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Improved Condition

After a difficult 2004 that saw Health Net’s profits fall from$234 million to $42.6 million, the Woodland Hills-based company came back in 2005, retooling its products and raising its rates. In that time, its stock price doubled with earnings jumping to $229.8 million in 2005 amid rumors of the possibility that the company will be acquired. President and CEO Jay Gellert has helmed the company through rough and calm waters and says that during the past year the company has attracted some talented new executives and developed some of its most innovative ideas. Question: How did 2005 turn into a year of recovery for the company? Answer: I think it was just focusing on the basics, improving our product offerings so that they met the needs of consumers. We improved our service operations so that people would have increased confidence in our reliability and responsiveness. We managed our administrative costs better so that we were more efficient in what we did and predicted the cost of care better so that we could effectively offer products that were competitive in the market but also were profitable to us. All along we’ve been serving the military through Tricare and serving Medi-Cal recipients, so as we’ve improved other things we’ve tried not to lose our focus in areas where we’ve already built strengths. Q: You’ve been focusing more on expanding your commercial product lines, how has that gone? A: It’s going well, we’ve really been working on expanding our product offerings. We’ve got a small group product that allows basically every employee to pick what kind of plan they want at a fixed cost for the employer so it really takes choice to a whole new level. We’ve implemented this Decision Power tool that has receive an incredibly favorable response from our members, giving them objective information developed from the best universities so they can think through what kind of service they want in the face of health care crises. What we’ve been able to do is integrate it into our provider network so that it’s supportive of the doctor patient relationship but also enhances the patient’s confidence. We’ve implemented a whole series of products that are targeted toward the Latino community under our Salud Con Health Net Plan. The most recent one, in conjunction with the Mexican consulate, is called MexiPlan which is a cross border product for individuals. Q: How would you describe the company’s current financial situation? A: The overall picture is really good. The really exciting thing that I think we’ve done is that we’ve improved the financial picture by improving the quality of our products and service. Sometimes people improve the financial situation simply by focusing on the financial, but we think improving products and service gives you some momentum into the future, so it’s a pretty exciting time. Our premiums went up, but they’re competitive in the marketplace, so we haven’t done it by taking our rates to a level above the competition, we’ve instead had competitive rates, but unique products offerings. Q: Last year your stock price almost doubled, is that necessarily a good thing? A: I think the key is to operate the company well and let the stock price go where it goes. That’s the way you get long-term shareholder appreciation, if you link it to the quality of your products. I think that year to year gains and losses are a function of a lot of things, but continuous improvement is the key as far as returns to shareholders, so that’s what we’re focused on. It’s a better thing than the stock going down, but in some ways you’d rather have it be the independent variable and have your dependent variable be the way you serve customers, because that’s what you have control over. Q: Are there more mergers ahead in the health care industry’s future, and in Health Net’s future? A: I think that health care is different than a lot of other industries, because it’s a local service. People receive health care in their area, it’s not a mass product. You don’t sell the same thing in Boston that you sell here. I think that consolidation for its own sake is not going to be all that valuable in the health care industry. I think where there are opportunities to merge strengths in health care companies so that you do everything better, that’s a good thing. I think that it will be more situational than just a general trend. Q: Why was the acquisition of Universal Care a good fit for Health Net? A: We worked a lot with them in terms of Medi-Cal, and we knew them and it was a good opportunity, I think, for them to continue to do what they wanted which was to run their clinics and their direct service and allow us to integrate the insurance part, which we’ve worked together on for quite a long time, into our operation. I think it was one of those cases where we had history, a good working relationship and a nice opportunity for both of us. They had a strong Medicare and Medi-Cal base, and then some commercial business in some parts of L.A. where we weren’t as strong. Q: Health Net has been the subject of speculation as a possible target of acquisition, can you comment on that? A: I think there’s been speculation about everyone in the industry, so I think it’s a fact of life. Our view is that with our recent performance and with our opportunities, that’s where we should focus our efforts. No one’s ever served a customer better by thinking about consolidation. There’s a lot of speculation but the good thing is that it’s been going on so consistently that I don’t think anyone takes any of it seriously. Q: Can you say whether you’re in merger discussions? A: We wouldn’t be commenting on that if it were the case? Q: Health Net unveiled a national advertising campaign in recent months, why did you pick now? A: Everybody that’s good at advertising tells you that the key to it is to have the products to back it up. It was a statement of confidence, that we really have something to offer. It’s worked, as we’ve gotten it out into the public and people have tried it. They really like what we have to offer. We wanted to do that when we knew we could deliver. There’s so much out there that if you can’t back up what you say it isn’t worth doing. Q: What would you like to be able to say about Health Net at the end of the year? A: I think that we want to continue our progress, continue some of the success of the new products we’re offering, we want to see growth in our business. We want to see continued, solid earnings and then on top of that what we’re really excited about is giving small businesses more choices so that small business people around here have good health care alternatives. We want to build on some of the specific segments we’ve worked on like the Salud segment and the individual products we’ve been offering and continue to expand on what we’ve been doing with Medi-Cal and Healthy Families and with the Department of Defense. We also want to introduce some of the things we’ve been doing in California to the East Coast, and then work as an overall force to be a responsible citizen and improve the quality of life in general in California and in L.A. and be someone who recognizes that we live in L.A. There aren’t many large companies that live in LA, and that means we have an opportunity and responsibility to give something back to the city. Q: You mentioned small business, there are some that worry about the sustainability of employer-based health care. How big is that issue? A: I think that it really will depend a lot on what happens over the next five years, but if you look at what happened recently in Massachusetts (the state legislature recently passed a bill that would require all residents to purchase health insurance), that whole reform is built around employer-based health coverage. With Massachusetts being the last point of innovation I think we’ll see strategies based around employer-based health insurance rather than based around the alternative. I don’t see anything that’s been better in the non-employer based model so I kind of think we’re going to have to strengthen the system and make it work better, but I think there’s a real model to do that. Q: Do you think California could pass health care legislation similar to what Massachusetts has come up with? A: The one big difference between Massachusetts and here is that Massachusetts has historically had a higher level of federal dollars in health care. It’s had broader expenditures in Medicaid and Medicare and I think that’s an issue California is going to have to confront. If we can make some progress there, which I believe we can, then I think it will open the door to some reform. If you look at the major problems in California, health care is probably the most solvable one. I think that over the next two to three years we’re going to see the various interests coming together to try and solve it because I think it’s within our reach. I’d rather tackle health care than something like gas prices or the education system. Jay Gellert Title: President and Chief Executive Officer, Health Net Inc. Born: 1954, Brooklyn Education: Stanford University, Bachelor of Arts in Political Science, 1975. Most Admired Person: I think we’ve all come to admire my dad, Irving Gellert. He just turned 89, he’s in great mental and physical shape. He’s got a wonderfully healthy view of the world and inspires many of us. Career Turning Point: I think it’s yet to come. Once you turn, you don’t learn anymore, and I think that’s a dangerous point, so you have to strive to view everyday as a turning point and keep having that insatiable openness.

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