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Health Net, Inc. (NYSE:HNT)

Annual Shareholder Meeting Call

May 22, 2012 13:00 ET

Executives

Roger Greaves – Chairman

Angelee Bouchard – Senior Vice President, General Counsel, and Corporate Secretary

Jay Gellert – President and Chief Executive Officer

Roger Greaves – Chairman

Good morning, ladies and gentlemen. It’s my pleasure to welcome you to the 2012 Annual Meeting of the Stockholders of Health Net Incorporated. I am Roger F. Greaves, Chairman of the Board of Directors of Health Net, I’ll act as Chairman of this meeting and Angelee Bouchard, Senior Vice President, General Counsel and Secretary will act as Secretary. I’ve been advised that a quorum is present and it’s now 10 O’clock Pacific Time and in accordance with the notice of the meeting, Health Net’s 2012 Annual Meeting of Stockholders is now called to order. If you are attending this meeting in person, please make sure you’ve signed in.

Before we begin with the formalities of the meeting, I’d like to introduce Jay Gellert, our President and CEO. Jay is also a Director of the company. Jay? I’d also like to introduce the other members of the company’s Board of Directors who are here with us today. Please stand as you are introduced or wave your hand, Mary Anne Citrino, Theodore Craver, Vicki Escarra, Gale Fitzgerald, Patrick Foley, Bruce Willison, and Frederick Yeager.

Biographies and other information about each of our Directors including myself are included in the proxy statement that was mailed to our stockholders. Representatives from the accounting firm of Deloitte & Touche are also present at our meeting today. Deloitte & Touche has been selected as our independent register public accounting firm for 2012 and their selection is being submitted to our stockholders for ratification of this meeting.

Now, we’ll turn the formal business of the annual meeting and both on the items presented in the proxy statement. After the polls are closed and while the board is being counted, Mr. Gellert will make some brief remarks about the company. At the conclusion of that report, boarding results we announced, we will then adjourn meeting and answer your questions.

I’ll now turn the podium over to Ms. Bouchard. Angelee, it's all yours.

Angelee Bouchard – Senior Vice President, General Counsel, and Corporate Secretary

Thank you, Roger. As you entered the meeting this morning, you should have received the copy of the agenda and the rules of conduct for this meeting. For each of you attending through the internet, the agenda and the rules of conduct are available on our website. We will conduct the meeting in accordance with the agenda and these rules to assure the meeting proceed in a fair, orderly, incredulous manner. There is time reserve for your questions and the reverse side of the agenda describes the procedures for the designated Q&A period at the meeting.

If you are attending a meeting in person, please hold your questions until the designated time. If you are attending the meeting via the internet, please follow the instructions on our website to submit your questions at the appropriate time. I’ll now briefly review certain procedural matters regarding organization of the meeting. We commenced mailing the notice of this meeting in proxy statement on or about April 6, 2012 to our stockholders record as of the close of business on March 28, 2012. Wells Fargo’s affidavit of the mailing will be filled with the records of this meeting.

Let’s the stockholders are entitled to vote at this meeting has been available to the past 10 days and is available at this meeting for examination by any stockholders. Martin Knapp of Wells Fargo Shareowner Services, the company’s transfer agent and registrar has been appointed to act as inspector of election for today’s meeting. Mr. Knapp’s oath as the inspector of election will be filed with the records of this meeting.

Mr. Knapp has informed us that they are present in person or by proxy at this meeting. Stockholders holding an aggregate of 78,810,997 shares of common stock, representing 94% of the outstanding shares of the common stock of the company entitled to vote at the meeting. Accordingly, a quorum is present at the 2012 Annual Meeting and it is duly properly and convened. The matters to be act as upon at this meeting are the three items listed in the company's proxy statement. The election of directors, the ratification of the selection of the Deloitte & Touche as the company's Independent Registered Public Accounting Firm for the year ending December 31, 2012 and the advisory vote on the compensation of the company's named executive officers.

The company has not received advance written notice of any other matters for consideration is required by the company's bylaws, so no other matters will be considered. We will now proceed with the opening of the polls and the votes. If you would like to vote by ballot at this meeting, please motion for one of our attendants to hand you a ballot. If you have already returned your proxy, submitted a proxy via the Internet, or telephone, or plan to hand in your proxy today, you do not need a ballot unless you wish to change your votes. Should anyone need a ballot? Okay.

So, now we move to the proposals. The first item to be considered is the election of nine director nominees as described in Proposal 1 of our proxy statement. If elected, each director will be elected to a one-year term or until the 2013 Annual Meeting of Stockholders. The following directors are standing for elections Ms. Citrino, Ms. Escarra, Ms. Fitzgerald, and Mr. Craver, Foley, Gellert, Greaves, Willison and Yeager.

The company's Board of Directors has recommended to the stockholders about four each of these nominees. The company has not received written notice of additional nominees in accordance of the procedures set forth in the company's bylaws. Therefore, no further nominations maybe made at this time and I declare the nominations closed. Are there any questions relating to this proposal? Okay. There are no questions. Discussion is closed.

Moving on to Proposal 2, the second item to be voted on is the ratification of the board selection of the Deloitte & Touche as our Independent Registered Public Accounting Firm for 2012 as described in Proposal 2 in the proxy statement. As Deloitte & Touche has served in this capacity since June of 1994, the company's Board of Directors has recommended a stockholders vote for this proposal, are there any questions? So, there are no questions. Discussion has been closed.

Moving on to Proposal 3, the third item to be voted on is an advisory, non-binding vote to approve the 2011 compensation of our named executive officers as described in Proposal 3 in the proxy statement. The company's Board of Directors has recommended stockholders' vote for this proposal. Are there any questions relating to this proposal? Okay, since there are no questions, discussion is closed.

And since there were no ballots distributed, all stockholders have had an opportunity to vote and I declare the poll closed. The ballots and proxies will be held in the possession of the inspector of election. The inspector of election will now tally the votes. And at this time, I'd like to invite Jay Gellert to the podium to share some remarks with respect to the company's recent progress. Jay?

Jay Gellert – President and Chief Executive Officer

Thank you, Angelee and welcome. We began 2012 with some issues. The key issue we faced was that we had prior period commercial development of about $67 million which took down our first quarter earnings and reduced the base from which we began 2012. We adjusted our earnings guidance to reflect that. We are presently in the process of completing a comprehensive review of all of the issues related to it. The guidance we gave was based on our initial look. We will continue that process (indiscernible) to report by our 2Q call. These events focused on our commercial business.

In the other areas of our business, we continue to show progress and strength. We completed the sanction process with regard to CMS and we've seen significant enrollment growth and improving margins in our MA program. Our Medicaid business remained stable and growing and we were recently awarded a number of additional counties and we have made the transition to the new TRICARE contract and our government contracts programs are performing as expected.

We completed on April 1st the sale of our CVS of our PDP business to CVS Caremark. That provided us with approximately $120 million of net cash, that we'll receive over the next couple of quarters. It also allowed us to enter into a new pharmacy agreement for our remaining business, which will positively impact our healthcare costs through the balance of '12 and beyond. We continue to expect improvement in our government contracts performing. The first quarter represents really the final quarter of transition and we are now going forward under the new contract and we haven’t changed our Medicaid or Medicare guidance from before.

We expect 2012 operating cash flow to be equal to net income plus depreciation and amortization. We entered 2012 with the very strong balance sheet. We have tangible net equity of about $1.2 billion. So, we are in a strong position in terms of necessary reserves for regulatory capital. We also have ample deployable capital. We anticipate that at the end of the year I am assuming no share of purchase will have about $0.25 billion of cash impairment. We expect continued growth in that as we move into 2013, which is important, because there will be demand on the capital side for the dual programs forthcoming.

Our long-term view is that the business though its pass-through a difficult patch continues to perform in our curative emphasis. Our tailored networks continue to perform strongly. Our commercial issues really are vested in the old business, which we had – which is the full network business and we continue to see strong performance in the new tailored networks, which presently represents about 35% of our business. Of the non-Kaiser companies in the industry we are probably at the highest in terms of those tailored network products.

We saw dedicated growth beyond what we expected as we emerged from sanctions and we expect to see that continuing on an ongoing basis. And despite all of the woes of the State of California, we've been able to show stability in our basic Medicaid programs. One of the most exciting opportunities ahead of us is the dual-eligible demonstration policy. We've been selected for two counties, I mean, California, actually the two of the largest ones, LA and San Diego County. We have opportunities in other counties that we presently do Medicaid over the longer haul.

The LA County dual-eligible demonstration project is the largest in the country. LA County has the most dual eligibles of any county. In the country, it actually has about 5% of all the dual eligibles in United States. This is an opportunity long overdue to really take two different programs that don’t provide a continuity of care to people most of the needs and actually build a program that really works both from a financial standpoint and a service standpoint. And we've been amazed by the amount of community interest and support for the development of this.

We also have continued opportunities on the TRICARE side. Our existing contract – and we are the only company in the new phase contract. It's anticipated the other regions will transition in 2013. We see additional opportunities on the DoD healthcare side. As we have said before, DoD in VA only have about one-fifth of their medical services I am contracted out. So, we see as the federal government faces more and more financial problems, there will be more and more opportunities in that sphere. So, between the duals and TRICARE with Medicaid expansion forthcoming and the additional counties we are receiving with a consistency on the Medicare side and growth in our tailored networks, I think our strategy is intact for the long-haul.

We need to make sure that we regain the trust of investors in terms of our performance. We need to deal with the issues we faced this year and give a clear and final reporting kind of where we are as we deal with Q2. We are going through that kind of a process now, but we don’t think it will diminish our capacity to grow and pursue the objectives that we have articulated up to this point. Our strong balance sheet also gives us confidence as we look to the future.

So, with that, I’ll stop and answer questions that people have regarding our present situation in our circumstances.

Question-and-Answer Session

Unidentified Analyst

Questions for Jay, either from the audience here or the internet, evidently you have answered all the questions. Jay, thank you very much. If during the conclusion you’d like to ask a question just step up to the microphone or ask over the internet according to what’s looked at on the website where the instructions appear. Well, it looks like, there are no questions. So, Angelee, I am going to turn the meeting back to you, you can tell us about the vote.

Angelee Bouchard – Senior Vice President, General Counsel, and Corporate Secretary

Alright, thank you Roger. I have been advised that the inspector of election has completed the preliminary vote count and has reported that there were sufficient votes in favor of Proposals 1, 2, and 3. And I hereby declare that all nine nominees for director have been elected, the selection of Deloitte & Touche for 2012 has been ratified and the compensation of our named executive officers to 2011 has been approved on an advisory and non-binding basis.

The inspector of election will make a final report that will be included in part of the record of this meeting. The final voting results will be included in a Form 8-K to be filed with the Securities and Exchange Commission. I will now turn the program back to you, Roger.

Jay Gellert – President and Chief Executive Officer

Okay. Again, thank you Angelee. Well, this concludes the formal business of the meeting and I'd like to thank all of you for attending. The meeting is now officially adjourned. Thank you very much for joining us for the 2012 Annual Meeting of the Stockholders of Health Net, Incorporated and we look forward to seeing all of you again next year. Good day.

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