Health Net Reports Net Income of $21 Million or $.19 Per Diluted Share

Health Net Reports Net Income of $21 Million or $.19 Per Diluted Share

    Business Editors/Health/Medical Writers

    LOS ANGELES--(BUSINESS WIRE)--May 3, 2005--Health Net, Inc. (NYSE:HNT):

--	Company Settles Physician Class Action Lawsuits and Records Related Charge of Approximately $66 Million
--	Improvements in Health Plan MCR and Administrative Ratio Highlight Results

    Health Net, Inc. (NYSE:HNT) today announced 2005 first quarter net income per diluted share of $.19 compared with net income per diluted share of $.13 in the first quarter of 2004.
    Included in the results for the first quarter of 2005 is the full effect of a $67,042,000 pretax charge, or $.36 per diluted share after tax, for severance benefits and litigation costs associated with the settlement of the physician class action lawsuits.
    Health Net reported net income of $21,348,000 in the first quarter of 2005 compared to net income of $15,012,000 in the first quarter of 2004.
    "We are pleased with our progress. Our earnings performance in the first quarter of 2005 showed substantial improvement over the prior year, consistent with our expectations," said Jay Gellert, president and chief executive officer of Health Net. "We remain confident regarding the balance of 2005 and believe there are opportunities for future growth.
    "We also are pleased that we have settled the physician class action lawsuits. We look forward to continuing improved relations with our physician partners," Gellert added.
    Positive developments for the first quarter of 2005 included:

    -- Commercial revenue per member per month (PMPM) increased by
    approximately 11 percent in the first quarter of 2005 compared
    to the first quarter of 2004, consistent with the company's
    expectations, representing the fourth straight quarter of
    accelerating yields;

    -- Commercial health care costs PMPM rose 6.9 percent;

    -- Health Net's Health Plan Medical Care Ratio (MCR) was 85.0
    percent, a 260 basis point improvement compared with 87.6
    percent reported in the first quarter of 2004;

    -- The Administrative Ratio declined by 50 basis points in the
    first quarter of 2005 to 9.5 percent compared with 10.0
    percent in the first quarter 2004 as a result of the company's
    ongoing efforts to monitor administrative expenses and
    adjusting to enrollment declines;

    -- Cash flow from operations of $95,151,000 for the first quarter
    of 2005 compared to a use of cash of $154,575,000 in the first
    quarter of 2004; and

    -- Settlement of physician class action lawsuits.

    Revenues

    Health Net's total revenues decreased slightly in the first quarter of 2005 to $2,911,745,000 from $2,924,752,000 in the first quarter of 2004. Health plan services revenues, including revenues from the company's Commercial, Medicare and Medicaid health plans, also declined slightly to $2,397,689,000 in the first quarter of 2005 compared to $2,404,355,000 in the first quarter of 2004 as lower health plan enrollment almost completely offset improved yields.
    The reduction in health plan services revenue was primarily a result of lower health plan enrollment in the first quarter of 2005 compared to the first quarter of 2004. Commercial enrollment, including both at-risk and Administrative Services Only (ASO) membership, was down 3.3 percent in the first quarter of 2005 compared with the fourth quarter of 2004. This lower enrollment almost completely offset higher commercial and Medicare premium yields across the company's health plans.
    In the first quarter of 2005, the overall health plan revenue PMPM, including commercial, Medicare and Medicaid enrollment, rose 9.3 percent compared to the same period in 2004. Commercial premium yields climbed 11.0 percent compared to the first quarter of 2004.
    "The premium yields we achieved in the first quarter of 2005 were in line with our expectations and position us well for the remainder of 2005," said Buddy Piszel, chief financial officer of Health Net. "This marks the fourth straight quarter of increasing yields, an indication that our pricing is having the desired effect.
    "Our commitment to disciplined pricing resulted in lower commercial enrollment in the first quarter of 2005. We believe that, by year-end, our commercial enrollment will be slightly above the level seen at the end of the first quarter of 2005, excluding New Jersey," Piszel added.
    In the first quarter of 2005, Health Net's Government contracts revenue declined 1.4 percent from the first quarter of 2004, falling by $7,238,000 to $496,710,000. "This decline resulted from the transition to the TRICARE North Region contract and the absence of any revenues from prior TRICARE contracts," noted Piszel.

    Health Plan Health Care Costs

    The health plan MCR decreased to 85.0 percent in the first quarter of 2005 from 87.6 percent in the first quarter of 2004. This decrease in the health plan MCR reflects the impact of better health care cost performance and the absence of negative prior period reserve developments.
    Overall PMPM health plan health care costs rose by 5.9 percent in the first quarter of 2005 compared to the first quarter of 2004. Commercial health care costs PMPM rose by 6.9 percent over the same period.

    Non-GAAP Health Plan Health Care Costs

    Health Net evaluates health care cost trends on a GAAP and non-GAAP basis. Given the charges recorded in the first quarter of 2004, Health Net believes it is important to examine health care costs on a non-GAAP basis to best determine underlying trends. "Subtracting the provider settlement and prior period reserve development from last year's health care costs, you would see a total PMPM health care cost increase of 7.7 percent in the first quarter of 2005. Implicit in that increase is a commercial PMPM increase of 8.8 percent," Piszel commented.
    A table outlining the impact of provider settlements, net prior period reserve development and other one-time items, to the first quarter of 2004 income statement appears below.

    Government Contracts Health Care Costs

    The Government contracts cost ratio rose by 120 basis points to 96.6 percent for the first quarter of 2005 compared to the first quarter of 2004. "We are now responsible for paying claims for active duty personnel who get care in the private sector and this added $40 million in costs and revenues," Piszel noted.
    "We also saw higher claims related to Operation Iraqi Freedom. We are pursuing recovery from the Department of Defense on these higher costs, in line with the terms of the contract," he added.

    Administrative Expenses

    In the first quarter of 2005, total general, administrative and depreciation expenses decreased by $14,685,000 to $226,783,000 compared to expenses of $241,468,000 in the first quarter of 2004. "The administrative ratio continues to reflect our desire to keep these costs low," commented Piszel. "However, we do expect to see the absolute levels of spending increase in the second half of 2005 as expenses for Medicare-related and other commercial marketing activities increase."
    Health Net's selling expenses decreased by $6,304,000 to $57,273,000 in the first quarter of 2005 compared with $63,577,000 in the same period in 2004, consistent with the decline in Small Group and Individual enrollment over the same periods. The selling costs ratio was 2.4 percent for the first quarter of 2005, compared with 2.6 percent in the same period last year.

    Balance Sheet Highlights

    Cash and investments as of March 31, 2005 were $1,895,602,000 compared with $1,782,102,000 as of December 31, 2004.
    The TRICARE receivable increased by $4,964,000 from the end of the fourth quarter of 2004 to $134,447,000 as of March 31, 2005, consistent with seasonal patterns.
    Debt decreased by $8,779,000 from December 31, 2004 to $388,981,000 as of March 31, 2005, primarily due to the mark-to-market adjustment of the interest rate swap contracts, with a corresponding increase in other noncurrent liabilities that reflects the mark-to-market value of the swap. The company's debt-to-total capital ratio was 22.9 percent as of March 31, 2005 compared to 23.8 percent as of December 31, 2004.
    Reserves for claims and other settlements decreased by $14,006,000 to $1,155,291,000 at March 31, 2005 from $1,169,297,000 at December 31, 2004. The Incurred But Not Reported (IBNR) portion of the reserves rose 4 percent sequentially.
    The company paid out approximately $38 million in the first quarter of 2005 for provider settlements associated with the charge taken in the fourth quarter of 2004, which was the primary cause of the total reduction in reserves. The company had remaining provider settlement reserves, associated with the charge taken in the fourth quarter of 2004, of approximately $100 million as of March 31, 2005 and approximately $138 million as of December 31, 2004.
    Interest expense was $2,171,000 higher in the first quarter of 2005 compared to the first quarter of 2004 due to a step up in the interest rate on the company's senior notes resulting from the rating agency downgrade of the company's senior unsecured debt rating in the third quarter of 2004 and higher market interest rates in the first quarter 2005 compared to rates in the first quarter of 2004.
    Days claims payable (DCP) increased to 51.4 days for the first quarter of 2005 compared to 44.7 days for the fourth quarter of 2004 and 45.2 days in the first quarter of 2004, a reflection of provider-related reserves recorded in the fourth quarter of 2004. Excluding provider settlement reserves related to the charge taken in the fourth quarter of 2004 and excluding capitation expenses, DCP increased by 0.4 days for the first quarter of 2005 to 61.4 days compared to 61.0 days for the fourth quarter of 2004.

    Cash Flow

    Cash flow provided by operations in the first quarter of 2005 amounted to $95,151,000 compared to cash flow used in operations of $154,575,000 in the first quarter of 2004.

    Medicare

    Health Net continues to be a major Medicare participant with more than 169,000 members in its Medicare Advantage plans. The company has filed applications with the Center for Medicare and Medicaid Services to participate in additional Medicare programs like the Part D drug benefit, the stand-alone Part D drug benefit, and both regional and local PPO plans.
    "We have a team focused on finding the best potential Medicare opportunities for Health Net in the areas we serve," Piszel added.

    Outlook

    Health Net believes its earnings per diluted share for the full year 2005 will be $1.94 to $2.14, including the effect of the physician class action settlement charge. Excluding the charge, the full year earnings per diluted share range would be between $2.30 and $2.50. The company believes that its earnings per diluted share in the second quarter of 2005 will be between $.50 and $.55.
    "We are reiterating our full year guidance despite having to absorb additional G&A expenditures for Medicare modernization, implementation of the business practice changes required by the physician class action settlement agreement and a higher than expected diluted share count," Piszel commented.
    "For the full year, we continue to believe that commercial enrollment will be up modestly overall from the end of the first quarter of this year, excluding New Jersey, with membership gains in key markets in the second half of the year," he added.
    The company's effective tax rate in the first quarter of 2005 was 34.0 percent as the company realized a tax-related benefit related to the final settlement of a small subsidiary that was sold in February 2005. The company expects its effective tax rate to rise to 38.9 percent for the full year of 2005.

    Conference Call

    As previously announced, Health Net will discuss the company's first quarter 2005 results during a conference call with investors on Tuesday, May 3, 2005, at approximately 11:00 a.m. EDT. To listen to the call, please dial 719-457-2728, code 5350704. A live webcast and replay of the conference call also will be available at www.healthnet.com. The conference call webcast is open to all interested parties. A replay of the conference call will be available following the call on Tuesday, May 3, 2005 through May 7, 2005, by dialing 719-457-0820, code 5350704. Anyone listening to the company's conference call will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2004, and other reports filed by the company from time to time with the Securities and Exchange Commission.

    About Health Net

    Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company's HMO, POS, insured PPO and government contracts subsidiaries provide health benefits to approximately 6.5 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE programs. Health Net's subsidiaries also offer managed health care products related to behavioral health and prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.
    For more information on Health Net, Inc., please visit the company's Web site at www.healthnet.com.

    Cautionary Statements

    Certain matters discussed in this release contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve a number of risks and uncertainties. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements. These statements are based on management's analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "may," "should," "could," "estimate," "intend" and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, rising health care costs, negative prior period claims reserve developments, trends in medical care ratios, issues relating to provider contracts, operational issues, health care reform and general business conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors" section included within the company's most recent Annual Report on Form 10-K filed with the SEC and the risks discussed in the company's other periodic filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this release.

Health Net, Inc. Condensed Consolidated Statements of Operations (Amounts in thousands, except per share and ratio data)

First Quarter Second Quarter Third Quarter Ended Ended Ended March 31, June 30, September 30, REVENUES: 2004 2004 2004 ------------------------------------------------- Health plan services premiums $2,404,355 $2,398,943 $2,393,160 Government contracts 503,948 504,317 525,783 Net investment income 15,201 13,818 14,750 Other income 1,248 1,737 1,540 ------------------------------------------------- Total revenues 2,924,752 2,918,815 2,935,233 -------------------------------------------------

EXPENSES: Health plan services 2,107,087 2,062,277 2,022,870 Government contracts 480,905 478,927 501,628 General and administrative 231,485 214,244 207,187 Selling 63,577 59,993 60,410 Depreciation 9,983 10,424 10,487 Amortization 606 606 789 Interest 8,438 7,304 8,044 ------------------------------------------------- 2,902,081 2,833,775 2,811,415 Litigation settlement, asset impairments and restructuring charges - 17,402 (b) 5,172 (b) (Gain) loss on sale of businesses (1,875)(a) - 400 (c) ------------------------------------------------- Total expenses 2,900,206 2,851,177 2,816,987 -------------------------------------------------

Income (loss) from continuing operations before income taxes 24,546 67,638 118,246 Income tax provision (benefit) 9,534 26,272 46,391 -------------------------------------------------

Net income (loss) $15,012 $41,366 $71,855 =================================================

Basic earnings (loss) per share $0.13 $0.37 $0.64 Diluted earnings (loss) per share $0.13 $0.36 $0.64

Weighted average shares outstanding: Basic 112,600 112,574 111,440 Diluted 114,342 113,460 112,397

Health plan services MCR 87.6% 86.0% 84.5% Government contracts cost ratio 95.4% 95.0% 95.4% Administrative ratio ((G&A+Dep) / (HP serv rev + Other income)) 10.0% 9.4% 9.1% Selling costs ratio (Selling costs / HP serv rev) 2.6% 2.5% 2.5% Days claims payable 45.2 46.6 46.2 Effective tax rate 38.84% 38.84% 39.23% Health plan services premiums PMPM $212.21 $215.98 $219.09 Health plan services costs PMPM $185.97 $185.67 $185.19

Fourth Quarter First Quarter Ended Ended December 31, March 31, REVENUES: 2004 2005 --------------------------------- Health plan services premiums $2,363,786 $2,397,689 Government contracts 487,823 496,710 Net investment income 14,378 15,763 Other income 1,606 1,583 --------------------------------- Total revenues 2,867,593 2,911,745 ---------------------------------

EXPENSES: Health plan services 2,221,404 (f) 2,036,873 Government contracts 466,138 479,974 General and administrative 235,564 (f) 215,227 Selling 56,137 57,273 Depreciation 10,532 11,556 Amortization 861 861 Interest 9,347 10,609 --------------------------------- 2,999,983 2,812,373 Litigation settlement, asset impairments and restructuring charges 10,319 (e) 67,042 (g) (Gain) loss on sale of businesses 305 (d) - --------------------------------- Total expenses 3,010,607 2,879,415 ---------------------------------

Income (loss) from continuing operations before income taxes (143,014) 32,330 Income tax provision (benefit) (57,385) 10,982 (h) ---------------------------------

Net income (loss) $(85,629) 21,348 =================================

Basic earnings (loss) per share $(0.77) $0.19 Diluted earnings (loss) per share $(0.77) $0.19

Weighted average shares outstanding: Basic 110,844 111,544 Diluted 110,844 113,235

Health plan services MCR 94.0% 85.0% Government contracts cost ratio 95.6% 96.6% Administrative ratio ((G&A+Dep) / (HP serv rev + Other income)) 10.4% 9.5% Selling costs ratio (Selling costs / HP serv rev) 2.4% 2.4% Days claims payable 44.7 51.4 Effective tax rate 40.13% 33.97% Health plan services premiums PMPM $222.30 $231.84 Health plan services costs PMPM $208.91 $196.96

Health Net, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands, except ratio data)

March 31, June 30, September 30, 2004 2004 2004 ------------------------------------- ASSETS Current Assets Cash and cash equivalents $684,782 $467,565 $622,903 Investments - available for sale 1,042,021 1,153,222 1,082,969 Premiums receivable, net 186,178 151,619 118,201 Amounts receivable under government contracts 121,037 128,960 136,335 Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract - - 114,618 Other receivables 94,469 93,920 102,494 Deferred taxes 40,827 40,652 41,162 Other assets 92,404 103,907 99,578 ------------------------------------- Total current assets 2,261,718 2,139,845 2,318,260 Property and equipment, net 186,700 186,570 185,291 Goodwill, net 723,595 723,595 723,595 Other intangible assets, net 19,313 21,505 22,716 Deferred taxes 41,409 41,868 18,327 Other noncurrent assets 214,894 282,258 249,912 ------------------------------------- Total Assets $3,447,629 $3,395,641 $3,518,101 =====================================

LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $1,069,247 $1,042,831 $990,240 Health care and other costs payable under government contracts 233,331 216,816 201,494 IBNR health care costs payable under TRICARE North contract - - 114,618 Unearned premiums 95,614 85,894 78,832 Accounts payable and other liabilities 272,000 254,453 296,782 ------------------------------------- Total current liabilities 1,670,192 1,599,994 1,681,966 Senior notes payable 406,603 384,220 401,750 Other noncurrent liabilities 78,958 95,243 81,657 ------------------------------------- Total Liabilities 2,155,753 2,079,457 2,165,373 -------------------------------------

Stockholders' Equity Common stock and additional paid-in capital 794,602 798,432 805,426 Restricted common stock 6,027 5,855 6,483 Unearned compensation (3,624) (3,121) (3,999) Treasury common stock, at cost (577,484) (580,634) (632,926) Retained earnings 1,066,788 1,108,154 1,180,009 Accumulated other comprehensive income (loss) 5,567 (12,502) (2,265) ------------------------------------- Total Stockholders' Equity 1,291,876 1,316,184 1,352,728 ------------------------------------- Total Liabilities and Stockholders' Equity $3,447,629 $3,395,641 $3,518,101 =====================================

Debt-to-Total Capital Ratio 23.9% 22.6% 22.9%

December 31, March 31, 2004 2005 ------------------------- ASSETS Current Assets Cash and cash equivalents $722,102 $765,842 Investments - available for sale 1,060,000 1,129,760 Premiums receivable, net 118,521 124,041 Amounts receivable under government contracts 129,483 134,447 Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract 173,951 216,740 Other receivables 92,435 82,401 Deferred taxes 98,659 106,150 Other assets 97,163 112,044 ------------------------- Total current assets 2,492,314 2,671,425 Property and equipment, net 184,643 183,176 Goodwill, net 723,595 723,595 Other intangible assets, net 21,855 20,993 Deferred taxes 23,737 24,917 Other noncurrent assets 207,050 163,732 ------------------------- Total Assets $3,653,194 $3,787,838 =========================

LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims and other settlements $1,169,297 $1,155,291 Health care and other costs payable under government contracts 119,219 128,570 IBNR health care costs payable under TRICARE North contract 173,951 216,740 Unearned premiums 139,766 115,859 Accounts payable and other liabilities 258,923 348,068 ------------------------- Total current liabilities 1,861,156 1,964,528 Senior notes payable 397,760 388,981 Other noncurrent liabilities 121,398 126,471 ------------------------- Total Liabilities 2,380,314 2,479,980 -------------------------

Stockholders' Equity Common stock and additional paid-in capital 811,426 834,412 Restricted common stock 7,188 7,859 Unearned compensation (4,110) (4,095) Treasury common stock, at cost (632,926) (632,926) Retained earnings 1,094,380 1,115,728 Accumulated other comprehensive income (loss) (3,078) (13,120) ------------------------- Total Stockholders' Equity 1,272,880 1,307,858 ------------------------- Total Liabilities and Stockholders' Equity $3,653,194 $3,787,838 =========================

Debt-to-Total Capital Ratio 23.8% 22.9%

Health Net, Inc. Condensed Consolidated Statements of Cash Flows (Amounts in thousands)

First Second Third Fourth First Quarter Quarter Quarter Quarter Quarter Ended Ended Ended Ended Ended March 31, June 30, September December March 31, 30, 31, 2004 2004 2004 2004 2005 ------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $15,012 $41,366 $71,855 $(85,629) $21,348 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Amortization and depreciation 10,589 11,030 11,276 11,393 12,417 (Gain) loss on sale of businesses (1,875) - 400 305 - Asset impairments - - - 5,916 - Other changes (898) 1,518 546 2,803 3,189 Changes in assets and liabilities, net of the effects of dispositions: Premiums receivable and unearned premiums (130,211) 24,839 26,356 60,614 (29,427) Other receivables, deferred taxes and other assets 4,718 515 5,140 (96,872) (6,685) Amounts receivable/payable under government contracts (52,787) (24,438) (22,697) (75,423) 4,387 Reserves for claims and other settlements 42,962 (26,416) (52,591) 179,057 (14,006) Accounts payable and other liabilities (42,085) (15,900) 44,267 433 103,928 ------------------------------------------------ Net cash (used in) provided by operating activities (154,575) 12,514 84,552 2,597 95,151 ------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments 125,015 65,320 79,438 12,751 23,090 Maturities of investments 112,345 84,102 30,632 47,171 13,777 Purchases of investments (186,289) (284,446) (22,774) (4,846)(125,650) Purchases of property and equipment (5,853) (10,045) (9,178) (12,870) (10,392) Cash received (paid) from the sale of businesses 11,026 - (400) 486 1,949 Sales and purchases of restricted investments and other (49,279) (84,552) 39,307 48,697 29,246 ------------------------------------------------ Net cash provided by (used in) investing activities 6,965 (229,621) 117,025 91,389 (67,980) ------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 4,785 3,040 6,053 5,213 16,569 Repurchases of common stock (33,264) (3,150) (52,292) - - ------------------------------------------------ Net cash (used in) provided by financing activities (28,479) (110) (46,239) 5,213 16,569 ------------------------------------------------

Net (decrease) increase in cash and cash equivalents (176,089) (217,217) 155,338 99,199 43,740 Cash and cash equivalents, beginning of period 860,871 684,782 467,565 622,903 722,102 ------------------------------------------------ Cash and cash equivalents, end of period $684,782 $467,565 $622,903 $722,102 $765,842 ================================================

Health Net, Inc. Notes to Condensed Consolidated Statements of Operations

Notes: (a) Pretax $1.9 million gain on the sales of our Subacute subsidiaries.

(b) Pretax severance and related benefit costs related to our workforce reduction announced in May 2004.

(c) Pretax $0.4 million additional loss on the sale of our Florida health plan resulting from the stock purchase and reinsurance settlement agreements dated September 30, 2004.

(d) Pretax $0.3 million additional loss on the sale of Denticare and Vision.

(e) Pretax $10.3 million asset impairments and restructuring charges due to the following: $5.9 million asset impairment charge taken on certain investments and fixed assets $2.7 million for severance and related benefit costs related to our workforce reduction announced in May 2004 $1.7 million for lease termination costs

(f) Includes pretax $158 million provider dispute charge and related legal costs of $11 million.

(g) Pretax $67.0 million litigation settlement and restructuring charges due to the following: $65.6 million litigation settlement $1.4 million for severance and related benefit costs related to our workforce reduction announced in May 2004.

(h) Includes $2.2 million of income tax benefit related to the sale of a small subsidiary.

HEALTH NET, INC. Medical Covered Lives at March 31, 2005 (in Thousands) ------------------ ------------------ ------------------ Commercial - Commercial - Commercial Risk Large Group (a) Small Group & Subtotal Individual ------------------ ------------------ ------------------ 03/05 12/04 03/04 03/05 12/04 03/04 03/05 12/04 03/04 ------------------ ------------------ ------------------

Arizona 66 74 70 54 55 52 120 129 122 California 1,113 1,101 1,194 433 459 524 1,546 1,560 1,718 Connecticut 182 192 202 38 41 44 220 233 246 New Jersey 71 98 133 98 111 147 169 210 279 New York 124 144 157 106 108 114 230 252 271 Oregon 103 105 91 34 33 31 137 138 121 ------------------ ------------------ ------------------ Total 1,659 1,714 1,846 763 808 912 2,422 2,523 2,758 ================== ================== ==================

Year over Year (10)% (16)% (12)% Sequential (3)% (6)% (4)% ------------------ ------------------ ------------------

------------------ ------------------ ASO Commercial Subtotal ------------------ ------------------ 03/05 12/04 03/04 03/05 12/04 03/04 ------------------ ------------------

Arizona - - - 120 129 122 California 7 3 3 1,552 1,564 1,721 Connecticut 48 51 52 268 284 298 New Jersey 18 18 18 188 228 297 New York 21 7 7 251 259 277 Oregon 1 1 - 138 139 121 ------------------ ------------------ Total 95 81 79 2,516 2,603 2,837 ================== ==================

Year over Year 20% (11)% Sequential 18% (3)% ------------------ ------------------

------------------ ------------------ ------------------ Medicare Risk Medicaid Health Plan Total ------------------ ------------------ ------------------ 03/05 12/04 03/04 03/05 12/04 03/04 03/05 12/04 03/04 ------------------ ------------------ ------------------

Arizona 32 35 36 - - - 152 164 158 California 93 95 98 696 696 691 2,341 2,355 2,510 Connecticut 27 27 27 93 94 98 388 405 423 New Jersey - - - 42 42 44 229 270 341 New York 6 6 5 - - - 256 265 283 Oregon 12 9 3 - - - 150 148 124 ------------------ ------------------ ------------------ Total 169 171 169 831 831 833 3,517 3,605 3,840 ================== ================== ==================

Year over Year (0)% (0)% (8)% Sequential (1)% (0)% (2)% ------------------ ------------------ ------------------

------ ------ ------ 03/05 12/04 03/04 ------ ------ ------ TRICARE Previous TRICARE Contracts (b) - - 1,477 North Contract (c) 2,941 2,929 - ------ ------ ------ Total TRICARE 2,941 2,929 1,477

(a) Commercial Large Group includes Medicare Supplement (b) Includes only Tricare eligible for which we have health care risk (c) Includes Tricare eligible for which we have health care risk, and those for which we provide Administrative Services Only (ASO), primarily active duty

Health Net, Inc. Reconciliation of Reserve For Claims And Other Settlements (In thousands)

Health Plan Services --------------------------------- Q1 2005 Year 2004 Year 2003 ---------------------------------

Reserve for claims (a), beginning of period $794,614 $777,059 $787,317

Divested health plans (b) - - (5,119)

Incurred claims related to: Current Year 1,329,557 5,048,289 4,487,698 Prior Years (d) (29,555) 8,769 (33,812) --------------------------------- Total Incurred (c) 1,300,002 5,057,058 4,453,886

Paid claims related to: Current Year 757,454 4,286,929 3,738,599 Prior Years 510,213 752,574 720,426 --------------------------------- Total Paid (c) 1,267,667 5,039,503 4,459,025

Reserve for claims (a), end of period 826,949 794,614 777,059 Add: Claims Payable 239,461 288,331 167,361 Other (e) 88,881 86,352 80,130 ---------------------------------

Reserves for claims and other settlements, end of period $1,155,291 $1,169,297 $1,024,550 =================================

(a) Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses. (b) Adjustment for 2003 consists primarily of reductions in reserves for claims resulting from the sales of our dental and vision plans. (c) Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included. (d) The change in "incurred related to prior years" claims was offset by an increase in the "incurred related to current year" claims amount. (e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

Health Net, Inc.(a) Consolidated Statements of Operations (Amounts in thousands, except for earnings per share) ----------- --------- Impact of Selected First Costs Quarter Recorded Ended in the March First 31, Quarter 2004 Ended (Actual) March 31, 2004 ---------------------

REVENUES Health plan services premiums $2,404,355 Government contracts 503,948 Investment income 15,201 Other income 1,248 ----------- --------- Total revenues 2,924,752 - ----------- ---------

EXPENSES Health plan services 2,107,087 (43,479) Government contracts 480,905 General and administrative 231,485 (2,713) Selling 63,577 Depreciation 9,983 Amortization 606 Interest 8,438

Asset impairment and restructuring charges - - Net (gain) loss on sale of businesses and properties (1,875) 1,875 ----------- --------- Total expenses 2,900,206 (44,317) ----------- ---------

Income before income taxes and cumulative effect of a change in accounting principle 24,546 44,317 Income tax provision 9,534

----------- Net income 15,012 ===========

Basic earnings (loss) per share $0.13

Diluted earnings (loss) per share $0.13

Weighted average shares outstanding Basic 112,600 Diluted Shares 114,342

(a) This table represents the company's consolidated statement of operations for the first quarter of 2004 (column 1), and the impact of provider settlement expenses, net prior period reserve developments, and other one-time items to the consolidated statement of operations for the first quarter of 2004 (column 2).

--30--TM/la*

CONTACT: Health Net, Inc. David Olson, 818-676-6978 david.w.olson@healthnet.com or Michael Engelhard 818-676-7620 michael.engelhard@healthnet.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: INSURANCE MEDICAL EARNINGS CONFERENCE CALLS SOURCE: Health Net, Inc.

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