Questions over billings, profits plague insurer.

Health Net Inc., facing pressure to improve its financial performance and mend fences with hospitals that claim they were shortchanged by the Woodland Hills-based health insurer, has shaken up its California operations.

The company has named Stephen Lynch president of Health Net of California, replacing Chris Wing, the executive who has been most closely tied to a reimbursement structure that led to alleged chronic underpayments to providers.

It also set aside $169 million to settle disputes and legal battles with hospitals in California and other states, under a new strategy intended to improve its damaged relations with the hospital industry.

"The noise level was just reaching a crescendo," said Dietmar Grellman, vice president of managed care for the California Hospital Association, a state trade group. "It just came time to start resolving these issues."

Health Net also faces pressure from Wall Street and state regulators who are looking into the payments issue.

The California Department Managed Health Care has already fined Health Net $250,000 for failing to pay some doctors for their services, and it is wrapping up an investigation into the insurer's reimbursements to hospitals.

Health Net, one of the nation's largest health insurers, has been struggling over the last several years with mediocre earnings and a lagging stock price, while competitors such as the former WellPoint Health Networks Inc. have thrived.

It is now viewed as a possible acquisition target, with analysts recently calling it a "fixer upper" and a "good asset that has been mismanaged," leading to speculation that Chief Executive Jay Gellert could be sent packing unless there is a financial turnaround.

The company said the $169 million charge off--including a $28.5 million settlement this month with Tenet Healthcare Corp. that is expected to be the first of many--is an effort to clear its books as it renegotiates contracts with hospitals and moves forward under a new management team.

That team includes new Chief Financial Officer Anthony Piszel, who joined Health Net five months ago as it began to clean house.

In June, Lynch was made chief operating officer of Health Net's Western region, where the problems have been most acute. (After being replaced by Lynch this month, Wing was moved to an executive vice president position "working to develop partnerships" with health care providers, the company said.)

Analysts are not convinced the fence-mending will work, given that new contracts could lead to higher reimbursement costs for the company, whose 3 percent margins have been under the industry's 5 percent average for the past few years.

Health Net reported a fourth-quarter loss of $86 million, compared with net income of $89.3 million for the like period a year earlier. The latest quarter's loss includes the $169 million charge.

"In our opinion, generating commercial growth could remain a challenge in 2006," wrote UBS Securities analyst William McKeever, in a post-earnings research note.

Health Net's recent moves reverse a policy that hospital executives said began several years ago when the company began more closely scrutinizing its hospital bills.

One hospital company official said Health Net started reviewing bills line-by-line and refused to make certain payments. It also refused to honor so-called stop loss provisions in its contracts, which cushion hospitals from extremely large bills for individual cases.

Health Net officials declined comment on the billing procedures or on Wing, who joined Health Net in 2002 after heading the California unit of Pacificare.

In a Feb. 8 conference call with analysts, Piszel said Health Net began to review hospital bills in late 2001 after it noticed big increases.

He said the large bills were being generated by hospitals that had sharply raised prices, causing Health Net to reject specific line items and completely reject incomplete claims.

However, Piszel, who undertook a review of the insurer's past practices after being appointed on Aug. 31, acknowledged that the policy may have caused more harm than good, resulting in significant arbitration and other "legal developments" against the company by the third quarter of last year.

"We began to see that our claims review practices were causing way too much friction with the hospitals," he said. "We decided to review our whole approach to the issue."

The insurer began paying disputed claims up front, as well as entering into settlement discussions with the hospitals and renegotiating contracts to make them clearer, he said. It also took the $169 million charge to clear its books of its projected liabilities to prevent a drag on this year's earnings.

The first settlement announced under the new policy came on Feb. 14, when Health Net agreed to pay Tenet $28.5 million to settle a contract dispute that at one point had the hospital operator demanding $120 million.

"We are pleased they will continue to be our partners," said Tenet spokesman David Langness. He said the hospital operator has signed a new contract with the insurer.

Health Net has said the charge stems from disputes with 37 hospitals. It allocated $135 million of the charge against its California operations.

Barry Arbuckle, chief executive of MemorialCare, the Long Beach-based hospital system that includes Long Beach Memorial Hospital, said the system concluded its own settlement discussions with Health Net within the past month, and that it included a payment in the "millions."

"We had all the issues that Tenet hospitals had with Health Net," Arbuckle said. He added that he thought it was unfair that the problems had been blamed on Wing, whom he has known for years. "In any business when things don't go right there is some sacrificial lamb, but to lay it on one person is kind of naive," Arbuckle said. "When Chris came from PacifiCare he was going to be the panacea."

Health Net still faces a potential fine from the state's Department of Managed Health Care. In January, the department fined the company for not properly paying 65,000 claims from doctors based in emergency rooms and other hospital wards.

The department took the action under a policy of aggressively enforcing a law that requires health plans to pay claims promptly.

"We are working with Health Net and they are cooperating with our investigation into similar hospital underpayments," said department spokeswoman Lynne Randolph. She said the investigation should be wrapped up in the next few weeks.

Assuming Health Net can resolve these issues, it has another challenge awaiting--earnings growth.

Health Net officials say the new contracts with hospitals will provide greater clarity, and the company is taking steps to reduce any potentially higher payments by trying measures such as limiting bed stays in hospitals.

However, the company is already not as price competitive in its premiums as some of its peers and expects to lose membership this year. Moreover, it strengthened its reserves by $65 million in the fourth quarter, mostly as a result of its decision to settle its differences with hospitals.

That would mean it expects the new contracts to result in permanently higher claims payments to hospitals, Smith Barney analyst Charles Boorady said in a recent research note. "We view Health Net as a good asset that has been mismanaged," he states in the note.