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

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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

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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

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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.”

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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.