The second quarter 2009 GAAP results include the effect of a $17.6 million pretax charge. The charge consists of $19.6 million comprised primarily of severance and other expenses related to the company's previously announced operations strategy, reduced by a $2.1 million benefit from a litigation reserve true-up.

Excluding the after-tax impact of the charge, net income in the second quarter of 2009 was $50.8million, or $0.49 per diluted share, which was in line with the company's expectations. Net income in the second quarter of 2008 was $80.0 million, or $0.74 per diluted share, excluding the impact of a $13.0 million pretax charge related to the company's operations strategy.

The company's second quarter results also include the impact of approximately $7.9 million in retroactive regulatory fees, assessments and premium taxes relating to its Northeast health plans.

"Our second quarter results show continued progress consistent with the strategy we laid out at our investor day last November. We are particularly pleased with the performance of our Western health plans," said Jay Gellert, president and chief executive officer of Health Net, Inc.

On July 20, 2009, Health Net announced that it had entered into a definitive agreement with UnitedHealthcare for the sale of Health Net's Northeast health plan subsidiaries and membership renewal rights.

Membership

Total health plan enrollment as of June 30, 2009 was approximately 3.6 million members, a decrease of 158,000 members, or 4.2 percent, compared with June 30, 2008. Sequentially, total health plan enrollment increased by 42,000 members, or 1.2 percent, from March 31, 2009.

Total commercial risk enrollment decreased by 180,000 members, or 8.4 percent, to approximately 2.0 million members as of June 30, 2009 compared with June 30, 2008. Sequentially, commercial risk enrollment decreased by 5,000 members, or 0.3 percent, since March 31, 2009.

"We are encouraged that, due to new sales, the commercial membership attrition rate is slowing. However, a weak labor market continues to have an impact on membership," said Jim Woys, Health Net's chief operating officer.

"Our Western region health plans produced commercial new sales of 42,000 members in the second quarter, with 15,000 of these new members in California's more affordable products, including Salud con Health Net, Elect Open Access and narrow network products," Woys added. "Many customers are choosing these more affordable alternatives, especially given the current economic environment. The diversity and flexibility of our products are meeting these needs."

Enrollment in the company's Medicare Advantage plans decreased by 1,000 members, or 0.4percent, to 284,000 members at the end of the second quarter of 2009 compared with the end of the second quarter of 2008. Sequentially, Medicare Advantage membership increased by 2,000 members, or nearly 1.0 percent, from March 31, 2009.

Membership in the company's Medicare PDP plans was 458,000 at the end of the second quarter of 2009, a decrease of 68,000 members, or 12.9 percent, compared with the end of the second quarter of 2008. Sequentially, PDP membership increased by 9,000 members, or 2.0 percent, from March 31, 2009.

Medicaid enrollment at June 30, 2009 was 878,000 members, an increase of 97,000 members, or 12.4 percent, from June 30, 2008. Sequentially, Medicaid membership increased by 36,000 members, or 4.3 percent, from March 31, 2009. Both the quarter-over-quarter and sequential increases in Medicaid enrollment were the result of the economic downturn that causes the Medicaid-eligible population to increase.

Revenues, Health Care Costs and G&A Expenses

Health Net's total revenues increased 4.5 percent in the second quarter of 2009 to $4.0billion from $3.8 billion in the second quarter of 2008. Health plan services premium revenues increased approximately 1.2 percent to approximately $3.2 billion in the second quarter of 2009 compared with $3.1billion in the second quarter of 2008.

The company's Government contracts revenues increased 19.7 percent in the second quarter of 2009 to $832.1 million from $694.9 million in the second quarter of 2008. The increase was the result of Option Period 6 pricing for the company's TRICARE contract. Additionally, Health Net's Military & Family Life Consultant program continued to grow. This program with the Department of Defense is administered by Health Net's behavioral health subsidiary, Managed Health Network, Inc. (MHN).

The health plan services medical care ratio (MCR) was 86.2 percent in the second quarter of 2009 and 85.3 percent in the second quarter of 2008. On an adjusted1 basis, the health plan services MCR in the second quarter of 2009 was 86.3 percent compared with 85.3 percent in the second quarter of 2008.

The commercial MCR was 86.1 percent in the second quarter of 2009 and 84.2 percent in the second quarter of 2008. Excluding the $2.1 million litigation reserve true-up benefit in the second quarter of 2009, the commercial MCR would have been 10 basis points higher than the reported commercial MCR, or 86.2 percent.

Commercial premium yields per member per month (PMPM) increased by 8.0 percent in the second quarter of 2009 compared with the second quarter of 2008.

Total commercial health care costs PMPM increased 10.5 percent in the second quarter of 2009 compared with the second quarter of 2008. Excluding the litigation reserve true-up benefit, total commercial health care costs PMPM would have been 10 basis points higher in the second quarter of 2009, or 10.6 percent.

"Our second quarter 2008 commercial health care costs were restated higher in the second half of last year, and the 2009 second quarter was impacted by H1N1 flu," Woys said. "Taking this into account, we remain on track to produce a positive commercial premium yield and health care cost spread of approximately 50 basis points for the full year of 2009. We continue to maintain pricing discipline, and our underlying commercial health care cost trends are consistent with expectations," said Woys.

Health Net's Medicare plans continued to perform well in the second quarter of 2009. The Medicare Advantage MCR improved by 450 basis points in the second quarter of 2009 compared with the second quarter of 2008.

"We made many adjustments to our benefit packages and premiums in both Medicare Advantage and Part D for 2009, and we are pleased that these changes are producing the desired results," added Woys. "Our Medicare Advantage plans continue to be popular in our core, network-model markets."

The Government contracts cost ratio was 95.1 percent in the second quarter of 2009 compared with 94.7 percent in the second quarter of 2008 and 95.5 percent in the first quarter of 2009. The sequential improvement in the second quarter of 2009 was a result of Option Period 6 pricing on the TRICARE contract and additional volume on the Military & Family Life Consultant contract.

"The Government contracts ratio in the second quarter of 2009 was in line with our expectations," said Woys. "We continue to expect that the Government contracts ratio will be in the 95.0 to 95.5 percent range in 2009."

On a GAAP basis, general and administrative (G&A) expense was $332.2 million in the second quarter of 2009 compared with $297.5 million in the second quarter of 2008. On an adjusted basis1, G&A expense was $312.5 million in the second quarter of 2009 compared with $284.4 million in the second quarter of 2008.

On an adjusted1 basis, Health Net's G&A expense ratio in the second quarter of 2009 increased 80 basis points compared with the second quarter of 2008. "Excluding the impact of the regulatory fees, assessments and premium taxes related to the Northeast business, G&A in the second quarter was consistent with our plans. We continue to expect a G&A expense ratio of 9.6 percent to 9.8 percent in 2009," said Woys.

Health Net's selling expenses of $81.4 million in the second quarter of 2009 decreased by $6.9million compared with the second quarter of 2008, primarily a result of a decrease in commercial membership during the quarter.

Balance Sheet

Cash and investments as of June 30, 2009 were $2.1 billion compared with $2.3 billion as of June30, 2008, and $2.1 billion as of March 31, 2009.

Reserves for claims and other settlements as of June 30, 2009 were $1.2 billion compared with $1.4 billion as of June 30, 2008.

Days claims payable (DCP), including provider and other claims settlements and charges, capitation payments and Medicare Part D expenses, for the second quarter of 2009 decreased by 4.7 days to 43.1 days compared with 47.8 days in the second quarter of 2008, and decreased sequentially by 1.0day compared with the first quarter of 2009.

On an adjusted2 basis, DCP in the second quarter of 2009 decreased by 1.8 days to 54.2days compared with the second quarter of 2008, and decreased by 0.9 days sequentially.

"The small sequential decrease in DCP is the result of an $85.2 million reduction in claims payable during the second quarter of 2009," said Joseph Capezza, Health Net's chief financial officer. "In the context of the Northeast transaction, we reduced claims inventory in the Northeast by 32 percent. We believe that this was a prudent step as we prepare for the transition of the Northeast business to UnitedHealthcare."

The company's debt-to-total capital ratio was 25.2 percent as of June 30, 2009 compared with 27.8 percent as of June 30, 2008 and 26.3 percent as of March 31, 2009.

Cash Flow

Operating cash flow was negative $54.2 million in the second quarter of 2009. This result was driven by an $85.2 million sequential reduction in claims payables due to inventory reductions, certain legal settlements and the payment of provider shared-risk settlements. In addition, the company paid $30million, primarily related to previously recorded charges for severance and other items during the quarter.

"We anticipate receiving approximately $250 million in Part D and Medicare risk adjuster payments in the second half of 2009. We received $100 million of that in July 2009," said Capezza. "Therefore, we continue to believe that operating cash flow for the full year of 2009 will be approximately $325 million to $350 million."

2009 Guidance

Including the impact of $60 million to $70 million in expected operations strategy-related pretax charges in 2009, Health Net continues to expect 2009 full-year GAAP earnings per diluted share of $1.85 to $2.05 based on expected diluted weighted average shares of 104 to 105 million shares. Excluding these charges, the company continues to expect full-year 2009 earnings per diluted share of $2.25 to $2.35.

"Due to retroactive regulatory fees, assessments and premium taxes in the Northeast that were not included in our original plan, we are reducing the upper end of our GAAP and non-GAAP guidance by $0.05 per diluted share," said Capezza.

The company is currently evaluating the impact of the potential sale of the Northeast business on its 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 table on the following page updates previously issued full-year 2009 guidance.

  Metric                                  2009 Guidance                                  Year-end Membership                     Commercial Risk: -- 3% to -- 5%                                                        Medicaid: +6% to +8% (previously +4% to +5%)                                           Medicare Advantage: -- 1% to -- 2%                                                     PDP: -- 15% to -- 20%                          Consolidated Revenues                   $15.5 billion to $16.0 billion                 Commercial Yields                       ~ 7.5% -- 8.0% (previously ~8.0 -- 8.5%)       Commercial Health Care Cost Trends      ~ 7.0% -- 7.5% (previously ~7.5 -- 8.0%)       Selling Cost Ratio                      ~ 2.9%                                         Government Contracts Ratio              ~ 95.0% to 95.5%                               G&A Expense Ratio((a))                  ~ 9.6% to 9.8%                                 Tax Rate((a))                           38.5% to 38.7%                                 Weighted-average Fully                                                                 Diluted Shares Outstanding              104 million to 105 million                     GAAP EPS((b))                           $1.85 to $2.05 (previously $1.85 to $2.10)     Non-GAAP EPS((a))                       $2.25 to $2.35 (previously $2.25 to $2.40)      -------------------------------------------------------------------------------  

(a) Excludes the impact of expected operations strategy-related charges of $60 million to $70 million in 2009.

(b) The company is currently evaluating the impact of the potential sale of the Northeast business on its 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.

Conference Call

As previously announced, Health Net will discuss the company's second quarter 2009 results during a conference call on Tuesday, August 4, 2009, beginning at approximately 11:00 a.m. Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:

         866.393.1637 (Domestic)            800.642.1687 (Replay -- Domestic)               706.643.5711 (International)       706.645.9291 (Replay -- International)    -------------------------------------------------------------------------------  

An access code is required for both the live conference call and the replay. The access code is 17080650. A replay of the conference call will be available through 12.00 a.m. Eastern time on August 9, 2009. A live webcast and replay of the conference call also will be available at www.healthnet.com under "Investor Relations." The conference call webcast is open to all interested parties. 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, 2008, Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, and other reports filed by the company from time to time with the Securities and Exchange Commission.

About Health Net

Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company's health plans and government contracts subsidiaries provide health benefits to approximately 6.7million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net's behavioral health subsidiary, MHN, provides mental health benefits to approximately 6.6 million individuals in all 50 states. The company's subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company's Web site at www.healthnet.com.

Cautionary Statements

All statements in this press release, other than statements of historical information provided herein, may be deemed to be forward-looking statements and as such are subject to a number of risks and uncertainties. These statements are based on management's analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, statements including the words "believes," "anticipates," "plans," "expects," "may," "should," "could," "estimate," "intend" and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, any failure to close the pending sale of our Northeast business; costs, fees and expenses related to the pending sale and proposed post-closing administrative services; potential termination of our TRICARE North operations; rising health care costs; a continued decline in the economy; negative prior period claims reserve developments; investment portfolio impairment charges; volatility in the financial markets; trends in medical care ratios; unexpected utilization patterns or unexpectedly severe or widespread illnesses; membership declines; rate cuts affecting our Medicare or Medicaid businesses; litigation costs; regulatory issues; operational issues; health care reform and general business and market conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors" section included within the company's most recent Annual Report on Form10-K, subsequent quarterly reports on Form 10-Q, and the risks discussed in the company's other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise any of its forward-looking statements to reflect events or circumstances that arise after the date of this release.

Footnotes

1Detailed explanations of the non-GAAP financial measures referred to in this release and reconciliations to the comparable GAAP measures are included in the attached financial tables.

2See footnote (a) in the Notes to Consolidated Financial Statements in the financial schedules attached to this release for a reconciliation of this information to the comparable GAAP financial measure.

  Health Net, Inc.