8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):August 4, 2003

HEALTH NET, INC.
(Exact Name of Registrant as Specified in Charter)

Delaware	1-12718	95-4288333
(State or other Jurisdiction of	(Commission File Number)	(IRS Employer
Incorporation)		Identification No.)

21650 Oxnard Street
Woodland Hills, California 91367
(Address of Principal Executive Offices) (Zip Code)

(818) 676-6000
(Registrant’s telephone number, including area code)

Item 12.          Results of Operation and Financial Condition

On August 4, 2003, Health Net, Inc. (the “Company”) issued a press release announcing its earnings for the quarter ended June 30, 2003.  The press release is attached hereto as Exhibit 99.1.  On August 5, 2003, the Company held a conference call to discuss its earnings for the quarter ended June 30, 2003.  A transcript of the conference call is attached hereto as Exhibit 99.2.

The information furnished pursuant to this Current Report on Form 8-K (including the exhibits hereto) shall not be considered “filed” under the Securities Exchange Act of 1934, as amended, nor shall it be incorporated by reference into future filings by the Company under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, unless the Company expressly sets forth in such future filing that such information is to be considered “filed” or incorporated by reference therein.

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 hereunto duly authorized.

Date:  August 6, 2003

HEALTH NET, INC.
By:	/s/ B. Curtis Westen
	B. Curtis Westen
	Senior Vice President, General Counsel
	and Secretary

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release of Health Net, Inc. dated August 4, 2003
99.2	Transcript of a conference call held on August 5, 2003 to discuss Health Net, Inc's earnings for the quarter ended June 30, 2003.

EX-99.1

Exhibit 99.1

Media Contact:     Lisa Haines

818.676.7912

lisa.j.haines@health.net

Investor Contact: David Olson

818.676.6978

david.w.olson@health.net

HEALTH NET’S SECOND QUARTER EPS

CLIMBS 24 PERCENT TO $.63 PER DILUTED SHARE

Commercial Enrollment Growth in CA and NY, Solid Health Plan and
TRICARE Performance Highlight Results

                LOS ANGELES, August 4, 2003 — Health Net, Inc. (NYSE:HNT) today announced that 2003 second quarter earnings per diluted share climbed 24 percent to $.63, compared with $.51 per diluted share in the second quarter of 2002.

Health Net reported net income of $74,535,000 in the second quarter of 2003, an increase of 15 percent over net income of $64,735,000 in the second quarter of 2002.

Highlights of the second quarter of 2003 included:

•Total Health Plan enrollment increased by 50,000 members compared to the first quarter of 2003, driven by the addition of 32,000 small group members primarily in

California and New York.  Excluding the loss of CalPERS membership on January 1, 2003, Health Plan enrollment has increased by 154,000 members since the second quarter of 2002;

•The company’s margin on Earnings Before Interest Expense, Taxes, Depreciation, Amortization, Net Investment Income and Asset impairment and restructuring charges (EBITDA) improved 18 basis points to 4.7 percent compared with the second quarter of 2002.  Pretax income margin was 4.3 percent for the second quarter of 2003, a 41 basis point improvement compared with the second quarter of 2002.  A reconciliation of EBITDA margin to pretax margin calculated under GAAP is presented in a reconciliation table at the end of this news release;

•Operating cash flow of $29,944,000, an increase of $47,864,000 compared with the second quarter of 2002.  The company generated $111,767,000 of operating cash flow in the first half of 2003 compared with a use of cash from operating activities of $51,092,000 in the first half of 2002;

•A Health Plan Medical Care Ratio (MCR) of 83.6 percent, an improvement of 44 basis points compared to the second quarter of 2002, as Health Net continued to price its Health Plan products conservatively;

•An Administrative Ratio of 10.3 percent for the period, in line with the same period last year and a 33 basis point improvement over the first quarter of 2003;

•A Debt-to-Total Capital ratio of 23.1 percent, down from 28.3 percent at the end of the second quarter of 2002 and below the company’s stated target of 30 percent;

•Return on Equity (ROE) of 22.5 percent compared to 19.7 percent reported in the second quarter of 2002, exceeding the company’s 20 percent target for the fourth

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consecutive quarter.  A table showing the calculation of ROE by using adjusted net income, which excludes asset impairment and restructuring charges, and reported equity, is presented at the end of this news release;

•The repurchase of an additional 2,421,055 shares of the company’s common stock.  The company  has repurchased 12,569,255 shares through June 30, 2003 under the stock repurchase program announced on May 2, 2002; and

•Days claims payable increased by 1.3 days from the second quarter of 2002 to 53.1 days.  Reserves for claims and other settlements was $1,089,717,000 as of June 30, 2003, an increase of $103,705,000 compared with the end of 2002’s second quarter.

“Our current success is a result of building enrollment in attractive markets, a consistent G&A ratio as we implement our Health One initiatives and overall strong financial performance,” said Jay Gellert, president and chief executive officer of Health Net.

“We are especially pleased with the strong commercial enrollment growth in California.  New York’s growth was aided by favorable competitive circumstances,” Gellert added.

Revenues

Health Net’s total revenues rose 9.8 percent in the second quarter of 2003 to $2,752,302,000 from $2,505,964,000 in the second quarter of 2002.  Health plan services revenue climbed 7.3 percent to $2,259,867,000 compared to $2,106,110,000 in the second quarter of 2002, as a result of higher commercial, Medicare and Medicaid premium yields across the company’s health plans.

The overall premium yield per member per month (PMPM) in the second quarter of 2003 rose 8.7 percent compared to the same period in 2002.  The PMPM premium yield on commercial rose by 13.2 percent compared to the second quarter of 2002.

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Overall, commercial enrollment declined by 1.8 percent in the second quarter of 2003 compared to the same period in 2002, primarily due to Health Net’s January 1, 2003 exit from the CalPERS account that resulted in the loss of more than 175,000 members.  Excluding the impact of CalPERS, California commercial enrollment grew by 158,000 members.  Overall commercial enrollment grew by 5.0 percent compared to the second quarter of 2002, excluding the impact of CalPERS.  The majority of the overall commercial growth came in the small group market that grew by a robust 17.8 percent compared with the second quarter of 2002.  New products and improved broker relationships continue to fuel this growth.

“We continue to believe that small group and mid-market offer excellent opportunities going forward,” Gellert commented.

In the second quarter of 2003, Health Net’s Government contracts revenue rose 26.3 percent from the second quarter of 2002, reaching $465,727,000.  This significant rise was largely due to the effects on the TRICARE program from the nation’s heightened military activity.  The company noted that an increased number of TRICARE enrollees sought care in the private sector as many military health care professionals continue to be deployed abroad.  As more care is provided in the private sector, contract costs and revenues rise.

“We are proud of our participation in the TRICARE program and the comfort it provides to our troops overseas by ensuring their families here get the care they need,” Gellert said.

Other income decreased by $3,172,000 compared to the second quarter of 2002, primarily due to the sale of a claims processing subsidiary in the second quarter of 2002.

In the second quarter of 2003, net investment income was $14,004,000, a decrease of $1,314,000 from the comparable prior year quarter, primarily due to the lower interest rate environment in 2003 compared to 2002.

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Health Care Costs

Overall PMPM health plan health care costs rose by 8.1 percent in the second quarter of 2003 compared to the second quarter of 2002.  Commercial health care PMPM costs rose 12.4 percent compared with the prior year period.

Continuing 2002’s favorable trends, the health plan MCR for the second quarter of 2003 improved by 44 basis points from the second quarter of 2002 to 83.6 percent.

                “We believe that our commercial pricing discipline and moderating health care cost trends are contributing to consistent and predictable MCR trends,” Gellert explained.

Government Contracts Costs

The Government contracts cost ratio, at 95.2 percent, improved by 157 basis points compared to the second quarter of 2002.  The improved performance was the result of higher pricing on new option periods and higher change order volume.

Administrative Expenses

                In the second quarter of 2003, Health Net’s administrative ratio (G&A plus depreciation) remained flat at 10.3 percent compared to the comparable prior year quarter.  Compared to the first quarter of 2003, the administrative ratio improved by 33 basis points from 10.6 percent.  Total general, administrative and depreciation expenses were $234,430,000 in the period.  Spending on operational and systems consolidation projects continued and is expected to continue for the balance of 2003.

“Our Health Net One project is approximately halfway complete and we are encouraged that we are on schedule and on budget with this vital effort,” Gellert commented.

                Health Net’s selling expenses increased by $10,112,000 to $56,800,000 in the second quarter of 2003 compared to $46,688,000 in the same period in 2002, resulting in a selling cost

5

ratio of 2.5 percent, a 30 basis point increase over the same period last year.  Strong growth in broker-driven segments such as small group drove this ratio higher.

Balance Sheet Highlights

Health Net’s balance sheet continued to strengthen in the second quarter of 2003, as it has consistently over the past several years.

Cash and investments as of June 30, 2003 were $1,743,697,000 compared with $1,777,258,000 as of March 31, 2003.  Continued share repurchase activity and a delayed Medi-Cal payment in June were the primary reasons for the decrease of cash and investments in the second quarter ended June 30, 2003.

The TRICARE receivable decreased by $49,823,000 from the end of the first quarter of 2003 to $92,982,000 as of June 30, 2003.  “We are pleased with the improvement in the receivable in the quarter.  We expect the receivable to increase back into the $100 - $125 million range in the third quarter,” Gellert added.

Debt remained essentially unchanged from the first quarter of 2003, and down by $120,000,000 from June 30, 2002, as the company reduced the outstanding balance on its revolving debt to zero in the third quarter of 2002.  The debt-to-total capital ratio was 23.1 percent at the end of the second quarter of 2003, well below the company’s target of 30 percent.  The debt-to-total capital ratio at the end of the second quarter of 2002 was 28.3 percent.

Reserves for claims and other settlements increased by $103,705,000 as of the end of the second quarter of 2003 versus the end of the second quarter of 2002.  Compared to the second quarter of 2002, days claims payable increased by 1.3 days, ending the quarter at 53.1 days.  The company believes that it is reserving at appropriate levels.

6

“We believe our reserves are consistent with our goal of accuracy and moderate conservatism,” Gellert said.

Cash Flow Strong

Cash flow from operations in the second quarter of 2003 was $29,944,000 compared to negative cash flow of $17,920,000 in the second quarter of 2002, representing an increase of $47,864,000.  This increase was achieved despite the company not receiving the June 2003 Medicaid payment of $46 million from the state of California until July.

“Strong cash flow has been a hallmark of our performance in recent years, and we expect it to continue,” Gellert noted.

Health Net repurchased 2,421,055 shares of its common stock in the second quarter of 2003.  Since the May 2002 inception of its $250 million stock repurchase program (net of exercise proceeds and tax benefits from the exercise of employee stock options), Health Net has repurchased 12,569,255 shares at an average price of $25.31 through June 30, 2003.  As of June 30, 2003, the company had $27 million remaining of its current repurchase authority.

“We believe that share repurchase is one of the best possible uses of cash flow, “ Gellert added.

Outlook

Based on currently available information, Health Net expects its improving performance to continue throughout 2003.  Accordingly, the company believes that earnings for the full year of 2003 in a range between $2.63 to $2.67 per share is reasonable based on currently available information.  The company had previously issued guidance for a range of between $2.56 and $2.60 per share for 2003.

7

The company further expects quarterly earnings improvement throughout 2003.  This improvement will be consistent with the company’s overall guidance for the full year and with the expectation of increasing quarterly percentage gains in earnings per share in each of the third and fourth quarters of 2003 when compared with the same quarters in 2002.

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 risks and uncertainties.  All statements other than statements of historical information provided herein may be deemed to be forward-looking statements.  Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements.  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 “Cautionary Statements” 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, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof.  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.

As previously announced, Health Net will discuss the company’s second quarter results during a conference call with investors on Tuesday, August 5, 2003, at approximately 11:00 a.m. EDT.  To listen to the call, please dial 719.457.2649, code 788420.  A live webcast and replay of the conference call will also be available at www.health.net.  The conference call webcast is open

8

to all interested parties.  A replay of the conference call will be available following the call on Tuesday, August 5 through Friday, August 8, 2003, by dialing 719.457.0820, code 788420.

Health Net, Inc. is one of 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, insured PPO and government contracts subsidiaries provide health benefits to approximately 5.3 million individuals in 15 states through group, individual, Medicare, Medicaid and TRICARE programs.  Health Net’s subsidiaries also offer managed health care products related to behavioral health, dental, vision 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.health.net.

#              #              #

[seven pages of tables follow]

9

Health Net, Inc.

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share data)

	Second Quarter				Third Quarter			Fourth Quarter			First Quarter			Second Quarter
	Ended				Ended			Ended			Ended			Ended
	June 30,				September 30,			December 31,			March 31,			June 30,
REVENUES:	2002				2002			2002			2003			2003
Health plan services premiums	$		2,106,110		$	2,172,607		$	2,215,384		$	2,234,568		$	2,259,867
Government contracts	368,660				377,439			403,088			453,556			465,727
Net investment income	15,318				18,214			16,457			13,075			14,004
Other income	15,876				9,390			13,182			11,822			12,704
Total revenues	2,505,964				2,577,650			2,648,111			2,713,021			2,752,302
EXPENSES:
Health plan services	1,769,753				1,799,629			1,841,235			1,861,190			1,888,966
Government contracts	356,885				366,873			387,629			437,542			443,549
General and administrative	204,484				212,446			225,095			224,163			219,977
Selling	46,688				50,843			54,209			54,636			56,800
Depreciation	15,132				17,154			16,068			15,011			14,453
Amortization	2,847				1,734			993			669			669
Interest	10,338				9,837			9,862			9,762			9,769
	2,406,127				2,458,516			2,535,091			2,602,973			2,634,183
Asset impairment and restructuring charges	-				12,167		(b)	48,170		(d)	-			-
Net loss on assets held for sale and sale of businesses	2,600			(a)	2,400		(c)	-			-			-
Total expenses	2,408,727				2,473,083			2,583,261			2,602,973			2,634,183
Income before income taxes	97,237				104,567			64,850			110,048			118,119
Income tax provision	32,502				35,543			19,797			41,819			43,584
Net income	$	64,735			$	69,024		$	45,053		$	68,229		$	74,535
Basic and diluted earnings per share:
Basic	$	0.52			$	0.55		$	0.37		$	0.57		$	0.64
Diluted	$	0.51			$	0.55		$	0.36		$	0.57		$	0.63
Diluted earnings per share before other items:
Income from operations - Diluted	$	0.51			$	0.55		$	0.36		$	0.57		$	0.63
Asset impairment and restructuring charges	-				0.06		(b)	0.24		(d)	-			-
Net loss on assets held for sale and sale of businesses	0.01			(a)	0.01		(c)	-			-			-
Net income before other items	$	0.52			$	0.62		$	0.60		$	0.57		$	0.63
Weighted average shares outstanding:
Basic	125,620				124,963			122,444			118,972			116,446
Diluted	127,800				126,091			123,999			120,577			118,631
Ratios:
Health plan services MCR	84.0			%	82.8		%	83.1		%	83.3		%	83.6		%
Government contracts cost ratio	96.8			%	97.2		%	96.2		%	96.5		%	95.2		%
Administrative ratio ((G&A+Dep) / (HP serv rev + Other income))	10.3			%	10.5		%	10.8		%	10.6		%	10.3		%
Selling costs ratio (Selling costs / HP serv rev)	2.2			%	2.3		%	2.4		%	2.4		%	2.5		%
Days claims payable	51.8				52.8			52.8			52.0			53.1

10

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands)

	June 30,				September 30,			December 31,			March 31,			June 30,
	2002				2002			2002			2003			2003
ASSETS
Current Assets
Cash and cash equivalents	$	672,978			$	827,036		$	841,164		$	869,340		$	788,296
Investments - available for sale	953,591				930,065			1,008,975			907,918			955,401
Premiums receivable, net	167,929				142,737			166,068			130,325			184,239
Amounts receivable under government contracts	128,653				106,291			78,404			142,805			92,982
Reinsurance and other receivables	113,504				100,245			108,147			104,242			114,327
Deferred taxes	74,092				78,319			78,270			77,469			77,314
Other assets	97,099				99,462			91,376			78,103			95,654
Total current assets	2,207,846				2,284,155			2,372,404			2,310,202			2,308,213
Property and equipment, net	253,405				242,705			199,218			197,823			198,502
Goodwill, net	762,360				762,066			762,066			762,066			762,066
Other intangible assets, net	24,942				23,269			22,339			21,734			21,129
Deferred taxes	18,627				-			-			-			-
Other noncurrent assets	139,689				126,953			110,650			163,933			157,387
Total Assets	$	3,406,869			$	3,439,148		$	3,466,677		$	3,455,758		$	3,447,297
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements	$		986,012		$	1,077,923		$	1,036,105		$	1,114,687		$	1,089,717
Health care and other costs payable under government contracts	203,741				227,666			224,235			235,758			236,935
Unearned premiums	63,830				62,550			178,120			79,622			73,905
Accounts payable and other liabilities	272,636				268,702			263,590			273,008			264,186
Total current liabilities	1,526,219				1,636,841			1,702,050			1,703,075			1,664,743
Revolving credit facility and capital leases	120,000				-			-			-			-
Senior notes payable	398,750				398,785			398,821			398,856			398,892
Deferred taxes	-				10,886			9,705			8,513			8,618
Other noncurrent liabilities	47,447				46,677			47,052			48,491			49,000
Total Liabilities	2,092,416				2,093,189			2,157,628			2,158,935			2,121,253
Stockholders' Equity
Common stock and additional paid-in capital	720,642				724,235			730,626			740,296			760,430
Restricted common stock	1,034				1,913			1,913			5,070			6,229
Unearned compensation	(914			)	(1,672		)	(1,441		)	(4,617		)	(5,278		)
Treasury Class A common stock, at cost	(124,201			)	(172,072		)	(259,513		)	(347,825		)	(413,918		)
Retained earnings	712,302				781,326			826,379			894,608			969,143
Accumulated other comprehensive income	5,590				12,229			11,085			9,291			9,438
Total Stockholders' Equity	1,314,453				1,345,959			1,309,049			1,296,823			1,326,044
Total Liabilities and Stockholders' Equity	$		3,406,869		$	3,439,148		$	3,466,677		$	3,455,758		$	3,447,297
Debt-to-Total Capital Ratio	28.3			%	22.9		%	23.4		%	23.5		%	23.1		%

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Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

	Second Quarter			Third Quarter			Fourth Quarter			First Quarter			Second Quarter
	Ended			Ended			Ended			Ended			Ended
	June 30,			September  30,			December 31,			March 31,			June 30,
	2002			2002			2002			2003			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	64,735		$	69,024		$	45,053		$	68,229		$	74,535
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation	17,979			18,888			17,061			15,680			15,122
Loss on assets held for sale and sale of businesses	2,600			2,400			-			-			-
Asset impairments	-			10,647			48,170			-			-
Other changes	3,210			(2,842		)	(1,350		)	1,675			1,842
Changes in assets and liabilities, net of the effects of dispositions:
Premiums receivable	(25		)	25,192			(23,331		)	35,743			(53,914		)
Unearned premiums	(6,867		)	(825		)	115,570			(98,498		)	(5,717		)
Other assets	(12,854		)	34,010			(820		)	18,737			(27,657		)
Amounts receivable/payable under government contracts	(40,084		)	46,287			24,456			(52,878		)	51,000
Reserves for claims and other settlements	(40,980		)	91,911			(41,401		)	78,582			(24,451		)
Accounts payable and other liabilities	(5,634		)	(6,136		)	(849		)	14,553			(816		)
Net cash (used in) provided by operating activities	(17,920		)	288,556			182,559			81,823			29,944
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments	19,502			163,462			107,653			27,520			107,591
Maturities of investments	88,998			106,853			90,358			193,664			113,105
Purchases of investments	(93,824		)	(216,235		)	(275,483		)	(161,339		)	(249,283		)
Net purchases of property and equipment	(16,021		)	(8,563		)	(8,777		)	(13,529		)	(15,060		)
Cash paid from the sale of businesses, net of cash received	-			(5,474		)	-			-			-
Restricted investments and other activity	(1,337		)	(11,875		)	(1,964		)	(16,526		)	(14,317		)
Net cash (used in) provided by investing activities	(2,682		)	28,168			(88,213		)	29,790			(57,964		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases	33,834			3,140			5,478			6,931			15,187
Borrowings under term loan promissory note	-			-			-			-			5,680
Repurchases of common stock	(28,370		)	(45,806		)	(85,500		)	(90,319		)	(68,092		)
Repayment of dept and other noncurrent liabilities	(99		)	(120,000		)	(196		)	(49		)	(5,799		)
Net cash provided by (used in ) financing activities	5,365			(162,666		)	(80,218		)	(83,437		)	(53,024		)
Net (decrese) increase in cash and cash equivalents	(15,237		)	154,058			14,128			28,176			(81,044		)
Cash and cash equivalents, beginning of period	688,215			672,978			827,036			841,164			869,340
Cash and cash equivalents, end of period	$	672,978		$	827,036		$	841,164		$	869,340		$	788,296

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Health Net, Inc.

Notes to Condensed Consolidated Statements of Operations

Notes:

(a)	Represents estimated pretax loss on the sale of EOS claims processing subsidiary completed on July 1, 2002.
(b)	Pretax charges for:  $3.6 million in other-than-temporary decline of an investment available for sale, $7.1 million write-off of a transaction relatedinvestment, and a $1.5 million true-up for the Q3 2001 restructuring plan.
(c)	Represents estimated pretax loss on a property held for sale.
(d)	Pretax impairment charge for write-off of investment in MedUnite of $12.4 million and the impairment of IT assets of $35.8 million.

13

Health Net, Inc.

Dollars in Thousands

Reconciliation of Pretax Margin to EBITDA Margin

		Q2 2003						Q2 2002
		Pretax			EBITDA*			Pretax			EBITDA*
	Operating Income Measure
	Income Before Taxes	$	118,119		$	118,119		$	97,237		$	97,237
	Plus: Interest Expense				9,769						10,338
	Plus: Depreciation and Amortization				15,122						17,979
	Less: Investment Income				(14,004		)				(15,318		)
	Plus: Charges				-						2,600
(a)	Operating Income Measure	$	118,119		$	129,006		$	97,237		$	112,836
	Revenues
	Total Revenues	$	2,752,302		$	2,752,302		$	2,505,964		$	2,505,964
	Less: Investment Income	-			(14,004		)	-			(15,318		)
(b)	Adjusted Revenues	$	2,752,302		$	2,738,298		$	2,505,964		$	2,490,646
=(a) / (b)	Margin Calculation	4.3		%	4.7		%	3.9		%	4.5		%

* EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, investment income and asset impairment and restructuring charges.  EBITDA should not be considered as an alternative to any measure of operating results as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of the company's overall performance.  EBITDA is a measure commonly used by analysts, investors, and other interested parties in the health care industry; however, our method of calculating EBITDA may be different from the method used by other companies and therefore comparability may be limited.  We use EBITDA margin as an important indicator of the quality of our operating earnings, and we believe this measure gives the reader a more complete understanding of our operating results.

14

Health Net, Inc.

Dollars in Thousands

Reconciliation of Return on Equity on a Reported versus an Adjusted Basis

		Q2 2002		Q3 2002		Q4 2002		Q1 2003		Q2 2003
	Reported Net Income	$	64,735	$	69,024	$	45,053	$	68,229	$	74,535
(a)	4-Quarter Net Income									256,841
	Reported Equity (as of period end)	1,314,453		1,345,959		1,309,049		1,296,823		1,326,044
(b)	5-Quarter Average Equity									1,318,466
= (a) / (b)	Return on Equity - Reported Basis									19.5		%
	Adjusted Net Income
	Reported Net Income	$	64,735	$	69,024	$	45,053	$	68,229	$	74,535
	FAS 142 Asset Impairment Charge, after tax	-
	Plus: Asset impairment and restructuring charges, after tax	-		8,031		29,551		-		-
	Plus:  Net loss on assets held for sale and sale of businesses, after tax	2,600		1,584		-		-		-
	Adjusted Net Income	67,335		78,640		74,604		68,229		74,535
(c)	4-Quarter Adjusted Net Income									296,008
	Reported Equity (as of period end)	1,314,453		1,345,959		1,309,049		1,296,823		1,326,044
(d)	5-Quarter Average Equity									1,318,466
= (c) / (d)	Return on Equity - Adjusted Basis									22.5		%

Return on Equity (ROE) represents earnings divided by average equity.  ROE should not be considered as an alternative to any measure of operating results as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of the company's overall performance.  ROE is a measure commonly used by analysts, investors, and other interested parties in the health care industry; however, our method of calculating ROE may be different from the method used by other companies and therefore comparability may be limited.  We use ROE as an important indicator of the return the company generates for its shareholders, and we believe this measure gives the reader a more complete understanding of our operating results.

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Health Net, Inc.

Medical Covered Lives at June 30, 2003

(in Thousands)

	Commercial				Medicare Risk				Medicaid				ASO				Insured  Subtotal
	6/03	3/03		6/02	6/03	3/03		6/02	6/03	3/03		6/02	6/03	3/03		6/02	6/03	3/03		6/02
Arizona	119	115		137	37	37		41	-	-		-	-	-		-	156	152		178
California	1,639	1,609		1,661	101	102		106	726	721		703	2	2		2	2,468	2,434		2,472
Connecticut	276	280		315	28	28		30	106	108		98	58	58		60	468	475		503
New Jersey	291	290		293	-	-		-	48	48		50	19	19		2	357	356		344
New York	272	254		248	6	6		7	-	-		-	10	10		11	287	270		266
Oregon	101	97		80	0	0		-	-	-		-	-	-		-	101	97		80
Pennsylvania	28	32		42	-	-		4	-	-		-	-	-		-	28	32		46
Life Companies	0	0		1	-	-		-	-	-		-	-	-		-	0	0		1
Total	2,725	2,676		2,776	172	173		188	880	877		851	89	89		75	3,865	3,815		3,890
Year over Year		(2	)%			(9	)%			3	%			18	%			(1	)%
Sequential		2	%			(1	)%			0	%			(1	)%			1	%

	6/03	6/02	Year over Year
TRICARE*
Active Duty Dependents	671	640	5	%
Retirees	807	819	(1	)%
Total TRICARE	1,478	1,459	1	%

* Best estimate based on available government data

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EX-99.2

Exhibit 99.2

Health Net, Inc.

Q2 2003 Earnings Conference Call

August 5, 2003 / 8:00AM PT

OPERATOR: Please stand by.

Good day everyone and welcome to this Health Net Incorporated conference call.  Today’s call is being recorded.  At this time, I would like to turn the call over to the Senior Vice President of Investor Relations, Mr. David Olson.  Please go ahead, sir.

DAVID OLSON: Thank you very much.  Good morning, everyone.

Certain matters discussed on today’s call will contain forward-looking statements within the meanings of Section 21E of the Securities and Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties.  All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements.  Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expression are intended to identify forward-looking statements.  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 company’s “Cautionary Statements” 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.  Listeners are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis, judgment, belief or expectation only as of the date of today.  The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this call.

Thank you all for joining us.  Let me now turn the call over to our CEO, Jay Gellert.

JAY GELLERT: Thank you, David, and good morning.

We view this as a very strong quarter from two perspectives.  First of all, we beat expectations, showed improved cash flow, 24 percent EPS growth, and raised numbers for the balance of the year.  Second, because of this strength, we were able to take greater steps than we had originally anticipated in this quarter to bolster our confidence for ’04 and ’05.  The numbers were solid as our key metrics improved yet again.  Pretax income rose by 22 percent.  Margins expanded with EBITDA margin climbing to 4.7 percent, up from 4.5 percent a year ago.  Commercial enrollment climbed sequentially, and we haven’t seen this kind of growth in a second quarter for a long period of time.  It’s consistent with our strategic focus on product and segment diversification.  In fact, we’re now down to about 50 percent HMO membership in the commercial book, and it will continue to go down further in the years ahead.

The balance sheet is strong.  Days claims payable rose, debt-to-total capital is well under our 30 percent target and ROE was again well over our 20 percent target.  Cash flow for the entire first

half was an encouraging $112 million, despite the fact we did not receive the June California Medi-Cal payment in this quarter.  This is a significant turnaround from negative cash flow we’ve typically seen over the past several years’ first halves.  And, with this strong cash, we were able to continue our share repurchase program.

TRICARE had a particularly strong quarter due to the effects of the nation’s heightened military activity and better than expected settlements with retrospective price adjustments.  Health plans did well as their overall MCR improved by 44 basis points from a year ago.  As we look at health plan performance, we saw that year-over-year commercial premiums in this quarter rose just above 13 percent, consistent with our expectations, while health care costs were up in the 12 percent or slightly lower range.  The health care cost trend is just starting to soften.  It is one factor behind our confidence in future performance.  We saw good enrollment growth in the second quarter in our two key markets, California and New York.  We are clearly on track to replace the block PERS enrollment before year-end.  The expanding enrollment was driven by share gains in the small group segment and in the PPO and POS product lines.  We have a very attractive and expanding suite of small group products and pricing is holding up nicely.  A critical element for us both in New York and California is an improved relationship with the distribution system.  In New York, we’re doing much better with general agents and, in California, we’ve shown the brokerage community that we’re in the small group market to stay.

With broker credibility, we can price to the market and secure our fair share of business.  In addition, with the relatively modest membership base in New York, we believe we can continue to produce fairly decent percentage enrollment gains.  It is a competitive market, no question, while we believe we have successfully revised our cost structure to make us competitive and to allow us to be successful in certain spots.  We like our small group position.  We are also seeing good opportunities in the mid-market and with select large groups.  We’ve had recent successes with some attractive large group accounts for ’04, so our outlook for January 1st is positive.  We’re seeing a good level of RFP activity as well.  At the same time, we are still determined to exit a few groups in the Northeast where they don’t make the economic cut.

On the cost side, the factors contributing to health care cost inflation remain pretty much the same in this second quarter.  Physician costs rose in the high single digits, pharmacy cost inflation is slowing.  The second quarter is when we’re beginning to see the effect of Claritin going OTC.  The basic message is we’ve done well in controlling our pharmacy costs.  Hospital costs are showing some early signs of slow down.  The trends are still in the mid-teens as we work through the back end of prior multi-year agreements and the impact of capitated contracts.  Based on the current status of our contracts, we think there’s good opportunity to start to cut into this trend and see some positive results for ’04 and beyond.

We finally have a budget in California, and it will cause Medi-Cal rates to managed care plans to decline, but by only 2.7%, less than what had been expected.  And we’re pleased that this important and successful program will continue to benefit needy Californians.

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As we look at TRICARE, we are very proud of our involvement with the program.  With heightened military activity, there are more beneficiaries and more beneficiaries seeking care in the private sector.  These factors drive revenues higher.  With higher revenues, coupled with effective health care cost management, we’ve seen some improvement in the second quarter.  The second half outlook, upon which our guidance is based, involves normalizing that to be more in line with recent history.  DoD has indicated that the new award announcements will likely come in mid to late August.  We look forward to that event and believe we are well situated for it.

Now, as it relates specifically to ’04 and beyond, we have the opportunity to address some issues that will help us in the future, this quarter, in advance of our system consolidation, and within the P&L.

We are restructuring two key outsourced health care processing contracts.  This restructuring will generate savings of nearly $100 million over the next five years, beginning in ’04.  We’ve resolved a number of outstanding provider issues this quarter, that relate to 2002 and before, opening the door to improved relationships and better arrangements going forward.  All in, these factors have absorbed about $17 million in expenses this quarter that allow us to address these issues which relate to 2002 and before.  We’ve also been running the costs of our “one company” initiative through the P&L.  This includes up to $5 million a quarter in severance, stay bonuses and write-offs.  These “one company” costs will begin to shrink and the benefits will begin to be realized next year, though these costs will persist through the second half of this year.  Our guidance reflects the entirety of these factors.  The ability to handle all of this through our P&L and grow membership at the same time is what boosts our confidence about the future.  It demonstrates that all the work we’ve put in over the past several years is producing results that get better and better over time.  We can now look forward to fulfilling even higher expectations over the next several years, growing with steadily expanding margins.  With our eyes on the future, the overall outlook for our health plans for ’04 is very encouraging.  The early snapshot on pricing is around 12-13 percent post-buydown.  This level of pricing is very consistent with our goal to price at least 50 basis points over the expected health care trend.  Because of our success in the second quarter, and, for that matter, for the first half of the year, we’re confident our sales momentum can continue into ’04.  Our focused sales efforts are working.  We like the markets we’re in and see good growth opportunities even with an economy that doesn’t necessarily rebound robustly.  Overall, we think growing commercial enrollment in the 5 percent range for next year is a very reasonable goal.  So, on the revenue side, things are looking good.

We also think our goal of a further 200 basis point improvement in G&A percentage is reachable within the next three years.  What is driving these achievements is the fact that our management team and all of our associates at Health Net are working together like never before.  We are well positioned to create ongoing shareholder value over the next several years as we execute on our strategy.  We believe the evidence of that was clear in the second quarter.  We look forward with great anticipation to the next several years as our story evolves.

Thank you, and let me now turn the call over to Marv Rich.

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MARV RICH: Thanks, Jay.  Our focus this year is on growth and efficiency and our results thus far have demonstrated the progress we are making toward achieving our goals.  Some of the highlights of the quarter include: EBITDA margin reached 4.7 percent, up from 4.5 percent a year ago.  The improvement was mostly due to two areas: lower health plan MCR and lower government contracts cost ratio.  While the health plan MCR decreased from last year, it did go up from Q1 by 30 basis points.  This is consistent with prior year seasonal patterns and similar to last year, and we expect the MCR to decline in Q3 and Q4.  Our administrative ratio of 10.3 percent in Q2 was flat compared to last year, and 30 basis points lower or better than Q1.  We absorbed a $2 million increase in G&A due to a shift in New York tax assessment from the tax line to G&A.  Our “one company, one system” initiatives are on track.  They’re almost halfway completed.  On last quarter’s call, I announced that we had just converted Arizona’s two core claims systems to our Health Net One claims system.  I’m pleased to report the conversion was a complete success and this consolidation will contribute $8 million on an annualized run-rate basis to our overall savings.  During the third quarter of this year, we will implement a common eligibility database, and in Q1 of ’04, we will have one provider database.  These two common databases will provide us with the ability to have a national benefit plan.  In the second quarter of ’04, we will convert California and Oregon’s claims systems to our Health Net One claims system.  Last year, we had 162 base systems compared to 36 base systems today, and we plan to have 24 systems a year from now.

In addition, we are consolidating our service centers.  Last year we had 11.  Today we have eight.  By the end of ’04, we’ll have from two to four.  We’re making all of these changes to allow us to achieve our very aspirational mission of helping people be healthy, secure, and comfortable.  Improved efficiency will lead to cost savings in our systems and operation areas of $30 million on an annualized basis, which is in addition to the $35 million in systems savings we have already realized in 2002 versus 2001.  Our earnings per share was $0.63 for the quarter which represents a 24 percent increase over Q2 of last year.  Operating cash flow was a positive $30 million for the quarter compared to a negative $18 million last year, and year-to-date cash from operations was a positive $112 million versus a negative $51 million a year ago.  A portion of our June Medi-Cal payment, $46 million, was not received until July.  Since the California budget was signed, we remain confident that we will achieve our full year operating cash flow target.  Reserves decreased by $25 million in the quarter and days claims payable increased by over one day.  We continue to make progress toward achieving our goal for this year of auto-adjudication of 59 percent of all of our claims.  In Q2 we auto-adjudicated 51 percent of our claims compared to 49 percent a year ago.  Looking forward to the implementation on the conversion of California and Oregon, to our go-to Health Net One claims system, California and Oregon today auto-adjudicate in the mid 20s, while our to-to system, Health Net One claims system, auto-adjudicates at 70 percent.  Our days on hand average 4.7 in June year-to-date, compared to 5.1 a year ago.  As I continue to point out, our goal is to pay claims faster so we have a better understanding of our actual health care cost trends and improve our relationship with providers.  In fact, 85 percent of claims were paid in less than 14 days during the quarter, and 97 percent were paid in less than 30 days.

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Now some additional key metrics and balance sheet items.  Our debt-to-total capital ratio was 23.1 percent compared to 28.3 percent at the end of the second quarter last year.  We’ve been better than our target level of 30 percent for six consecutive quarters.  Our revolving line of credit remains at zero compared to a drawdown of $120 million a year ago.  The return on equity was 22.5 percent, the fourth straight quarter we’ve been above our goal of 20 percent.

Our capital expenditures were $15.1 million in the second quarter and $28.6 million for the first half.  We expect cap-ex spending for 2003 to be in the range of $60-70 million.  The government receivable was $93 million at the end of the second quarter, almost $50 million lower than Q1.  The reduction was primarily due to the early settlement of the Region 6 bid price adjustment.  We believe the deployment of reservists and military medical personnel directed more TRICARE eligible beneficiaries into the private sector.  We expect the receivable level to be in the $100-125 million range by year-end due to continued deployment of reservists and medical military personnel.  Finally, our cash and investment balances decreased by $33 million from the end of Q1.  We bought back 2.4 million shares during the second quarter at an average price of $27.30.  Since May 2002, we’ve repurchased over 12.5 million shares.  Our diluted shares outstanding were 118.6 million in the second quarter of the year compared to 127.8 million in Q2 of ’02.  We again had a very solid quarter.  We continue to be well positioned to meet our goals for the year.

Thank you for your time, and let’s start the Q&A.

DAVID OLSON: Operator, if you would please start the question queue for us.

OPERATOR: Thank you.  Today’s question and answer session will be conducted electronically.  If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch-tone telephone.  If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.  We will proceed in the order that you signal us and take as many questions as the time permits.  Once again, touch star one for a question.

We will take our first question today from Matthew Borsch with Goldman Sachs.

MATTHEW BORSCH: Thank you, good morning.  Could you maybe comment a little bit more on what you’re seeing in terms of the hospital trend, and the hospital negotiating environment, and you know, what might be changing in the landscape that’s helping you in the renegotiation of contracts?

JAY GELLERT: Yes, Matthew.  First of all, we have been saying all along that the key to bringing cost trends down is on the hospital side.  The biggest effect for us will be beginning in ’04 because we had a number of longer term agreements going through ’03.  At this point in time, we’re seeing the beginnings of some abatement on the hospital side.  I believe it’s partially

5

because we’ve been going through a makeup period, particularly in California because of nursing standards, seismic standards and the like.  And it appears that many of the systems now are in much stronger financial shape than they were a couple of years ago.  We’re also, I think, seeing a public reaction towards pricing on the hospital side that has led some of the not-for-profit boards to realize the importance of affordability in terms of the overall process.  And finally, and equally importantly, we’re seeing a commitment on the hospital side, and on our side, to simplification of the contracts, moving away from charge-based systems, moving towards a more predictable structure, predictable for them and for us, and also more easily administered.  So, the combination of those things seem evident.  And we believe it will lead to some abatement in trend in ’04.  I think we’re probably a month or two away from getting fully comfortable with it, and we’re not pricing with that significant anticipation at this point.  We’re only pricing based on existing agreements.  But we see some light at the end of the tunnel because of those phenomena.

MATTHEW BORSCH: Great, thanks.  If I could shift gears for a moment on the enrollment picture.  If we look at the apparent market share gains that you made in the California and New York markets, where you referred in your press release to a favorable competitive situation, can you comment on that and comment on it in light of some of the weak enrollment trends from some of the other companies that have reported results for California and New York?

JAY GELLERT: Well, I’d make two comments.  One, you know, this is a new segment to a degree for us.  I mean, we’ve been in it for four years and we’ve been building up.  And, you know, that means that when you have relatively small share, you have some more opportunity to be strategic in where you compete.  If you’re defending a larger book, sometimes it’s less — you’re less capable of doing that.  So, it’s important to note, first of all, that, you know, compared to people who are talking about weaker enrollment, in both California and New York, in the segment where we grew, we were in a position where we were growing from a smaller base and could be more opportunistic.  And the advantage we had was that because of the rest of our book in those markets, we had competitive cost structures but could seek out opportunistic places.  Also, I think we’ve built a better relationship with the distribution network.  These companies have historically had that good relationship.  So, I think there’s probably a relative up-tick in our relationship with the distribution system.  So, I think that, you know, it’s more an enhancement in our capacity, allowing us to kind of get more in the league with these other players, and be able to grow as a result of that, rather than anything specific about them.

MATTHEW BORSCH: Great.  And just the last, on the piece in your press release about the favorable competitive circumstances.  Could you just elaborate on what that was referring to?

JAY GELLERT: Oh, I think what we were referring to is the phenomena I just spoke about, the addition of some new sales talent and some — and really, you know, as we said on the calls before, we’ve been building a technology that allows us — and a system that allows us to focus on niches in the market and economic and geographies where we have some unique competitive advantage because of our contracting and the like.  And I think that that’s what we’re talking about.  It — there’s — you know, you always hear stuff about pricing and stuff like that.  But I

6

think this is more about execution, and more about us coming into the league of the good executors and gaining that advantage in the process.

MATTHEW BORSCH: Great, thank you.

OPERATOR: We’ll move on to Josh Raskin with Lehman Brothers.

JOSH RASKIN: Hi, thanks.  Good morning.

JAY GELLERT: Good morning.

JOSH RASKIN: Just wanted to talk a little bit about the up-tick on the medical loss ratio on a sequential basis.  I know Marv mentioned there was a seasonality there, but based on the fact that cost trends, or I guess pricing, is outpacing cost trends, and you’re seeing a bigger shift to the small group market, I would have thought, you know, that some of that might have been offset.  And I was just wondering, you know, is it just seasonality, or are there any other factors that you guys can point to?

JAY GELLERT: Well, the comments I made in my remarks pointed to the fact that some of the improvements that we’ve made that will affect us in ’04 resulted in us taking expenses in Q2.  So, if you took that $17 million out, a large portion of it which is on the medical side, you’d in fact find a run rate decline in our MLR.

JOSH RASKIN: I see.  So some of those recontracting efforts, etc. are going through your medical loss ratio?

JAY GELLERT: Yes.  The vast majority of the numbers I articulated are going through that line.  And there are instances where we’re settling past disputes, and in exchange for that, positioning ourselves for better and simpler contracts going into the future.

JOSH RASKIN: I see.  So that — so those provider sort of reserve balances, etc., you’d pay those down in the second quarter as you re-contract for an ’04 and beyond period?

JAY GELLERT: Yeah.  As we settle — where there are instances for us to improve our position going forward, we’re really settling the past and then improving the future.  And I think that’s a constant strategy on our part.  And I think if you looked at it on a run-rate basis, and took that out, you’d see a decline in the sequential MLR.  So, I think that our strategy has been that because of system consolidation, and because of some of the general trends in the overall numbers, it gives us an opportunity to reposition us for the future.  And as I said, the vast majority of the number I articulated is being felt on the medical cost line, not the G&A line.

JOSH RASKIN: Got it.  That’s helpful.  And any color specifically to the medical loss ratios in the small group markets in either California, New York?  Are those — and I understand that it’s a,

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you know, much smaller base that you guys are working off, but just on a relative basis year-over-year, the medical loss ratios improving there similar to the overall improvement in the book?

JAY GELLERT: With the exception of New York, where we had an unusually low base, I mean we — because of our — some of the initiatives we’ve taken, we’ve had a, you know, an unusually low base, they are declining in a consistent fashion.  There’s a little less decline in New York, but the number there is well below our average.

JOSH RASKIN: Okay, that’s helpful.  And then just let me ask on the membership side, there’s been a little discussion on the West about CalPERS associations, especially in Southern California, looking for alternatives — you know, excluding CalPERS.  I know there are decisions coming up in the next couple weeks.  Was wondering what sort of interest you’ve seen there and have you seen any commitments from the different agencies for additional membership in ’04?

JAY GELLERT: We’ve seen some activity and some limited commitments to this point in time.  We expect it probably to be more of an ’05 phenomena, but we’ll be able to show some results in ’04 as we complete this process.

JOSH RASKIN: Okay.  Then last question, when’s the next board meeting?

JAY GELLERT: The next board meeting is later in August.

JOSH RASKIN: Thank you.

JAY GELLERT: Marv had one comment, too, which I interrupted.

MARV RICH: Q3 and Q4 MCR improved sequentially as well as year-over-year.

JOSH RASKIN: Okay.

OPERATOR: Thank you.  We’ll take our next question from Christine Arnold with Morgan Stanley.

CHRISTINE ARNOLD: Okay.  Marv, just that last comment, you said the third quarter MLR will improve sequentially?  Did I hear correctly?

MARV RICH: Correct.

CHRISTINE ARNOLD: On that $17 million — is that kind of one-time, nonrecurring?  Is it recurring through this year?  Can you help us think about that?  And then I have a follow-up.

8

JAY GELLERT: Yeah. You know, it basically is kind of premised, you know, on opportunities that come to us, you know, like the renegotiation of these outsourcing agreements are the result of some really hard work, particularly by Marv.  And so it came forward to us.  We think we’ll have some additional opportunities throughout the rest of the year in conjunction with the system consolidation effort.  And our guidance reflects that.  We don’t anticipate — we anticipate that this will be an ’03 phenomena.

CHRISTINE ARNOLD: Okay.  So I guess what I’m trying to get at is the underlying run rate on the MLR for the rest of the year. It’ll improve because of the core earnings or it’ll improve because that $17 million goes down?

JAY GELLERT: It will improve for both reasons.  So we’ll get improvement partially as a result of abatement in the one time, plus regardless of that, the core rate will improve.

CHRISTINE ARNOLD: Okay.  And then secondly you said you were going to price at 12-13 percent pro-forma, did I hear you correctly?

JAY GELLERT: I said at this point in time net of buydowns we’re modeling it at 12-13 percent.  Historically, on all of these calls, we’ve always told the number and we’ve always come in above the number because we’ve always been more conservative for the number.  But what I said was that that’s our pricing — that’s our premium assumption and we’re pricing for at least 50 bps medical costs below that.

CHRISTINE ARNOLD: So does the — I mean you said that you’re not pricing in hospital deceleration beyond what you already have.  So do you already have deceleration in cost that you’re putting in there or is it buydowns are going to be bigger or mixed shift?  Can you shed some light on these?

JAY GELLERT: Yeah, I will.  Some of it is mixed shift as we continue, but most of it is that we do — we are pricing the hospital agreements we already have, which will already result in some abatement of the trend.  But we’re not speculating on arrangements that we haven’t signed yet.

CHRISTINE ARNOLD: Got it.  And on the doctor side, probably no change?

JAY GELLERT: We’re seeing consistency and, you know, again, in California, we’ve seen some improvement in the solvency of the medical groups as we’ve been able to pass through some of the premium increases in the past.

CHRISTINE ARNOLD: Great, thanks.

OPERATOR: Morris Williams with Williams and Company has our next question.

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MORRIS WILLIAMS: Yes, would you talk about the dividend policy and the tradeoffs between share repurchase and raising or putting a dividend in place?

JAY GELLERT: Yes.  At this point, we’ve adopted the share repurchase approach as the means to return money to the shareholders.  The reason we’ve done that is because when you look at the economic analysis, given the multiple and the like, that seems like a more intelligent way to do it.  We though, in light of some of the tax issues, are reassessing it and considering alternatives. But at this point, we’re following the share repurchase route and have repurchased a significant dollar amount of shares over the course of the last 12-18 months.

MORRIS WILLIAMS: Thank you.

OPERATOR: We’ll move on to Ed Kroll with SG Cowen.

ED KROLL: Good morning.

JAY GELLERT: Good morning.

ED KROLL: I apologize if you said this and I missed it.  But did you discuss prior-period developments at all?  Did you have any favorable or unfavorable?

JAY GELLERT: The net of all of that is in that number I articulated.

ED KROLL: Okay.  And then on the Medi-Cal rates —

JAY GELLERT: Yes.

ED KROLL: You said you were getting a cut of 2.7 percent.

JAY GELLERT: Yes.

ED KROLL: When is that effective?  What date is that effective, and for how long?

JAY GELLERT: Well, I’ll have to get back to you on what date it’s effective.  The budget just passed, and it’s always a question of how quickly they can program it and the like.  And the anticipation, though, is that it would be effective through October of ’04 — or the end of September.  The one caveat, though, is California has a little bit of a volatile political environment, which you may be aware of.

ED KROLL: Yes.

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JAY GELLERT: And you know, whether something would happen before that is unclear.  To this point in time, though, you know, I think it’s been consistently working through the annual budget and the anticipation would be that that rate would stand until that point in time.

ED KROLL: Great.  And finally, on your tax rate, you had a little shift, I guess, premium tax going up to G&A.  What should we model for the second half?

MARV RICH: Prior to the second quarter, we’re at 38 percent, second quarter we’re 36.9.  And go-forward will be 37.4.

ED KROLL: 37.4.  Thank you.

MARV RICH: You’re welcome.

OPERATOR: As a reminder, if you do have a question, press star-one.  We’ll move on to Bob Yedid with Principled Capital.

BOB YEDID: Good morning.  Thank you for taking my question.  I was wondering, Jay, if you could give us a little more detail, you said the Rx trend was favorable, if you could give us a percentage change for that trend?

JAY GELLERT: We are running in the single digits in Rx.

BOB YEDID: And the other question that I had — you said that you would have substantial cost savings as a result of these renegotiations of two outsourcing contracts.  Could you please give us some more detail on the contracts you renegotiated and what you think the magnitude of the savings is?  Maybe you said that, I just may have missed it.

JAY GELLERT: The magnitude of the savings is in the range of $100 million over five years.  It will get in the teens in ’04, I believe, and then you know, gradually going up.  And it’s related to some processing arrangements and call arrangements on the health care side.

BOB YEDID: This is claims processing?

JAY GELLERT: And some other administrative arrangements on the health care side.

MARV RICH: And the reason we’re being vague is we’re still in negotiations.

BOB YEDID: Got it.  Thanks very much.

OPERATOR: Our next question comes from William McKeever with UBS.

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WILLIAM McKEEVER: Yes, good morning.  My question has to do with TRICARE.  You mentioned the decision would come at the end of August.  I’m wondering, given the usual appeals, when you think the new contract would be effective?

JAY GELLERT: You know, it’s still our belief that they’re going to stick to their schedule.  And so we’re operating on the assumption that there will be no change in the previous guidance, on when the changes would occur, which would be mid ’04.  You know, until we see the result and see the activity that people take, it’s hard to even predict anything else.

WILLIAM McKEEVER: And related question, and maybe you just answered it, is that if you try to size the business that you have today with TRICARE, assuming that you win— I’m not saying that you’re not going to win, but assuming that you do, what does that do for your revenue potential in TRICARE?

JAY GELLERT: Well, the guidance that we’ve been giving is that our sense is that two of the regions — as you know, we bid on all three — two of the regions, the North and the West, are roughly equivalent to our present size business and the South is larger.

WILLIAM McKEEVER: Okay.  Thank you very much.

OPERATOR: As a final reminder, if you do have a question, press star one.  We do have a question from Morris Williams with Williams and Company.

MORRIS WILLIAMS: Just as a follow-up on the previous discussion about the dividends.  Have you discussed with anyone the fact that you’re probably excluding potential buyers from your stock by not having any dividend in place?  And also, what about the implications that as a way of compensating your executives, if they own stock, their dividends would be taxed at 15 percent as opposed to their compensation being taxed at 35 percent?

JAY GELLERT: Yes, all of that data, which is very valuable and to the point, has been included in our consideration.  And, you know, we will continue to assess it as part of our ongoing plan to maximize value for the shareholder.

MORRIS WILLIAMS: Well, I would simply encourage you to put a dividend in place, and — but continue to generate the good results.  Congratulations on a good quarter.

JAY GELLERT: Thank you.  And we appreciate your input, and it’s something that we really are studying on an ongoing basis.  I think from our history over the last year in particular, you can see we’re committed to returning cash to the shareholders, and I’m not eating it up internally.

MORRIS WILLIAMS: Thank you.

OPERATOR: Bob Yedid with Principled Capital has a follow-up question.

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BOB YEDID: I was just wondering if you could comment on the pricing environment in the small group in both New York and California given you’ve made good progress there over the last few quarters.

JAY GELLERT: Well, I think that the pricing environment has been solid.  I think our MLR has stayed consistent and within expectations and has kind of diminished with our overall numbers.  To us, again, I think it’s much more a part of a process of getting better at doing what we said we’d do all along, responding to the brokers, responding to the general agents, and then focusing on the geographies in these large areas where we can offer competitive advantage.  One of the key learning’s in California is that California is 21 small group markets.  California is not a market.  And that because of the volume of business in some places, we come up looking better than others, because of the internal rates.  And the more effective we are at those elements of execution, those elements of product, and the ability to be consistent, that’s what separates us.  It’s not a pricing matter, per se.

BOB YEDID: Got it.  Thank you very much.

OPERATOR: We have a follow-up question from Matthew Borsch with Goldman Sachs.

MATTHEW BORSCH: Thanks.  Just a couple follow-up points here.  Is your outlook for your share count relative to your EPS guidance still the same as it was on the first quarter, which I believe was 116 for Q3 and 117 for Q4?

JAY GELLERT: No, it’s higher than that.  And it’s in the —

DAVID OLSON: Model 120 for the second half of the year.

JAY GELLERT: Model 120 for the second half of the year.

MATTHEW BORSCH: Great, thanks.  And in terms of your outlook for full year cash flow, is that the same as it was?

MARV RICH: 460 to 470.

MATTHEW BORSCH: Okay, great.  And in terms of looking out to ’04, and I realize it’s early, but you mentioned a goal or a target of 5 percent for next year.  How do you, you know, talk us through how you get there, just in light of the fact that obviously the insured labor force, you know, is growing or actually probably shrinking right now but even an improvement probably won’t be growing that robustly.  Is it smaller plans that you think you can take share from, or do you expect more in solvencies like we’ve had over the last 24 months?

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JAY GELLERT: It’s a combination of things.  I think that most importantly, you know, we’ve had a few important large group wins over the course of the last couple of months that we can book into ’04 at this point in time.  There is a consolidation going on in the marketplace, as people become more demanding, that I believe is working to our advantage, by virtue of the concentration we have in markets.  And then finally, you know, the Southern California economy in particular remains strong.  And I think that we’re also seeing a movement back towards more managed products as a result of some of the economic issues going on.  So since our book isn’t, you know, largely in ASO-kind of type companies, I think in some ways we’re at this point getting some benefits of the market as it stands.  I guess the final point I’d make is, you know, like, I think that the products we’re beginning to be able to offer because of some of the improvements in our “one company” process are showing results.

MATTHEW BORSCH: Great.  And last, just one follow-up on that, if you could.  Is there — has there been any acceleration in the level of buydown that you think customers will be looking for going into 2004, and you know, any additional detail you can give on that in terms of how it might be changing year-over-year?

JAY GELLERT: Yeah.  We’re not seeing an acceleration.  Quite honestly, I think one of the other companies aptly stated that at least at present, there is a movement towards security and security means having a benefit.  We see interest increasing in some buydown alternatives but I think people are moving slowly into that area.  And we’re prepared to go further in that regard.  But it’s the market that makes the final call.

MATTHEW BORSCH: Thank you.

OPERATOR: There are no more questions in the queue at this time.  I’ll turn the conference over to Mr. Olson for any additional closing remarks.

DAVID OLSON: Thank you all very much.  We’ll see you early November.  Thanks.

OPERATOR: That concludes today’s conference call.  We thank you for your participation, and have a nice day.

END

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