(iv) permit any of the Acquired Companies to enter into, or amend or modify, any Provider Contract such that it would (A) provide for a term of more than one (1) year except as set forth on Schedule 4.1(a)(iv) or (B) bind Buyer or any of its Affiliates (other than an Acquired Company);

(v) permit any of the Acquired Companies to enter into, or amend or modify, any Client Contract such that it would (A) provide for a term of more than one (1) year except as set forth on Schedule 4.1(a)(v), (B) provide for a rate cap or rate guaranty for future periods except as set forth on Schedule 4.1(a)(v), or (C) bind Buyer or any of its Affiliates (other than an Acquired Company);

(vi) permit any of the Acquired Companies to enter into a contract providing for the lease or other use of a third party’s physician or health care provider network;

(vii) permit any of the Acquired Companies to acquire or agree to acquire by merging or consolidating with, or by purchasing substantially all of the stock or assets of any business or any corporation, partnership, joint venture, association, or other business organization or division thereof, other than in connection with investment management in the ordinary course of business, consistent with past practice;

(viii) permit any Insurance Subsidiary or any of the Acquired Companies voluntarily to forfeit, abandon, terminate or otherwise materially modify, waive or change any of its insurance licenses or HMO licenses and certificates or other required authorizations from a Governmental Entity that are material to the conduct of the Acquired Business, except as may be required in order to comply with Law;

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(ix) permit any of the Acquired Companies to make any change in accounting methods or principles used for statutory reporting purposes, other than as required by GAAP, SAP, applicable Law or a Governmental Entity;

(x) change any Tax accounting methods or make or change any Tax election, to the extent related to the business of the Acquired Companies except as required by GAAP, SAP, applicable Law or a Governmental Entity;

(xi) permit any of the Acquired Companies to incur any indebtedness for borrowed money or make any guarantees for indebtedness for borrowed money, in each case, except for intercompany indebtedness and other payables in the ordinary course of business;

(xii) sell, lease, license or dispose of any of the Acquired Companies’ material tangible assets or properties or subject any such assets or properties to any Liens (other than Permitted Liens), except (A) in the ordinary course of business consistent with past practice, including as may be required to settle intercompany accounts, (B) as contemplated by this Agreement or the Transaction Documents, (C) as may be required to settle any Actions (subject to subsection (xiii) below), (D) any dividend or other distribution of cash with respect to the Shares or (E) as set forth on Schedule 4.1(a)(xii);

(xiii) split, combine or reclassify any outstanding shares of capital stock of the Acquired Companies;

(xiv) redeem, purchase or acquire or offer to acquire any shares of capital stock of the Acquired Companies;

(xv) create any Subsidiary of the Acquired Companies;

(xvi) settle any Action (including for the avoidance of doubt regulatory actions) (A) for an amount in excess of $5,000,000 or (B) that would bind the Acquired Companies and/or Buyer or its Affiliates after the Closing to any material non-monetary obligations (other than confidentiality obligations);

(xvii) permit any of the Acquired Companies to enter into any Reinsurance Agreement with any Person other than the renewal of any intercompany agreement or any Reinsurance Agreement, in each case, that would not continue after the Closing Date;

(xviii) permit any of the Acquired Companies to enter into any intercompany agreement that would continue after the Closing Date;

(xix) permit any of the Acquired Companies to enter into any employment, severance or similar contract; or

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(xx) agree, commit or arrange to do any of the foregoing.

(b) During the period commencing on the Effective Date and ending on the Closing Date, Parent and Seller shall cause each Acquired Company to, and each Acquired Company shall, unless otherwise consented to by Buyer in writing (such consent not to be unreasonably withheld):

(i) maintain the risk-based capital reserves of the Acquired Companies in the ordinary course of business consistent with past practices and in compliance with applicable Law;

(ii) use commercially reasonable efforts to encourage the Business Employees required to satisfy the obligations of Parent and Seller under the Administrative Services Agreements and Business Transition Agreement to remain with Seller or its Affiliates after the Closing (provided that neither Parent, Seller nor their respective Subsidiaries shall be required (x) to provide any compensation (or incur any other material cost or expense) under this clause (ii) in excess of such Business Employees’ normal compensation in effect from time to time or (y) to make any non-monetary changes to their employment practices under this clause (ii));

(iii) promptly notify Buyer if any Acquired Company declares, sets aside or pays any dividend or other distribution payable in cash, stock, property or otherwise with respect to shares of capital stock;

(iv) maintain the books, accounts, and records of the Acquired Companies in all material respects in accordance with past accounting practices and GAAP, and where inconsistent with GAAP, in conformity with statutory or other accounting practices prescribed or permitted by the applicable regulatory authorities in the relevant jurisdictions and consistent with the custom and practice; and

(v) promptly notify Buyer of any amendments or modifications to any Broker Contract with a general agent.

(c) During the period commencing on the Effective Date and ending on the Closing Date, Seller shall provide Buyer with true and, except for redactions thereto (of the same types of substantive content and materially to the same extent as redactions to documents provided to Buyer prior to the Effective Date or in connection with its due diligence) by Seller in its sole discretion made in order to ensure compliance with federal and state antitrust laws or to comply with confidentiality provisions in any applicable contract, complete copies of all contracts or similar agreements entered into between the Effective Date and the Closing Date that, if entered into prior to the Effective Date, would have been provided pursuant to Section 2.8(d).

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Section 4.2 Access and Information.

(a) Subject to the terms and conditions of the Confidentiality Agreement and applicable Law, between the Effective Date and the Closing Date, Parent shall cause HN Life and the Acquired Companies to afford Buyer and its Representatives (as defined in the Confidentiality Agreement) reasonable access during normal business hours to all of the properties, executive personnel, Contracts and Other Agreements and other books and records of the Acquired Companies and HN Life (to the extent that such books and records relate to the Acquired Business) and shall promptly deliver or make available, or cause to be delivered or made available, to Buyer such other information concerning the business, properties, assets and executive personnel of the Acquired Companies and HN Life (to the extent that such information relates to the Acquired Business) as Buyer may from time to time reasonably request; provided, however, that (i) Buyer and its Representatives shall provide Parent with reasonable advance notice and obtain Parent’s consent (which consent shall not be unreasonably withheld) before contacting any executive personnel of Parent, HN Life or the Acquired Companies and (ii) Parent shall not be required to (or cause its Subsidiaries, HN Life or any of the Acquired Companies to) afford such access or furnish such information to the extent that doing so would result in the loss of attorney-client privilege. Buyer shall hold, and shall cause its representatives to hold, all Evaluation Material and Highly Confidential Evaluation Material (each as defined in the Confidentiality Agreement) in confidence in accordance with the terms of the Confidentiality Agreement and otherwise comply with the provisions of the Confidentiality Agreement (including, without limitation, with respect to the treatment of Highly Confidential Evaluation Material). In the event of the termination of this Agreement for any reason, Buyer promptly shall return or destroy all Evaluation Material and all Highly Confidential Evaluation Material in accordance with the terms of the Confidentiality Agreement. Between the Effective Date and the Closing Date, Parent and Seller shall deliver to Buyer the final monthly unaudited consolidated balance sheets and statements of income of the Acquired Companies that are prepared by Parent or its Affiliates in the ordinary course of business.

(b) Following the Closing Date, each party, in addition to its obligations pursuant to the Administrative Services Agreements, shall allow the other party, upon reasonable prior notice and during normal business hours, through its Affiliates, employees and representatives, (x) the right to examine and make copies, at its expense, of the books and records relating to the Acquired Business, and (y) reasonable access to its employees, in the case of either clause (x) or (y), for any reasonable purpose relating to the business of the Acquired Business or the Acquired Companies, including, without limitation, the preparation or examination of Tax Returns, regulatory and statutory filings and financial statements and the conduct of any litigation or otherwise, or the conduct of any regulatory, policyholder, client or other dispute resolution whether pending or threatened. Each party shall, and shall cause its Affiliates to, maintain the books and records of the Acquired Business for examination and copying by the other party for a period of not less than six (6) years following the Closing Date or any longer period as mandated by applicable Law or

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contract, after which, each party may destroy such records in its discretion. Access to such records shall not unreasonably interfere with the business operations of the party granting access.

(c) Except as set forth in Section 9.1(d) of the Administrative Services Agreements, Buyer (on behalf of itself, its Affiliates and, after the Closing Date, the Acquired Companies) agrees that, notwithstanding anything to the contrary in this Agreement or the Transaction Documents, neither Buyer nor its Affiliates (including, after the Closing Date, the Acquired Companies) shall have access to the Caremark Agreement (other than the Pharmacy Benefits Services Agreement between Health Net Pharmaceutical Services, Health Net of New York, Inc. and CaremarkPCS Health, L.P., dated November 28, 2007, as amended, excluding Addendum A thereto). Buyer acknowledges and agrees that the agreements between each Acquired Company and Health Net Pharmaceutical Services, Inc. or MHN Services, Inc. with respect to pharmacy benefit management services (including mail order, retail network, claims processing, specialty pharmacy and other administrative services) (collectively “PBM Services”) and behavioral health services, respectively, are expected to remain in effect as of the Closing Date with such amendments as are necessary to effectuate the purposes of each Administrative Services Agreement and this Agreement. After the Closing Date, Seller shall administer such agreements substantially in the same manner as such contracts were administered prior to the Closing Date. Seller represents that all agreements for PBM Services that are in effect as of the Closing Date, or that are entered into by Seller on behalf of each of Acquired Company after the Closing Date, contain competitive information that is confidential to the vendor, manufacturer, and other third parties (each a “Third Party”) and to Seller’s Affiliates. Seller represents that disclosure of pricing or other confidential or competitive information directly to each Acquired Company or its Affiliates could result in termination of such agreements or allegations of breach by any such Third Party, or otherwise result in a loss of competitive pricing and terms for each Acquired Company. Seller and each Acquired Company agree to cooperate to obtain permission from such Third Parties to provide limited personnel of each Acquired Company with access to a redacted version of any such agreements for PBM Services, solely on a need-to-know basis; provided, however, that the failure to obtain the permission of any such Third Party shall not excuse the performance of each Acquired Company’s obligations under the applicable Administrative Services Agreement or otherwise constitute a breach by Seller of its obligations under such Administrative Services Agreement. Each Acquired Company may confirm that it is receiving the benefit of the PBM Services by engaging an independent auditor reasonably acceptable to Seller, to perform a confidential review of such agreements of which such Acquired Company is not a party. Prior to performing the confidential review, the independent auditor shall enter into a confidentiality agreement, reasonably acceptable to Seller and the applicable Third Party.

Section 4.3 Reasonable Best Efforts.

(a) Subject to the terms and conditions of this Agreement (including Section 4.3(f)), each party will use its reasonable best efforts to take or cause to be

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taken, and to do or cause to be done, all actions necessary, proper or advisable under this Agreement and applicable Laws (including Regulatory Laws) to consummate the transactions contemplated by this Agreement or any Transaction Document as soon as practicable after the Effective Date. Such actions include (i) preparing and filing, in consultation with the other parties and as promptly as practicable and advisable after the Effective Date, all documentation to effect all necessary applications, notices, petitions, filings and other documents and to obtain as promptly as practicable all consents, clearances, waivers, licenses, Orders, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any third party and/or Governmental Entity in order to consummate the transactions contemplated by this Agreement or any Transaction Document and (ii) taking all reasonable steps as may be necessary to obtain all such material consents, clearances, waivers, licenses, registrations, permits, authorizations, Orders and approvals.

(b) If and to the extent required or deemed advisable, as reasonably determined by Buyer, in furtherance and not in limitation of the foregoing, Buyer agrees to make or cause to be made, in consultation and cooperation with Seller and as promptly as practicable and advisable after the Effective Date, (i) an appropriate filing of a Notification and Report Form pursuant to the HSR Act, and (ii) all other necessary registrations, declarations, notices and filings relating to the transactions contemplated by this Agreement or any Transaction Document with other Governmental Entities under any other antitrust, competition, trade regulation or other Regulatory Law and to respond to any inquires received and supply as promptly as practical any additional information and documentary material that may be requested pursuant to the HSR Act and any other Regulatory Law. Subject to Section 4.3(f), each party further agrees to take, or cause to be taken, all other actions reasonably necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act and any other Regulatory Law as soon as practicable and not to extend any waiting period under the HSR Act and any other Regulatory Law or enter into any agreement with a Governmental Entity not to consummate the transaction contemplated by this Agreement, except with the prior written consent of the other party, which consent shall not be unreasonably withheld, delayed or conditioned.

(c) In furtherance and not in limitation of the foregoing, each party hereto agrees to make or cause to be made, in consultation and cooperation with the other and as promptly as practicable and advisable after the Effective Date, each of the following filings and notices required to be made by such party: (i) an appropriate filing with the New York Department of Insurance, the New York State Department of Health, the New Jersey Department of Banking and Insurance, the Connecticut Department of Insurance and the Rhode Island Department of Health; (ii) a notification to CMS and DMAHS regarding the transaction described herein as soon as practicable and advisable after the Effective Date, and, if required by CMS and/or DMAHS, make or cause to be made an appropriate filing with CMS and/or DMAHS, in consultation and cooperation with the other as promptly as practicable; (iii) the notices and filings set forth on Schedule 4.3(c); and (iv) all other necessary registrations, declarations, notices and filings relating to the transactions

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contemplated by this Agreement or any Transaction Document with other Governmental Entities relating to the Insurance Subsidiaries contemplated hereby. Each party agrees, in consultation and cooperation with the other and as promptly as practicable and advisable, to respond to any inquires received and supply as promptly as practical any additional information and documentary material that may be requested and to take all other actions reasonably necessary to cause approval to be obtained from the relevant Governmental Entities.

(d) Subject to the terms of a joint defense agreement, if applicable, in connection with each party’s obligations under Section 4.3(a), Section 4.3(b) and Section 4.3(c), subject to Section 4.3(f), and to the extent permissible under applicable Law, each party shall use its commercially reasonable best efforts to (i) cooperate with each other in connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private party, (ii) promptly inform the other parties of any communication received by such party from, or given by such party to, any Governmental Entity and of any material communication received or given in connection with any proceeding by a private party, in each case regarding any of the transactions contemplated hereby, (iii) permit the other parties, or their legal counsel, to review any communication given by it to, and consult with each other in advance of any meeting or conference with, any Governmental Entity or, in connection with any proceeding by a private party, with any other Persons, (iv) give the other parties the opportunity to attend and participate in such meetings and conferences to the extent allowed by applicable Law or by the applicable Governmental Entity, (v) in the event one party is prohibited by applicable Law or by the applicable Governmental Entity from participating in or attending any meetings or conferences, keep the other promptly and reasonably apprised with respect thereto and (vi) cooperate in the filing of any memoranda, white papers, filings, correspondence, or other written communication explaining or defining the transaction contemplated hereby, articulating any regulatory or competitive argument, and/or responding to requests or objections made by any Governmental Entity.

(e) Subject to Section 4.3(f), if necessary to obtain any regulatory approval or if any objections are asserted (or any inquiry or investigation is formally commenced) with respect to the transactions contemplated hereby under any Regulatory Law or other applicable Law, or if any suit or proceeding, whether judicial or administrative, is instituted by any Governmental Entity or any private party challenging any of the transactions contemplated hereby as violative of any Regulatory Law or other applicable Law, each party shall use its reasonable best efforts to (i) promptly respond to any inquiry or investigation by any Governmental Entity regarding the transactions contemplated by this Agreement and the other Transaction Documents, (ii) oppose or defend against any Action brought by any Governmental Entity or Person to prevent or enjoin consummation of this Agreement (and the transactions contemplated herein), (iii) take such action as reasonably necessary to overturn any regulatory action by any Governmental Entity to block consummation of this Agreement (and the transactions contemplated herein), including by such litigation as necessary, including exhaustion of all appeals, to avoid

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entry of, or have vacated, overturned or terminated, any order or judgment preventing consummation of this Agreement (and the transactions contemplated herein), and/or (iv) take such action as reasonably necessary in order to resolve any such objections or challenge as such Governmental Entity or private party may have to such transactions under such Regulatory Law, or other applicable Law, so as to permit consummation of the transactions contemplated by this Agreement, provided, however, that, subject to the terms of a joint defense agreement, if applicable, each party shall cooperate with the other parties in connection with all proceedings related to the foregoing and Buyer shall have sole discretion and final decision making authority to initiate and/or agree to any resolution pursuant to provision (iv) of this subparagraph (e) above at any time; provided, further, that any such decision taken by Buyer to resolve any such matters pursuant to provision (iv) of this subparagraph (e) shall not (x) effect Buyer’s obligation to make the Closing Payment and the payments described in Section 1.4 herein in the amounts set forth herein or (y) without the prior written consent of Parent, materially increase the obligations to be performed or the cost and expense of performance, by Parent, Seller or their respective Subsidiaries under this Agreement or the Transaction Documents.

(f) Notwithstanding anything in this Agreement to the contrary, in connection with obtaining the necessary approvals or clearances described in this Section 4.3, (i) no party nor any of its Affiliates shall (x) be required to sell, hold separate or otherwise divest or dispose of any assets or its business, in a specified manner, or (y) permit the sale, holding separate or other divestiture or disposition of, any assets or business, in a specified manner; (ii) in no event shall Buyer or its Affiliates be required to (A) pay any sums required or requested by any Governmental Entity (other than as expressly set forth herein), except routine filing fees and costs contemplated by this Agreement, unless either Parent or Seller in its sole discretion elects to pay or reimburse Buyer for such sums, in which case Buyer will be required to agree to such matters, (B) agree not to compete in any geographic area or line of business, or materially restrict the manner in which, or whether, Buyer, the Acquired Companies, or any of their Affiliates may carry on business in any geographic area, or (C) agree to any condition or provision that would, or would be reasonably likely to, prevent Buyer from renewing the Acquired Business on a Legacy United Entity Plan in accordance with this Agreement and the Transaction Documents or would have a material adverse effect on the Acquired Business, taken as a whole; and (iii) Buyer and its Affiliates shall be permitted to acquire any Equity Interest in, acquire all or substantially all of the assets of, merge, consolidate, enter into a share exchange or business combination, or enter into any other similar transaction with, any Person, and the parties agree that any such transaction shall not be a breach of this Section 4.3.

Section 4.4 Notification of Certain Matters. Seller shall give written notice to Buyer, and Buyer shall give written notice to Seller, promptly upon becoming aware of any occurrence, or failure to occur, of any event, which occurrence or failure to occur has caused, or could reasonably be expected to cause, any condition to the obligations of any party as set forth under ARTICLE V to effect the transactions contemplated by this Agreement not to be satisfied. In the event that Seller provides Buyer with a written notice stating that any representation or warranty

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made under ARTICLE II of this Agreement was when made, or has subsequently become, untrue in any respect, Seller shall provide such written notice to Buyer via written update to the Seller Disclosure Schedule, provided that, for purposes of determining the fulfillment of the condition precedent set forth in Section 5.2(b), no such update shall be given effect except for an update to Section 2.7 of the Seller Disclosure Schedule to the extent that the relevant facts and circumstances arise after the Effective Date and are permitted under Section 4.1(a) without the consent of Buyer.

Section 4.5 Public Announcements. The initial press release or releases with respect to the transactions contemplated by this Agreement shall be in the form agreed to by Buyer and Seller. Thereafter, Buyer and Seller shall not, and shall cause their Subsidiaries and Affiliates not to, issue or cause the publication of any press release with respect to the transaction set forth in Section 1.1, this Agreement or the other transactions contemplated hereby without the consent of the other, except where such release is required by applicable Law or pursuant to the rules or regulations of any securities exchange or any other regulatory requirements. Schedule 4.5 sets forth the representatives of Buyer and Seller authorized to provide the consent contemplated by the preceding sentence. Without limiting the obligations of the parties or their Affiliates under the Transaction Documents, each party agrees to cooperate with each other party to develop and implement a plan with respect to the communication of the transactions contemplated by this Agreement and the Transaction Documents to members, Employer Groups, brokers and providers of the Acquired Business.

Section 4.6 Tax Matters.

(a) Tax Returns.

(i) Tax Periods Ending on or Prior to the Closing Date – Nonconsolidated Tax Returns. Parent shall, at the Parent’s expense, prepare or cause to be prepared all Tax Returns for the Acquired Companies for all periods ending on or prior to the Closing Date that are filed after the Closing Date, other than Tax Returns described in Section 4.6(a)(ii) with respect to consolidated, unitary or combined Tax Returns of Parent which include the operations of the Acquired Companies, and pro forma federal and state income Tax Returns of the Acquired Companies described in Section 4.6(a)(iii). All such Tax Returns shall be prepared in a manner consistent with past practice, to the extent such past practice complies with applicable Law. No later than thirty (30) days prior to the due date (including extensions) for filing such Tax Returns, Parent shall deliver the Tax Returns described in this Section 4.6(a)(i) to Buyer for its review, comment, and approval. Parent shall make all such changes as are reasonably requested by Buyer, and shall deliver the Tax Returns, completed as approved by Buyer and duly executed by an authorized person, to the Buyer no later than ten (10) days prior to the due date (including extensions) for filing such Tax Returns. Buyer shall file or cause to be filed all such Tax Returns on or prior to the due date (including extensions) for filing such Tax Returns, and shall timely pay all Taxes due as reflected on such Tax Returns. Parent shall remit to Buyer, no later than five (5) days prior to the due date (including extensions) for filing such Tax Returns, the amount of any Taxes due as reflected on such Tax Returns to the extent such Taxes are not included or reflected on the Closing Date Combined Balance Sheet.

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(ii) Tax Periods Ending on or Prior to the Closing Date – Consolidated Tax Returns. For all Tax periods ending on or prior to the Closing Date, Parent shall cause the Acquired Companies to join in any consolidated, unitary or combined Tax Return of Parent, and Parent shall timely pay any such Taxes attributable to the Acquired Companies. All such Tax Returns, to the extent they relate to the Acquired Companies or the Acquired Business, shall be prepared in a manner consistent with past practice, to the extent such past practice complies with applicable Law.

(iii) Tax Information.

(A) No later than ninety (90) Business Days after the Closing Date, Parent shall deliver the Deferred Tax Inventory of the Acquired Companies as of the Closing Date and pro forma federal and state income Tax Returns (or similar documentation) to support such inventory.

(B) In connection with the calculation of Closing Adjusted Tangible Net Equity and the preparation of the Closing Date Combined Balance Sheet pursuant to Section 1.4(d)(ii), Parent shall provide, in addition to any statement or itemization required by Section 1.4(d)(ii), a detailed itemization and description of any Taxes due or owed which Parent seeks to include in the calculation of Closing Adjusted Tangible Net Equity.

(C) In connection with the preparation of the Quarterly Combined Financial Statements and the Actual Final Combined Financial Statement pursuant to Section 1.4(e)(i), Parent shall provide, in addition to any statement or itemization required by Section 1.4(e)(i), and the Termination Date Combined Financial Statement pursuant to Section 1.4(e)(ii), a detailed itemization and description of any Taxes due or owed, as such Taxes are calculated for purposes of Section 1.4(e)(i) and or Section 1.4(e)(ii).

(iv) Straddle Periods. Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Acquired Companies for any Straddle Period (“Straddle Returns”). No later than thirty (30) days prior to the due date (including extensions) for filing such Tax Returns, Buyer shall deliver the Tax Returns described in this Section 4.6(a)(iv) to Parent for its review, comment and approval. Buyer shall make all changes with respect to Straddle Returns as are reasonably requested by Parent. Parent shall pay to Buyer an amount equal to the Taxes due as reflected on such Straddle Returns, to the extent that such Taxes arise in or are incurred with respect to a Pre-Closing Tax Period and to the extent such Taxes are not included or reflected on the Closing

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Date Combined Balance Sheet, at least five (5) Business Days prior to the due date (including extensions) for filing such Straddle Returns. All Straddle Returns shall be prepared in a manner consistent with past practices of Parent, to the extent such past practice complies with applicable Law. Where Taxes involve a Straddle Period, such Taxes shall be calculated as though the taxable year of the Acquired Company terminated as of the close of business on the day preceding the Closing Date; provided, however, that in the case of a Tax not based on income, receipts, proceeds, profits or similar items, Taxes shall be equal to the amount of Tax for the taxable period multiplied by a fraction, the numerator of which shall be the number of days from the beginning of the taxable period through to the Closing Date and the denominator of which shall be the number of days in the taxable period.

(v) Amended Tax Returns. After the Closing Date, Buyer, to the extent permitted by Law, shall have the right to amend, modify or otherwise change all Tax Returns of the Acquired Companies, other than Tax Returns described in Section 4.6(a)(ii), for all Tax periods; provided, however, that any such amendment, modification or change that has the effect of increasing the Acquired Companies’ Tax liability for any Tax period ending on or prior to the Closing Date (other than an amendment, modification or change required by applicable Tax Laws or to correct a material misstatement of fact) shall not be made without the prior written consent of Parent, which written consent shall not be unreasonably withheld or delayed.

(vi) Dispute Resolution. If there is disagreement between Buyer and Parent as to whether a change to any Tax Return is “reasonably requested” for purposes of this Section 4.6(a) and Section 4.6(g), Buyer and Parent shall act in good faith to resolve any such dispute prior to the date on which such Tax Return is required to be filed. In the event Buyer and Parent are unable to resolve any dispute in good faith, Buyer and Parent shall mutually request the Independent Expert to resolve any issue in dispute. The fees, costs and expenses of the Independent Expert shall be allocated equally between the Buyer and Parent.

(b) Purchase Price Allocation. The consideration paid by Buyer to Seller pursuant to this Agreement shall be allocated among the Acquired Companies as described on Schedule 4.6(b) or as otherwise updated by the mutual agreement of the parties following the Effective Date.

(c) Section 338(h)(10) Election. Solely with respect to the purchase of Health Net of New York, Inc. (“HNNY”) and Health Net Insurance of New York, Inc. (collectively, the “Election Companies”), Parent shall join Buyer in making the election provided for by Section 338(h)(10) of the Code and Section 1.338(h)(10)-1 of the Treasury regulations and any comparable election under state, local or foreign Tax Law (the “Section 338(h)(10) Election”). Buyer and Parent shall cooperate fully in making the Section 338(h)(10) Election, including the filing of all required IRS forms and related forms under state, local or foreign Tax Law. Prior to the Closing Date, Buyer shall prepare an IRS Form 8023 with respect to each of the Election

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Companies, which shall be attached hereto as Schedule 4.6(c). On the Closing Date Parent shall execute and deliver the fully completed Forms 8023 to Buyer. Buyer shall file the Forms 8023 on or prior to the due date for filing such Forms 8023. The Closing Payment with respect to the Election Companies shall be allocated among the assets of the Election Companies in accordance with Sections 338 and 1060 of the Code and the Treasury regulations promulgated thereunder (the “Allocation”). The Allocation shall be delivered by Parent to Buyer within 60 days after the Closing Date for Buyer’s approval, which approval shall not be unreasonably withheld. Parent and Buyer shall work in good faith to resolve any disputes relating to the Allocation. If Parent and Buyer are unable to resolve any such dispute within 30 days after Buyer’s receipt of the Allocation, such dispute shall be resolved by the Independent Expert, the costs of which shall be borne equally by each party. Buyer, Parent and their Affiliates shall file their respective Tax Returns (including IRS Form 8883) in all respects and for all purposes consistent with the Section 338(h)(10) Election and the Allocation and no party shall take any position (whether in audits, Tax Returns or otherwise) that is inconsistent with the making of the Section 338(h)(10) Election or the Allocation with respect to each of the Election Companies unless required to do so by applicable Law. If the consideration paid by Buyer to Seller pursuant to this Agreement is adjusted in any manner as provided in this Agreement, the Allocation shall be adjusted as mutually agreed by Buyer and Seller to reflect such adjustments to the consideration paid pursuant to this Agreement.

(d) Tax Disputes.

(i) Within ten (10) Business Days after Buyer or the Acquired Companies receives written notice of any Tax contest, audit or other proceeding relating to any Taxes for which Seller has an indemnification obligation pursuant to Section 7.1 (each a “Tax Contest”), Buyer will notify Parent in writing of such Tax Contest. Parent shall have thirty (30) days after receipt of such notice to elect to undertake, conduct, and control (through counsel of its own choosing and at its own expense) the settlement or defense thereof, and Buyer and the Acquired Companies and their respective Affiliates shall cooperate in connection therewith as reasonably requested by Parent. If within thirty (30) days after the receipt of Buyer’s notice Parent does not notify Buyer that Parent elects (at its cost and expense) to undertake the defense thereof, or gives such notice and thereafter fails to contest such claim in good faith, Buyer shall have the right to contest, settle, or compromise such claim and Buyer shall not thereby waive any right to indemnity for such claim under this Agreement; provided, however, that none of Buyer or the Acquired Companies shall pay or settle any such claim without the prior written consent of Parent, which consent shall not be unreasonably withheld or delayed. Buyer shall have the right to participate in any Tax Contest which is reasonably expected to have the effect of increasing Buyer’s or the Acquired Companies’ Tax liability for any Tax period ending after the Closing, and Parent shall not settle or compromise any such Tax Contest without Buyer’s prior written consent, which consent will not be unreasonably withheld or delayed; provided, further, that Buyer shall consent to any settlement or compromise if Parent fully indemnifies Buyer for any increase in Buyer’s or the Acquired Companies’ Tax liability.

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(ii) Notwithstanding Section 4.6(d)(i), Parent shall control and be solely responsible for the audit, other administrative proceeding or inquiry or judicial proceeding involving the consolidated income Tax Return of Parent. Without the written consent of Buyer, which shall not be unreasonably withheld, Parent shall not settle any such audit or proceeding to the extent such settlement would increase any Tax liability of the Acquired Companies for any Tax period ending after the Closing Date. Except as set forth in the immediately preceding sentence, Parent shall have the sole discretion to settle any audit, other administrative proceeding or inquiry or judicial proceeding involving the consolidated income Tax Return of Parent.

(e) Tax Sharing Agreements. All tax-sharing or similar agreements with respect to or involving any Acquired Company shall be terminated as of the Closing Date, and after the Closing Date the Acquired Companies shall not be bound thereby or have any liability thereunder.

(f) Cooperation. Parent, Buyer, and the Acquired Companies shall cooperate fully, as and to the extent reasonably requested by the other parties, in connection with the preparation and filing of Tax Returns pursuant to this Section 4.6 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include signing any Tax Returns, amended Tax Returns, claims or other documents necessary to settle any Tax controversy, the retention and (upon the other party’s request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Such cooperation shall be provided as soon as reasonably possible and without undue delay.

(g) Unified Loss Rule Election. If any of the Shares are “loss shares” for purposes of Treasury Regulations Section 1.1502-36 after taking into account the effects of all applicable rules of law, including any adjustments under Treasury Regulations Section 1.1502-36(b), (c), or (d)(5)(iii), then Parent shall elect pursuant to Treasury Regulations Section 1.1502-36(d)(6)(i)(A) to reduce a portion of Parent’s Tax basis in the Shares of the relevant Acquired Company by an amount equal to the excess, if any, of the amount of such loss over the total amount of such Acquired Company’s “Category A,” “Category B,” “Category C” assets (as defined in Treasury Regulations Section 1.1502-36(d)(4)) and Class VI and Class VII assets (as defined in Treasury Regulations Section 1.338-6(b)(2)) of “Category D” assets, taking into account the Closing Payment, the post-closing payments described in Section 1.4, and any other adjustments resulting from a final determination of the application of Treasury Regulations Section 1.1502-36. If Parent is required by this Section 4.6(g) to make such an election, no later than thirty (30) days prior to the due date (including extensions) for filing Parent’s U.S. federal consolidated income Tax Return, Parent shall deliver a fully completed “Section 1.1502-36 Statement” (as defined in, and in

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the form and manner prescribed by, Treasury Regulations Section 1.1502-36(e)(5)) to Buyer for its review, comment, and approval, which shall not be unreasonably withheld or delayed. Parent shall make all such changes as are reasonably requested by Buyer, and shall file the “Section 1.1502-36 Statement” with Parent’s timely filed U.S. federal consolidated income Tax Return.

Section 4.7 Consents.

(a) To the extent that the consummation of the transactions contemplated by this Agreement or the performance by Seller of its obligations under the Transaction Documents require the consent or approval of a third party to any Contract or Other Agreement with any Acquired Company, Parent and/or Seller shall use its commercially reasonable efforts to obtain, and/or to cause such Acquired Company to obtain, such consents or approvals. Buyer and Seller further agree that, although Seller and Buyer shall cooperate with each other in attempting to obtain all such consents and approvals, any failure to obtain any consents by Parent or Seller shall not constitute a breach of this Agreement by Parent or Seller, so long as it has met the standard in the previous sentence. All administrative costs and expenses (including, by way of example, document preparation and expenses of mailing) in connection with obtaining the consents contemplated by this Section 4.7 shall be borne by Seller. In no event shall any of Buyer, Parent or any of their respective Subsidiaries be obligated to disburse any funds as a result of assessments or requirements of another party to any such Contract or Other Agreement in order to obtain such consents.

(b) Without limiting the foregoing, prior to the Closing, Seller shall use its commercially reasonable efforts to cause HNNY to assign or transfer each of the Touchstone Agreements to Seller or another Subsidiary of Parent (other than an Acquired Company), subject to the receipt of any required consents or approvals from Touchstone and its Affiliates or a Governmental Entity. Between the Effective Date and the Closing Date, Seller shall use commercially reasonable efforts to obtain such consents or approval in accordance with (and subject to) Section 4.7(a). In the event that Seller does not obtain such consents or approvals prior to the Closing, from and after the Closing, Buyer shall, or shall cause HNNY to, promptly pay to Seller any amounts received from Touchstone or its Affiliates under the Touchstone Agreements by wire transfer of immediately available funds to an account designated by Seller in writing. For the avoidance of doubt, (i) any such amounts shall be independent of (and shall neither increase nor decrease) any payment made under Section 1.4 or (ii) if the Touchstone Agreements are not assigned or transferred prior to the Closing, no receivables or other amounts related to the Touchstone Agreements shall be included on any of the financial statements prepared under Article I.

Section 4.8 Intercompany Obligations.

(a) Except as set forth on Schedule 4.8, effective as of the Closing Date, subject to the receipt of any required consents of Governmental Entities, Seller will terminate and will cause its Affiliates to terminate each Contract and Other

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Agreement between or among any of the Acquired Companies and Seller or any Affiliate of Seller, including the Intercompany Agreements (the “Terminated Agreements”). All remaining amounts due between or among the Acquired Companies and Seller or any Affiliate of Seller upon termination of such Contract and Other Agreements will be settled by the relevant party within twenty (20) Business Days of the Closing Date. Without limitation to the foregoing, on or prior to the Closing Date, Seller shall, or shall cause its applicable Affiliates to, cancel the Surplus Note. For the avoidance of doubt, the failure to obtain any required consent of any Governmental Entity shall not relieve Seller, on the one hand, or the Acquired Companies, on the other hand, of their liabilities to each other for any amounts outstanding between Seller or any of its Affiliates, on the one hand, and the Acquired Companies, on the other hand, that would otherwise have been settled pursuant to this Section 4.8, except that the Surplus Note shall be cancelled without any consideration to Seller.

(b) As promptly as practicable following the Closing Date, the parties agree to cooperate to effect the termination of the Joint Enterprise Agreement, effective as of March 31, 2005, by and among HN Life, Health Net Insurance of Connecticut and HNINY, as amended on May 26, 2005. The parties agree to cooperate in transferring the New York stand-alone Medicare Part D membership under such agreement to one or more similar plans of Buyer or its Affiliates as directed by Buyer.

Section 4.9 Dissolution; Names. After the run-off of all claims under the Administered Contracts of an Acquired Company, Seller may deliver written notice to Buyer requiring that Buyer, at the election of Seller, take commercially reasonable efforts to either (a) dissolve such Acquired Company in accordance with applicable Law or (b) change the name of such Acquired Company so that it no longer includes the name “Health Net” or any derivative thereof. Seller acknowledges in connection with the foregoing that (i) any such action is subject to regulatory approval; (ii) because such action is subject to regulatory approval, due to timing and other considerations, dissolution may not be a reasonable alternative and, therefore, it may be necessary for Buyer to take other action to eliminate an Acquired Company (such as a merger into another entity); (iii) in no event shall Buyer be required to post any bond, set aside any funds or otherwise provide any type of financial or similar guarantee or otherwise agree to any material condition, restriction or other covenant relating to its or any business of its Affiliates in connection with such dissolution; and (iv) in no event shall Seller or its Affiliates use as a defense against any indemnification claim or other right by Buyer and its Affiliates under this Agreement or any of the Transaction Documents that Buyer has failed to take commercially reasonable efforts to dissolve an Acquired Company. Buyer shall, upon request, keep Seller reasonably informed of its progress in dissolving or changing the name of any Acquired Company.

Section 4.10 Certain Employee Matters.

(a) Within twenty (20) Business Days after the Effective Date, Seller shall provide to Buyer a complete and accurate list (which shall identify the name, job title and job grade of such Business Employees) by employer of all Business Employees

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that are full-time provider network administration employees or sales and account management employees (the “Designated Employees”); provided, however, that Buyer and its Affiliates shall not be permitted to extend offers of employment to such Designated Employees except in accordance with a transition plan mutually acceptable to Buyer and Seller or with the prior written consent of Parent (which shall not be unreasonably withheld) and provided further that the list of Designated Employees may be updated upon the mutual agreement of Buyer and Seller at any time prior to the Closing Date. Any such permitted offer of employment with respect to a Designated Employee may be effective as of any date on or after the Closing Date. As used in this Agreement, “Business Employees” means each employee of Parent or any of its Subsidiaries whose principal office is in Connecticut, New Jersey or New York, who provides services exclusively for the Acquired Business and who is identified by title on Schedule 4.10, as may be updated by Parent not less than five (5) Business Days prior to the Closing with respect to any employees whose employment has been terminated for any reason between the Effective Date and the date of such schedule and new hires during such period.

(b) Subject to the prior written consent of Parent (which shall not be unreasonably withheld), Buyer shall be permitted, during the period commencing on the Closing Date and ending on the Transition Date, to extend offers of employment on such terms and conditions (including standard background checks) as Buyer, in its sole discretion, shall determine, to those Business Employees (other than Designated Employees) whom it desires to hire. With respect to any such Business Employees, (i) Buyer shall furnish written notice to Parent within five (5) days prior to extending an offer of employment to any Business Employee, and (ii) the employment commencement date of any Business Employee who accepts an offer of employment with Buyer or one of its Affiliates shall not occur until at least thirty (30) days have elapsed from the date of receipt of such offer of employment. Any Business Employee who accepts an offer of employment with Buyer or one of its Affiliates (a “Hired Employee”) shall be deemed to have incurred a termination of employment with Parent or its Affiliates due to a voluntary resignation by such Business Employee for purposes of any employee benefit plan or personnel policy or procedure maintained by Parent or its Affiliates. Neither Parent nor its Affiliates shall incur any obligation or liability with respect to the hiring of any Hired Employee. Buyer will have no obligations or liabilities with respect to any current or former employees of Parent or its Affiliates, other than obligations and liabilities with respect to Hired Employees that arise on or after the date on which such Hired Employees commence employment with Buyer or its Affiliates.

(c) Nothing contained in this Agreement shall confer upon any employee of Parent or its Affiliates any right with respect to continued employment by Parent or its Affiliates, nor shall anything herein interfere with the right of Parent or its Affiliates to terminate the employment of any of its employees at any time, with or without cause, or restrict Parent or its Affiliates in the exercise of its independent business judgment in modifying any of the terms and conditions of the employment of any of its employees. Nothing herein shall constitute an agreement by Buyer to assume or be bound by any previous or existing employment agreement or

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arrangement between Parent (or any of its Affiliates) and any Hired Employee, or a guaranty that any Hired Employee shall be entitled to remain in the employment of Buyer (or any of its Affiliates) for a specified period of time. Prior to or after the Closing, neither Buyer nor its Affiliates shall be obligated to pay any amount, whether sales incentive, commission or other compensation, to any current or former employee of Parent or its Affiliates or to any Hired Employee in connection with such employee or Hired Employee’s relationship with Parent or its Affiliates prior to Closing.

(d) Except as otherwise provided in Section 4.10(a) or (b), if (and only if) this Agreement is terminated in accordance with ARTICLE VI prior to the Closing Date, then Buyer and its Affiliates shall not, for a period lasting until the first anniversary of the date of such termination, directly or indirectly, solicit for employment any Designated Employee. Notwithstanding the foregoing, neither Buyer nor its Affiliates (to the extent controlled by Buyer and/or Guarantor) shall be restricted from hiring any Designated Employee who (i) has been terminated by, or who voluntarily leaves employment with, Parent or its Affiliates (provided that Buyer has not breached this clause), (ii) responds to a general solicitation of employment not specifically directed at Designated Employees or (iii) is referred to Buyer or its Affiliates by search firms, employment agencies or other similar entities; provided that such entities have not been specifically instructed by Buyer or its Affiliates to solicit the Designated Employees.

(e) No provision of this Agreement shall create any third party beneficiary rights in any Business Employee or Hired Employee, or any beneficiary or dependents thereof, or any collective bargaining representative thereof, with respect to the compensation, terms and conditions of employment and benefits that may be provided to any Hired Employee.

Section 4.11 No Negotiations. From and after the Effective Date until the Closing Date, neither Parent nor Seller shall, directly or indirectly, and neither Parent nor Seller shall authorize any Affiliate, officer, director, employee, representative or agent to, solicit, initiate, enter into, engage in or conduct any discussions or negotiations with, or provide any non-public information to, or enter into any agreement or letter of intent with any Person or group of Persons regarding any Competing Transaction. Each of Parent, Seller, and their controlled Affiliates, shall promptly (and in any event within two (2) Business Days) notify Buyer of (a) the receipt by Parent, Seller, or any of their controlled Affiliates of any written inquiries, or proposals or requests for information concerning a Competing Transaction, or (b) Parent or Seller becoming aware that any such written inquiries or proposals have been received by Parent’s or Seller’s non-controlled Affiliates or by Parent’s, Seller’s or their Affiliates’ investment bankers, financial advisors, attorneys, accountants or other representatives and shall provide Buyer with a copy of all written materials relating to such inquiries, proposals or requests. As of the Effective Date, Parent and Seller shall, and shall direct their respective officers, directors, employees, representatives and agents to, cease all discussions or negotiations with any Person (other than Buyer and its Affiliates) relating to a Competing Transaction. A “Competing Transaction” means any of the following (other than any transaction contemplated by this Agreement): (w) any sale of stock or other Equity Interests in any Acquired Company or

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Seller, (x) a merger, consolidation, share exchange, business combination, or other similar transaction by any Acquired Company or Seller, (y) any sale, lease, transfer or other disposition of all or substantially all of the assets of any Acquired Company or Seller in a single transaction or a series of related transactions, or (z) any agreement to endorse a carrier other than Buyer or its Affiliates in a renewal rights transaction with respect to the Acquired Business. Notwithstanding anything to the contrary in this Agreement, Buyer hereby acknowledges and agrees that Parent and its officers, directors, employees, representatives and agents shall be permitted (without the consent of, or notice to, Buyer or its Affiliates) to solicit, initiate, enter into, engage in or conduct any discussion or negotiations with, provide any information to, enter into any agreement or letter of intent with, any Person or group of Persons, and/or consummate a transaction regarding (i) any sale of stock or other Equity Interests in Parent, (ii) a merger, consolidation, share exchange, business combination, or other similar transaction involving Parent or its Affiliates, other than the Acquired Companies or Seller, or (iii) any sale, lease, transfer or other disposition of the assets of Parent or its Affiliates, other than the Acquired Companies or Seller, in a single transaction or a series of related transactions; provided, however, that, with respect to any transaction described in the foregoing clauses (ii) or (iii) that (A) would be a Triggering Event (as defined in Section 4.15) if such transaction occurred on or after the Closing Date, Parent (or its successor) shall perform or cause to be performed the obligations set forth in Section 4.15 as if a Triggering Event had occurred or (B) includes HN Life, Parent (or its successor) shall take such action prior to the consummation of such transaction so as to ensure that the obligations of HN Life under the Transaction Documents will be binding on HN Life or its successor after the consummation of such transaction.

Section 4.12 Assignment of Certain ASO Contracts; Delivery of Intercompany Agreement Amendments.

(a) Parent and Seller shall use commercially reasonable efforts to assign to an Acquired Company the ASO customer contracts to which Parent or any of its Subsidiaries (other than any of the Acquired Companies) is a party relating to the Acquired Business and which service customers whose situs is in the States of Connecticut, New Jersey or New York (the “Transferred ASO Contracts”) prior to the Closing Date, and shall provide access to any bank accounts necessary to administer the Transferred ASO Contracts.

(b) Prior to the Closing Date, Seller shall deliver to Buyer executed copies of (i) the Fourth Amendment to IPA Services Agreement by and between MHN Services IP and Health Net of New York, Inc., (ii) the Seventh Amendment to Agreement for Administrative Services and Managed Behavioral Health Care Services by and between MHN Services and Health Net of New Jersey, Inc., (iii) the Amendment to Administrative Services Agreement by and between MHN Services and Health Net Insurance of New York, Inc., (iv) Second Amendment to Agreement for Administrative Services and Managed Behavioral Health Care Services by and between MHN Services and Health Net of Connecticut, Inc., (v) Third Amendment to Administrative Services Agreement by and between MHN Services and Health Net of New York, Inc., (vi) Amendment to Administration Services Agreement by and between Health Net Pharmaceutical Services and Health Net of Connecticut, Inc., (vii) Amendment to Claims Administration Services Agreement by and between Health Net Pharmaceutical Services and Health Net Insurance of New York, Inc., (viii) Amendment to Claims Administration Services Agreement by and between

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Health Net Pharmaceutical Services and Health Net of New Jersey, Inc., (ix) Amendment to Pharmacy Benefits Management Services Agreement by and between Health Net Pharmaceutical Services and Health Net of New York, Inc., and (x) Amendment #3 to Quota Share Reinsurance Agreement by and between Health Net of New Jersey, Inc. and Health Net Life Insurance Company, each in the form as agreed to by the parties on or prior to the Effective Date and with such changes as may be required by any applicable Governmental Entity (the “Intercompany Agreement Amendments”).

(c) Prior to the Closing Date, Seller and Buyer shall mutually agree upon the form of the Claims Servicing Agreement, which shall be attached as Schedule 16.1 of the Administrative Services Agreements, and which shall include the terms and conditions set forth on Schedule 4.12(c).

Section 4.13 Effective Date Membership Statement. Except as otherwise required to ensure compliance with HIPAA by Seller in its sole discretion: (a) no later than ten (10) Business Days following the Effective Date, Seller shall prepare and deliver to Buyer a schedule listing the number of Commercial Members and Employer Groups by State and, within each State, by size of Employer Group (2-50, 51-99, 100 or greater) (such schedule, the “Effective Date Membership Statement”); and (b) Seller shall provide an updated Effective Date Membership Statement each month during the period between the Effective Date and the Closing Date, which shall set forth the number of Commercial Members and data described above as of such date.

Section 4.14 Provider Access.

(a) Parent and Seller shall use commercially reasonable efforts to arrange for continued access to the Acquired Companies’ network of contracted health care providers for the HN Life Business from and after the Closing and for so long as it is necessary for Seller to perform its obligations under the Administrative Services Agreements. To the extent that such access is not permissible (under contract or Law) for any portion of such contracted health care provider network (as reasonably determined by Buyer), Parent and/or Seller shall use commercially reasonable efforts to provide for access to one or more of Parent’s or Seller’s leased provider networks for the HN Life Business to be effective as of and after the Closing and for so long as it is necessary for Seller to perform its obligations under the Administrative Services Agreements. After the Closing Date, Parent shall not, and shall cause its Subsidiaries not to, access the Acquired Companies’ network of contracted health care providers other than with respect to the Acquired Business.

(b) Seller shall use commercially reasonable efforts to make available the services under its contract for laboratory services with *** to the Acquired Companies from and after Closing and for so long as it is necessary for Seller to perform its obligations under the Administrative Services Agreements.

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Section 4.15 Change in Status.

(a) From and after the Closing Date, Parent (or its successor) shall notify Buyer within four Business Days following: (i) the entry into any agreement that would result in (A) the sale or transfer of all or substantially all of the assets of Parent (or its successor) to any Person, (B) the sale of all or substantially all of the assets of HN CA to any Person (other than Parent, its successor or another direct or indirect Subsidiary thereof) or (C) the sale or transfer of the ownership of a majority of the issued and outstanding capital stock of HN CA to any Person (other than Parent, its successor or a direct or indirect Subsidiary thereof), whether by merger, consolidation, business combination or related transaction or series of transactions, or (ii) the adoption of any plan to liquidate or dissolve Parent (or its successor), including in the case of insolvency or rehabilitation. Each of the transactions described in foregoing clause (i) are referred to herein as a “Disposition Transaction”; each of the events described in foregoing clause (ii) are referred to herein as a “Parent Liquidation”; and each of the transactions and events described in foregoing clauses (i) and (ii) are referred to herein as a “Triggering Event”. For the avoidance of doubt, the term “Triggering Event” shall not include any merger, consolidation, business combination or similar or related transaction or series of transactions in which Parent or a successor to Parent survives (whether, for example, in a forward or reverse merger), or any issuance of capital stock or equity interests of Parent or any transfer or sale of outstanding shares of capital stock or outstanding equity interests of Parent by the holders thereof to another Person.

(b) No later than immediately prior to the occurrence of any Triggering Event, Parent (or its successor) shall (i) in the event such Triggering Event constitutes a Disposition Transaction, either (A) cause the purchaser (the “Successor Guarantor”) in such Disposition Transaction to provide a financial guarantee of the full, complete and timely performance by Parent (or its successor) of the post-Closing financial obligations of Parent (or its successor) under this Agreement (including any obligation under Article VII) and the Transaction Documents (a “Successor Guarantee”) or (B) cause an Affiliate directly or indirectly controlling such purchaser to become a Successor Guarantor and provide a Successor Guarantee; or (ii) in the event such Triggering Event constitutes a Parent Liquidation, cause an Affiliate (other than Parent or its successor) directly or indirectly controlling HN CA to become a Successor Guarantor and provide a Successor Guarantee.

(c) Any Successor Guarantee shall (i) provide that Buyer or any of its Affiliates may proceed to enforce its rights against the Successor Guarantor from time to time prior to, contemporaneously with, or after any enforcement against Parent (or its successor) or without any enforcement against Parent (or its successor), (ii) subject to the applicable terms and conditions of this Agreement, waive (A) any and all defenses specifically available to a guarantor (other than performance in full by Parent (or its successor) and (B) any notices, including any notice of any amendment of this Agreement, (iii) be a continuing guarantee and remain in full force and effect until the satisfaction in full of all such obligations of Parent (or its successor) and Seller under this Agreement, and (iv) provide that the Successor Guarantor will be obligated to cause any acquiror or transferee of all or substantially all of the assets of HN CA, or a majority of the issued and outstanding capital stock of HN CA, to assume the Successor Guarantor’s obligations under the Successor Guarantee and to provide any future notices required pursuant to subsection (a) above.

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Section 4.16 Implementation of Certain Undertakings.

(a) From the Effective Date through the Closing Date, Seller, on behalf of the Acquired Companies, shall take necessary steps to comply in all material respects with any outstanding corrective action plans, consent decrees, settlements or orders binding on the Acquired Companies and/or the Acquired Business and entered into or effective on or prior to the Closing Date or entered into after the Closing Date with the consent of Seller pursuant to the Administration Services Agreements, including with respect to the following: (i) McCoy v. Health Net, Inc., et al; (ii) the Market Conduct Report of Health Net of Connecticut, Inc. and Health Net Life Insurance Company, issued by the Connecticut Insurance Department, dated March 3, 2009; and (iii) the Assurance of Discontinuance No. 08-186 with the Attorney General of the State of New York, entered into by Health Net of the Northeast, Inc., Health Net of New York, Inc. and Health Net Insurance, Inc.

(b) Between the Closing Date and the earlier of the Transition Date and the ASA Termination Date, Seller, on behalf of the Acquired Companies, shall take necessary steps to comply and implement the terms of any outstanding corrective action plans, consent decrees, settlements or orders binding on the Acquired Companies and/or the Acquired Business and entered into or effective on or prior to the Closing Date, including with respect to the following: (i) McCoy v. Health Net, Inc., et al; (ii) the Market Conduct Report of Health Net of Connecticut, Inc. and Health Net Life Insurance Company, issued by the Connecticut Insurance Department, dated March 3, 2009; and (iii) the Assurance of Discontinuance No. 08-186 with the Attorney General of the State of New York, entered into by Health Net of the Northeast, Inc., Health Net of New York, Inc. and Health Net Insurance, Inc.

ARTICLE V.

CONDITIONS

Section 5.1 Conditions to Each Party’s Obligations. The respective obligations of each party to effect the transactions set forth in Section 1.1 shall be subject to the fulfillment or waiver at or prior to the Closing of the following conditions:

(a) no Laws or Orders shall have been enacted, entered, promulgated or enforced by any court or Governmental Entity that would prohibit or prevent the consummation of the transactions set forth in Section 1.1;

(b) all consents, authorizations, orders and approvals of (or filings or registrations with) any Governmental Entity that are (i) described on Schedule 5.1(b), or (ii) otherwise required in connection with the execution, delivery and performance of this Agreement and the Transaction Documents, shall have been obtained or made (as the case may be), except for (A) any documents required to be filed after the Closing or (B) in the case of clause (ii), any consent, authorization, order, approval, filing or registration the failure of which to have been obtained or made would not have a Material Adverse Effect;

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(c) such consents, authorizations, orders and approvals shall be subject to no conditions other than conditions that would not conflict with the provisions of Section 4.3(f)(i) and (ii);

(d) there shall not be any pending action, suit, litigation, criminal prosecution or proceeding by any Governmental Entity (i) challenging or seeking to make illegal, or to delay or otherwise directly or indirectly restrain or prohibit, the consummation of the transactions contemplated hereby, or (ii) seeking to invalidate or render unenforceable any material provision of this Agreement or any of the other Transaction Documents;

(e) any waiting period applicable to the transactions set forth in Section 1.1 under the HSR Act shall have expired or been terminated, if required; and

(f) CMS approval for the novation, assignment or other transfer to a Legacy United Entity, effective as of January 1, 2011, of the business operated under the Medicare Revenue Contract; provided, however, that if the Initial Termination Date has been extended to the Extended Termination Date, then this closing condition shall be deemed satisfied.

Section 5.2 Conditions to Obligation of Buyer. The obligation of Buyer to effect the transactions set forth in Section 1.1 shall be subject to the fulfillment or waiver at the Closing of the following additional conditions:

(a) Parent, Seller and the Acquired Companies shall have performed in all material respects the covenants and obligations required to be performed by them under this Agreement on or prior to the Closing;

(b)(i) the representations and warranties of Parent and Seller in ARTICLE II that are qualified by reference to materiality, a Material Adverse Effect or words of similar import are true and correct on the Closing Date as if they were made at and as of Closing (other than such representations and warranties that address matters only as of a certain date, which need only be true and correct as of such certain date), and (ii) the representations and warranties of Parent and Seller in ARTICLE II that are not so qualified are true and correct in all material respects on the Closing Date as if they were made at and as of Closing (other than such representations and warranties that address matters only as of a certain date, which need only be true and correct in all material respects as of such certain date), except, in each case, for representations and warranties the breach of which has not had, and would not reasonably be expected to have, a Material Adverse Effect;

(c) Buyer shall have received certificates signed by an executive officer of Parent to the effect of Section 5.2(a) and Section 5.2(b);

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(d) since the Effective Date, no change, event, circumstance, development or effect, shall have occurred that, individually or in aggregate, has had a Material Adverse Effect that is continuing or would reasonably be expected to have a Material Adverse Effect;

(e) there shall not be any action, suit, litigation, criminal prosecution or proceeding pending or Order entered into by any Governmental Entity (i) imposing or seeking to impose material limitations on the ability of Buyer or any of its Affiliates to acquire or hold or to exercise full rights of ownership of the Acquired Companies, or (ii) seeking to prohibit direct or indirect ownership or operation by Buyer or any of its Affiliates of all or any portion of the Acquired Business, or to compel Buyer or any of its Affiliates or an Acquired Company to sell, hold separate or otherwise divest or dispose of any assets or its business, as a result of the transactions contemplated hereby; and

(f) on the Closing Date, Parent and Seller shall have delivered to Buyer each of the items referred to in Section 1.3(a) and executed copies of each of the Transaction Documents to which Parent, Seller or any Acquired Company is a party.

Section 5.3 Conditions to Obligation of Parent and Seller. The obligation of Parent, Seller and the Acquired Companies to effect the transactions set forth in Section 1.1 shall be subject to the fulfillment or waiver at the Closing of the following additional conditions:

(a) Buyer shall have performed in all material respects the covenants and obligations required to be performed by it under this Agreement on or prior to the Closing;

(b)(i) the representations and warranties of Buyer in ARTICLE III that are qualified by reference to materiality, a Material Adverse Effect or words of similar import are true and correct on the Closing Date as if they were made at and as of Closing (other than such representations and warranties that address matters only as of a certain date, which need only be true and correct as of such certain date), and (ii) the representations and warranties of Buyer in ARTICLE III that are not so qualified are true and correct in all material respects on the Closing Date as if they were made at and as of Closing (other than such representations and warranties that address matters only as of a certain date, which need only be true and correct in all material respects as of such certain date), except, in each case, for representations and warranties the breach of which has not had, and would not reasonably be expected to have, a material adverse effect on Buyer’s ability to consummate the transactions contemplated hereby;

(c) Seller shall have received a certificate signed by an executive officer of Buyer to the effect of Section 5.3(a) and Section 5.3(b); and

(d) on the Closing Date, Buyer shall have delivered to Parent and Seller the Closing Payment as provided in Section 1.3(b) and executed copies of each of the Transaction Documents to which Buyer or any of its Affiliates is a party.

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ARTICLE VI.

TERMINATION

Section 6.1 Termination. This Agreement may be terminated and the transactions set forth in Section 1.1 contemplated hereby may be abandoned at any time prior to the Closing:

(a) by the written consent of Buyer, Parent and Seller;

(b) by Buyer, on the one hand, or Parent and Seller, on the other hand:

(i) if a court of competent jurisdiction or other Governmental Entity shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions set forth in Section 1.1 and such Order or other action shall have become final and nonappealable; or

(ii) if the Closing shall not have occurred prior to May 1, 2010 (the “Initial Termination Date”); provided, however, that the Initial Termination Date may, from time to time be extended by either Parent or Seller or Buyer, by written notice to the other parties, to August 1, 2010 (the “Extended Termination Date”), in the event that all conditions to the Closing other than those set forth in Section 5.1(b), 5.1(d), 5.1(e) or 5.2(e) (the “Regulatory Conditions”) have been or are reasonably capable of being satisfied at the time of such extension and the Regulatory Conditions have been or are reasonably capable of being satisfied on or prior to the Extended Termination Date; provided, further, that the right to terminate this Agreement under this Section 6.1(b)(ii) shall not be available to any party whose failure to fulfill materially any covenant or obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date;

(c) by Buyer if, since the Effective Date, there has been a change, event, circumstance, development or effect that, individually or in aggregate, has had a Material Adverse Effect;

(d) prior to the Closing, by written notice to Parent and Seller from Buyer, if both (i) there has been a material breach of covenant on the part of Parent or Seller, or if a representation or warranty of Parent or Seller set forth in this Agreement shall be untrue in each case such that the conditions specified in Section 5.2(a) or (b) would not be satisfied at the Closing (a “Terminating Seller Breach”), and (ii) such Terminating Seller Breach is not curable, or if curable, is not cured within twenty (20) Business Days after written notice of such Terminating Seller Breach is given to Parent by Buyer; provided, however, that the right to terminate this Agreement pursuant to this Section 6.1(d) shall not be available to Buyer if Buyer’s action or failure to act has been a principal cause of or resulted in the failure of the transaction to be consummated on or prior to such date; and

(e) prior to the Closing, by written notice to Buyer from Parent or Seller, if both (i) there has been a material breach of covenant on the part of Buyer, or if a representation or warranty of Buyer set forth in this Agreement shall be untrue in

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each case such that the conditions specified in Section 5.3(a) or (b) would not be satisfied at the Closing (a “Terminating Buyer Breach”), and (ii) such Terminating Buyer Breach is not curable, or if curable, is not cured within twenty (20) Business Days after written notice of such Terminating Buyer Breach is given by Seller or Parent to Buyer; provided, however, that the right to terminate this Agreement pursuant to this Section 6.1(e) shall not be available to Parent or Seller if Parent or Seller’s action or failure to act has been a principal cause of or resulted in the failure of the transaction to be consummated on or prior to such date.

Section 6.2 Procedure for and Effect of Termination. In the event that this Agreement is terminated and the transactions set forth in Section 1.1 are abandoned by Buyer or Parent and Seller, pursuant to Section 6.1, written notice of such termination and abandonment shall forthwith be given to the other parties and this Agreement (and all representations, warranties and covenants hereunder) shall terminate and the transactions set forth in Section 1.1 shall be abandoned without any further action; provided, however, that Section 4.5, Section 4.10(d), this Section 6.2 and ARTICLE VIII shall survive the termination of this Agreement. If this Agreement is terminated as provided herein, no party hereto shall have any liability or further obligation to any other party under the terms of this Agreement except with respect to any liabilities or Losses arising out of any fraud by a party with respect to any of its representations, warranties, covenants or other agreements contained in this Agreement in which case any and all remedies available to the other parties either in Law or equity (including specific performance) shall be preserved and survive the termination of this Agreement.

ARTICLE VII.

INDEMNIFICATION

Section 7.1 Indemnification by Parent and Seller. Notwithstanding any investigation made by or on behalf of Buyer or the results of any such investigation and notwithstanding any fact known by Buyer at the time of the Closing, subject to the limitations set forth in Section 7.3, from and after the Closing, Parent and Seller, jointly and severally, shall indemnify, defend and hold harmless Buyer, its Affiliates (including, after the Closing, the Acquired Companies) and each of their respective officers, directors, employees, agents and representatives (the “Buyer Indemnified Parties”) from and against any and all Losses, to the extent arising or resulting from any of the following:

(a) any breach of any covenant of Parent or Seller contained in this Agreement;

(b) any breach by the Administrator of the Administrative Services Agreements;

(c) any breach by Seller or HN Life of the Business Transition Agreement;

(d) any breach by Parent or its applicable Subsidiaries of the Claims Servicing Agreements, Transitional Trademark License Agreement or the other Transaction Documents;

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(e) any Pre-Closing Liabilities; and

(f) any Excluded Liabilities.

Section 7.2 Indemnification by Buyer and the Acquired Companies. Notwithstanding any investigation made by or on behalf of Parent or Seller, or the results of any such investigation and notwithstanding any fact known by Parent and Seller at the time of the Closing, from and after the Closing, Buyer and the Acquired Companies, shall indemnify, defend and hold harmless Seller, each of its Affiliates and each of its officers, directors, employees, agents and representatives (the “Seller Indemnified Parties”) from and against any and all Losses, to the extent arising or resulting from any of the following:

(a) any breach of any representation or warranty of Buyer contained in this Agreement;

(b) any breach of any covenant of Buyer contained in this Agreement;

(c) any breach by the Acquired Companies of the Administrative Services Agreements;

(d) any breach by United of the Business Transition Agreement;

(e) any breach by Buyer or its applicable Affiliates of the Claims Servicing Agreements, the Transitional Trademark License Agreement or the other Transaction Documents;

(f) any Buyer Cost not taken into consideration in the calculation of any Quarterly Net Payment; and

(g) any Assumed Liability.

Section 7.3 Right of Offset; Limitations on Indemnity.

(a) Buyer may offset any amounts to which it may be entitled under the terms of this Agreement, the Claims Servicing Agreements, the Business Transition Agreement and the Administrative Services Agreements and other Transaction Documents against amounts otherwise payable by it under this Agreement, other than the First Anniversary Adjusted Tangible Net Equity Payment. Each of Parent and Seller may offset any amounts to which it may be entitled under the terms of this Agreement, the Claims Servicing Agreements, the Business Transition Agreement, the Administrative Services Agreements and the other Transaction Documents against amounts otherwise payable by it under this Agreement. Neither the exercise of, nor the failure to exercise, such right of offset shall constitute an election of remedies or limit Buyer in any manner in the enforcement of any other remedies that may be available to it hereby.

(b) Notwithstanding anything in this Agreement, the Transaction Documents or the Claims Servicing Agreements to the contrary, (i) in no event shall

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Parent or Seller be required to indemnify any Buyer Indemnified Party pursuant to Section 7.1(b) or (c) in any amount exceeding the sum of all Adjusted Tangible Net Equity Payments paid or payable under this Agreement (the “Cap Amount”); and (ii) in no event shall Buyer be required to indemnify any Seller Indemnified Party pursuant to Section 7.2(c) or (d) in any amount exceeding the Cap Amount.

(c) No party hereto shall be liable to the others for Losses that constitute lost profits or indirect, consequential or punitive damages (in each case, except to the extent constituting Third Party Claims) claimed by such other party or parties, as the case may be, resulting from such first party’s breach of its representations, warranties or covenants hereunder or under the Transaction Documents or Claims Servicing Agreements.

(d) Buyer Indemnified Parties shall not be entitled to indemnification with respect to (i) any matter to the extent such matter was taken into account in the calculation of any Quarterly Net Payment or other payment pursuant to Section 1.4, (ii) if any adjustment under Section 1.5 has been made with respect to such matter, (iii) any matter to the extent of the reserve for such matter that was included in the Closing Date Combined Balance Sheet or the balance sheet included in the final Quarterly Combined Financial Statement in accordance with Section 1.4, or (iv) any matter to the extent Parent, Seller or their respective Affiliates have reimbursed such Buyer Indemnified Parties for such matter under the Administrative Services Agreements, the Claims Servicing Agreements or the Business Transition Agreement. Seller Indemnified Parties shall not be entitled to indemnification with respect to (A) any matter to the extent such matter was a Buyer Cost taken into account in the calculation of any Quarterly Net Payment or other payment pursuant to Section 1.4, (B) any matter if any adjustment under Section 1.5 has been made with respect to such matter, or (C) any matter to the extent Buyer or its Affiliates have reimbursed such Seller Indemnified Parties for such matter under the Administrative Services Agreements, the Claims Servicing Agreements or the Business Transition Agreement.

(e) Notwithstanding anything to the contrary in this ARTICLE VII, neither Parent nor Seller shall be required to defend or hold harmless the Buyer Indemnified Parties from and against any Losses arising or resulting from (i) any grievances, appeals, inquiries, complaints or investigations contemplated by Article VII of the Administrative Services Agreements that are not lawsuits or proceedings, unless and/or until Seller or its Affiliates have failed to address such matters in accordance with the Administrative Services Agreements or such matters are not addressed by the Administrative Services Agreements, or (ii) any Pre-Closing Liability, unless such Pre-Closing Liability has become due and payable and Seller or its Affiliates have failed to timely pay or otherwise satisfy such Pre-Closing Liability in the ordinary course of business consistent with the Acquired Companies’ practices prior to Closing (other than any Pre-Closing Liability that is being disputed in good faith by appropriate proceedings); provided that this limitation shall not apply to any Losses arising from or resulting from any Third Party Claim against a Buyer Indemnified Party (other than an Acquired Company).

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(f) Without limiting the foregoing, to the extent that a specific reserve for a litigation matter in excess of $1,000,000 has been reflected in the Closing Date Combined Balance Sheet, Actual Final Combined Financial Statement or Termination Date Combined Financial Statement (each, an “Acquired Reserve”), Buyer agrees to first exhaust such Acquired Reserve prior to seeking indemnification from a Seller Indemnified Party. From and after the earlier of the ASA Termination Date and Transition Date, to the extent that Buyer or its Affiliates determine in accordance with GAAP that all or a portion of any Acquired Reserve (other than the Loss Reserve or Termination Date Loss Reserve) is no longer necessary or that the litigation matter for which such Acquired Reserve was established has been satisfied for an amount less than such Acquired Reserve, within five (5) Business Days, Buyer shall pay the amount of such unnecessary or unused Acquired Reserve to Seller by wire transfer of immediately available funds to an account designated by Seller. For purposes of the foregoing, if there are litigation matters aggregated within a class action, the reserves relating to such matters shall be aggregated in measuring the size of the Acquired Reserve with respect to such class action.

Section 7.4 Indemnification Procedures.

(a) Procedures Relating to Indemnification of Third Party Claims. Except as otherwise provided in Section 4.6(d) (Tax Matters), if any party (the “Indemnified Party”) receives written notice of the commencement of any Action or the assertion of any claim by a third party or the imposition of any penalty or assessment for which indemnity may be sought under Section 7.1 or 7.2 (a “Third Party Claim”), and such Indemnified Party intends to seek indemnity pursuant to this ARTICLE VII, the Indemnified Party shall promptly provide the other party or parties, as applicable (the “Indemnifying Party”) with written notice of such Third Party Claim, stating the nature, basis and the amount thereof, to the extent known, along with copies of the relevant documents evidencing such Third Party Claim and the basis for indemnification sought. Failure of the Indemnified Party to give such notice will not relieve the Indemnifying Party from liability on account of this indemnification, except if and solely to the extent that the Indemnifying Party is prejudiced thereby. The Indemnifying Party will have fifteen (15) days from receipt of any such notice of a Third Party Claim to give notice to assume the defense thereof (but, in any event, at least five (5) Business Days prior to the date that an answer to such Third Party Claim is due to be filed). If notice to the effect set forth in the immediately preceding sentence is given by the Indemnifying Party, the Indemnifying Party will have the right to assume the defense of the Indemnified Party against the Third Party Claim with reputable counsel, subject to the approval of the Indemnified Party, which shall not be unreasonably withheld, delayed or conditioned. So long as the Indemnifying Party has assumed the defense of the Third Party Claim in accordance herewith, (i) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim, and (ii) the Indemnified Party will not file any papers or consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party. Neither the Indemnified Party nor the Indemnifying Party may concede, settle or compromise any Third Party Claim

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without the consent of the other party, which consent shall not be unreasonably withheld, except the Indemnifying Party may settle or compromise such Third Party Claim to the extent that the sole relief provided (other than, for the avoidance of doubt, confidentiality obligations pursuant to such settlements or compromises) is monetary damages that are paid in full by the Indemnifying Party and the Indemnified Party receives a complete release with respect to the subject matter thereof. If (A) the Indemnifying Party fails to assume the defense of such Third Party Claim within fifteen (15) days after receipt of the notice of the Third Party Claim, (B) the Indemnified Party reasonably determines that there is a conflict of interest that prevents the Indemnifying Party from adequately representing the interests of the Indemnified Parties with respect to such Third Party Claim, or (C) (1) the Third Party Claim seeks relief other than the payment of monetary damages, and (2) the subject matter of a Third Party Claim relates to the ongoing operations of the Indemnified Party (other than the run-off of the Acquired Companies), which, if decided against the Indemnified Party, would have an adverse effect that is not immaterial on the ongoing business or reputation of Indemnified Party, then (subject to the preceding sentence) the Indemnified Party against which such claim has been asserted will (upon delivering notice to such effect to the Indemnifying Party) have the right to undertake the defense of such claim (and the Indemnifying Party shall reimburse the Indemnified Party for its reasonable out of pocket costs and expenses (including reasonable fees of outside counsel) for such defense) and the Indemnifying Party shall have the right to participate therein at its own cost; provided, however, that the Indemnifying Party shall be obligated to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction. The parties will cooperate in any such defense and give each other reasonable access to all information relevant thereto.

(b) Procedures for Non Third Party Claims. Except as otherwise provided in Section 4.6(d) (Tax Matters), the Indemnified Party will notify the Indemnifying Party in writing reasonably promptly of its discovery of any matter that does not involve a Third Party Claim, giving rise to the claim of indemnity pursuant hereto. Such notice shall state the nature basis and amount of the claim to the extent known, and include copies of the relevant documents and the basis for indemnification sought. The failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party from liability on account of this indemnification, except only to the extent that the Indemnifying Party is materially prejudiced thereby. The Indemnifying Party will have thirty (30) days from receipt of any such notice to give notice of dispute of the claim to the Indemnified Party. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim described in such notice or fails to notify the Indemnified Party within thirty (30) days after delivery of such notice by the Indemnified Party whether the Indemnifying Party disputes the claim described in such notice, the Loss in the amount specified in the Indemnified Party’s notice will be conclusively deemed a liability of the Indemnifying Party and the Indemnified Party shall be entitled to recover the amount of such Loss from the Indemnifying Party in accordance with the terms and conditions of this ARTICLE VII. If the Indemnifying Party has timely disputed its liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute for a period of at

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least thirty (30) days, and if such dispute is not resolved through such negotiation prior to the expiration of such period, such dispute may be resolved in accordance with Section 8.6.

(c) For purposes of this ARTICLE VII, all Losses shall be computed net of (i) any Tax benefit actually realized by the Indemnified Party, (ii) any insurance benefits actually realized from a Person other than an Indemnified Party’s Affiliates, and (iii) any amounts recovered from any third parties based on claims the Indemnified Party has against such third parties which reduce the Losses that would otherwise be sustained; provided, however, that, in the cases of clauses (i), (ii) and (iii), the timing of the receipt or realization of insurance proceeds or Tax benefits or recoveries from third parties shall be taken into account in determining the amount of reduction of Losses. Each Indemnified Party agrees to use its commercially reasonable efforts to pursue any claims or rights it may have against any non-Affiliate insurer, which would reduce the amount of Losses otherwise incurred by such Indemnified Party. In the event an Indemnifying Party pays for an Indemnified Party’s Losses pursuant to this ARTICLE VII, such Indemnifying Party shall be subrogated to the rights the Indemnified Party has against any non-Affiliate insurer or other third party with respect thereto (and, upon the reasonable request of the Indemnifying Party, the Indemnified Party shall take appropriate actions necessary to transfer and assign such rights to the Indemnifying Party).

Section 7.5 Survival. Except as provided in the following sentence, the terms and provisions of this Agreement shall survive the Closing of the transactions contemplated hereunder. Notwithstanding the foregoing, all representations and warranties contained in Article II and Article III of this Agreement shall not survive the Closing or the termination of this Agreement and shall thereafter have no further force or effect.

Section 7.6 Sole and Exclusive Remedy. Except (i) as provided in the following sentence, (ii) for any equitable relief or specific performance sought under Section 8.9 (Equitable Relief and Specific Performance), including with respect to a breach of Section 4.9 (Dissolution; Names), Section 4.10 (Certain Employee Matters), Section 4.11 (No Negotiations) and Section 4.15 (Change in Status), and for equitable relief or specific performance sought under the Non-Competition Agreement or other Transaction Documents, and (iii) with respect to a claim brought on the basis of fraud, from and after the Closing, the indemnification provisions of this ARTICLE VII shall be the sole and exclusive right and remedy of each party (including the Seller Indemnified Parties and the Buyer Indemnified Parties), and each such party hereby waives any other right or remedy (statutory, equitable, common law or otherwise), for any breach of the other party’s representations, warranties, covenants, or agreements contained in this Agreement or the Transaction Documents. Notwithstanding the foregoing, Section 1.5 provides the sole and exclusive method for resolving any and all disputes related to, arising out of or in connection with any matters that are the subject of Section 1.5, other than with respect to fraud.

Section 7.7 Compliance with Express Negligence Rule. All releases, disclaimers, limitations on liability, and indemnities in this Agreement, including those in this ARTICLE VII, shall apply even in the event of the sole, joint, and/or concurrent negligence, strict liability, or

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fault of the party whose liability is released, disclaimed, limited, or indemnified; provided, however, that the limits described in this Section 7.7 shall not apply in cases of fraud. Each party agrees that this paragraph constitutes a conspicuous legend.

Section 7.8 Treatment of Indemnification Payments. All indemnification payments made pursuant to this ARTICLE VII shall be treated by the parties as adjustments to the Closing Payment unless otherwise required by applicable Law.

ARTICLE VIII.

MISCELLANEOUS

Section 8.1 Amendment and Modification. This Agreement may be amended, modified or supplemented, only by a written agreement signed by each of the parties hereto. No course of dealing between or among any of the parties hereto shall be deemed effective to modify or amend any part of this Agreement or any rights or obligations of any party under or by reason of this Agreement.

Section 8.2 Waiver of Compliance; Consents. Any failure of Buyer, on the one hand, or Parent or Seller, on the other hand, to comply with any obligation, covenant, agreement or condition herein may be waived by Buyer, or Parent or Seller, respectively, only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 8.2.

Section 8.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in Person, by telecopier (with a confirmed receipt thereof) or registered or certified mail (postage prepaid, return receipt requested), and on the next Business Day when sent by overnight courier service, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

(a) if to Buyer or Guarantor, to:

Oxford Health Plans, LLC

One Penn Plaza

New York, NY 10019

Facsimile No.: (203) 459-7171

Attention: Jeffrey D. Alter, Northeast Region Chief Executive Officer

Phone: (203) 459-7275

E-mail: Jeffrey_D_Alter@UHC.com

and:

UnitedHealth Group Incorporated

9900 Bren Road East

Minnetonka, MN 55343

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Facsimile No.: (952) 936-0044

Attention: Chief Legal Officer

Facsimile No.: (952) 936-3007

Attention: Vice President, Corporate Development

with a copy to:

Dorsey & Whitney LLP

Suite 1500

50 South Sixth Street

Minneapolis, MN 55402

Attention: Neal N. Peterson, Esq.

Facsimile No.: (612) 340-2868

(b) if to Parent or Seller, to:

Health Net, Inc.

21650 Oxnard Street

Woodland Hills, CA 91367

Attention: Linda V. Tiano, Senior Vice President, General

Counsel and Secretary

Facsimile: 818.676.7503

with a copy to:

Latham & Watkins LLP

355 South Grand Avenue

Los Angeles, CA 90071-1560

Attention:         James Beaubien, Esq.

                         Julian Kleindorfer, Esq.

Facsimile:         213.891.8763

Section 8.4 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties; provided, however, that Buyer shall have the right, without the consent of Parent or Seller, to assign all of its rights, duties and obligations under this Agreement (a) to any Subsidiary of Buyer or (b) in connection with the sale of all or substantially all of the capital stock or assets of Buyer. For the avoidance of doubt, not such assignment shall relieve Guarantor of its obligations under Section 8.16.

Section 8.5 Expenses. Except as provided in Sections 1.4 and 1.5(e), whether or not the transactions set forth in Section 1.1 are consummated, all fees, charges and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such fees, charges or expenses, except any filing fees with Governmental Entities incurred in connection with any required filings contemplated by Section 4.3, which expenses shall be borne one-half by Buyer and one-half by Parent and Seller.

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Section 8.6 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with the internal laws of the state of New York applicable to agreements made and to be performed entirely within such state, without regard to the choice of law principles thereof. Each of Buyer, Parent and Seller hereby irrevocably and unconditionally consents to submit to the sole and exclusive jurisdiction of the courts of the State of New York sitting in the Borough of Manhattan, the City of New York, and of the United States District Court for the Southern District of New York (the “Chosen Courts”) for any litigation arising out of or relating to this Agreement, or the negotiation, validity or performance of this Agreement, or the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the Chosen Courts and agrees not to plead or claim in any Chosen Court that such litigation brought therein has been brought in any inconvenient forum. The Parties waive the right to trial by jury with respect to any claims hereunder.

Section 8.7 Counterparts. This Agreement may be executed and delivered (including by facsimile transmission or by electronic mail with a pdf scanned attachment) in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Section 8.8 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. The parties are sophisticated, represented by counsel and jointly have participated in the negotiation and drafting of this Agreement and there shall be no presumption or burden of proof favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

Section 8.9 Equitable Relief and Specific Performance. The parties hereto agree that irreparable damage would occur in the event any of the provisions of this Agreement were not to be performed in accordance with the terms hereof and that the parties shall be entitled to an injunction to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in the Chosen Courts, this being in addition to any other remedy to which they are entitled at Law or in equity.

Section 8.10 Entire Agreement; Further Assurances. This Agreement (including the agreements, schedules, exhibits, documents or instruments referred to herein), the Transaction Documents and, until the Closing Date, the Confidentiality Agreement embody the entire agreement and understanding of the parties hereto in respect of the subject matter hereof and thereof and supersede all prior agreements and understandings, both written and oral, among the parties, or between any of them, with respect to the subject matter hereof and thereof. The parties hereto agree that, on and after the Closing Date, they shall execute any documents, instruments or conveyances of any kind which may be reasonably necessary to carry out any of the provisions hereof.

Section 8.11 Schedules; Exhibits. All Schedules, Exhibits and Disclosure Schedules referred to in this Agreement shall be attached hereto and are incorporated by reference herein. To the extent a state of facts or the occurrence of any event is described in the Seller Disclosure Schedule for purposes of qualifying a representation, warranty or covenant of Seller contained in

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the Agreement, the existence of such a state of facts or the occurrence of such event shall not be deemed to constitute a breach of such representation, warranty or covenant of the Seller under this Agreement. Any disclosure contained in any section of the Seller Disclosure Schedule shall be deemed to be disclosed with respect to any other section of such Seller Disclosure Schedule as though fully set forth in such other section for which the applicability of such disclosure is reasonably apparent on the face of such disclosure. The disclosure of any item or information in any section of the Seller Disclosure Schedule shall not (i) be deemed to constitute an admission, or otherwise imply, that any such item or information is material or would result in a Material Adverse Effect or created measures for materiality for the purposes of the Agreement, or (ii) represent a determination by the Seller that such item occurred or was incurred other than in the ordinary course of business. In no event shall the listing of any matters in the Seller Disclosure Schedule be deemed or interpreted to broaden or otherwise amplify any representations, warranties or covenants contained in this Agreement. Any disclosure contained in any section of the Seller Disclosure Schedule is made in confidence and on the terms and subject to the conditions of the Confidentiality Agreement.

Section 8.12 No Third Party Beneficiaries. This Agreement is not intended to, and does not, create any rights or benefits of any party other than the parties hereto other than the third party rights provided for under ARTICLE VII.

Section 8.13 No Implied Representation. Notwithstanding anything contained in ARTICLE II or III or any other provision of this Agreement, it is the explicit intent of each party hereto that Seller is making no representation or warranty whatsoever, express or implied, beyond those expressly given in this Agreement and the Transaction Documents, including but not limited to any implied warranty or representation as to condition, merchantability or suitability as to any of the properties or assets of the Acquired Business. It is understood that any cost estimates, projections or other predictions contained in or referred to in the Seller Disclosure Schedule or provided in the offering materials or other materials that have been provided to Buyer by the Acquired Companies or Seller are not and shall not be deemed to be representations or warranties of the Acquired Companies or Seller. With respect to any such cost estimates projections or other prediction delivered by or on behalf of Seller or the Acquired Companies to Buyer, Buyer acknowledges that (i) there are uncertainties inherent in attempting to make such cost estimates projections and other predictions, (ii) it is familiar with such uncertainties, (iii) it is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it and (iv) it shall have no claim against Seller or any of its Affiliates, officers, directors, partners, employees or representatives with respect thereto.

Section 8.14 Confidentiality Agreement. The parties acknowledge that Parent and Guarantor have entered into the Confidentiality Agreement. Parent and Guarantor hereby agree to extend the term set forth in Section 20 of the Confidentiality Agreement to the Closing Date. Except for the foregoing, the terms and conditions of the Confidentiality Agreement shall survive the execution and delivery of this Agreement, and each of the parties hereto agree to comply with the terms thereof.

Section 8.15 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable Law, but in case any

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one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable.

Section 8.16 Guarantee. Guarantor hereby guarantees the full, complete and timely performance by Buyer of each and every obligation of Buyer under this Agreement. If any default shall be made by Buyer in the performance of any such obligations, then Guarantor will perform or cause to be performed such obligation immediately upon notice from Parent, Seller or any of their Affiliates specifying the default. Parent, Seller or any of their Affiliates may proceed to enforce its rights against Guarantor from time to time prior to, contemporaneously with, or after any enforcement against Buyer or without any enforcement against Buyer. Subject to the terms and conditions hereof, Guarantor waives (a) any and all defenses specifically available to a guarantor (other than performance in full by Buyer) and (b) any notices, including any notice of any amendment of this Agreement or waiver or other similar action granted pursuant to this Agreement; provided, that nothing in this Section 8.16 shall affect or hinder Guarantor’s rights as a Buyer Indemnified Party under ARTICLE VII hereof. The guarantee set forth in this Section 8.16 shall be deemed a continuing guarantee and shall remain in full force and effect until the satisfaction in full of all obligations of Buyer under this Agreement.

Section 8.17 No Investigation by Buyer. Notwithstanding anything to the contrary in this Agreement, (a) no investigation by Buyer shall affect the representations and warranties of Parent, Seller or the Acquired Companies under this Agreement or any Transaction Document and (b) such representations and warranties shall not be affected or deemed waived by reason of the fact that Buyer knew or should have known that any of the same is or might be inaccurate in any respect.

ARTICLE IX.

DEFINITIONS

Section 9.1 Definitions. For purposes of this Agreement, the following terms shall have the meanings ascribed to them in this ARTICLE IX.

“2010 Actual Medicare GAAP Revenues” is defined in Section 1.4(b)(i)(A).

“2010 Actual Medicare Profit/Loss Amount” is defined in Section 1.4(b)(i)(B).

“2010 Actual Medicare Revenue-Based Payment Amount” is defined in Section 1.4(b)(i)(C).

“2010 Estimated GAAP Revenues” is defined in Section 1.4(b)(i)(D).

“2010 Estimated Medicare Profit/Loss Amount” is defined in Section 1.4(b)(i)(E).

“2010 Estimated Medicare Revenue-Based Payment” is defined in Section 1.4(b)(i)(F).

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“2010 Medicare Actual Income Statement” is defined in Section 1.4(b)(i)(G).

“2010 Medicare Estimated Income Statement” is defined in Section 1.4(b)(i)(H).

“2010 Medicare Profit (Loss)” is defined in Section 1.4(e)(ix)(G).

“2010 Medicare Revenue Period” is defined in Section 1.4(b)(i)(I).

“2010 Operating Costs” is defined in Section 1.4(b)(i)(J).

“2010 PMPM Amount” is defined in Section 1.4(b)(i)(K).

“2011 Actual Medicare GAAP Revenues” is defined in Section 1.4(b)(i)(L).

“2011 Actual Medicare Revenue-Based Payment Amount” is defined in Section 1.4(b)(i)(M).

“2011 Buyer Non-Novated Medicare Profit (Loss)” is defined in Section 1.4(e)(ix)(H).

“2011 Estimated Medicare GAAP Revenues” is defined in Section 1.4(b)(i)(N).

“2011 Estimated Medicare Revenue-Based Payment Amount” is defined in Section 1.4(b)(i)(O).

“2011 Medicare Actual Income Statement” is defined in Section 1.4(b)(i)(P).

“2011 Medicare Bid” is defined in Section 1.4(b)(i)(Q).

“2011 Medicare Estimated Income Statement” is defined in Section 1.4(b)(i)(R).

“2011 Medicare Revenue Period” is defined in Section 1.4(b)(i)(S).

“2011 Operating Costs” is defined in Section 1.4(b)(i)(T).

“2011 Opt-Out Percentage” is defined in Section 1.4(b)(i)(U).

“2011 PMPM Amount” is defined in Section 1.4(b)(i)(V).

“2011 Seller Novated Medicare Profit (Loss)” is defined in Section 1.4(e)(ix)(I).

“2012 Actual Medicare GAAP Revenues” is defined in Section 1.4(b)(i)(W).

“2012 Actual Medicare Revenue-Based Payment Amount” is defined in Section 1.4(b)(i)(X).

“2012 Estimated Medicare GAAP Revenues” is defined in Section 1.4(b)(i)(Y).

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“2012 Estimated Medicare Revenue-Based Payment Amount” is defined in Section 1.4(b)(i)(Z).

“2012 Medicare Actual Statement of Revenues” is defined in Section 1.4(b)(i)(AA).

“2012 Medicare Estimated Statement of Revenues” is defined in Section 1.4(b)(i)(BB).

“2012 Medicare Revenue Period” is defined in Section 1.4(b)(i)(CC).

“Acquired Business” means (i) the business conducted by the Acquired Companies on the Effective Date and (ii) the HN Life Business.

“Acquired Companies” is defined in the recitals.

“Action” means any action, claim, suit, litigation, proceeding, arbitral action, governmental audit (including any market conduct or financial examination), criminal prosecution, investigation or unfair labor practice charge or complaint before a Governmental Entity.

“Actual Final Combined Financial Statement” is defined in Section 1.4(e)(i).

“Actual Final Net Payment” is defined in Section 1.4(e)(i).

“Actual Member Tax Basis” is defined in Section 1.4(e)(viii).

“Additional Quoted Groups” is defined in Section 1.4(a)(i).

“Adjusted Tangible Net Equity” means (i) shareholders’ equity minus (ii) goodwill, intangible assets, net property, plant and equipment, intercompany and affiliate assets net of intercompany and affiliate liabilities (excluding insurance-related payments, e.g., pharmacy and behavioral health), fifty percent (50%) of Medicare pre-paids and net deferred tax assets, plus (iii) the Net Deferred Tax Asset Payment. Notwithstanding the foregoing, as of the Closing Date all amounts included in the Adjusted Tangible Net Equity must be capable of being liquidated to cash within twenty four (24) months of the Closing Date.

“Adjusted Tangible Net Equity Payments” means the Closing Adjusted Tangible Net Equity Payment, the First Anniversary Adjusted Tangible Net Equity Payment, the Second Anniversary Adjusted Tangible Net Equity Payment, and any Excess Adjusted Tangible Net Equity Payments.

“Administrative Services Agreements” is defined in Section 1.3(a)(ii).

“Administrator” is defined in the Administrative Services Agreements.

“Affiliate,” with respect to any Person, shall mean any Person controlling, controlled by or under common control with such Person and shall also include any Person 50% or more of whose outstanding voting power is owned by the specified Person either directly or indirectly through Subsidiaries.

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“Affiliated Group” is defined in Section 2.17(h).

“Agreement” is defined in the preamble.

“Allocation” is defined in Section 4.6(c).

“Annual Financial Statements” is defined in Section 2.19(a).

“ASA Termination Date” is defined in Section 1.4(e)(ii).

“ASO Contracts” means any administrative services only contract entered into by the Acquired Companies or HN Life for the administration of health care benefits or services for which the applicable Employer Group remains financially responsible on a self-insured basis. For purposes of this definition, a contract is not an ASO Contract because it is experience rated, retrospectively rated, or a minimum premium or similar arrangement so long as an insurance or HMO license is required under applicable Law to issue the contract.

“Assumed Liabilities” means (i) any liability or obligation incurred with respect to the Medicare Revenue Contract after the novation, assignment or other such transfer the business operated under the Medicare Revenue Contract to a Legacy United Entity; (ii) any liability or obligation with respect to the NJ Medicaid Contract after the earlier of (x) June 30, 2010 (only if the Buyer Medicaid Election is made) and (y) the assignment or other transfer of the NJ Medicaid Contract to a Legacy United Entity; (iii) any corporate franchise taxes of the Acquired Companies incurred after the winding up and running out period for such Acquired Company; (iv) any costs or expenses of any dissolution or liquidation of an Acquired Company after the Closing Date; (v) any liability or obligation resulting from, arising out of, relating to or caused by any new business written or Administered Contracts renewed by an Acquired Company (A) in violation of Article V of the applicable Administrative Services Agreement or (B) after the termination date of the applicable Administrative Services Agreement; (vi) any liability or obligation resulting from, arising out of, relating to or caused by any new line of business conducted or undertaken by the Acquired Companies at the direction of Buyer or its Affiliates after the Closing Date; (vii) any medical expenses relating to the Administered Contracts of an Acquired Company paid after the earlier of the Transition Date and the ASA Termination Date; (viii) any loss adjustment expenses relating to the Administered Contracts of an Acquired Company paid after the ASA Termination Date; and (ix) any medical expenses arising out of the Unreserved Claims.

“Banc of America” is defined in Section 2.10.

“Benefit Programs” means (i) all pension, retirement, profit sharing, stock bonus or other similar plans or programs (including an “employee benefit plan” (as defined in Section 3(3) of ERISA); (ii) any affirmative action plans or programs; (iii) employment agreements, current and deferred compensation, severance, vacation, stock purchase, stock option, bonus and incentive compensation benefits; and (iv) medical, hospital, life, health, accident, disability, death and other fringe and welfare benefits.

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“Broker Contract” is defined in Section 2.8(d)(iv).

“Business” is defined in the Administrative Services Agreements.

“Business Day” means any day which is not a Saturday, Sunday, or legal holiday recognized by the States of California, Minnesota or New York.

“Business Employees” is defined in Section 4.10(a).

“Business Transition Agreement” is defined in Section 1.3(a)(v).

“Buyer” is defined in the preamble.

“Buyer TNE Account” is defined in Section 1.4(e)(iv)(a).

“Buyer Indemnified Parties” is defined in Section 7.1.

“Buyer 2011 Medicare Percentage” is defined in Section 1.4(e)(ix)(K).

“Buyer Contribution Amount” is defined in Section 1.4(e)(ix)(D).

“Buyer Costs” is defined in Section 1.4(e)(ix)(D).

“Buyer Medicaid Election” is defined in Section 1.4(c)(i).

“Buyer Medicaid Net Income (Loss)” is defined in Section 1.4(e)(ix)(F).

“Buyer Medicare Affiliate” is defined in Section 1.4(e)(ix)(J).

“Buyer’s Allocable Investment Income (Loss)” is defined in Section 1.4(e)(ix)(A).

“Calculation Statement” is defined in Section 1.5.

“Cap Amount” is defined in Section 7.3(b).

“Capital and Surplus Deficiency” is defined in Section 1.4(h).

“Capital and Surplus Contribution Amount” is defined in Section 1.4(h).

“Caremark Agreement” means (i) Pharmacy Benefits Management Services Agreement, between Health Net Pharmaceutical Services, Health Net of New York, Inc. and CaremarkPCS Health, L.P. for the limited purpose of acting as a subcontractor of HNPS; (ii) Mail Pharmacy Services Agreement between Caremark IPA, LLC, a New York limited liability company and Health Net of New York, Inc.; and (iii) Specialty Pharmacy Prescription Services Agreement between Caremark, Inc. and Health Net of New York, Inc., entered into on January 2, 2007.

“Chosen Courts” is defined in Section 8.6.

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“Claims Servicing Agreements” means the Claims Servicing Agreement (Bermuda), the Claims Servicing Agreement (Connecticut), the Claims Servicing Agreement (New York HMO), the Claims Servicing Agreement (New York Insurance) and the Claims Servicing Agreement (New Jersey), each substantially in the form attached to the corresponding Administrative Service Agreement, in each case, as amended, modified or supplemented from time to time.

“Client Contract” means:

(a) any contract for the provision of health plan benefits that any of the Acquired Companies or HN Life (with respect to the HN Life Business) has entered into with (i) an eligible individual who subscribes to the health plan (which subscription may be on behalf of the individual alone or the individual together with one or more eligible dependents), or (ii) an Employer Group or Governmental Entity pursuant to a government sponsored health care program, including but not limited to Medicare, Medicaid or Children’s Health, or (iii) other Employer Group that purchases the health plan for its eligible employees or other individuals (together, if applicable, with such employees’ or other individuals’ eligible dependents), which in either case, any of the Acquired Companies or HN Life has assumed financial risk for the provision of such health plan benefits; and

(b) any ASO Contract any of the Acquired Companies or HN Life has entered into with respect to the Acquired Business.

“Closing” is defined in Section 1.2.

“Closing Adjusted Tangible Net Equity” is defined in Section 1.4(d)(ii).

“Closing Adjusted Tangible Net Equity Amount” is defined in Section 1.4(d)(ii)

“Closing Date” is defined in Section 1.2.

“Closing Date Combined Balance Sheet” is defined in Section 1.4(d)(ii).

“Closing Payment” is defined in Section 1.3(b)(i).

“CMS” means the Centers for Medicare & Medicaid Services.

“Code” means the Internal Revenue Code of 1986, as amended.

“Commercial ASO Members” is defined in Section 1.4(a)(iii)(A).

“Commercial Insured Members” is defined in Section 1.4(a)(iii)(B).

“Commercial Members” is defined in Section 1.4(a)(iii)(C).

“Company Forms” means all material policies, binders, slips, certificates, annuity contracts and participation agreements and other agreements of insurance or HMO coverage, whether individual or group, in effect as of the Effective Date (including all applications, supplements, endorsements, riders and ancillary agreements in connection therewith) that are issued by the Insurance Subsidiaries, including any and all marketing materials.

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“Competing Transaction” is defined in Section 4.11.

“Confidentiality Agreement” means the letter agreement dated as of January 6, 2009 between Parent and Guarantor.

“Contracts and Other Agreements” is defined in Section 2.4.

“Contribution Date” is defined in Section 1.4(i).

“Copyrights” is defined in this Section 9.1 in the definition of “Intellectual Property Rights”.

“Deferred Tax Inventory” means all acquired deferred Tax assets and liabilities of the Acquired Companies as of the Closing Date.

“Designated Employees” is defined in Section 4.10(a).

“Disposition Transaction” is defined in Section 4.15(a).

“Dispute” is defined in Section 1.4(e)(ix)(E).

“DMAHS” means the State of New Jersey, Department of Human Services, Division of Medical Assistance and Health Services.

“Effective Date” is defined in the preamble.

“Effective Date Membership Statement” is defined in Section 4.13.

“Election Companies” is defined in Section 4.6(c).

“Employer Groups” shall mean any or all employers, associations, labor unions, trusts, Governmental Entities or other legally organized groups of individuals or other entities which legally contract to provide health benefits on behalf of their eligible employees, members or beneficiaries.

“Environmental Laws” is defined in Section 2.16.

“Equity Interest” means, with respect to any Person, any share of capital stock of, general, limited or other partnership interest, membership interest or similar ownership interest under the Laws of a jurisdiction outside the United States, in such Person.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Estimated Adjusted Tangible Net Equity Payment” is defined in Section 1.3(b)(i).

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“Estimated Closing Date Combined Balance Sheet” is defined in Section 1.4(d)(i).

“Estimated Closing Adjusted Tangible Net Equity” is defined in Section 1.4(d)(i).

“Estimated Closing Adjusted Tangible Net Equity Deficit” is defined in Section 1.4(d)(i).

“Estimated Final Net Payment” is defined in Section 1.4(d)(iv).

“Estimated Final Combined Financial Statement” is defined in Section 1.4(d)(iv).

“Excess Adjusted Tangible Net Equity Payments” is defined in Section 1.4(d)(vi).

“Excluded Liabilities” means (i) any liabilities or obligations of Parent or its Affiliates whatsoever to the extent related to the Acquired Business (including any liabilities or obligations related to the stand-alone Medicare Part D business) or the breach by Parent or its Affiliates of this Agreement or any of the Transaction Documents, whether accrued, absolute, contingent or otherwise; and (ii) any liability or obligation related to the Acquired Business and incurred through the winding up and running out period of the Acquired Business including liabilities or obligations resulting from, arising out of, relating to or caused by any accounts payable and accrued expenses, contractual liabilities, long-term debt and accrued interest, any legal activities, litigation, regulatory, administrative or arbitration proceedings (but excluding any liability arising from any breach by Buyer or its Affiliates (including, after the Closing, the Acquired Companies) of any of the Transaction Documents). Notwithstanding the foregoing, “Excluded Liabilities” shall not include any liabilities or obligations to the extent such liability or obligation (A) is a Buyer Cost incurred after the earlier of the ASA Termination Date and the Transition Date, (B) is an Assumed Liability, (C) has been specifically included in or taken into account in the calculation of any Quarterly Net Payment, Actual Final Net Payment or Termination Date Net Payment, (D) was less than the amount of a reserve (whether for an individual matter or a group of aggregated matters, as applicable) in the Closing Date Balance Sheet, the Actual Final Combined Financial Statement (including the Loss Reserve reflected thereon) or the Termination Date Combined Financial Statement (including the Termination Date Loss Reserve reflected thereon) or (E) that arises from the business or operations of a Person into which, or with whom, an Acquired Company merges at any time following the Closing Date or is a liability or obligation of such Person that otherwise does not arise from the Acquired Business.

“Extended Termination Date” is defined in Section 6.1(b)(ii).

“First Anniversary Adjusted Tangible Net Equity Payment” is defined in Section 1.4(d)(iii).

“Fully-Insured Contract” is defined in Section 1.4(a)(iii)(D).

“GAAP” shall mean generally accepted accounting principles in the United States.

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“Governmental Entity” is defined in Section 2.5.

“Gross-Up Cap” is defined in Section 1.4(e)(vii).

“Guarantor” is defined in the preamble.

“Health Care Laws” is defined in Section 2.18(a).

“HIPAA” means the Health Insurance Portability and Accountability Act of 1996.

“Hired Employee” is defined in Section 4.10(b).

“HMO” means health maintenance organization.

“HN CA” means Health Net of California, Inc. including any successor thereto and/or any entity holding all or substantially all of its or any successor’s assets.

“HN Life” is defined in the recitals.

“HN Life Business” means, collectively, the POS and PPO business in Connecticut and New Jersey as of the Closing Date conducted by HN Life.

“HNNY” is defined in Section 4.6(c).

“HSR Act” is defined in Section 2.5.

“including” shall, unless the context clearly requires otherwise, mean including but not limited to the items or things following such term.

“Indemnified Party” is defined in Section 7.4(a).

“Indemnifying Party” is defined in Section 7.4(a).

“Independent Expert” is defined in Section 1.5(c).

“Initial Business Payment” is defined in Section 1.3(b)(i).

“Initial Membership Statement” is defined in Section 1.4(a)(i).

“Initial Termination Date” is defined in Section 6.1(b)(ii).

“Insurance Contract” is defined in Section 2.19(d).

“Insurance Subsidiaries” is defined in Section 2.18(f).

“Intellectual Property” means tangible embodiments of Intellectual Property Rights, including any of the following: (i) inventions (whether patentable or not), invention disclosures, proprietary information, technology, technical data, and all documentation relating to any of the foregoing; or (ii) works of authorship (including computer programs, source code, object code, whether embodied in software, firmware or otherwise), and associated documentation.

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“Intellectual Property Rights” means any or all of the following and all worldwide common law and statutory rights in, arising out of, or associated therewith: (i) patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof and foreign counterparts thereto (“Patents”); (ii) copyrights, copyrights registrations and applications therefor (“Copyrights”); (iii) trade secrets (including, those trade secrets defined in the Uniform Trade Secrets Act and under corresponding foreign statutory and common law) (“Trade Secrets”); and (iv) any similar or equivalent rights to any of the foregoing (as applicable), but excluding trade marks, trade names, service marks, service names, logos, domain names, trade dress, and the good will associated with any of the foregoing and any registrations and applications therefor (“Trademarks”).

“Intercompany Agreement Amendments” is defined in Section 4.12(b).

“Intercompany Agreements” is defined in Section 2.20(b).

“IRS” means the Internal Revenue Service.

“JP Morgan” is defined in Section 2.10.

“knowledge” with respect to Seller shall mean the actual knowledge of the individuals listed in Schedule B.

“Latest Balance Sheets” is defined in Section 2.19(a).

“Latest Financial Statements” is defined in Section 2.19(a).

“Law” means any applicable federal, state or local statute, law (including common law), ordinance, regulation, rule, ruling, order, writ, injunction, decree, other official enactment, regulatory settlement, agreement, stipulation or requirement of or by any Governmental Entity, including Health Care Laws.

“Leased Real Property” is defined in Section 2.14.

“Legacy United Entity” is defined in the Business Transition Agreement.

“Legacy United Entity Plan” is defined in the Business Transition Agreement.

“Legal Proceeding” is defined in the Administrative Services Agreements.

“liability” means any liability, commitment or obligation of any kind, whether due or to become due, known or unknown, accrued or fixed, or absolute or contingent.

“Lien” means any lien, security interest, charge, claim, mortgage, deed of trust, warrant, purchase right, lease, or other encumbrance.

“Loss Reserves” is defined in Section 1.4(h).

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“Losses” means all claims, losses, damages, liabilities, obligations or expenses, including, reasonable third-party legal fees and expenses.

“Material Adverse Effect” shall mean any change, event, circumstance, development or effect, which individually or in the aggregate results in or causes a material adverse effect on, or a material adverse change in, as the case may be, the business, assets, liabilities, financial condition or results of operations of the Acquired Business, taken as a whole, other than a change, event, circumstance, development or effect relating to or arising from: (i) the announcement that Parent and Seller have entered into the transactions contemplated hereby with Buyer and its applicable Affiliates, (ii) changes in GAAP or regulatory accounting requirements, or interpretations thereof by courts or Governmental Entities, in each case after the Effective Date (other than those that have had a materially disproportionate adverse effect relative to other similarly situated health plan companies on the Acquired Business taken as a whole), (iii) changes in Laws of general applicability (other than those that have had a materially disproportionate adverse effect relative to other similarly situated health plan companies on the Acquired Business taken as a whole) and changes in Law relating to health care reform, (iv) changes, or proposed or announced changes, in state or federal spending or eligibility criteria for Medicare or Medicaid, in each case after the Effective Date, (v) actions or omissions of a party to this Agreement taken with the prior written consent of the other party to this Agreement, (vi) changes, after the Effective Date, affecting any of the industries in which HN Life or any of the Acquired Companies are engaged or general economic and market conditions (other than those that have had a materially disproportionate adverse effect relative to other similarly situated health plan companies on the Acquired Business taken as a whole), or (vii) any failure of the businesses of the Acquired Companies to meet any published or internally prepared estimate of revenues, earnings or other economic performance for any period on or after the Effective Date (provided, however, that any change, event, circumstance, development or effect that may have caused or contributed to such failure to meet any projection or forecast shall not be excluded). Notwithstanding anything to the contrary herein, a Material Adverse Effect shall be deemed to have occurred if, and only if, the number of Commercial Members decreases below 200,000 prior to the Closing Date.

“Medicaid Renewal Deadline” is defined in Section 1.4(c)(i).

“Medicaid Revenue-Based Payment Amount” is defined in Section 1.4(c)(iv).

“Medicaid Statement of Revenues” is defined in Section 1.4(c)(iii).

“Medicaid Transfer Date” is defined in Section 1.4(c)(ii).

“Medicare Revenue Contract” is defined in Section 1.4(b)(i)(DD).

“Membership Renewal Amount” is defined in Section 1.4(a)(iii)(F).

“Membership Renewal Statement” is defined in Section 1.4(a)(iii)(E).

“Membership Renewal Statement Date” is defined in Section 1.4(a)(iii).

“Net Business Payment Amount” is defined in Section 1.4(a)(iv)(G).

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“Net Deferred Tax Asset Payment” means, with respect to the Acquired Companies other than the Election Companies, the sum of (i) cumulative deferred Tax assets as of the Closing Date relating to loss discount reserves and unearned premiums; (ii) the discounted amount of cumulative net deferred Tax assets as of the Closing Date for all other Tax attributes except net operating loss carryforwards and credits, with the discount factor based on a 10% discount rate applied over three (3) years or, if applicable, the remaining useful life of any intangible assets; and (iii) solely with respect to Health Net of New Jersey, Inc., the amount of federal net operating loss carryforwards available to the Buyer as of the Closing Date after applying the rules in Code Section 382 and Treasury Regulations Section 1.1502-36.

“Net Investment Income (Loss)” is defined in Section 1.4(e)(ix)(B).

“NJ Medicaid Contract” means the Agreement to Provide HMO Services between Health Net of New Jersey, Inc. and DMAHS, effective October 1, 2000, as amended, or any successor contracts thereto as the same may have been renewed prior to or in connection with the Closing.

“Non-Competition Agreement” is defined in Section 1.3(a)(vi).

“NY Medicare Part D Contract” means the Contract S5678, effective as of September 30, 2005, by and among CMS, HN Life and Health Net Insurance of New York, Inc.

“Objection Notice” is defined in Section 1.5(a).

“Objection Period” is defined in Section 1.5(a).

“Orders” is defined in Section 2.9(b).

“Outstanding Quotes” is defined in Section 1.4(a)(i).

“Outstanding Quotes Statement” is defined in Section 1.4(a)(i).

“Parent” is defined in the preamble.

“Parent Liquidation” is defined in Section 4.15(a).

“party” is defined in the preamble.

“Patents” is defined in this Section 9.1 in the definition of “Intellectual Property Rights”.

“Permit” means all governmental approvals, permits and insurance, HMO and other declarations, certificates, licenses, franchises, approvals, authorizations, exemptions, franchises, accreditations, consents, qualifications, or other similar documents or permissions required by Governmental Entities.

“Permitted Liens” means (i) Liens or other encumbrances for Taxes not yet due and payable or that are being contested in good faith by appropriate proceedings, (ii) Liens or

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other encumbrances in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, construction or similar Liens or other encumbrances arising by operation of Law, (iii) Liens for utilities and other governmental charges that, in each case, are not yet due or payable, are being contested in good faith by appropriate proceedings or may thereafter be paid without giving rise to any material penalty or material additional cost or liability, (iv) defects, irregularities or imperfections of title and other Liens which, individually or in the aggregate, do not materially impair the continued use of the asset or property to which they relate, (v) Liens for judgments not yet due and payable or that are being contested in good faith by appropriate proceedings, (vi) statutory deposits of cash, securities or other assets pursuant to applicable insurance or HMO Laws and (vii) Liens on personal property leased under operating leases.

“Person” shall mean and include an individual, a partnership, a joint venture, a limited liability company, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

“POS” means point-of-service.

“PPO” means preferred provider organization.

“Pre-Closing Liabilities” means (i) liability for any investment banking, business consultancy, financial advisory, brokerage or finders’ fees or commissions in connection with the transactions contemplated hereby not paid by Seller; (ii) any liability of the Acquired Companies arising out of the Acquired Business incurred prior to the Closing Date, including the following, in each case, to the extent incurred prior to the Closing Date (A) any liability relating to any member enrolled prior to the Closing Date directly resulting from the enrollment of such enrollee in a manner inconsistent with any applicable Law, (B) any liability for contractual obligations under any Client Contracts arising prior to Closing, including medical claims for services rendered to enrollees on or prior to the Closing and claims of enrollees who are hospitalized or confined on the Closing Date through the date of discharge for such enrollees, (C) any liability for the servicing of any such medical claims, and (D) any liability to, or with respect to, current or former employees, independent contractors, members, directors or officers (or any dependants or beneficiaries thereof) of the Acquired Business, including without limitation, salaries or compensation of any kind, vacation or severance pay, or with respect to the Benefit Programs of Parent or its Affiliates in connection with such Person’s employment with or engagement by Parent or its Affiliates or the termination thereof; (iii) any liability of Parent or its Affiliates relating to any action or proceeding asserted against the Acquired Companies prior to the Closing Date and relating to the acts or omissions of the Acquired Companies, including their officers, directors and employees, prior to the Closing Date; (iv) any Taxes of the Acquired Companies with respect to any Pre-Closing Tax Period and the Taxes of any Person (other than any of the Acquired Companies) pursuant to Treasury Regulations Section 1.1502-6 (or any similar Laws), as a transferee or successor, by contract, or otherwise, except to the extent that any such Taxes are reflected in the reserves for Tax liabilities (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) shown on the Closing Date Combined Balance Sheet; and (v) any other liability relating to the Acquired Business arising, or based on facts and circumstances occurring prior to, the Closing Date.

99

“Pre-Closing Tax Period” means any Tax period ending on or before the Closing Date and that portion of any Straddle Period ending on the Closing Date.

“Preparer” is defined in Section 1.5(a).

“Property Leases” is defined in Section 2.14.

“Provider Contract” means any contract between any Acquired Company or HN Life and a hospital, physician, clinical laboratory, ancillary provider, health care practitioner, medical group, independent physicians association or other supplier that renders or provides health care services or supplies relating to the Acquired Business.

“Quarterly Combined Financial Statement” is defined in Section 1.4(e)(i).

“Quarterly Net Payment” is defined in Section 1.4(e)(ix)(C).

“Recipient” is defined in Section 1.5(a).

“Regulatory Law” means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended, and all other Federal, state and foreign, if any, statutes, rules, regulations, orders, decrees, administrative and judicial doctrines and other Laws that are designed or intended to prohibit, restrict or regulate (i) foreign investment or (ii) actions having the purpose or effect of monopolization or restraint of trade or lessening of competition.

“Reinsurance Agreements” is defined in Section 2.8(a)(vi).

“Renew” or “Renewed” is defined in Section 1.4(a)(iii)(H).

“Rental Network Contract” is defined in Section 2.8(d)(v).

“SAP” means Statutory Accounting Principles.

“Second Anniversary Adjusted Tangible Net Equity Payment” is defined in Section 1.4(d)(v).

“Section 338(h)(10) Election” is defined in Section 4.6(c).

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Seller” is defined in the preamble.

“Seller Commercial Account” is defined in Section 1.4(e)(iv)(B).

“Seller Disclosure Schedule” is defined in ARTICLE II.

“Seller Indemnified Parties” is defined in Section 7.2.

100

“Seller IP” means all Intellectual Property Rights that are owned by Seller or the Acquired Companies that are used exclusively in the business of the Acquired Companies.

“Seller Registered IP” is defined in Section 2.12(a).

“Shares” is defined in the recitals.

“Specified Contract” is defined in Section 2.8(a).

“Statutory Statements” is defined in Section 2.19(b).

“Straddle Period” means any Tax period beginning before and ending after the Closing Date.

“Straddle Returns” is defined in Section 4.6(a)(iv).

“Subsidiary,” with respect to any Person, shall mean any corporation 50% or more of the outstanding voting power of which, or any partnership, joint venture, limited liability company or other entity 50% or more of the total Equity Interest of which, is directly or indirectly owned by such Person. For purposes of this Agreement, all references to “Subsidiaries” of a Person shall be deemed to mean “Subsidiary” if such Person has only one subsidiary.

“Successor Guarantee” is defined in Section 4.15(b).

“Successor Guarantor” is defined in Section 4.15(b).

“Surplus Note” means that certain Section 1307 Loan Agreement, dated May 17, 2007, by and between Seller, as lender, and Health Net Insurance of New York, Inc., as borrower.

“Target Member Tax Basis” is defined in Section 1.4(e)(vii).

“Tax Contest” is defined in Section 4.6(d)(i).

“Tax Return” shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes.

“Taxes” shall mean any federal, state, local or foreign income, gross receipts, sales, use, ad valorem, franchise, profits, license, value added, property, windfall profits, withholding, social security, unemployment, disability, transfer, registration, alternative or add-on minimum or estimated taxes or other taxes of any kind whatsoever, including any interest, penalty, or addition thereto.

“Terminated Agreements” is defined in Section 4.8

“Terminating Buyer Breach” is defined in Section 6.1(e).

“Terminating Seller Breach” is defined in Section 6.1(d).

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“Termination Date Combined Financial Statement” is defined in Section 1.4(e)(ii).

“Termination Date Loss Reserves” is defined in Section 1.4(e)(ii).

“Termination Date Net Payment” is defined in Section 1.4(e)(ii).

“Third Party Claim” is defined in Section 7.4(a).

“Touchstone” means Touchstone Health Partnership, Inc.

“Touchstone Agreements” means the (a) Restructured Payments Agreement, dated April 14, 2009, by and among Touchstone Health Partnership, Inc., Touchstone Health HMO, Inc., Touchstone Health MSO, Inc., Physicians Health Alliance IPA, Inc., Senior Health Associates, Inc. and HNNY, (b) Transition Services Agreement, dated September 1, 2007, by and between HNNY and Touchstone Health HMO, Inc., and (c) Services Agreement, dated March 1, 2006, by and between HNNY and Touchstone Health Partnership, Inc. and Physicians Health Alliance IPA, Inc., as amended, modified, and supplemented from time to time.

“Trademarks” is defined in this Section 9.1 in the definition of “Intellectual Property Rights”.

“Trade Secrets” is defined in this Section 9.1 in the definition of “Intellectual Property Rights”.

“Transaction Documents” means the Administrative Services Agreements, Business Transition Agreement, Transitional Trademark License Agreement, Non-Competition Agreement and Intercompany Agreement Amendments along with the related intercompany agreements being amended by the Intercompany Agreement Amendments.

“Transferred ASO Contract” is defined in Section 4.12.

“Transition Date” is defined in Section 1.4(a)(iii).

“Transitional Trademark License Agreement” is defined in Section 1.3(a)(iv).

“Triggering Event” is defined in Section 4.15(a).

“United Product” is defined in Section 1.4(b)(i)(EE).

“Unreserved Claims” means (i) claims attributable to the business under the NJ Medicaid Contract with occurrence dates after the Medicaid Transfer Date, if applicable, or, if Buyer has made the Buyer Medicaid Election, after June 30, 2010, (ii) claims attributable to the business under the Medicare Revenue Contract with occurrence dates after the Closing Date and through December 31, 2010, taking into account Seller’s entitlement to and liability for the 2010 Actual Medicare Profit/Loss Amount (except that from and after the time that the 2010 Actual Medicare Profit/Loss Amount has been paid in accordance with Section 1.4(b)(iii), it shall not be so taken into account), (iii) if (A) the Closing occurs on or after May 1, 2010, (B) Buyer opts-out of the terms and pricing of the 2011 Medicare Bid and (C) the 2011 Novation has not occurred, claims attributable to the business under the Medicare Revenue Contract with occurrences dates during the year ended December 31, 2011, taking into account Buyer’s entitlement to and liability for the 2011 Buyer Non-Novated Medicare Profit (Loss), if any (except that from and after the time that the final quarterly payment of the 2011 Buyer Non-Novated Medicare Profit (Loss) has been paid in accordance with Section 1.4(e), it shall not be so taken into account), (iv) if (A) the Closing occurs on or after May 1, 2010, (B) Buyer opts-out

102

of the terms and pricing of the 2011 Medicare Bid and (C) the 2011 Novation has occurred, claims attributable to the business under the Medicare Revenue Contract with occurrence dates during the year ended December 31, 2011, taking into account Seller’s entitlement to and liability for the 2011 Seller Novated Medicare Profit (Loss), if any (except that from and after the time that the final quarterly payment of the 2011 Seller Novated Medicare Profit (Loss) has been paid in accordance with Section 1.4(e), it shall not be so taken into account), (v) if (A) the Closing occurs on or after May 1, 2010 and (B) Buyers opts-in to the terms and pricing of the 2011 Medicare Bid, all claims attributable to the business under the Medicare Revenue Contract with occurrences dates during the year ended December 31, 2011 and (vi) claims attributable to the business under the Medicare Revenue Contract or United Product with occurrence dates on or after January 1, 2012, if any.

“Vendor Contracts” is defined in Section 2.8(e).

Section 9.2 Construction. Unless the context of this Agreement otherwise requires: (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement; (iv) the terms “Article” or “Section” refer to the specified Article or Section of this Agreement; (v) the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or”; (vi) the term “including” means “including without limitation”; (vii) the term “foreign” is used with respect to the United States; and (viii) unless the context otherwise requires, an accounting term not otherwise defined in this Agreement has the meaning assigned thereto in accordance with GAAP, consistently applied in accordance with the historical practices of Parent, Seller and the Acquired Companies, as the case may be, insofar as such practices are in accordance with GAAP. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified.

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IN WITNESS WHEREOF, Buyer, Parent, Seller and, solely with respect to Section 8.16, Guarantor, have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written.

OXFORD HEALTH PLANS, LLC

/s/ Jeff Alter

By: Jeff Alter

Its: President and Chief Executive Officer

HEALTH NET, INC.

/s/ Jay Gellert

By: Jay Gellert

Its: President and Chief Executive Officer

HEALTH NET OF THE NORTHEAST, INC.

/s/ Paul Lambdin

By: Paul Lambdin

Its: President

Solely with respect to Section 8.16 of this Agreement:

UNITEDHEALTH GROUP INCORPORATED

/s/ George L. Mikan III

By: George L. Mikan III

Its: Chief Financial Officer

S-1

SCHEDULE A

ACQUIRED COMPANIES

• Health Net of Connecticut, Inc., a Connecticut corporation

• Health Net of New York, Inc., a New York corporation

• Health Net Insurance of New York, Inc., a New York corporation

• FOHP, Inc., a New Jersey corporation

• Health Net of New Jersey, Inc., a New Jersey corporation and wholly-owned subsidiary of FOHP, Inc.

• Health Net Services (Bermuda) Ltd., a Bermuda corporation

SCHEDULE 5.1(b)

CONDITIONS TO EACH PARTY’S OBLIGATIONS

1. Approval of the transaction (as described in ARTICLE I of the Agreement), the Agreement and, as necessary, the Transaction Documents by the following Governmental Entities:

A. New York State Insurance Department;

B. New York State Department of Health;

C. New Jersey Department of Banking and Insurance;

D. Connecticut Insurance Department; and

E. Rhode Island Department of Health.

2. To the extent required by applicable Law, or in the event Buyer deems a filing with respect to the transaction is advisable under the HSR Act, as reasonably determined by Buyer, the waiting period under the HSR Act shall have expired or been terminated.

3. To the extent required by Law for the purchase and sale of the Shares, consents, approvals, filings and/or notices required by (A) the New Jersey Department of Human Services Division of Medical Assistance and Health Services and/or (B) Centers for Medicare and Medicaid Services.

4. With respect to Seller, which will be acting as the administrator of the Acquired Companies’ programs under the Administrative Services Agreement, approval of the following will be required: approval as an HMO management contractor in New York, approval as an adjuster with NYID in New York, registration as a Utilization Review (“UR”) agent with NYID and NYDOH in New York, approval of a license application to be a Third Party Administrator in New Jersey and a license application to become a UR agent in Rhode Island.

EX-10.1

Exhibit 10.1

ADDENDUM A

SALE TRANSACTION

1. Award of Transaction Bonus. In the event the Company enters into a definitive agreement with a Buyer (as defined below) to sell all or substantially all of the securities or assets of the Acquired Companies (as defined below), each Participant identified on Schedule 1 hereto shall be entitled to receive such Participant’s Incentive Award at the Target Incentive Level (the “Transaction Bonus”), provided, that one of the following conditions has been satisfied (each, a “Payment Event”):

a. The Transaction Date (as defined below) occurs on or before December 31, 2009, and the Participant remains employed through the Transaction Date;

b. The Transaction Date has not occurred as of December 31, 2009, and the Participant remains employed by the Company through December 31, 2009;

c. The Participant terminates employment with the Company (other than a termination for “Cause”, as defined in the Company’s Severance Policy) and accepts employment with the Buyer as part of the sale transaction after the date that the sale agreement is executed (the “Signing Date”) and on or before the Transaction Date; or

d. The Participant is terminated by the Company without Cause after the Signing Date and on or before the Transaction Date.

2. Payment of Transaction Bonus. Any Transaction Bonus that becomes payable to a Participant under Section 1 shall be paid in a single lump-sum payment following the date of the Payment Event, as follows:

a. With respect to a Payment Event under Section 1(a), within 30 days following the Transaction Date.

b. With respect to a Payment Event under Section 1(b), no later than March 15, 2010.

c. With respect to a Payment Event under Section 1(c) or 1(d), within 30 days following the date of Participant’s termination of employment and no later than March 15, 2010.

d. In the event the sale is not consummated on or before March 15, 2010, the Transaction Bonus shall be paid no later than March 15, 2010, provided, that a Payment Event condition under Section 1 has been satisfied as of March 15, 2010.

3. Definitions. For purposes of this Addendum, the following terms shall have the following meanings:

a. “Acquired Companies” means Health Net of Connecticut, Inc., Health Net of New York, Inc., Health Net Insurance of New York, Inc., FOHP, Inc., Health Net of New Jersey, Inc., and Health Net Services (Bermuda) Ltd..

b. “Administrator” means the Compensation Committee of the Board.

c. “Buyer” means the person(s) acquiring the securities or assets of the Acquired Companies pursuant to the sale transaction.

d. “Transaction Date” means the date of the consummation of the sale transaction.

4. Additional Terms and Conditions.

a. This Addendum shall be effective upon the Signing Date and shall expire one year from the Signing Date.

b. In the event a Participant is eligible to receive a Transaction Bonus under this Addendum, such Transaction Bonus shall be paid in lieu of any Incentive Award that would otherwise be payable under the Plan with respect to the 2009 Plan Year.

c. In the event that a Participant’s employment with the Company is terminated for any reason other than as specified in Section 1, such Participant shall forfeit all right, title and interest in and to any Transaction Bonus under this Addendum.

d. If a Participant is entitled to a payment of a Transaction Bonus under Section 1 in connection with his or her termination of employment, the Transaction Bonus will be paid to the Participant only if such termination constitutes a “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h). For purposes of this Addendum, the date of a Participant’s termination of employment shall be the date of such Participant’s “separation from service.”

e. Each Transaction Bonus payable under this Addendum is intended to satisfy the short-term deferral exemption under Treasury Regulation Section 1.409A-1(b)(4). To the extent that the Administrator determines that any such payments may not be either compliant with or exempt from Section 409A of the Code and related Department of Treasury guidance, the Administrator may, in its sole discretion, take such action(s) that it determines are necessary or appropriate to cause the Transaction Bonus to be exempt from, or comply with, Section 409A of the Code and related Department of Treasury guidance.

IN WITNESS WHEREOF, this Addendum is adopted effective as of the Signing Date.

HEALTH NET, INC.
By:	/s/ Karin D. Mayhew
Name:	Karin D. Mayhew
Title:	Senior Vice President of Organization Effectiveness

EX-10.2

Exhibit 10.2

FORM OF

NONQUALIFIED STOCK OPTION AGREEMENT

UNDER THE HEALTH NET, INC.

2006 LONG-TERM INCENTIVE PLAN,

AS AMENDED

This agreement (together with the Notice of Grant of Stock Options (the “Grant Notice”) attached hereto and incorporated by reference herein, the “Option Agreement”) is made as of the grant date set forth on the Grant Notice (the “Grant Date”), by and between Health Net, Inc., a Delaware corporation (the “Company”), and the participant identified on the Grant Notice, an employee of the Company or a Subsidiary of the Company (the “Optionee”).

Pursuant to the Health Net, Inc. 2006 Long-Term Incentive Plan, as amended (the “Plan”), the Compensation Committee of the Board of Directors of the Company (the “Committee”) or an appropriate executive officer of the Company empowered by the Committee, has determined that the Optionee is to be granted, on the terms and conditions set forth in this Option Agreement, a nonqualified stock option (the “Option”) to purchase shares of Common Stock of the Company, par value $.001 per share (the “Common Stock”), and hereby grants such Option. Capitalized terms used but not defined herein shall have the meanings set forth in the Plan.

1. Number of Shares and Exercise Price. The Option is to purchase the number of shares of Common Stock set forth on the Grant Notice (the “Option Shares”) at a price per share set forth on the Grant Notice (the “Exercise Price”), which is equal to the Fair Market Value (as defined in the Plan) of the Option Shares as of the Grant Date.

2. Exercise of Option. Except as set forth in Sections 3 and 9, the Option shall become exercisable in cumulative installments beginning on the [first] anniversary of the Grant Date to the extent of [__%] of the Option Shares covered by the Option, and [on each subsequent anniversary of the Grant Date to the extent of an additional __%] of the Option Shares covered by the Option, until the Option has become exercisable as to all of the Option Shares (the “Vesting Dates”). The Option may be exercised only to purchase whole shares, and in no case may a fraction of a share be purchased.

3. Term of Option and Termination of Employment.

(a) General Term. The term of the Option and this Option Agreement shall commence on the Grant Date. The right of the Optionee to exercise the Option with respect to any Option Shares, to purchase any such Option Shares and all other rights of the Optionee with respect to any such Option Shares shall terminate on the seventh anniversary of the Grant Date, unless the Option has been earlier terminated as provided either in paragraphs (b) through (g) below or under the Plan.

(b) Death of Optionee. If the Optionee shall die prior to the exercise of the Option, then:

(i) if the Optionee dies while employed by an Employer (as defined in the Plan), then the Option (subject to subsection (g) below) may be exercised by the legatee(s) or personal representative of the Optionee at any time within one year after the Optionee’s death;

(ii) if the Optionee’s employment with the Employer was terminated due to a Disability (as defined in the Plan) and the Optionee dies within one year after termination of employment, then the Option (subject to subsection (g) below) may be exercised by the legatee(s) or personal representative of the Optionee any time during the remainder of the period during which the Optionee would have been able to exercise the Option pursuant to subsection (c) below had the Optionee not died;

(iii) if the Optionee dies within three months after termination of employment by the Employer without Cause, as determined pursuant to Subsection 3(g), and clause (ii) is not applicable, then the Option (subject to subsection (g) below) may be exercised by the legatee(s) or personal representative of the Optionee at any time within one year after the Optionee’s death.

(c) Disability. If the Optionee’s employment with the Employer shall terminate prior to the exercise of the Option as a result of a Disability, then the Option (subject to subsection (g) below) may be exercised by the Optionee (or his or her personal representative) at any time within one year after the Optionee’s termination of employment.

(d) Termination by the Employer for Cause. If the Optionee’s employment with the Employer shall be terminated by the Employer prior to the exercise of the Option for Cause then the Option shall immediately terminate and shall immediately cease to be exercisable and shall be forfeited to the Company. For purposes of this Option Agreement, “Cause” shall have the meaning set forth in Section [INSERT SECTION NUMBER] of the Plan.

(e) Termination by the Employer Without Cause. If prior to the exercise of the Option, the Optionee’s employment with the Employer shall be terminated by the Employer without Cause, then the Option (subject to subsection (g) below) held by the Optionee may be exercised at any time within three months after the Optionee’s termination of employment, provided that, if such termination of the Optionee’s employment occurs during a Company trading blackout period established pursuant to the Company’s then existing Insider Trading Policy (the “Trading Blackout”), and the Optionee is subject to such Trading Blackout, such Option (subject to subsection (g) below) may be exercised at any time starting from the Optionee’s termination date through the last day of the third month following the expiration date of such Trading Blackout. For purposes of this Option Agreement, if a Subsidiary by which the Optionee is employed ceases to be a Subsidiary, whether through a sale by the Company of all or a portion of the stock or assets of such Subsidiary, a merger or otherwise (a “Subsidiary Transaction”), the Optionee’s employment with the Employer shall be deemed to have been terminated by the Employer without Cause as of the effective date of such Subsidiary Transaction.

(f) Termination for Other Reason. If prior to the exercise of the Option, the Optionee’s employment with the Employer shall be terminated for any reason other than as set forth in paragraphs (b) through (e) above, then the Option (subject to subsection (g) below) held by the Optionee may be exercised at any time within one month after the Optionee’s termination of employment, provided that, if such termination of the Optionee’s employment occurs during a Trading Blackout and the Optionee is subject to such Trading Blackout, such Option (subject to subsection (g) below) may be exercised at any time starting from the Optionee’s termination date through the last day of the first month following the expiration date of such Trading Blackout.

(g) Post-Termination exercisability. Notwithstanding any other provision of this Section 3 to the contrary, following termination of employment of the Optionee for any reason: (i) the Option shall be exercisable during any of the post-employment periods described in subparagraphs (b) through (f) of this Section 3 if and only to the extent the Option was exercisable (i.e., vested) at the time of such termination of employment and (ii) no portion of the Option shall be exercisable following the seventh anniversary of the Grant Date.

4. Employment/Association with Company Competitor. The Optionee hereby agrees that, during (i) the six-month period following a termination of the Optionee’s employment with an Employer that entitles the Optionee to receive severance benefits under an agreement with or the policy of the Company or (ii) the twelve-month period following a termination of the Optionee’s employment with an Employer that does not entitle the Optionee to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Noncompetition Period”), the Optionee shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon the Optionee to reveal, to make judgments on or otherwise use any confidential business information or trade secrets of the business of the Company or any Subsidiary to which the Optionee had access during his employment with the Employer. In addition, the Optionee agrees that, during the Non-competition Period applicable to the Optionee following termination of employment with the Employer, the Optionee shall not, directly or indirectly, solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its Subsidiaries during the 12 month period prior to the date of such termination of employment, to discontinue his or her relationship with the Company or any of its Subsidiaries or to accept employment by, or enter into a business relationship with, the Optionee or any other entity or person. In the event that the Optionee breaches the covenants set forth in this first paragraph of Section 4:

(a) the Option shall immediately terminate; and

(b) the Optionee shall promptly pay to the Company an amount of cash equal to the Gain Realized (as defined below) on any Option Shares acquired during the Restricted Period (as defined below).

For the purposes of this Section 4: “Restricted Period” shall refer to the period of time commencing ninety days prior to such termination of the Optionee’s employment and ending (x) in the case of an Optionee terminated under clause (i) of the first paragraph of this Section 4, six months after such termination or (y) in the case of an Optionee terminated under clause (ii) of the first paragraph of this Section 4, twelve months after such termination; “Gain Realized” shall equal the difference between (x) the Exercise Price applicable to the Option Shares and (y) the greater of the Fair Market Value (as defined in the Plan) of the Option Shares (I) on the date of acquisition of such Option Shares or (II) on the date such competitive activity with a Competitor was commenced by the Optionee; and “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any Subsidiary.

It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 4 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

The Optionee acknowledges that the services to be rendered by him/her to the Company are of a special and unique character, which gives this Option Agreement a peculiar value to the Company, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by him/her of any of the provisions contained in this Section 4 will cause the Company irreparable injury. Optionee therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 4 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Optionee from any such violations or threatened violations.

5. Notices. Any notice or communication given hereunder shall be in writing and shall be given electronically (e.g., email), or by fax or first class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of an email or a fax to the following addresses:

To the Recipient at:	Address on record at Health Net, Inc. as of the date any notice is to be delivered.
To the Company at:	Health Net, Inc. 21650 Oxnard Street Woodland Hills, California 91367 Attention: General Counsel

or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

6. Failure to Enforce Not a Waiver. The failure of the Company to enforce at any time any provision of this Option Agreement or the Plan shall in no way be construed to be a waiver of such provision or of any other provision hereof.

7. Incorporation of Plan; Entire Agreement. The Plan is hereby incorporated by reference and made a part hereof, and the Option and this Option Agreement are subject to all terms and conditions of the Plan. This Option Agreement and the Plan, taken together, constitutes the entire agreement between the parties relating to or effecting the Option, and no promises, terms, conditions or obligations other than those contained in this Option Agreement or the Plan shall be valid or binding. Any prior agreements, statements or promises, either oral or written, made by any party or agent of any party relating to or effecting the Option that are not contained in the Option Agreement or the Plan are of no force or effect.

8. Rights of a Stockholder. The Optionee shall have no rights as a stockholder with respect to any Option Shares unless and until certificates for shares of Common Stock are issued to the Optionee.

9. Change of Control. Notwithstanding the provisions of Section 2 and 3 hereof, in the event that (i) there shall occur a Change in Control (as defined in the Plan) and (ii) the employment of the Optionee shall be terminated within the two year period following the Change in Control but prior to any Vesting Date either (A) by the Company without Cause or (B) under circumstances which entitle the Optionee to Change in Control severance benefits under an effective employment agreement between the Optionee and the Company or the Company’s Safety Net Security Program, each Option shall become fully vested and the date of such vesting shall be deemed to be the Vesting Date hereunder; such termination shall be treated as having occurred pursuant to Section 3(e) hereof for purposes of determining the post-termination exercise period. For purposes of this Section 9, “Cause” shall have the meaning set forth in the Plan.

10. Rights to Terminate Employment. Nothing in the Plan or in this Option Agreement shall confer upon the Optionee the right to continue in the employment of an Employer or affect any right which an Employer may have to terminate the employment of the Optionee. The Optionee specifically acknowledges that the Employer intends to review Optionee’s performance from time to time, and that the Company and/or the Employer has the right to terminate Optionee’s employment at any time, including a time in close proximity to a Vesting Date, for any reason, with or without Cause. The Optionee acknowledges that upon his or her termination of employment with an Employer for any reason, the Option shall be exercisable only to the extent it is exercisable on the effective date of the Optionee’s termination of employment and only within the period following such termination as is set forth in this Option Agreement.

11. Transferability. The Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Optionee otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.

12. Amendment. The Board may terminate or amend the Plan at any time; provided, however, that the termination or any modification or amendment of the Plan shall not, without the consent of the Optionee, impair the rights of the Optionee under this Option Agreement.

13. Compliance with Applicable Law. The Option is subject to the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action, is necessary or desirable as a condition of, or in connection with, the purchase or delivery of shares hereunder, the Option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent or approval.

14. Decisions of Board or Committee. The Board of Directors or the Committee shall have the right to resolve all questions which may arise in connection with the Option or its exercise. Any interpretation, determination or other action made or taken by the Board of Directors or the Committee regarding the Plan or this Option Agreement shall be final, binding and conclusive.

15. Failure to Execute Agreement. This Option Agreement and the Option granted hereunder is subject to the Optionee returning a counter-signed copy of this Option Agreement to the designated representative of the Company on or before 60 days after the date of its distribution to the Optionee. In the event that the Optionee fails to so return a counter-signed copy of this Option Agreement within such 60 day period, then this Option Agreement and the Option granted hereunder shall automatically become null and void and shall have no further force or effect. Electronic acceptance of this Option Agreement shall constitute an execution of the Option Agreement by the Optionee and a return of the counter-signed copy to the Company for purposes of this Section 15.

IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the date and year set forth above.

Health Net, Inc.

Name:

Title:

OPTIONEE HEREBY EXPRESSLY ACKNOWLEDGES AND AGREES THAT (I) HE/SHE IS AN EMPLOYEE AT WILL AND MAY BE TERMINATED BY THE EMPLOYER AT ANY TIME, WITH OR WITHOUT CAUSE, (II) THE OPTION MAY NOT BE EXERCISED WITH RESPECT TO ANY OPTION SHARES THAT ARE NOT VESTED ON THE DATE OF ANY SUCH TERMINATION AND (III) THE OPTION MAY BE EXERCISED WITH RESPECT TO OPTION SHARES THAT ARE VESTED ON THE DATE OF ANY SUCH TERMINATION ONLY TO THE EXTENT EXPRESSLY PROVIDED IN THIS OPTION AGREEMENT.

Your acceptance of this Option Agreement indicates that you hereby accept and agree to all the terms and provisions of the foregoing Option Agreement and the attached Grant Notice, and to all the terms and provisions of the Plan incorporated by reference herein.

Notice of Grant of Stock Options

Health Net, Inc.

Plan Name: ______________________________________

Participant Name: ___________________________________

Participant ID: ______________________________________

Grant Date: ______________________________________

Grant Number: ______________________________________

Type of Options:      Non-Qualified Stock Options

Option Shares Granted: _________________________________

Exercise Price: ______________________________________

Expiration Date: ______________________________________

Vesting Template: ______________________________________

Vesting Schedule: ______________________________________

EX-10.3

Exhibit 10.3

[DIRECTOR NAME]

[TYPE OF GRANT]

FORM OF

NONQUALIFIED STOCK OPTION AGREEMENT

FOR NON-EMPLOYEE DIRECTORS

UNDER THE HEALTH NET, INC.

2006 LONG-TERM INCENTIVE PLAN,

AS AMENDED

This agreement (the “Option Agreement”) is made as of [DATE] (the “Grant Date”), between Health Net, Inc., a Delaware corporation (the “Company”), and [NAME], a non-employee director of the Company (the “Optionee”).

Pursuant to the Health Net, Inc. 2006 Long-Term Incentive Plan, as amended (the “Plan”), the Optionee is to be granted, on the terms and conditions set forth herein, a nonqualified stock option (the “Option”) to purchase shares of Common Stock of the Company, par value $.001 per share (the “Common Stock”).

1. Number of Shares and Option Price. The Option is to purchase [NUMBER OF SHARES] shares of Common Stock (the “Option Shares”) at a price of [GRANT PRICE] per share (the “Option Price”), which is equal to the Fair Market Value (as defined in the Plan) of an Option Share as of the Grant Date.

2. Exercise of Option. The Option shall become exercisable on the date that is one year after the Grant Date to the extent of 33 1/3 % of the Option Shares covered by the Option, and shall become exercisable on each subsequent anniversary of the Grant Date to the extent of an additional 33 1/3 % of the Option Shares covered by the Option until the Option becomes fully exercisable. The Option may be exercised only to purchase whole shares, and in no case may a fraction of a share be purchased.

3. Term of Option and Termination of Service.

(a) General Term. The term of the Option and this Option Agreement shall commence on the date hereof. The right of the Optionee to exercise the Option with respect to any Option Shares, to purchase any such Option Shares and all other rights of the Optionee with respect to any such Option Shares shall terminate on the seventh anniversary of the Grant Date, unless the Option has been earlier terminated as provided in paragraphs (b) through (e) below, or under the Plan.

(b) Death of the Optionee. If the Optionee shall die prior to the exercise of the Option, then:

(i) if the Optionee dies while serving as a member of the board of directors of the Company (a “Director”), then the Option (subject to clause (g) below) may be exercised by the legatee(s) or personal representative of the Optionee at any time within one year after the Optionee’s death;

(ii) if the Optionee’s service as a Director was terminated due to Permanent and Total Disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, or any successor thereto) (hereinafter, “Permanent and Total Disability”) and the Optionee dies within one year after termination of service, then the Option (subject to clause (g) below) may be exercised by the legatee(s) or personal representative of the Optionee at any time during the remainder of the period during which the Optionee would have been able to exercise the Option had the Optionee not died; and

(iii) if the Optionee dies within three months after termination of service as a Director and clause (ii) is not applicable, then the Option (subject to clause (g) below) may be exercised by the legatee(s) or personal representative of the Optionee at any time within one year after the Optionee’s death.

(c) Permanent and Total Disability. If the Optionee’s service as a Director shall terminate prior to the exercise of the Option as a result of Permanent and Total Disability, then the Option (subject to clause (g) below) may be exercised by the Optionee (or his or her personal representative) at any time within one year after such termination of service as a Director.

(d) Removal by Stockholders for Cause. If the Optionee shall be removed from the board of directors of the Company by the Company’s stockholders prior to the exercise of the Option for cause (for these purposes, if such termination occurs within 12 months after a Change in Control, as defined in Section 8.9 of the Plan, removal for cause shall only mean a felony conviction for fraud, misappropriation or embezzlement), then upon such removal the Option shall immediately terminate.

(e) Removal by Stockholders Without Cause and Expiration of Term of Office. If prior to the exercise of the Option, the Optionee’s service as a Director shall be terminated as a result of expiration of the Director’s term of office without an accompanying renomination or reelection of such Director, then the Option (subject to clause (g) below) shall become exercisable at the time of such termination and may be exercised at any time within three months after the Optionee’s termination of service as a Director, provided that, if such termination occurs during a Company trading blackout period established pursuant to the Company’s then existing Insider Trading Policy (the “Trading Blackout”), such Option (subject to clause (g) below) may be exercised at any time starting from the Optionee’s termination date through the last day of the third month following the expiration date of such Trading Blackout period. If prior to the exercise of the Option, the Optionee’s service as a Director shall be terminated as a result of (i) removal by the Company’s stockholders without cause or (ii) the tendering of the Optionee’s resignation as a Director upon expiration of his or her term of office, then the Option (subject to clause (g) below) may be exercised at any time within three months after the Optionee’s termination of service as a Director, provided that, if such termination occurs during a Trading Blackout, such Option (subject to clause (g) below) may be exercised at any time starting from the Optionee’s termination date through the last day of the third month following the expiration date of such Trading Blackout period.

(f) Termination for Other Reason. If prior to the exercise of the Option, the Optionee’s service as a Director shall be terminated for any reason other than as set forth in subsections (b) through (e) above, including as a result of the tendering of the Optionee’s resignation as a Director during his or her then current term of office, then the Option (subject to

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clause (g) below) held by the Optionee may be exercised at any time within one month after the Optionee’s termination of service as a Director, provided that, if such termination of the Optionee’s service as a director occurs during a Trading Blackout, such Option (subject to clause (g) below) may be exercised at any time starting from the Optionee’s termination date through the last day of the first month following the expiration date of such Trading Blackout period.

(g) Post-Termination Exercisability. Notwithstanding any other provision of this Section 3 to the contrary, following termination of Optionee’s service as a Director for any reason: (i) the Option shall be exercisable during any of the post-termination periods described in subparagraphs (b) through (f) of this Section 3 if and only to the extent the Option was exercisable (i.e., vested) at the time of such termination and (2) no portion of the Option shall be exercisable following the seventh anniversary of the Grant Date.

(h) Service on Subsidiary Board. Notwithstanding anything to the contrary set forth herein, if upon an Optionee’s termination of service as a Director, such Optionee becomes a member of a board of directors of a subsidiary of the Company, then such Optionee’s service shall not be treated as having terminated hereunder until such Optionee’s termination of service as member of the board of directors of such subsidiary.

4. Notices. Any notice required or permitted under the Plan shall be deemed given when delivered personally, transmitted electronically by facsimile or email, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Optionee either at the last known address set forth in the records of the Company or such other address as the Optionee may designate in writing to the Company.

5. Failure to Enforce Not a Waiver. The failure of the Company to enforce at any time any provision of this Option Agreement or the Plan shall in no way be construed to be a waiver of such provision or of any other provision hereof or thereof.

6. Incorporation of Plan; Entire Agreement. The Plan is hereby incorporated by reference and made a part hereof, and the Option and this Option Agreement are subject to all terms and conditions of the Plan. This Option Agreement and the Plan, taken together, constitute the entire agreement between the parties relating to or effecting the Option, and no promises, terms, conditions or obligations other than those contained in this Option Agreement or the Plan shall be valid or binding. Any prior agreements, statements or promises, either oral or written, made by any party or agent of any party relating to or effecting the Option that are not contained in the Option Agreement or the Plan are of no force or effect.

7. Rights of Stockholder. The Optionee shall have no rights as a stockholder with respect to any Option Shares unless and until certificates of shares of Common Stock are issued to the Optionee.

8. Change of Control. The Option shall become immediately fully vested and exercisable upon the occurrence of a Change in Control, as such term is defined in the Plan.

9. Rights of Removal. Nothing in the Plan or in this Option Agreement shall confer upon the Optionee the right to continue as a director of the Company or affect any right which the stockholders of the Company may have to remove the Optionee as a director of the Company.

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10. Amendment. The Plan may be terminated or amended pursuant to its terms at any time; provided, however, that the termination or any modification or amendment of the Plan shall not, without the consent of the Optionee, impair the rights of the Optionee under this Option Agreement.

11. Compliance with Applicable Law. The Option is subject to the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action, is necessary or desirable as a condition of, or in connection with, the purchase or delivery of shares hereunder, the Option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent or approval.

12. Tax Payments. The Optionee shall be responsible for all the taxes associated with an exercise of the Option and subsequent sale of the Option Shares. No taxes on the income from the exercise of the Option and sale of the Option Shares will be deducted or withheld by the Company. In compliance with the Internal Revenue Code, the Company will issue a Form 1099-Misc during January of each year to report all non-employee compensation earned during the preceding calendar year, including income from the exercise of the Option and sale of the Option Shares. This Form 1099-Misc can be used to calculate the applicable federal and state income taxes.

IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the date and year set forth above.

HEALTH NET, INC.

By:

Name:

Title:

The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Option Agreement and to all the terms and provisions of the Health Net, Inc. 2006 Long-Term Incentive Plan, as amended, and as herein incorporated by reference.

_________________________________  Optionee

Signature of Optionee

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Jay M. Gellert, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Health Net, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009	/s/    JAY M. GELLERT
	Jay M. Gellert
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Joseph C. Capezza, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Health Net, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009	/s/    JOSEPH C. CAPEZZA
	Joseph C. Capezza
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of CEO and CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Health Net, Inc. (the “Company”) for the quarterly period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jay M. Gellert, as Chief Executive Officer of the Company, and Joseph C. Capezza, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/    JAY M. GELLERT

Jay M. Gellert

Chief Executive Officer

August 7, 2009

/S/    JOSEPH C. CAPEZZA

Joseph C. Capezza

Chief Financial Officer

August 7, 2009