**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**








**FORM
      10-K****/A**








**(Mark
      One)**


R
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the fiscal year ended December 31, 2006**


**or**




࿠
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
                the transition period from****________****to ________********Commission
                File Number: 1-8865**





**SIERRA
                HEALTH SERVICES, INC.**
              **(Exact
                Name of Registrant as Specified in Its
                Charter)****Nevada**
            
            **88-0200415****(State
                or Other Jurisdiction**
              **of
                Incorporation or Organization)**
            
            **(I.R.S.
                Employer Identification No.)****2724
                North Tenaya Way, Las Vegas, NV**
            
            **89128****(Address
                of Principal Executive Offices)**
            
            **(Zip
                Code)**




**Registrant’s
      Telephone Number, Including Area Code: (702) 242-7000**





**Securities
      Registered Pursuant to Section 12(b) of the Act:**




Title
                of each class
            
            Name
                of each exchange which registeredCommon
                Stock, par value $.005
            
            New
                York Stock Exchange





**Securities
                Registered Pursuant to Section 12(g) of the Act:
                None**Indicate
                by check mark if the registrant is a well-known seasoned issuer,
                as
                defined in Rule 405 of the Securities Act. YesRNo
                ྈIndicate
                by check mark if the registrant is not required to file reports pursuant
                to Section 13 or Section 15(d) of the Act. Yes ྈNoRIndicate
                by check mark whether the registrant: (1) has filed all reports
                required to be filed by Section 13 or 15(d) of the Securities
                Exchange Act of 1934 during the preceding 12 months (or for such
                shorter
                period that the registrant was required to file such reports), and
                (2) has been subject to such filing requirements for the past
                90 days. YesRNoྈIndicate
                by check mark if disclosure of delinquent filers pursuant to Item 405
                of Regulation S-K is not contained herein, and will not be contained,
                to
                the best of registrant’s knowledge, in definitive proxy or information
                statements incorporated by reference in Part III of this Form 10-K
                or any
                amendment to this Form 10-K. ྈIndicate
                by check mark whether the registrant is a large accelerated filer,
                an
                accelerated filer, or a non-accelerated filer. See definition of
                “accelerated filer” and “large accelerated filer” in Rule 12b-2 of
                the Exchange Act (check one).Large
                accelerated filerRAccelerated
                filer࿠Non-accelerated
                filer࿠Indicate
                by check mark whether the registrant is a shell company (as defined
                in
                Rule 12b-2 of the Exchange Act). Yes࿠ NoRThe
                aggregate market value of the voting stock held by non-affiliates
                of the
                registrant at June 30, 2006 was $2,301,974,000 (which represents
                shares of 51,121,000 Common Stock held by such non-affiliates multiplied
                by $45.03, the closing sales price of such stock on the New York
                Stock
                Exchange on June 30, 2006).The
                number of shares outstanding of the registrant’s Common Stock as of
                April 26, 2007 was 55,967,000.**Documents
                Incorporated By Reference**None













**Explanatory
      Note**





Sierra
      Health Services, Inc. (the “Company,” “Sierra,” “we,” or “us”) hereby amends its
      Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Each
      of
      the below-referenced Items in Part III is amended by deleting the Items in
      their
      entirety and replacing them with the Items set forth in this amendment. Any
      Items in the original filing not expressly changed by this amendment shall
      be as
      set forth in the original filing.




**PART
      III**




**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**




**Directors
      and Executive Officers**




The
      following lists our executive officers and directors and their respective ages
      and positions as of December 31, 2006:




**Name**
            
            **Age**
            
            **Position**Anthony
                M. Marlon, M.D.
            
            64
            
            Chief
                Executive Officer and Chairman of the BoardJonathon
                W. Bunker
            
            48
            
            President and
                Chief Operating OfficerFrank
                E. Collins
            
            52
            
            Senior
                Executive Vice President, Legal and Administration and
                SecretaryDonald
                J. Giancursio
            
            48
            
            Senior
                Vice President, Sales and MarketingPaul
                H. Palmer
            
            45
            
            Senior
                Vice President, Chief Financial Officer and TreasurerDarren
                G.D. Sivertsen
            
            45
            
            Senior
                Vice President, OperationsMarc
                R. Briggs
            
            37
            
            Vice
                President, Finance and Chief Accounting OfficerThomas
                Y. Hartley
            
            73
            
            Lead
                DirectorCharles
                L. Ruthe
            
            72
            
            DirectorAlbert
                L. Greene
            
            57
            
            DirectorMichael
                E. Luce
            
            56
            
            DirectorAnthony
                L. Watson
            
            65
            
            Director







Anthony
      M. Marlon, M.D., has been the Chief Executive Officer and Chairman of the Board
      of the Company since its inception in 1984. He also served as President from
      1984 until 1994. In 2001, Dr. Marlon reassumed the role of President, which
      he held until August 2006. He held similar executive positions with several
      of
      the Company’s predecessors dating back to 1972, the year of inception of the
      Company’s predecessor physician group. In those capacities, he organized and
      managed the Company’s predecessor physician group, ambulatory surgical facility,
      management company and Health Plan of Nevada, Inc. (“HPN”). Dr. Marlon has
      served on the board of America’s Health Insurance Plans since 1997.
      Dr. Marlon has served as Associate Professor of Medicine at the University
      of Nevada School of Medical Sciences since 1975 and held positions as Chief,
      Division of Cardiology, and Medical Director, Cardiac Rehabilitation, of
      University Medical Center of Southern Nevada from 1972 to 1985; Clinical
      Associate of the Department of Medicine at the University of Arizona from 1973
      to 1979; and Clinical Associate Professor, Department of Medicine, Tulane
      University, New Orleans, from 1973 to 1977. Dr. Marlon is a board-certified
      specialist in internal medicine and cardiovascular diseases. In 1967,
      Dr. Marlon received his M.D. from State University of New York. In 1972,
      Dr. Marlon completed his internship, residency and cardiology fellowship at
      Stanford University. Dr. Marlon was appointed to the Federal Task Force on
      Long Term Health Care Policies in 1986 by Dr. Otis R. Bowen, then Secretary
      of Health and Human Services. In July 1988, Dr. Marlon was appointed
      and continues to serve on the Board of Trustees of the Nevada Development
      Authority, a non-profit organization dedicated to the expansion and
      diversification of the southern Nevada business community.




Jonathon
      W. Bunker joined the Company in 1996 as Vice President, HMO and Insurance
      Operations and has served as President of HPN and Sierra Health and Life
      Insurance Company, Inc. (“SHL”) since then. In March 2000, Mr. Bunker
      was promoted to Senior Vice President, HMO and Insurance Operations, and
      President of the Managed Healthcare Division, which encompassed all of Sierra’s
      managed health care and group practice management operations, including
      responsibility for sales and marketing. He was promoted to the office of
      President and Chief Operating Officer of the Company in August of 2006. Prior
      to
      joining the Company, he served as Vice President of John Alden Horizon Health
      from 1989 to 1996 and Vice President of Prime Health from 1988 to 1989.
      From 1984 to




1
 Return
          to Top


1988,
      Mr. Bunker was Vice President of SHL. From 1982 to 1984, he was a Staff
      Accountant with Deloitte Haskins & Sells (now Deloitte &
Touche LLP). Mr. Bunker received his degree in accounting from Utah State
      University.




Frank
      E.
      Collins joined the Company in 1986 as General Counsel and Secretary. In 1997,
      he
      was also appointed Executive Vice President. In 2001 he was promoted to the
      position of Senior Vice President, Legal and Administration and Secretary,
      and
      in August of 2006, he was promoted to Senior Executive Vice President, Legal
      and
      Administration and Secretary. From 1981 to 1986, Mr. Collins was employed
      by Blue Cross and Blue Shield of Kansas City, originally as Staff Legal Counsel
      and in early 1986 as Associate General Counsel. Mr. Collins also served as
      counsel for the Missouri Division of Insurance from 1979 to 1981, where he
      was
      responsible for providing legal advice on insurance and HMO-related regulatory
      issues. Mr. Collins received his Juris Doctor from the University of
      Missouri at Kansas City School of Law and is a member of the Missouri Bar
      Association.




Donald
      J.
      Giancursio joined the Company in 1996 as Vice President of Sales and Marketing,
      Western Region, for HPN, and served as Vice President of Sales for the Managed
      Healthcare Division from March 2000 until August 2006. He was promoted to Senior
      Vice President of Sales and Marketing of the Company in August 2006. He
      currently oversees sales, account retention, marketing and advertising, product
      development, telemarketing and broker relations. From 1988 to 1996 Mr.
      Giancursio worked for EBP Health Plans, which at the time was one of the largest
      publicly held third-party administrators in the country. During his tenure
      he
      held a series of increasingly responsible positions, including Vice President
      of
      Sales for the western region. He held Group Underwriter and Sales Executive
      positions for United Insurance Company of America in California from 1982 to
      1988. Mr. Giancursio is a business administration graduate of California State
      University, Fullerton.




Paul
      H.
      Palmer joined the Company in 1993 as the Finance Director for one of the
      Company’s subsidiaries, Southwest Medical Associates, Inc. (“SMA”). In
      1994, he became the Assistant Vice President and Corporate Controller of the
      Company. In April 1998, Mr. Palmer was appointed Vice President,
      Finance, Acting Chief Financial Officer and Treasurer of the Company. In
      November 1998, he became the Chief Financial Officer and in May 2002,
      he was appointed Senior Vice President, Chief Financial Officer and Treasurer.
      Prior to joining the Company, Mr. Palmer was a manager at
      Deloitte & Touche LLP, where he worked from 1988 to 1993.
      Mr. Palmer received a Masters Degree in Business Administration and a
      Masters of Accountancy from Brigham Young University and is a Certified Public
      Accountant. Mr. Palmer retired from the position of Senior Vice President,
      Chief
      Financial Officer and Treasurer on April 6, 2007. He will remain on a full-time
      basis in a transitional role through May 4, 2007, and will continue to work
      part-time for the Company from May 7 through May 30, 2007.




Darren
      G.D. Sivertsen joined the Company in January 1997 as Director of Project
      Analysis. Shortly afterward, he was promoted to CFO of the Western Region (now
      the Managed Healthcare Division). He was promoted to the office of Senior Vice
      President of Operations of the Company in August 2006, and he currently oversees
      clinical, insurance and pharmacy operations, government programs and health
      education. Mr. Sivertsen is also the Vice President and Chief Operating Officer
      for SHL, and HPN, as well as CEO of SMA and President of Sierra Health-Care
      Options, Inc., Behavioral Healthcare Options, Inc. and Sierra Home Medical
      Products, Inc., dba THC of Nevada, wholly-owned subsidiaries of the Company.
      Prior to joining the Company, Mr. Sivertsen was CFO for Hi Tech Healthcare
      Services, a healthcare company offering TPA, PPO, utilization review, physician
      practice management and home healthcare services. He began his career with
      KPMG
      Peat Marwick, working in its healthcare and banking groups. Mr. Sivertsen earned
      an M.B.A. degree from the University of Utah and is a Certified Public
      Accountant.




Marc
      R.
      Briggs joined the Company in 2000 as Assistant Corporate Controller. In 2005,
      he
      was appointed to the position of Assistant Vice President, Corporate Controller.
      In January 2006, he was promoted to the position of Vice President, Finance,
      and
      in May 2006 was also given the title of Chief Accounting Officer. He was
      promoted to the position of Senior Vice President, Chief Financial Officer
      and
      Treasurer of the Company on April 6, 2007. From 1997 to 2000, Mr. Briggs was
      employed by OB Sports, the owner and operator of golf course projects throughout
      the west coast, eventually serving as Corporate Controller for the company.
      Mr.
      Briggs was previously an auditor in the Las Vegas office of Deloitte &
Touche LLP. He is a Certified Public Accountant and earned his bachelor's degree
      in accounting from the University of Utah and an M.B.A. from the University
      of
      Nevada Las Vegas. He is a member of the American Institute of Certified Public
      Accountants and the Nevada State Society of Certified Public
      Accountants.




2
 Return
          to Top


Thomas
      Y.
      Hartley has been a Director of the Company since 1992. Mr. Hartley served
      on the Board of Southwest Gas Corporation from 1991 until May 2006 and served
      as
      its Chairman from 1997 through May 2006. He is currently a Director on the
      Board
      of Medicor, Ltd. He served on the Board of Directors of Ameritrade Holdings
      Corporation from November 1996 to September 2002 and on the Board of
      Directors of the Rio Suite Hotel & Casino, Inc. from 1990 to
      1998. Mr. Hartley was associated with Deloitte Haskins & Sells
      (now Deloitte & Touche LLP) from 1959 until his retirement in 1988 as
      area managing partner in charge of Las Vegas, Reno, Phoenix and Tucson offices.
      Mr. Hartley, who obtained his degree in business from Ohio University, is a
      Certified Public Accountant. He is active in many Las Vegas civic and charitable
      organizations.




Charles
      L. Ruthe has been a Director of the Company and Chairman of the Board of
      Directors of HPN since 1984. He was also a member of the Board of Directors
      of
      one of the Company’s predecessors. Mr. Ruthe has been the owner since 1975
      of Charles L. Ruthe and Associates, Inc., a real estate brokerage firm in
      Las Vegas, Nevada, and served as its President until 1988, at which time he
      assumed the position of Chairman of the Board. Mr. Ruthe held the position
      of Consultant to Boyd Gaming Corporation, a corporation which operates several
      Nevada hotel/casinos, from January 1997 to June 1999. From 1988
      through 1996, he served as President and a Director of Boyd Gaming Corporation.
      From 1996 through 1999, he served as President and a Director of Boyd
      Development Corporation, a subsidiary of Boyd Gaming Corporation. He was a
      Director of First Interstate Bank of Nevada from 1979 to 1983, Vice Chairman
      of
      the Board of Directors of First Western Financial Corporation, the parent
      company of a savings and loan company, from 1985 to 1991, and was President
      of
      the Nevada State Chamber of Commerce in 1977. Mr. Ruthe served on the Board
      of Directors of Pioneer Citizens Bank of Nevada from January 1998 to
      November 1999.




Albert
      L.
      Greene has been a Director of the Company since August 2000. He is
      currently Chief Executive Officer of Valley Presbyterian Hospital in Van Nuys,
      California, a position he accepted in March 2006. Since November 1,
      2005, he has also been a Managing Partner of Radius Healthcare Management Group,
      a hospital turnaround and management company. From January 2002 through
      October 2005, he served as Chief Executive Officer of Hollywood
      Presbyterian Medical Center, formerly known as Queen of Angels-Hollywood
      Presbyterian Medical Center, in Los Angeles, California. From 1998 to 2001,
      he
      served as Chairman of the Board and Chief Executive Officer of
      HealthCentral.com, a provider of healthcare e-commerce to consumers through
      a
      network of sites on the Internet. He also served as President of
      HealthCentral.com from July 1998 to November 2000. In
      October 2001, HealthCentral.com and its wholly-owned subsidiaries filed
      voluntary petitions for protection under the U.S. Bankruptcy Code. From
      May 1990 to February 1998, Mr. Greene served as President of Alta
      Bates Medical Center, a hospital in Berkeley, California. From January 1996
      to July 1998, Mr. Greene simultaneously served as Chief Executive
      Officer of the East Bay Service Area of Sutter Health, a healthcare provider.
      Mr. Greene received a B.A. in Psychology from Ithaca College and an M.H.A.
      in Hospital Administration from the University of Michigan.




Michael
      E. Luce has been a Director of the Company since August 2000. Mr. Luce
      is currently President of the Walters Group, a Las Vegas-based holding company
      for diversified investments and business ventures in the areas of real estate
      and recreation. From 1991 to 1997, Mr. Luce was the Director of Finance for
      Bigelow Companies. Between 1985 and 1991, Mr. Luce was engaged in financial
      consulting and development in Nevada, Idaho and Hawaii. From 1981 to 1985,
      he
      was Vice President of Commercial Lending at Idaho Bank and Trust and from 1972
      to 1981 he was a Commercial Loan Officer of First National Bank of Nevada in
      Reno, Nevada. Mr. Luce received a B.S. in Business Administration from the
      University of Nevada, Reno.




Anthony
      L. Watson has been a Director of the Company since March 2000. He is currently
      the Chairman and Chief Executive Officer of EmblemHealth, Inc., the parent
      company of recently affiliated HIP Health Plan (HIP) and Group Health, Inc.
      (GHI).   In addition to his role at EmblemHealth, since 2006, Mr. Watson
      has been a Director and Chairman and Chief Executive Officer of HIP since 1991,
      and was the Executive Vice President of HIP from 1985 to 1990; he was also
      Chairman of the Board of Directors of HIP Health Plan in New Jersey from 1995
      to
      1999. Mr. Watson served as Chairman of the American Association of Health Plans
      from June 2000 through December 2001. From 1966 to 1970, he was Supervising
      Public Health Advisor at the Center for Disease Control of the United States
      Department of Health, Education and Welfare. From 1970 to 1976, he was Deputy
      Director of the New York City Comprehensive Health Planning Agency. From 1976
      to
      1985, he was Executive Director of the Health Systems Agency of New York City.
      From 1972 to 1974, he also was an instructor in health planning at the Herbert
      J. Lehman College of the City of New York. Mr. Watson was named by President
      Clinton to serve as a member of the National Bipartisan Commission on the Future
      of Medicare and served during the Commission’s 1998-1999 duration.




3
 Return
          to Top


**CORPORATE
      GOVERNANCE**




The
      Board
      of Directors oversees the management of our business in accordance with the
      corporation law of the State of Nevada and our Articles of Incorporation and
      Bylaws. Members of the Board are kept informed regarding our business through
      discussions with the Chairman and Chief Executive Officer, the President and
      Chief Operating Officer and other officers, by reviewing materials provided
      to
      them and by participating in meetings of the Board and its
      committees.




**Documents
      Establishing Our Corporate Governance**




The
      Company has adopted a number of key documents that are the foundation of its
      corporate governance:




·
            Corporate
                Governance Guidelines




·
            Code
                of Ethics




·
            Code
                of Ethics for Directors




·
            Code
                of Conduct for the Chief Executive Officer and Senior Financial
                Officers




·
            Audit
                Committee Charter




·
            Nominating
                and Governance Committee Charter




·
            Compensation
                Committee Charter




These
      documents and other important information on our governance are posted in the
      “Investors” section of the Sierra Health Services, Inc. website, and may be
      viewed at http://www.sierrahealth.com .
      We will
      also provide any of these documents in print to a stockholder who requests
      it.
      You may direct your request to the Senior Executive Vice President, Legal and
      Administration, Sierra Health Services, Inc.,
      P. O. Box 15645, Las Vegas, Nevada 89114-5645.




The
      Board
      of Directors has a long-standing commitment to sound and effective corporate
      governance practices. The Board’s Corporate Governance Guidelines address a
      number of important governance issues such as:




·
            Selection
                and monitoring of the performance of senior
                management;




·
            Succession
                planning for senior management;




·
            Qualifications
                for Board membership, including mandatory retirement for Board members
                upon completion of a term after attaining age
                78;




·
            Functioning
                of the Board, including the requirement for meetings of the independent
                Directors; and




·
            Standards
                and procedures for determining independence of
                Directors.




The
      Board
      believes that the Corporate Governance Guidelines and other governance documents
      meet current requirements and reflect a high standard of corporate
      governance.






4
 Return
          to Top


**Independence
      of Directors**




The
      foundation for the Company’s corporate governance is the Board’s policy that a
      substantial majority of the members of the Board should be independent. The
      Board of Directors has adopted the following statement as of April 27,
      2007:




We
      have
      determined that the following Sierra Health Services, Inc. Directors are
      currently independent: Messrs. Greene, Hartley, Luce, Ruthe and Watson. Our
      determination of “independence” means that we find that each of those Directors
      has no material relationship with Sierra, either directly or as a partner,
      stockholder or officer of an organization that has a relationship with the
      Company. Those Directors meet the objective, categorical standards of
      independence set forth in our Corporate Governance Guidelines. Regarding
      Directors who serve as members of the Audit Committee, we find that each
      Director meets an additional high standard of independence, in that each of
      them
      has not, other than in his or her capacity as a member of the Board or Board
      committee (or the board of an HMO subsidiary of Sierra), accepted directly
      or
      indirectly any consulting, advisory or compensatory fee from, or been an
      affiliated person of, Sierra Health Services, Inc. or any of its
      subsidiaries .




The
      Board
      made its determination of independence in accordance with its Corporate
      Governance Guidelines, which specify standards and a process for evaluating
      Director independence. The Corporate Governance Guidelines provide:




·
            A
                Director cannot be independent if he or she fails to meet the objective
                requirements as to “independence” under the New York Stock Exchange
                (“NYSE”) listing standards.




·
            If
                a Director meets the objective NYSE standards, he or she will be
                deemed
                independent, absent unusual circumstances, if in the current year
                and the
                past three years the Director has had no related-party transaction
                or
                relationship with the Company or an “interlocking” relationship with
                another entity triggering disclosure under the SEC disclosure
                rules (such disclosure is required in the Company’s proxy statements
                and Form 10-K).




·
            If
                a Director who meets the objective NYSE independence requirements
                has had
                a disclosable transaction or relationship, or if the Nominating and
                Governance Committee or the Senior Executive Vice President, Legal
                and
                Administration request that the Board consider any other circumstances
                in
                determining the Director’s independence, the Board will make a subjective
                determination of independence.




The
      independence of Audit Committee members is determined in accordance with all
      applicable standards, referred to by the Board in its statement
      above.




The
      NYSE
      requires a listed company to disclose in its proxy statement its specific
      categorical standards of Director independence. The following is an excerpt
      from
      Section 4 of our Corporate Governance Guidelines, setting forth our
      categorical standards for Director independence:




***Objective
      Factors Demonstrating Director Independence—Sierra’s Categorical
      Standards.*** **** Absent
      unusual circumstances, a Director meeting the requirements of (1) above will
      be
      deemed to be independent under Sierra’s categorical standards if, during the
      current year and the preceding three years, the Director and his or her
      immediate family members:




(a)
            Have
                not had, during 2005 or earlier years, a transaction or relationship
                with
                Sierra triggering disclosure under Item 404(a) or (b) of
                Regulation S-K under the Securities Exchange Act of 1934 as then
                in
                effect;




*Note:
                A charitable organization that employs the Director will be treated
                as a
                business entity and Sierra contributions to it will be treated as
                payments
                in applying Item 404(b);*




(b)
              Have
                  not had, during 2006 and later years, a direct or indirect material
                  interest in a transaction in which Sierra was a participant triggering
                  disclosure under Item 404(a) of Regulation S-K as in effect from
                  November 7, 2006;
                  and


5
 Return
          to Top




(c)
            Have
                not had an “interlocking” relationship in 2005 or earlier years, of the
                type required to be disclosed under Item 402(j)(3) of Regulation S-K
                or, in 2006 or later years, of the type required to be disclosed
                under
                Item 407(e)(iii) of Regulation S-K as in effect from November 7,
                2006 (in both cases this can arise where a Director is an executive
                officer of another entity and an executive officer of Sierra is a
                Director
                of the other entity, if either of the two individuals has authority
                to set
                the compensation of the other).




*Explanatory
                Note: Section (1) contains the stated NYSE bright line
                criteria for director “independence;” it is not reprinted
                here.*




As
      disclosed in our proxy statement dated April 14, 2006 for our 2006 Annual
      Meeting, the Board had determined that William J. Raggio was independent. Mr.
      Raggio served on the Nominating and Governance Committee and the Compensation
      Committee during 2006, until his retirement under our mandatory retirement
      policy effective at the date of our 2006 Annual Meeting, May 23, 2006.




**Board
      of Directors**




In
      accordance with our Bylaws, the Board of Directors has specified that the number
      of Directors currently is six. Our Bylaws provide for two classes of Directors,
      as nearly equal in number as possible, with each class serving for a term of
      two
      years.




To
      promote open discussion among the independent Directors, those Directors have
      met and will meet in 2007 in regularly scheduled executive sessions without
      management participation. Mr. Hartley serves as the Lead Director for
      purposes of these meetings.




**Committees
      of the Board of Directors**




The
      Board
      of Directors has an Audit Committee, the current members of which are
      Messrs. Greene, Hartley, Luce, Ruthe and Watson. As stated above, the Board
      of Directors has determined that the current members of the Audit Committee,
      who
      served throughout 2006, have met all applicable independence requirements.
      The
      Board also has determined that Mr. Hartley fulfills the requirements for
      being the Audit Committee financial expert.




The
      Board
      has a Compensation Committee, the current members of which are
      Messrs. Greene, Hartley, Luce, Ruthe and Watson. As stated above, the Board
      of Directors has determined that these current members of the Compensation
      Committee, who served throughout 2006 and Mr. Raggio, who served until his
      retirement in May 2006, each was an independent Director.




The
      Board
      has a Nominating and Governance Committee, the current members of which are
      Messrs. Greene, Hartley, Luce, Ruthe and Watson. As stated above, the Board
      of Directors has determined that these current members of the Nominating and
      Governance Compensation Committee, who served throughout 2006 and Mr. Raggio,
      who served until his retirement in May 2006, each was an independent Director.




**How
      to Contact the Board and its Committees**




We
      have
      established a process by which stockholders and other interested persons can
      contact our Board of Directors, the Lead Director, the non-management
      Directors as a group or any committee of the Board of Directors. To contact
      any
      of these parties, you can send an email to




*communications@sierrahealth.com* ,
      or
      write to either of the following addresses:




**Board
                of Directors**
              **Sierra
                Health Services, Inc.**
              c/o
                Audit Committee
              2724
                North Tenaya Way
              Las
                Vegas, NV 89128
              (overnight
                mail)
            or
            **Board
                of Directors**
              **Sierra
                Health Services, Inc.**
              c/o
                Lead Director
              P.
                O. Box 15645
              Las
                Vegas, NV 89114-5645
              (regular
                mail)







6
 Return
          to Top







·
            All
                concerns and complaints will be received and processed by the Sierra
                Health Services Corporate Compliance Officer and/or the Company’s Director
                of Internal Audit.




·
            Any
                communications that such officers deem to be credible and to contain
                substantive allegations will be reported to the Lead Director and
                to the
                Chair of the Audit Committee.




·
            Priority
                will be assigned to communications involving an allegation of a threat
                to
                a person, property or the environment, and to ongoing or time-sensitive
                issues.




·
            If
                you have provided your name, or have received a control number to
                permit
                anonymous or confidential treatment, you will receive a response
                to your
                communication, by telephone or in
                writing.




·
            The
                Lead Director or Chair of the Audit Committee will decide whether
                to
                forward your communication to other Directors, including the
                non-management Directors, taking into account the substance of your
                communication and any request you may have made regarding such
                dissemination.




**Compensation
      Committee Interlocks and Insider Participation**




The
      members of the Compensation Committee, each of whom is a non-employee Director,
      are Messrs. Greene, Hartley, Luce, Ruthe and Watson. These Directors also
      served on the Compensation Committee during 2006, together with Mr. Raggio
      prior
      to his retirement in May 2006. The members of the Compensation Committee, other
      than Mr. Raggio, formed a subcommittee to act with respect to certain items
      of
      compensation of senior executive officers, in order to ensure that such
      compensation could qualify for full tax deductibility by Sierra without
      limitation under Section 162(m) of the Internal Revenue Code.




Mr.
      Raggio was a stockholder of Jones Vargas, a Nevada law firm which during 2006
      rendered legal services to the Company for which it was paid approximately
      $112,000. The legal fees paid to Jones Vargas for services rendered in 2006
      were
      higher than the historic norm because a law firm that we had previously engaged
      merged with Jones Vargas in late 2004.




**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**




**Compensation
      Discussion and Analysis**




*This
      discussion and analysis of our compensation program for named executive officers
      (“NEOs”) should be read in conjunction with the accompanying tables and text
      disclosing the compensation awarded to, earned by or paid to the NEOs for
      2006.*





We
      intend
      that our compensation program for the NEOs help ensure that outstanding
      individuals lead and manage Sierra. Furthermore, we intend that our program
      for
      compensating executives not only attract and retain such outstanding
      individuals, but also motivate them to achieve our annual and longer-term
      strategic goals.




As
      discussed in more detail below, we are pleased to report that our senior
      executive pay-for-performance alignment is strong. Based on fiscal 2005 (the
      most recently completed fiscal year for which a comparative pay-for-performance
      assessment could be performed), our measurement of both relative corporate
      financial performance and relative senior executive compensation placed us
      at
      about the 65 th percentile of 14 selected peer companies. Based on additional short and
      long-term perspectives (covering both the annual average and full three-year
      duration of fiscal years 2003 to 2005), our relative corporate financial
      performance and relative senior executive compensation were each at about the
      80 th percentile of the 14 selected peer companies. These findings indicate a strong
      alignment of relative pay and performance. The results of our review are
      discussed further below under the caption *Senior
      Executive Pay-for-Performance Alignment* .




Our
      executive compensation program is currently comprised of:




Ÿ
            Base
                salary;


Ÿ
              Annual
                  bonus, which is delivered in cash;
 7
 Return
              to Top




Ÿ
            Long-term
                incentives (“LTIs”), which are comprised of annual grants of restricted
                stock units (“RSUs”), with most RSUs granted to NEOs subject to
                achievement of a performance
                condition;




Ÿ
            Broad-based
                benefits, which are generally available to all of Sierra’s employees ,
                including retirement, health care, life insurance and employee stock
                purchase plan benefits;




Ÿ
            Supplemental
                executive benefits, including supplemental executive retirement plans
                (“SERPs”) and supplemental life insurance and certain
                perquisites;




Ÿ
            Employment
                agreements and severance provisions;
                and




Ÿ
            Executive
                stock ownership guidelines.




Each
      of
      these program components is discussed in further detail below under *Discussion
      of Each Component of the Executive Compensation Program* .




***Executive
      Compensation Program*** ***Guiding Principles For Our NEOs***




Our
      Board
      of Directors oversees and guides management in the conduct of Sierra’s
      operations, executing the business strategy under the direction of our Chief
      Executive Officer (“CEO”). To ensure that the CEO and management maintain a
      strong focus on advancing stockholders’
      interests, the Board strives to ensure that the CEO and management:




Ÿ
            Responsibly
                address the concerns of other stakeholders and interested parties
                including employees, customers, suppliers, communities served by
                the
                Company, government officials and the public at large;
                and




Ÿ
            Possess
                the skills, knowledge, experience and dedication required to lead
                Sierra
                toward realizing its mission while adhering to our values. A key
                part of
                this is achievement of our strategic and competitive business
                objectives.




In
      support of the latter objective, the Board has crafted an executive compensation
      program that is grounded in the following guiding principles:




·
            Helps*attract*high quality individuals; helps*retain*them, particularly in a competitive talent market in which our executives
                may be strongly sought after by other organizations, including larger
                organizations; and helps*motivate*them to achieve our annual and longer-term strategic
                goals;




·
            Aligns
                pay with performance, by augmenting salary and other fixed elements
                of
                compensation with “upside” pay opportunities through cash and stock-based
                incentive compensation tied to Sierra’s performance; which ties
                executives’ interests to Sierra’s success and further encourages
                executives to optimize stockholder
                returns;




·
            References
                but is not bound entirely by “competitive” or “typical” practices; rather,
                reflects those practices which best support our objectives and serve
                stockholders’ interests; and




·
            Is
                relatively simple and straightforward for both stockholders and executive
                participants to understand.




These
      guiding principles drive our strategy, design and decision-making related to
      the
      compensation provided to key executives, including our five NEOs. Our NEOs
      for
      2006 include the following five senior executives: Anthony M. Marlon, M.D.,
      Chairman and Chief Executive Officer; Jonathon W. Bunker, President and Chief
      Operating Officer; Frank E. Collins, Senior Executive Vice President, Legal
      and
      Administration and Secretary; Donald J. Giancursio, Senior Vice President,
      Sales
      and Marketing; and Paul H. Palmer, Senior Vice President, Chief Financial
      Officer and Treasurer.




8
 Return
          to Top




***Competitive
      Compensation Positioning in Relation to Our Market for Executive
      Talent***




We
      seek
      to evaluate our executive compensation program using a holistic approach that
      takes into account not only each element of executive pay, benefits and
      perquisites, but also the effectiveness and competitiveness of the overall
      program. To assess the program’s competitive positioning in relation to the
“market,” we define market as those companies with which we compete for
      executive talent, as follows:




Ÿ
            *Primary
                market for executive talent:*U.S.-based health insurers and health care providers, which have
                a
                business mix similar to the Company’s, are not closely held, and are of
                similar size to us (i.e., generally ranging from one-half to two-times
                Sierra’s size with respect to market capitalization and annual
                revenue);




Ÿ
            *Secondary
                market for executive talent (for tracking broader competitive
                practices):*Other U.S.-based health insurers and health care providers which
                may fall
                outside designated company-size parameters of the primary market
                for
                executive talent but with which we also compete for such talent;
                also
                similar size companies in other service-based industries, particularly
                for
                functional executives who may be recruited from or to such
                organizations.




We
      assess
      the competitiveness of compensation design and levels, covering both the overall
      executive compensation program and individual program components, using a
      variety of sources providing competitive market data on the defined talent
      markets described above. Competitive data sources include published executive
      compensation surveys as well as public disclosures of selected peer companies.
      In 2006, we reviewed public disclosures of 14 selected peer companies, listed
      below, to supplement published survey data for purposes of benchmarking both
      executive compensation and corporate financial performance.




AMERIGROUP
                    Corporation
                Great
                    American Financial ResourcesAviva,
                    fka AmerUs Group Co.
                Health
                    Net, Inc.Apria
                    Healthcare Group, Inc.
                HealthMarkets,
                    Inc., fka UICICentene
                    Corporation
                Humana,
                    Inc.Chemed
                    Corporation
                Molina
                    Healthcare, Inc.Coventry
                    Health Care, Inc.
                Universal
                    American Financial CorporationFBL
                    Financial Group, Inc.
                Wellcare
                    Health Plans, Inc.





In
      relation to the defined executive talent markets, we generally seek to
      maintain:




Ÿ
            *Aggregate
                base salaries*near
                the 50thpercentile;




Ÿ
            *Aggregate
                target total direct compensation*(“TDC”), which is base salary, annual bonus and LTI opportunities for
                target level performance near the 50thpercentile, while providing for upper-quartile TDC opportunities
                for
                achieving sustained, superior performance at the individual, business
                unit
                and corporate levels; and




Ÿ
            *Aggregate
                target total remuneration*(which is TDC plus benefits and perquisites) at competitive levels
                in the
                market by maintaining benefits and perquisites at market-competitive
                levels.




For
      individual executives, we may set compensation at levels above or below these
      targeted market positions to reflect an individual’s performance, experience,
      role and breadth of responsibilities. In this regard, with respect to Dr.
      Marlon, whose role and performance have been critical to Sierra’s success since
      its founding, we have set target TDC and total remuneration at levels which
      are
      substantially above the 50 th percentile. W e
      have
      taken this approach in view of Dr. Marlon’s sustained excellence in leading
      Sierra since its founding, and particularly in view of the outstanding results
      achieved by Sierra in the past five years. This strong performance has resulted
      in sharply increased performance targets in successive years in this five-year
      period.  ****


***Role
        of the Compensation Committee and Executive Officers in Determining Executive
        Compensation***
  The
        Board’s Compensation Committee (“Committee”), which is composed entirely of
        non-employee Directors who the Board has determined to be independent, operates
        under a Charter adopted by the Board. The Charter assigns to


9
 Return
          to Top


the
      Committee the responsibility to develop and make recommendations to the Board
      with respect to the Company’s compensation policies. In addition, the Committee
      has the authority to determine the compensation to be paid to the CEO and other
      NEOs and executive officers. Prior to May 23, 2006, compensation decisions
      with
      respect to the CEO and certain other NEOs and executive officers were subject
      to
      the approval of a subcommittee, the five members of which all qualify as
“outside Directors” for purposes of Section 162(m) of the Internal
      Revenue Code.




In
      addition to determining appropriate targeted levels of executive compensation,
      the Committee makes other key determinations that affect executive compensation,
      including:




·
            Setting
                the amount of additional compensation that should be paid for performance
                that exceeds targeted levels to provide an incentive for outstanding
                performance;




·
            Setting
                reduced rates of payment of compensation for performance below targeted
                levels;




·
            Establishing
                the nature of the performance goals and levels of performance set
                as
                targets;




·
            Allocating
                TDC between salary, annual bonus and LTIs;
                and




·
            Determining
                the forms in which to grant LTIs.




The
      Committee’s determination of performance goals used for annual bonus and LTIs is
      driven largely by its assessment, together with that of the Board, of Sierra’s
      unique business strategy. The Committee makes many of its decisions on
      compensation for a given year before the year begins or early in the year.
      In
      this way, it can set performance goals for executives to achieve in the coming
      year, with actual performance in that year to control the amount of compensation
      earned. By setting a range of payouts that vary with performance, the annual
      bonus program can continue to serve as an incentive throughout the year even
      if
      business performance is particularly strong or particularly weak in the early
      part of the year.




In
      2006,
      the Committee retained the services of Watson Wyatt Worldwide (“Watson Wyatt”),
      an independent executive compensation consultant, to assist the Committee in
      evaluating and designing the overall executive compensation program. Watson
      Wyatt assisted the Committee in performing a strategic executive compensation
      assessment, and its reports and recommendations to the Committee encompassed
      an
      update on trends and developments in executive compensation; suggestions to
      enhance our executive pay and performance strategy; a competitive assessment
      of
      executive pay, benefits and perquisites; an evaluation of LTI design; a
      pay-for-performance assessment covering NEOs; and development of senior
      executive “tally sheets” for the Committee’s reference in making executive pay
      decisions.




The
      CEO
      makes compensation recommendations, including base salary adjustments and annual
      bonus and LTI awards, to the Committee for other executive officers based on
      the
      CEO’s annual review of each officer’s performance. The CEO’s recommendations are
      presented to the Committee for review and approval, and the Committee retains
      full authority to act in its discretion. In some cases, certain executive
      officers (including the CEO, the President and Chief Operating Officer, the
      Senior Executive Vice President, Legal and Administration and Secretary, and/or
      the Senior Vice President, Chief Financial Officer and Treasurer) participate
      in
      portions of Committee meetings to perform such functions as reviewing and
      recommending performance metrics and goals for the annual bonus plan and
      performance RSU grants and reviewing and discussing changes to the executive
      compensation program.




***Senior
      Executive Pay-for-Performance Alignment***




The
      Company’s senior executive pay-for-performance alignment is strong, as
      determined by a pay-for-performance analysis performed by Watson Wyatt on behalf
      of the Committee in 2006. The analysis encompassed both a one-year (short-term)
      perspective and a three-year (longer-term) perspective of NEO
      pay-for-performance in relation to that of the peer companies listed above
      under
*Competitive
      Compensation Positioning in Relation to Our Market for Executive
      Talent*.
      Each
      perspective showed a high degree of alignment between the Company’s relative
      senior executive compensation and its relative corporate financial performance.
      Each perspective and related findings of the pay-for-performance analysis are
      summarized below.




10
 Return
          to Top




**Annual
                (Short-term) Pay-for-Performance Assessment****Senior
                Executive Pay**
            **Corporate
                Financial Performance***Approach:*Compared the actual realized total cash compensation (i.e., base
                salary
                plus annual bonus) given to our fiscal 2005 NEOs with actual realized
                total cash compensation delivered to 14 selected peer companies’ NEOs.
                Expressed Sierra’s pay results as a percentile ranking.
            *Approach:*Compared Sierra’s annual corporate financial performance with that of the
                14 selected peer companies, based on a composite of four corporate
                financial performance metrics: total stockholder return (“TSR”), growth in
                sales, growth in earnings per share (“EPS”), and growth in earnings before
                interest, taxes, depreciation and amortization (“EBITDA”, as a measure of
                cash flow).
              Omitted
                discontinued Texas and military operations from the Company’s income
                statement results. Expressed the Company’s performance results as a
                percentile ranking.*Findings:*Sierra’s
                relative senior executive pay was*between
                the 65**th**percentile and about the 80**th**percentile*,
                based on a one-year only view and a three-year average view.
              
              -Fiscal
                2005:*67**th**percentile*
              -Average
                of fiscal 2003-2005:*81**st**percentile*
            *Findings:*Sierra’s
                relative corporate financial performance was also*between
                the 65**th**percentile and about the 80**th**percentile*,
                based on a one-year only view and a three-year average view.
              -Fiscal
                2005:*65**th**percentile*
              -Average
                of fiscal 2003-2005:*78**th**percentile*







**Three-year
                (Longer-term) Pay-for-Performance Assessment****Senior
                Executive Pay**
            **Corporate
                Financial Performance***Approach:*Compared three-year stock compensation gains realizable by our fiscal
                2005
                NEOs with three-year stock compensation gains realizable by the 14
                selected peer companies’ NEOs. Expressed Sierra’s pay results as a
                percentile ranking.
            *Approach:*Compared our three-year corporate financial performance with that
                of the
                14 selected peer companies, based on a composite of four corporate
                financial performance metrics: TSR, growth in sales, growth in EPS,
                and
                growth in (EBITDA, as a measure of cash flow.)
              Omitted
                discontinued Texas and military operations from the Company’s income
                statement results. Expressed Sierra’s performance results as a percentile
                ranking.*Findings:*Sierra’s
                relative senior executive pay for the three-year period from fiscal
                2003
                to 2005 was at the*78**th**percentile*.
            *Findings:*Sierra’s
                relative corporate financial performance for the three-year period
                from
                fiscal 2003 to 2005 was also at the*78**th**percentile*.





The
      report provided to us by our compensation consultants in 2006 also benchmarked
      compensation levels of our NEOs. This report established median compensation
      levels for comparable positions by blending survey information with information
      for our peer group. For this purpose, the survey information was weighted 75%
      and the market information was weighted 25%. The survey information provides
      a
      specific percentile ranking only up to the 75 th percentile. For our NEOs other than the CEO, salary levels fell within a range
      near the 50 th percentile, with one salary level, that of Mr. Collins, being 9% above the
      calculated market median and the others being very close to or less than the
      calculated market median. For our CEO, the report showed that his salary was
      above the 75thpercentile of the calculated market median. Total cash compensation levels,
      summing salary and target annual bonuses, were above the calculated market
      medians, ranging from the 58thto
      68thpercentile of the calculated market for NEOs other than the CEO, and with the
      CEO’s total cash compensation level exceeding the 75thpercentile.




11
 Return
          to Top


Total
      direct compensation consists of salary, target bonus, and grant-date value
      of
      long-term incentives, which in 2006 were mostly in the form of performance-based
      restricted stock units. Taking into account our equity award grants in 2006,
      the
      total direct remuneration of NEOs ranged from the below median to above the
      75 th percentile, with Mr. Bunker at the 64 th percentile and Dr. Marlon and Mr. Collins above the 75 th percentile of the calculated market for the given job, based on 2005 competitive
      data. In the case of the CEO, we have set salary, annual bonus and long-term
      incentive award levels in view of his long and outstanding service to Sierra,
      in
      particular his critical role in our outstanding performance over the past five
      years. In addition, our CEO has long held a substantial equity position in
      Sierra, so that we have weighted his compensation more heavily in its cash
      components and less heavily in its equity components. Viewed in the context
      of
      the peer group of companies, the resulting 2006 total direct compensation for
      the CEO is at approximately the 80 th percentile of the market based on 2005 competitive compensation
      data.




***Discussion
      of Each Component of the Executive Compensation
      Program***




*Base
      Salary*




Base
      salary provides executives with a fixed level of cash income to compensate
      them
      for primary services rendered. In setting base salaries, the Company takes
      into
      account such factors as the individual’s performance, experience, role, breadth
      of responsibilities as well as competitive base salary levels. To some extent,
      the Committee’s final determination of base salary levels is a subjective one,
      giving weight to our ongoing performance and appropriateness of salary increases
      to our leaders. Each year, the Committee reviews the CEO’s base salary and
      adjusts it based on these factors. For other NEOs, the CEO reviews base salaries
      and recommends adjustments to the Committee. The Committee confers with the
      CEO
      closely in assessing other NEOs’ individual performance, taking into account
      achievement of Company and individual goals. Finally, in making NEO salary
      adjustments the Committee takes into account our annual “merit” salary increases
      for the general employee population. Thus, while the Committee takes into
      consideration market positioning, other considerations result in our setting
      salaries that may vary above or below the 50 th percentile of our peer group.




Before
      the beginning of 2006, the Committee determined to increase the CEO’s base
      salary for 2006 to $1.538 million, which represented a 2.5% merit increase
      from
      the CEO’s 2005 base salary. Three other NEOs also received a merit increase of
      2.5% for 2006. The other NEO, Mr. Giancursio, received a merit increase of
      3.8%
      for 2006. Such 2006 merit increases provided to NEOs were below the average
      merit increase of 4.1% for the general employee population.




In
      August
      2006, Mr. Bunker received an additional salary increase of 21% in consideration
      of his promotion to President and Chief Operating Officer. The effect of this
      was to raise his base salary from 3% below market median (as calculated by
      our
      consultants) to 19% above the market median figure.




Effective
      January 1, 2007, each NEO received a merit increase of 2%, which also falls
      below the 2007 merit increase budget of 3.3% for the general employee
      population.




*Annual
      Bonus*




Annual
      bonuses for NEOs (except for certain bonuses for Mr. Giancursio, discussed
      below) are provided for under the Company’s Management Incentive Compensation
      Plan (“MICP”) and are intended to reward NEO performance for assisting us in
      achieving short-term financial success. For 2006, the Committee determined
      that:




Ÿ
            NEOs’
                target 2006 annual bonus amounts, as a percentage of 2006 base salary,
                were as follows: Dr. Marlon, 100%; Mr. Bunker, 100%; Mr. Collins,
                100%;
                Mr. Palmer, 90%; Mr. Giancursio, 60%.


Ÿ
              NEOs’
                  2006 annual bonuses under the MICP would be payable only if 2006
                  EPS,
                  fully diluted, was at or above $2.02; otherwise, no bonuses would
                  be
                  payable to the NEOs.**This designated EPS level was based on our budgeted EPS as of December
                  2005, and represented a target level that was 11.6% above our 2005
                  fully
                  diluted EPS of $1.81.
 
 12
 Return
              to Top




Ÿ
            Assuming
                2006 EPS was at or above $2.02 as discussed above, NEOs’ 2006 MICP annual
                bonus payouts would be determined based on achievement of other financial
                and operational and/or individual objectives, with the Committee
                having
                discretion to pay additional bonus up to the designated maximum.
                The
                specified additional performance measures and their weighting under
                the
                2006 MICP were as follows:




**Performance
                Metric**
            **Weighting
                in Bonus Calculation**
            **Range
                of Earnings**Operating
                income as a percentage of targeted operating income (for this purpose,
                operating income included the expense of the bonuses to be paid under
                the
                MICP) and
              Financial
                cash flow (measured as EBITDA) as a percentage of targeted financial
                cash
                flow
            Weighted
                85% for purposes of preliminary bonus amount
            0%
                to 175% (of the 85%)Measures
                of quality of care and quality of service
            Weighted
                10% for purposes of preliminary bonus amount
            0%
                to 150% (of the 10%)Voluntary
                employee turnover rates
            Weighted
                5% for purposes of preliminary bonus amount
            0%
                to 200% (of the 5%)Individual
                performance and development
            Multiplier
            0%
                to 125% times preliminary bonus amountCEO’s
                challenge - prescription drug program profit margin
            A
                pool equal to 10% of the aggregate bonus pool
            Allocated
                to participants at the Committee’s discretion







For
      the
      NEOs participating in the MICP, we established a matrix for measuring combined
      operating income and cash flow (EBITDA) results. The 2006 target operating
      income level was $204.99 million, and the 2006 targeted cash flow level was
      $223.04 million. These performance objectives were set in an effort to focus
      management on Sierra’s increasing cashflows and earnings to improve our
      financial strength and leverage ratios as well as to maximize earnings and
      stockholder value. The matrix provided payout levels for achievement of between
      90% and 110% of the target amounts. Threshold, target and maximum earnings
      levels were as follows: A 50% earnings level for achievement of 90% of each
      of
      operating income and cash flow targets; a 100% earnings level for achievement
      of
      100% of each of operating income and cash flow targets, and a 175% earnings
      level for achievement of 110% of each of operating income and cash flow targets.
      As shown in the table above, the percentage earnings level would be multiplied
      by 85% of the NEO’s target bonus. Based on our 2006 operating income of $217.4
      million and EBITDA of $234.0 million, the resulting earnings level for this
      element of MICP annual bonus was 147.2%, which, when weighted 85% for purposes
      of the preliminary bonus amount calculation, contributed 125.1% to the
      preliminary bonus amount.




For
      purposes of the MICP, we measure quality of care and quality of service based
      on
      a combination of third-party quality measures and our measured customer
      satisfaction levels. This performance element was met at target levels in 2006,
      resulting in an additional 10% of target accruing to each NEO’s preliminary
      bonus amount.




The
      employee turnover performance measure rewards executives for retaining our
      staff
      (i.e., holding down employee turnover). We view this as an important element
      of
      our long-term success in providing quality care. This performance measure,
      applied to Mr. Bunker and Mr. Giancursio, was based on turnover at specified
      business units other than the parent company, while other NEOs were measured
      based on the turnover rate at our parent company. Under this measure, Mr. Bunker
      and Mr. Giancursio received credit of 3.3% toward their preliminary bonus
      amount, while other NEOs received credit of 10% toward their preliminary bonus
      amount.




13
 Return
          to Top




Once
      the
      preliminary bonus amount is calculated, individual performance can then modify
      it, from a low of 0% to a high of 125% of the preliminary amount. An individual
      rating of less than 50% is considered unsatisfactory and may result in no bonus
      being payable. Individual objectives may include meeting specified revenue
      goals, business expansion goals, cost targets or goals relating to acquisitions
      or divestitures. For 2006, each of the NEOs achieved a high individual
      performance rating that resulted in a 25% enhancement of the executive’s
      calculated preliminary bonus amount.




As
      a
      result, the 2006 MICP bonuses were payable at the following calculated
      percentages of 2006 base salary: Dr. Marlon, 181%; Mr. Bunker, 173%; Mr.
      Collins, 181%; Mr. Palmer, 163%; and Mr. Giancursio, 104%. The Compensation
      Committee retains discretion regarding the final amount of the annual incentive
      payable under the MICP to increase or decrease the final amount payable, subject
      to (i) the requirement that the EPS goal has been met, (ii) the maximum
      per-person limitation under the LTIP (4% of pre-tax operating income), and
      (iii)
      the maximum payout level under the MICP formulas presented above but with the
      Committee given discretion to award an additional amount equal to the added
      bonus that would have resulted from operating income and cash flow at levels
      triggering a 300% earning level under the financial goals matrix (projected
      to
      that level) plus allocation of up to the full amount of a designated additional
      bonus pool to the named executive. For 2006, the Committee authorized this
      additional bonus pool - referred to as the “CEO’s challenge” - based on
      profitability of our Medicare Part D Prescription Drug Program (“PDP”). The
      amount of this pool was equal to 10% of the calculated bonus pool for all MICP
      participants resulting under the above calculations, with the amounts in this
      pool distributable by the Committee at its discretion. In exercising this
      discretion, the Committee took into account a number of factors, including
      (i)
      success in the control of general and administrative expenses, (ii) the extent
      to which EPS exceeded plan and resulted in increases in street estimates during
      the year, (iii) growth in commercial membership, (iv) an increased credit
      facility and lowered drawn and undrawn borrowing costs, (v) investment income
      in
      excess of plan, and (vi) credit upgrades by rating agencies. The Committee
      also
      took into account business challenges, in particular the fact that some large
      accounts that had become self insured, and the strength of Sierra’s 2006
      business performance in the face of those challenges. The Committee determined
      to increase the bonus payouts to NEOs, other than Dr. Marlon, as an allocation
      of the CEO’s challenge bonus pool and as additional bonus in recognition of this
      performance. As a result, the bonuses under the MICP, as reflected in the
“Non-Equity Incentive Plan Payouts” column of the Summary Compensation Table,
      for Messrs. Collins, Bunker, Palmer, and Giancursio substantially exceeded
      the
      preliminary bonus amount calculated under the MICP. The Committee elected to
      round Dr. Marlon’s bonus amount downward slightly from the preliminary bonus
      amount calculation.




The
      Committee designated a portion of the bonus amounts as subject to a delay in
      payment until the final reconciliation of the results of our PDP for 2006.
      As
      discussed in this Form 10-K (as originally filed), the PDP was new for 2006,
      and
      the final reconciliation of the results of the 2006 program is not expected
      to
      occur with the Centers for Medicare and Medicaid Services (CMS) until around
      the
      third quarter of 2007. If the results of this final reconciliation are not
      what
      we have estimated, the actual results may have a materially adverse effect
      on
      our operating results. In such case, the Committee reserves the right to adjust
      the bonus amounts subject to the delay in payment. These delayed bonus amounts
      are as follows: Dr. Marlon, $1 million; Mr. Bunker, $250,000; Mr. Collins,
      $150,000; Mr. Palmer, $100,000; and Mr. Giancursio, $100,000.




As
      Senior
      Vice President, Sales and Marketing, Mr. Giancursio also participates in a
      separate bonus plan under which he receives quarterly payouts tied directly
      to
      1) quarterly gross sales goals; 2) quarterly account retention goals; and 3)
      quarterly new business and renewal yield targets. Actual performance in relation
      to goals is determined based on our quarterly financial results. For 2006,
      Mr.
      Giancursio received the quarterly bonus payouts under this bonus program
      aggregating $100,852 out of a potential maximum of $120,000.




*Long
      Term Incentives*




We
      deliver LTIs in the form of stock-based incentive compensation. As stated above,
      we generally seek to award LTIs at competitive market levels but provide further
      performance-based “upside” compensation opportunities which are
      potentially well above median market levels. Because such upside opportunities
      would be a direct result of growth in the value of our common stock, our LTI
      program is well aligned with stockholder interests.  The
        primary objectives of the LTI program, listed below, fully support our executive
        compensation guiding principles




14
 Return
          to Top


.


·
            Encourage
                efforts to increase stockholder
                value;




·
            Promote
                achievement of strategic goals;




·
            Design
                LTIs which are relatively simple to
                understand;




·
            Encourage
                ownership of Sierra stock; and




·
            Effectively
                manage stock compensation cost with regards to accounting expense,
                stockholder value transfer (i.e., expense as a percentage of market
                capitalization), share utilization and tax
                deductibility.




Historically,
      the Company delivered LTIs in the form of stock options, which supported the
      objectives listed above including effective cost management, since stock options
      had incurred no accounting expense under accounting rules in effect before
      2006.
      In 2006, new accounting rules required “fair value” accounting for all forms of
      stock-based compensation, including stock options, effectively increasing the
      expense of stock options as compared to other types of stock-based compensation.
      This event provided a new opportunity for us to consider the advantages and
      disadvantages of all forms of stock-based compensation, including other
      effective forms of performance-based LTIs. Consequently, in 2006, the Committee
      determined to grant annual LTI awards to NEOs in the form of RSUs. Most of
      the
      RSUs granted in 2006 to NEOs were performance-based, but we granted time-based
      RSUs to Mr. Palmer and 40% of the grant to Mr. Giancursio was
      time-based.




Performance-based
      RSUs are units denominated in shares of our stock which vest (i.e., the risk
      of
      forfeiture upon a voluntary termination of employment lapses) only upon the
      achievement of an EPS performance goal, providing that the NEO generally also
      must remain employed through that vesting date. We selected performance-based
      RSUs as our ongoing, primary form of LTI for a variety of reasons,
      including:




·
            Reduced
                levels of stock utilization (including dilution and potential dilution
                from outstanding awards) caused by full-value
                awards;




·
            The
                ability to qualify performance-based RSUs for full tax-deductibility
                as
                “performance-based compensation” under Internal Revenue Code
                Section 162(m); and




·
            Their
                effectiveness toward motivating executives to achieve annual goals
                (i.e.,
                EPS performance) and longer-term, stockholder-related goals (i.e.,
                stock
                price growth), as well as encouraging executive retention (i.e.,
                time-based service requirements applicable to a grant each
                year).




To
      evaluate performance-based RSU grants as a component of overall compensation,
      we
      value the RSUs based on current market prices of our common stock. We consider
      other factors as well in making grants, including the individual’s past and
      current performance, the strength of prior year performance, the budgeted effect
      of expense from the long-term incentive grant on current-year performance and
      projected expense levels for future years, compliance with stock ownership
      requirements under the Executive Stock Ownership Program and other subjective
      factors. We generally do not assign any particular weighting to these
      considerations.




As
      shown
      under the caption *Grants
      of Plan-Based Awards for 2006* and *Option
      Exercises and Stock Vested -- 2006* below,
      we granted performance-based RSUs on August 17, 2006. On that date, Dr. Marlon
      received 40,000 performance RSUs; Mr. Bunker received 28,000 performance RSUs;
      Mr. Collins received 22,000 performance RSUs; and Mr. Giancursio received 8,400
      performance RSUs. Such performance-based RSUs were scheduled to vest on December
      31, 2006 if fully diluted EPS for the fourth quarter of 2006 was at least $0.53,
      representing 20% growth over fourth quarter 2005 EPS. If vested based on
      performance, the stock units would be settled on August 17, 2009, subject to
      accelerated settlement in the case of certain terminations or a change in
      control. Actual fourth quarter 2006 EPS was $0.65, so the EPS performance goal
      was achieved and the performance-based RSUs vested on December 31, 2006. We
      selected a relatively short-term performance goal to ensure full deductibility
      under Code Section 162(m) and consistent with our practice in recent years
      to
      recognize the expense for our long-term incentive awards predominantly in the
      year in which the award is granted rather than over multiple years.




15
 Return
          to Top


We
      granted time-vested RSUs to two NEOs in 2006. In the case of Mr. Palmer, we
      granted 500 RSUs that would vest if he continued in employment through December
      31, 2006. We set the amount and vesting terms of this award taking into account
      Mr. Palmer’s announcement that he was stepping down from his position during
      2007 but working with us on a transition of his duties to a successor. In the
      case of Mr. Giancursio, we granted 40% of his LTI award for 2006 in the form
      of
      5,600 time-vested RSUs which vest over a four-year period. We structured LTI
      awards to a group of executives below the most senior level as partly
      performance-based RSUs and partly time-vested RSUs based on our view that their
      exposure to performance risk should not be as great as in the case of the most
      senior executives, and with the view that time-vested RSUs provided for a
      greater long-term retention effect.




Whether
      for past grants of stock options or more recent grants of performance RSUs,
      we
      have not maintained a formal policy which prescribes specific timing of grants.
      However, prior to 2006, we typically made annual grants to all recipients on
      the
      date of the spring (normally April or May) Board meeting. In 2006, we delayed
      the annual grant until the August Board meeting due to a management
      reorganization which we implemented in spring and summer 2006. The Committee
      determined that 2006 performance RSU grants should not be made until completion
      of the reorganization so that, in determining individual grant levels, the
      Committee could take into account such factors as recipients’ new roles and
      breadth of responsibilities.




*Executive
      stock ownership requirements*




In
      1995,
      the Company implemented the Executive Stock Ownership Program to further align
      management’s interests with stockholders. The program requires that certain
      stock ownership levels be reached and maintained by executive officers of the
      Company. Ownership requirements are determined by the executive’s base salary at
      date of hire or promotion date. Once the initial goal is achieved after three
      years, the executive’s ownership requirement is modified annually to tie it to
      his or her next year’s salary and then-current market prices of our common
      stock. Longer periods are allowed for executives to reach required ownership
      levels if the levels rise due to large stock price movements. Executive
      officers, other than the CEO, are required to acquire stock or hold vested
      stock
      options and vested RSUs equal in value to the executive’s targeted salary. The
      CEO is required to maintain stock ownership (determined on the same basis)
      equal
      in value to four times his target salary. As of fiscal year-end 2006, all NEOs
      exceeded their ownership requirements: the CEO exceeded his ownership
      requirement 25 times over; the other NEOs on average exceeded their ownership
      requirements nine times over. Our Policy on Insider Trading prohibits short
      sales and transactions in derivative securities which would effectively “hedge”
an executive’s risk of ownership of Sierra stock. The Policy permits
      case-by-case exceptions upon a finding that a proposed transaction in derivative
      securities is not part of a speculative or short-term trading strategy.




*Broad-based
      benefits*




NEOs
      participate in various benefit programs that are generally available to all
      employees of the Company, including broad-based defined contribution retirement
      benefits, health care benefits, group term life insurance and an employee stock
      purchase plan (“ESPP”). These are meant to provide a competitive level of
      benefits that helps us attract and retain all employees, including NEOs.




The
      purpose of the Company’s 401(k) defined contribution retirement plan is to
      provide employees the opportunity to save income for retirement on a
      tax-deferred basis. The 401(k) plan is a tax-qualified
      retirement savings plan that permits employees to defer the lesser of up to
      75%
      of their annual salary or the limit prescribed by the Internal Revenue Service
      to the 401(k) plan on a before-tax basis. Employees’ elective deferrals are
      immediately vested and non-forfeitable upon contribution to the 401(k) plan.
      We
      currently make matching contributions to the 401(k) Plan in an amount up to
      a
      maximum of 6% ****** of
      the
      participant’s annual salary contributed and subject to certain other limits. The
      employee is immediately vested in the first 4% of contributions by the Company.
      After 3 years of service, the employee is vested for the remaining 2% of
      contributions by the Company. Employees of the Company are eligible to
      participate in the 401(k) Plan after six months of service.




The
      purpose of the Company’s ESPP is to encourage employees to own Sierra stock and,
      in turn, share in the success of our stock performance. Under the ESPP,
      employees may purchase through payroll deductions newly issued shares of our
      common stock at 85% of the fair market value of such shares on the lower of
      the
      first or last trading day of each six-month plan purchase
      period.


16
 Return
          to Top


*Supplemental
      executive benefits and perquisites*




NEOs
      also
      participate in certain supplemental benefit and perquisites programs which
      are
      generally not available to all employees of the Company but which are intended
      to serve a particular business purpose, help retain key executives, or both.
      These include supplemental executive retirement plan (“SERP”) benefits, a
      deferred compensation program, split-dollar life insurance, and perquisites
      in
      the form of company-sponsored country club memberships and personal use of
      the
      Company’s aircraft.




*SERP* .
      The
      SERP is designed to provide a select group of executives with non-qualified
      retirement benefits that supplement those provided under the 401(k) plan, since
      such executives’ ability to save for retirement under the 401(k) plan is
      relatively limited due to Internal Revenue Service regulations for qualified
      defined contribution plans. The SERP also provides an inducement for
      participating executives to remain with the Company. The Company currently
      maintains three SERP plans: SERP I, SERP II, and SERP III. We established SERPs
      I and II in 1997 and 1998 to provide a competitive retirement program that
      would
      have a strong retention effect on members of our management team. Those SERPs
      included terms that offset the value of our previous retirement contributions
      under defined contribution plans from the ultimate payout of benefits under
      the
      SERPs. These offset accounts are currently relatively substantial amounts,
      reducing the cost of SERP I and SERP II.




*Deferred
      compensation.* The
      Company maintains a non-qualified deferred compensation program to provide
      specified tax-deferred savings benefits to a select group of management or
      highly compensated employees, including NEOs. Under the plan, a participating
      executive may elect to defer up to 90% of annual base salary and annual bonus
      and, if the participant also participates in the 401(k) plan, we provide a
      matching contribution to offset certain limitations on the Sierra matching
      contributions to the participant’s 401(k) plan account. In 2006, none of the
      NEOs elected to defer any compensation under the plan.




*Split
      dollar life insurance.*  We
      implemented a program in 1997 under which we purchased life insurance policies
      for senior executive officers for which we would pay the premiums over a period
      of years under terms that would provide that we ultimately would be repaid
      those
      premiums without interest at the end of a 15-year period, or earlier in the
      event a death benefit were paid. The program provided a relatively low-cost
      and
      tax-favorable means for us to provide additional life insurance protection
      for
      senior executives and an additional retirement savings vehicle, with terms
      that
      promoted retention and long-term service by our executives. The benefit to
      participants and costs to us arose essentially from the fact that our payment
      of
      premiums in a given year had the economic effect of a no-interest loan to the
      participant, and we reported this value (on a present-value basis) as
      compensation to the executive in our proxy statements in the year in which
      we
      paid the premiums. The Sarbanes-Oxley Act of 2002 prohibited loans to executive
      officers, as a result of which we determined to cease paying premiums under
      the
      policies. The policies remain in effect, but in the absence of payment of
      premiums, a portion of the built-up policy value is being applied to pay for
      insurance protection each year. It is possible that the effect of this would
      be
      to reduce the value of the policies to a level which would not provide for
      full
      repayment to Sierra for premiums it has paid. We therefore have elected to
      show
      the value of the insurance protection being provided under these continuing
      policies as additional income to the NEOs.




*Company-sponsored
      country club memberships.* The
      purpose of Company-sponsored country club memberships is to provide selected
      NEOs with an additional forum and location to conduct business with customers
      and other business contacts. In 2006, the Company paid membership dues for
      Mr.
      Bunker and Mr. Giancursio. We do this primarily for business purposes but,
      recognizing that such memberships confer an element of personal benefit, we
      disclose the full amount of these payments as a perquisite as required by SEC
      disclosure rules.




*Personal
      use of the Company’s aircraft.* Sierra
      has an ownership interest in aircraft to be used primarily for business-related
      travel of executive officers. Use of our aircraft enables executives to meet
      demanding travel required in performing duties assigned to them. On occasion,
      NEOs may use our aircraft for personal travel. This serves to recognize the
      executive’s contributions to Sierra and to save valuable time for the executive.
      We treat the value of this perquisite as a portion of the executive’s
      compensation, as reported in the “All Other Compensation” column of the Summary
      Compensation Table below. In January 2007, the Company implemented a policy
      for
      use of the aircraft, limiting aggregate personal use to less than 35% of total
      use (based on occupied seat hours). The CEO must approve personal use and
      personal use by NEOs must be disclosed to stockholders in relevant SEC public
      filings. Under applicable IRS rules, no tax deduction will be allowed to us
      for
      expenses attributed to personal use, based on occupied seat hours, to the extent
      the expense exceeds the Standard
      Industry Fare Level (SIFL) amount deemed to be




17
 Return
          to Top


income
      to
      the executive resulting from such personal use. For 2006, we estimate the value
      of the disallowed tax deduction relating to personal use of our corporate
      aircraft, based on our estimated marginal federal income tax rate, was
      approximately $293,000.




*Employment
      agreements and severance provisions*




We
      have
      entered into employment agreements with all NEOs to help promote their long-term
      service to us and, in turn, reduce the risk that our talented and experienced
      executives will be recruited away from us, particularly by large competitors
      with national reach. The principal terms of the agreements are described below
      under the captions *Additional
      Information Relating to Summary Compensation Table and Grants of Plan-Based
      Awards Table* and *Potential
      Termination and Change-in-Control Payments.*




We
      provide severance protection to our NEOs under the terms of their employment
      agreements. We believe this protection fosters a long-term perspective and
      permits executives to focus upon executing our strategy and enhancing
      stockholder value without undue concern or distraction. This protection is
      also
      intended to be fair and competitive to aid in attracting and retaining
      experienced executives, who generally seek to be protected in the event of
      termination without cause or as a result of actions we may take giving him
      or
      her good reason to terminate employment. We believe that the protection we
      provide, including the level of severance payments and post-termination
      benefits, is appropriate in fostering long-term stockholder-value enhancing
      performance, and within the range of competitive practice.




In
      line
      with competitive practices, we provide for increased severance payments and
      benefits should the executive be terminated without cause or terminate for
      good
      reason after a change in control. This protection, while potentially costly,
      provides a number of important benefits to Sierra. First, it permits an
      executive to evaluate a potential change-in-control transaction while relatively
      free of concern for his or her own situation, reducing the potential for
      conflict between his or her own interests and those of our stockholders. Second,
      change-in-control transactions take time to unfold, and a stable management
      team
      can help to preserve our operations in order to enhance the value delivered
      to
      our stockholders from a transaction or, if no transaction is consummated, to
      ensure that our business will continue without undue disruption afterwards.
      We
      believe that the potential cost of executive change-in-control severance
      payments and benefits, as a percentage of the potential transaction price,
      would
      be well within the range of reasonable industry practice, and represents an
      appropriate cost relative to the benefits to us and our stockholders. As
      indicated in the section captioned *Potential
      Termination and Change-in-Control Payment* below,
      while we provide for payments to named executives to keep them whole for any
      golden parachute excise taxes, the overall design of our compensation program
      and recent compensation history have reduced the likelihood that such “gross-up”
payments would be paid by us in connection with a change in control.




***Tax
      Deductibility of Compensation Under Internal Revenue Code
      Section 162(m)***




In
      implementing our compensation programs, the Compensation Committee’s general
      policy is to consider any significant effects of Section 162(m) of the
      Internal Revenue Code. Section 162(m), under certain circumstances,
      disallows a public company’s tax deduction for certain compensation paid to the
      NEOs to the extent that compensation exceeds $1 million in any tax year.
      Compensation that qualifies as “performance-based” compensation is excluded from
      the $1 million deductibility cap, and therefore remains fully tax
      deductible. The Committee has taken steps so that annual incentive compensation
      and performance-based RSUs granted to senior executive officers are subject
      to
      performance conditions and can qualify as “performance-based” compensation and,
      therefore, be fully deductible by us. The regulations under
      Section 162(m) impose a number of technical requirements in order for
      such compensation to qualify as “performance-based.” In addition, some forms of
      compensation, such as salary and time-based RSUs, do not currently qualify
      as
“performance-based” compensation. There can be no assurance that compensation in
      excess of $1 million paid to any executive officer will be fully tax
      deductible under Section 162(m). As a result of payment to Dr. Marlon of
      salary in excess of $1 million, for 2006, he received compensation that was
      non-deductible by us under Code Section 162(m). We estimate the value of this
      lost tax deduction for 2006, based on our estimated marginal federal income
      tax
      rate, at $221,729. Preserving deductibility under Section 162(m) is
      only one consideration among many in implementing our executive compensation
      program. In some cases, we have concluded that compliance with
      Section 162(m) in connection with any component of compensation may
      interfere with more important objectives or impose burdens or costs that
      outweigh the benefit of preserving full tax deductibility under
      Section 162(m).




18
 Return
          to Top


**COMPENSATION
      COMMITTEE REPORT**




The
      Compensation Committee of the Board of Directors of Sierra Health Services,
      Inc.
      has reviewed and discussed with management the Compensation Discussion and
      Analysis that appears above. Based on such review and discussion with
      management, the Compensation Committee recommended to the Board that the
      Compensation Discussion and Analysis be included in this Annual Report on Form
      10-K/A for filing with the Securities and Exchange Commission.




THE COMPENSATION COMMITTEECHARLES L. RUTHE, CHAIRMANALBERT L. GREENETHOMAS Y. HARTLEYMICHAEL E. LUCEANTHONY L.
                WATSON




**COMPENSATION
      OF NAMED EXECUTIVE OFFICERS**




The
      following table sets forth information concerning the compensation for services
      for the fiscal year ended December 31, 2006 for the Chief Executive Officer,
      the
      Chief Financial Officer, and each of our three other most highly compensated
      executive officers (referred to as the NEOs):




**SUMMARY
      COMPENSATION TABLE FOR 2006**




Name
                and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
                (1)
            
            Stock
                Awards
              ($)
                (2)
            
            Option
                Awards
              ($)
                (3)
            
            Non-Equity
                Incentive Plan Compensation ($) (4)
            
            Change
                in Pension Value and Non-qualified Deferred Compensa-
              tion
                Earnings
              ($)
                (5)
            
            All
                Other Compensa-tion
              ($)
                (6 )
            
            Total
              ($)(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)Anthony
                M. Marlon, M.D.
              CEO
                and Chairman of the
              Board
            
            
            2006
            
            
            1,536,058
            
            
            --
            
            
            1,497,608
            
            
            357,500
            
            
            2,750,000
            
            
            4,147,140
            
            
            341,349
            
            
            10,629,655Paul
                H. Palmer
              Sr.
                Vice President and Chief
              Financial
                Officer
            
            
            2006
            
            
            327,692
            
            
            --
            
            
            21,800
            
            
            175,275
            
            
            700,000
            
            
            695,908
            
            
            90,987
            
            
            2,011,662Jonathon
                W. Bunker
              President
                and Chief Operating
              Officer
            
            
            2006
            
            
            466,154
            
            
            --
            
            
            1,048,325
            
            
            175,275
            
            
            1,250,000
            
            
            1,900,000
            
            
            36,566
            
            
            4,876,320Frank
                E. Collins
              Sr.
                Exec. Vice President
              Legal
                & Administration & Secy
            
            
            2006
            
            
            368,654
            
            
            --
            
            
            823,684
            
            
            175,275
            
            
            900,000
            
            
            1,358,618
            
            
            60,229
            
            
            3,686,460Donald
                J. Giancursio
              Sr.
                Vice President,
              Sales
            
            
            2006
            
            
            219,746
            
            
            176,308
            
            
            338,900
            
            
            106,355
            
            
            600,000
            
            
            105,682
            
            
            41,645
            
            
            1,588,636





(1)
            The
                amount in column (d) represents a sales bonus to Mr. Giancursio in
                the
                amount of $101,308 and a payment for entering into a non-competition
                agreement in the amount of $75,000.




(2)
                The
                    amounts in column (e) reflect the expense we recognized for financial
                    statement reporting purposes for 2006, in accordance with Statement
                    of
                    Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), for stock
                    awards under our 1995 Long-Term Incentive Plan (“LTIP”), without regard to
                    estimated forfeitures of such awards. The amount includes expense
from
                    awards granted in 2006. Assumptions used in the calculation of
                    these
                    amounts are discussed in Note 9 to our audited


19
 Return
          to Top




financial
                      statements for the fiscal year ended December 31, 2006, included
                      in our
                      Annual Report on Form 10-K filed with the Securities and Exchange
                      Commission on February 27,
                      2007.


(3)
            The
                amounts in column (f) reflect the amount of expense we recognized
                for
                financial statement reporting purposes for 2006, in accordance with
                SFAS
                123(R), for options under our LTIP, without regard to estimated
                forfeitures of such awards. The amount includes expense from options
                granted before 2006 which remained unvested in any part of 2006.
                We
                granted no stock options in 2006. Assumptions used in the calculation
                of
                this amount for fiscal years ended December 31, 2001, 2002, and 2003
                are
                discussed in Note 16 to our audited financial statements for the
                fiscal
                year ended December 31, 2003, included in our Annual Report on Form
                10-K
                filed with the Securities and Exchange Commission on March 5, 2004,
                and
                assumptions used in the calculation of this amount for fiscal years
                ended
                December 31, 2004, and 2005 are discussed in Note 9 to the Company’s
                audited financial statements for the fiscal year ended December 31,
                2006,
                included in the Company’s Annual Report on Form 10-K filed with the
                Securities and Exchange Commission on February 27, 2007.




(4)
            The
                amounts in column (g) reflect the cash awards paid under the FY 2006
                Management Incentive Compensation Plan, which is discussed further
                below
                under the heading*Additional
                Information Relating to Summary Compensation Table and Grants of
                Plan-Based Awards Table*.
                This includes bonus amounts earned by performance in 2006, certain
                portions of which were paid in 2007.




(5)
            The
                amounts in column (h) reflect the increase in the present value of
                the
                NEO’s benefits under our pension plans determined using interest rate
                and
                related assumptions consistent with those used in our financial
                statements, and, in the case of Mr. Giancursio, includes amounts
                that the
                NEO currently may not be entitled to receive because such amounts
                are not
                vested. The present values of pensions are calculated for this purpose
                in
                a manner consistent with the calculation of present value for purposes
                of
                the table under the caption “Pension Benefits”
                below.




(6)
            The
                table below shows the items comprising compensation in column (i),
                which
                include our matching contributions for each individual’s contributions
                under our Profit Sharing/401(k) Plan and Trust (“401(k) Plan”), a defined
                contribution retirement plan available to our employees; imputed
                income
                charge for the Company’s Split Dollar Life (“SDL”) Insurance premium; and
                perquisites. We calculate our incremental cost of permitting personal
                use
                of the corporate aircraft based on the cost of fuel, trip-related
                maintenance and maintenance and depreciation based on hours of use,
                crew
                travel expenses, on-board catering, landing fees, trip-related hangar
                and
                parking costs, and similar variable costs, offset by any time-share
                lease
                payments by the executive. Because the company-owned aircraft are
                used
                primarily for business travel, we do not include the fixed costs
                that do
                not change based on usage, such as pilots’ salaries, the purchase costs of
                the company-owned aircraft, and the cost of maintenance not related
                to
                trips and hours of use.




Name
            
            401(k)
              Matching
                Contribution
            
            Imputed
                Income Charge for SDL (a)
            
            Perquisites
                - Aircraft Use
            
            Other
                Perquisites (b)
            
            Total
                “All Other Compensation”Anthony
                M. Marlon, M.D.
            
            $
            13,200
            
            $
            15,059
            
            $
            311,705
            
            $
            1,385
            
            $
            341,349Paul
                H. Palmer
            
            
            10,800
            
            
            914
            
            
            77,869
            
            
            1,404
            
            
            90,987Jonathon
                W. Bunker
            
            
            10,800
            
            
            1,391
            
            
            12,431
            
            
            11,944
            
            
            36,566Frank
                E. Collins
            
            
            12,880
            
            
            1,700
            
            
            44,264
            
            
            1,385
            
            
            60,229Donald
                J. Giancursio
            
            
            10,800
            
            
            3⁄4
            
            
            22,457
            
            
            8,388
            
            
            41,645





(a)
            Amounts
                in this column represent imputed income resulting from split-dollar
                life
                insurance policies. These amounts represent the taxable value of
                the life
                insurance provided to the NEO.


(b)
                These
                      amounts include country club membership dues for Messrs. Bunker
                      and
                      Giancursio, spousal travel to a Board of Directors meeting
                      for NEOs other
                      than Mr. Giancursio and spousal travel to a sales conference
                      for Mr.
                      Bunker.


20
 Return
          to Top




**Grants
      of Plan-Based Awards For 2006**




The
      following table shows all plan-based awards granted to the NEOs for 2006. The
      payouts for 2006 resulting from the non-equity incentive plan awards are
      reflected in the *Summary
      Compensation Table* under
      the column “Non-Equity Incentive Plan Compensation,” and the stock awards
      identified in this table also appear in the *Outstanding
      Equity Awards at Fiscal Year-End - 2006 Table* below.
      All stock awards were granted under our LTIP.




**GRANTS
      OF PLAN-BASED AWARDS FOR 2006**





Name
            Grant
                Date
            Estimated
                Future Payouts Under Non-Equity Incentive Plan Awards
            Estimated
                Possible Payouts Under Equity Incentive Plan Awards
            All
                Other Stock Awards: Number of Shares or Stock Units (#)
                (4)
            Grant
                Date Fair Value of Stock and Option Awards
              ($)
                (5)Threshold
              ($)
            Target
              ($)
                (1)
            Maximum
              ($)
            Threshold
              (#
                )
            Target
              (#
                ) (3)
            Maximum
              (#
                ) (3)(a)
            (b)
            (c)
            (d)
            (e)
            (f)
            (g)
            (h)
            (i)
            (j)Anthony
                M. Marlon, M.D.
            8/17/06
            
            
            
            3⁄4
            40,000
            40,000
            3⁄4
            1,497,6083/14/06
            3⁄4
            1,537,500
            (2)Paul
                H. Palmer
            8/17/06
            
            
            
            
            
            
            500
            21,8003/14/06
            3⁄4
            295,200
            (2)Jonathon
                W. Bunker
            8/17/06
            
            
            
            3⁄4
            28,000
            28,000
            3⁄4
            1,048,3253/14/06
            3⁄4
            525,000
            (2)Frank
                E. Collins
            8/17/06
            
            
            
            3⁄4
            22,000
            22,000
            3⁄4
            823,6843/14/06
            3⁄4
            369,000
            (2)Donald
                J. Giancursio
            8/17/06
            
            
            
            3⁄4
            8,400
            8,400
            5,600
            518,7813/14/06
            3⁄4
            132,034
            (2)





(1)
            This
                is an amount equal to the NEO’s 2006 salary.




(2)
            The
                maximum amounts payable under this award were subject to two formulaic
                limitations. First, under the LTIP, the maximum award could not exceed
                4%
                of pre-tax operating income for 2006 (for the year, this amount was
                $8,619,720). Second, under the MICP, the maximum individual award
                was
                subject to limits based on the Plan’s formulas and bonus pools, as
                explained in the Compensation Discussion and Analysis—Discussion of Each
                Component of the Executive Compensation Program—Annual Bonus.




(3)
            The
                amounts shown in these columns represent the number of performance-related
                restricted stock units (“RSUs”) that were granted to each of the NEOs on
                August 17, 2006. At that date, the closing price of our common stock
                was
                $43.60 a share. The vesting of these RSUs was subject to Sierra meeting
                its earnings per share goal for 4thquarter 2006 of $0.53. We met this goal and all of the RSUs in this
                column
                vested on December 31, 2006. The vested performance-based RSUs will
                be
                settled on August 17, 2009, subject to accelerated settlement in
                certain
                cases.




(4)
            The
                amounts shown in this column represent time-vested RSUs granted on
                August
                17, 2006. In the case of Mr. Palmer, all of his RSUs vested and became
                settleable on December 31, 2006. In the case of Mr. Giancursio, the
                non-performance-based RSUs shown in this column represent 40% of
                his 2006
                grant of RSUs. These RSUs will vest as to 25% on each of May 10,
                2007, May
                10, 2008, May 10, 2009 and May 10, 2010.
                The first three tranches that vest will be settled on August 17,
                2009; the
                fourth tranche will vest and be settled on May 10, 2010. Vesting
                and
                settlement are subject to acceleration in the event of certain types
                of
                termination of employment or a change in
                control.




(5)
                  The
                    amounts shown in this column represent the fair value of the
                    stock awards
                    at the date of grant, as computed in accordance with SFAS 123(R).
                    See also
                    footnote (1) to the Summary Compensation Table.




21
 Return
          to Top








The
                  closing price of our stock on the date of grant was $43.60. Fair
                  value,
                  determined in accordance with SFAS 123(R), is lower than the grant-date
                  market price of common stock in the case of RSUs that are subject
                  to a
                  mandatory deferral period after vesting.


**Additional
      Information Relating to Summary Compensation Table and Grants of Plan-Based
      Awards Table**




The
      following provides background information to give a better understanding of
      the
      compensation amounts shown in the Summary Compensation Table and Grants of
      Plan-Based Awards Table above.




*Non-Equity
      Incentive Plan Compensation*




The
      amounts shown in the two tables above as “Non-Equity Incentive Plan
      Compensation” result from cash-based awards under our Management Incentive
      Compensation Plan (the “MICP”) for all NEOs. Before the beginning of 2006, the
      Compensation Committee established a target level of EPS which was required
      to
      be reached as a condition to payment of MICP awards to the NEOs. The 2006 EPS
      goal was set at $2.02 per share, which was based on our budgeted EPS level
      as of
      December 2005. If this EPS goal were achieved, the MICP provided for bonuses
      to
      be paid based on other performance measures, including operating income
      (including eligible bonus expense) financial cash flow (measured as EBITDA)
      and
      other operational and/or individual objectives. A more complete explanation
      of
      the operation of the MICP and results thereunder for 2006 appears above under
      the caption, *Compensation
      Discussion and Analysis—Discussion of Each*  *Component
      of the Executive Compensation Program—Annual Bonus.*




*Bonus*




Mr.
      Giancursio also participates in a separate bonus program with quarterly payout
      amounts tied to quarterly gross sales goals, quarterly account retention goals,
      and quarterly new business and renewal yield targets. Payouts under this program
      for 2006, together with a payment for Mr. Giancursio’s entry into a
      non-competition agreement, appear in the “Bonus” column of the *Summary
      Compensation Table* .
      See
      also *Compensation
      Discussion and Analysis—Discussion of Each*  *Component
      of the Executive Compensation Program—Annual Bonus.*




*Equity
      Incentive Plan Awards*




The *Summary
      Compensation Table* and *Grants
      of Plan-Based Awards Table* contain
      amounts that result from two types of equity incentive plan awards. One type
      are
      stock options, all of which were granted before 2006. To the extent a portion
      of
      those options remained unvested in 2006, we recognized expense under SFAS 123(R)
      for those options. Expense reflected in the Stock Awards column resulted from
      the RSUs which we granted in August 2006; no RSUs granted before 2006 remained
      unvested in 2006 and therefore no expense in the Stock Awards column resulted
      from pre-2006 awards. Except for the RSUs granted to Mr. Palmer and 40% of
      those
      granted to Mr. Giancursio, which were time-vested RSUs, these awards are
      reflected in the *Grants
      of Plan-Based Awards Table* in the
      columns captioned “Estimated Possible Payouts Under Equity Incentive Plan
      Awards,” and their grant date fair value (in column (j) of that table) is the
      same as the expense amount appearing in the *Summary
      Compensation Table’s* Stock
      Awards column. The performance-based RSUs included a holding requirement; they
      are scheduled to be settled in August 2009.




We
      included a performance requirement for the performance-based RSUs granted to
      NEOs requiring that Sierra attain earnings per share in the fourth quarter
      of
      2006 equal to at least $0.53 per share, fully diluted. Actual fourth quarter
      EPS
      was $0.65, fully diluted. A major reason for specifying this performance goal,
      which was substantive (20% higher than 2005 fourth quarter EPS) was to ensure
      that the RSUs would qualify as performance-based compensation under Code Section
      162(m) and regulations thereunder, so that we would be entitled to claim tax
      deductions for any compensation resulting from the awards. Mr. Palmer received
      500 time-vested RSUs which vested on December 31, 2006. Mr. Palmer is retiring
      from full-time employment with us on May 4, 2007. He will continue in a
      part-time position for an additional period thereafter. Mr. Giancursio received
      5,600 time-vested RSUs, in addition to the performance-based RSUs. These
      time-vested RSUs are subject to vesting in four equal annual installments from
      May 2007 through May 2010. The first three tranches include a holding
      requirement; they are scheduled to settle in August 2009. The final tranche
      would be settled at the time of vesting in May 2010.


22
 Return
          to Top


*Change
      in Pension Value*




A
      significant component of compensation reported in the Summary Compensation
      Table
      for 2006 appears in the column “Change in Pension Value and Non-qualified
      Deferred Compensation Earnings.” The amount appearing in that column relates
      entirely to the increase in the present value of the NEO’s defined benefit
      pension under our Supplemental Executive Retirement Plans (SERP I for
      participants other than Mr. Giancursio and SERP III for Mr. Giancursio). These
      plans are explained in greater detail under the caption *Pension
      Benefits* below.
      Several factors contributed to the reported changes in pension value under
      SERP
      I in 2006, including (i) for Mr. Bunker and Mr. Palmer, the accrual of an
      additional year of service, (ii) for all four SERP I participants, an increase
      in final average compensation due to the levels of salary and annual incentive
      awards for 2006, and (iii) reduced certain account balances in our defined
      contributions plans that offset the SERP I benefit, due to the investment
      performance of those accounts. For Dr. Marlon, the increase in pension value
      resulted primarily from an increase in final average compensation, with
      decreases in the offset account balances contributing to a lesser extent.




*Employment
      Agreements*




The
      Company has entered into employment agreements with its CEO and other NEOs.
      Each
      of these agreements currently has a term extending until December 31, 2009,
      except the employment agreements with Dr. Marlon and Mr. Palmer extend until
      December 31, 2007. Mr. Palmer has agreed that he will resign as a full-time
      employee on May 4, 2007 and continue to work part-time through May 30, 2007.
      These agreements specify a level of base salary and provide for participation
      in
      our bonus and equity award programs, retirement programs (i.e., a SERP), and
      fringe benefit programs. The agreements contemplate annual adjustments in
      compensation based on job duties and performance, and other reasonable standards
      deemed appropriate by the Committee. Termination provisions of these agreements
      are described in more detail below under the caption Potential Termination
      and
      Change-in-Control Payments.




The
      employment agreements restrict each NEO’s use and disclosure of confidential
      information and interference with the Company’s business relationships and
      competition with the Company, including an agreement that, for one year
      following any termination of employment (whether before or after a change in
      control), the NEO is prohibited from working for any competitor which operates
      in Nevada.





In
      connection with our proposed merger with UnitedHealth Group, the following
      NEOs
      have entered into employment agreements with UnitedHealth Group: Jonathon W.
      Bunker, Frank E. Collins and Donald J. Giancursio. These employment agreements
      will commence on the effective time of the merger and are intended to supersede
      and replace the current employment agreements those NEOs have with
      us.





23
 Return
          to Top


**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END 2006 (1)**





Option
                Awards (2)
            Stock
                AwardsName
            Number
                of Securities Underlying Unexercised
              Options
              (#)
              Exercisable
            Number
                of Securities Underlying Unexercised Options
              (#)
              Unexercisable
            Option
                Exercise Price
              ($)
            Option
                Expiration Date
            Number
                of Shares
              or
                Units
              of
                Stock
              That
                Have
              Not
                Vested
              (#)
            Market
                Value of Shares of Units of
              Stock
                That Have Not Vested
              ($)(a)
            (b)
            (c)
            (d)
            (e)
            (f)
            (g)Anthony
                M. Marlon, M.D.
            24,000
                (3)
            3⁄4
            30.06
            04/20/2010
            3⁄4
            3⁄4Paul
                H. Palmer
            12,000
                (3)
            3⁄4
            30.06
            04/20/2010
            3⁄4
            3⁄423,750
                (4)
            6.31
            04/13/2013
            3⁄4
            3⁄4Jonathon
                W. Bunker
            12,000
                (3)
            3⁄4
            30.06
            04/20/2010
            3⁄4
            3⁄423,750
                (4)
            6.31
            04/13/2013
            3⁄4
            3⁄4Frank
                E. Collins
            6,332
                (5)
            3⁄4
            5.83
            12/09/2012
            3⁄4
            3⁄412,000
                (3)
            3⁄4
            30.06
            04/20/2010
            3⁄4
            3⁄440,000
                (4)
            23,750
                (4)
            6.31
            04/13/2013
            3⁄4
            3⁄4Donald
                J. Giancursio
            3,000
                (6)
            
            4.47
            12/09/2011
            3⁄4
            3⁄43,000
                (5)
            3,000
                (5)
            5.83
            12/09/2012
            5,600
                (7)
            201,824
                (8)10,000
                (4)
            6.31
            04/13/20133,000
                (9)
            38.62
            12/06/2010





(1)
            No
                NEO had any unearned equity awards outstanding at December 31,
                2006.




(2)
            All
                options were granted at an exercise price equal to the fair market
                value
                of our Common Stock on the option grant date. The exercise price
                may be
                paid by the optionee in cash or, if permitted by the Compensation
                Committee, by surrender of unrestricted shares of our Common Stock
                (at
                their fair market value on the date of exercise). All awards were
                non-qualified stock options granted pursuant to our LTIP. Upon a
                change in
                control of Sierra, as defined in the LTIP, the vesting of the options
                will
                be automatically accelerated. With the exception of the options granted
                on
                December 7, 2005, the options shown above will terminate and may
                no longer
                be exercised if the optionee ceases to be an employee or Director
                of
                Sierra, except post-termination exercise periods are specified in
                the case
                of death, disability, or other involuntary termination other than
                a
                termination by us for “cause.” The options, together with a portion of the
                gains realized upon exercise of the options during a specified period,
                will be subject to forfeiture if the optionee engages in competition
                with
                us, misuses our proprietary information, or fails to assist us in
                litigation. Cashless withholding of option shares to satisfy tax
                obligations may be permitted by the Compensation
                Committee.




(3)
            These
                options were granted on April 21, 2005 and became vested and
                exercisable in full on December 30,
                2005.




(4)
            These
                options were granted on April 14, 2003. The options originally granted
                to
                Messrs. Palmer, Bunker and Collins vested at 25% a year over four
                years;
                the unvested options shown in column (c) became vested on April 14,
                2007.
                The options originally granted to Mr. Giancursio vested at 20% a
                year over
                five years, so the remaining unvested options became vested as to
                5,000
                shares on April 14, 2007 and will vest as to 5,000 shares on April
                14,
                2008.




(5)
            These
                options were part of grants made on December 10, 2002. Mr. Collins’
                original option grant vested at 33 1/3% a year over three years.
                Mr.
                Giancursio’s original grant vested at 20% a year over five years, so the
                remaining unvested options will vest December 10,
                2007.




(6)
            These
                options were part of a grant made on December 10, 2001 which vested
                at 20%
                a year over five years.




(7)
            These
                RSUs were granted on August 17, 2006 and will vest at 25% on each
                of May
                10, 2007, May 10, 2008, May 10, 2009 and May 10, 2010. The first
                three
                tranches will be settled on August 17, 2009 and the
                fourth




24
 Return
          to Top


tranche
      settles on May 10, 2010. RSUs are subject to accelerated vesting in full in
      the
      event of a change in control and in the case of death or disability, and to
      pro
      rata vesting in the event of a termination by us not for cause.




(8)
            The
                value of these RSUs is based on the closing price of our Common Stock,
                $36.04 per share, on December 29, 2006.




(9)
            These
                options were granted on December 7, 2005 and vested 100% on December
                30,
                2005. They have a three-year holding period from date of grant. Upon
                termination of employment other than for “cause,” the employee has 30 days
                in which to exercise these options.




**OPTION
      EXERCISES AND STOCK VESTED**




The
      following table presents information relating to the option exercises and stock
      vested for our NEOs during the fiscal year ended December 31, 2006.




**Option
      Exercises and Stock Vested -- 2006**





**Option
                Awards**
            **Stock
                Awards**Name
            Number
                of Shares Acquired on Exercise (#)
            Value
                Realized on Exercise
              ($)
                (1)
            Number
                of Shares Acquired on Vesting
              (#)
                (2)
            Value
                Realized on Vesting
              ($)
                (2)(a)
            (b)
            (c)
            (d)
            (e)Anthony
                M. Marlon, M.D.
            229,544
            8,388,857
            40,000
            1,441,600Paul
                H. Palmer
            52,150
            1,779,549
            500
            18,020Jonathon
                W. Bunker
            50,416
            1,751,323
            28,000
            1,009,120Frank
                E. Collins
            28,500
            999,135
            22,000
            792,880Donald
                J. Giancursio
            18,750
            417,307
            8,400
            302,736







(1)
            Amounts
                reflect the difference between the exercise price of the option and
                the
                market value of the shares acquired upon exercise at the time of
                exercise.




(2)
            These
                RSUs were granted on August 17, 2006. Amounts in column (e) reflect
                the
                market value of the stock underlying the restricted stock units (“RSUs”),
                based on the closing price of our Common Stock on December 29, 2006
                ($36.04), the last trading date preceding the vesting date of December
                31,
                2006. The vesting of the RSUs for NEOs other than Mr. Palmer was
                subject
                to a requirement that Sierra achieve fourth quarter earnings of at
                least
                $0.53 per share, and such RSUs remain subject to a mandatory holding
                period, deferring the settlement of the award until August 17,
                2009.




**Pension
      Benefits**




The
      following table shows information regarding the present value as of
      December 31, 2006 of the accumulated benefits of our named executives under
      our pension arrangements.




25
 Return
          to Top




**Pension Benefits for Fiscal 2006**




Name
            Plan
                Name
            Number
                of Years of Credited Service
            Present
                Value of Accumulated Benefit
              ($)
                (2)
            Payments
                During Last Fiscal Year
              ($)Anthony
                M. Marlon, M.D.
            SERP
                I
            34
            19,328,804
            3⁄4Paul
                H. Palmer
            SERP
                I
            17
            3,087,571
            3⁄4Jonathon
                W. Bunker
            SERP
                I
            18
            5,649,684
            3⁄4Frank
                E. Collins
            SERP
                I
            24
            6,312,608
            3⁄4Donald
                J. Giancursio
            SERP
                III
            2
            351,683
            3⁄4





(1)
            Number
                of years of credited service as of December 31, 2006 valuation date.
                The maximum number of years of service used in calculating the benefit
                under the Supplemental Executive Retirement Plan (“SERP I”) is 20, so any
                years of service in excess of 20 do not result in any additional
                benefit
                for the participant. Since the inception of the SERP I in 1997, we
                have
                provided for the crediting of four years of additional service to
                Messrs.
                Palmer, Collins and Bunker, and in 2005, at the inception of the
                Supplemental Executive Retirement Plan III (“SERP III”), we provided that
                Mr. Giancursio could earn two additional years of service by continuing
                in
                employment through December 31, 2008. We have agreed to credit Mr.
                Palmer
                with a full year of service if he continues in employment until May
                4,
                2007, the scheduled date of his resignation from full-time employment.
                At
                that date, Mr. Palmer would have served approximately three-fourths
                of a
                year of service, so in effect he will be credited with approximately
                three
                months of additional service.




(2)
            The
                present value of accumulated benefits is based on a discount rate
                of 5.6%
                at December 31, 2006 and, in the case of SERP I participants, employment
                termination and commencement of SERP benefits at December 31, 2006
                in the
                case of Dr. Marlon, or the later date at which the participant has
                attained both age 55 and 20 years of service (in the case of Mr.
                Palmer,
                Feb. 22, 2016; Mr. Bunker, December 2, 2013; and Mr. Collins, April
                10,
                2009). In the case of Mr. Giancursio, present value under SERP III
                is
                based on assumed termination at the date he has attained age 55 with
                eight
                years of participation (April 28, 2013). Pre-retirement mortality
                is
                ignored in the calculation of the present value of accumulated plan
                benefits. All other assumptions were those reflected in Note 9 to
                our
                audited financial statements included in our Annual Report on Form
                10-K
                for the year ended December 31, 2006.




We
      provide retirement benefits to NEOs, other than Mr. Giancursio, under SERP
      I and
      to Mr. Giancursio under SERP III. Each of these is a non-qualified defined
      benefit plan. Under SERP I, each participant is, or may become, entitled to
      receive annual payments, following retirement, disability or certain other
      terminations of employment, for a 15-year period. The annual benefit will equal
      3.75% of the executive’s “final average compensation” for each year of service
      credited to the executive up to 20 years, reduced by an “offset” amount
      equal to the annualized payout over a 15-year period that would be payable
      to
      the executive as a result of Sierra contributions under our qualified plans,
      including the current 401(k) Plan, and under the Deferred Compensation
      Plan. The annual benefit is not reduced for social security payments. Final
      average compensation generally means the average of the NEO’s three highest
      years of compensation out of the last five years, with compensation being
      generally the amounts reported as salary, non-equity incentive plan payouts
      and
      other bonus amounts in the Summary Compensation Table which appears in each
      of
      our annual proxy statements.




Under
      SERP III, Mr. Giancursio may become entitled to receive annual payments,
      following retirement, disability or certain other terminations of employment,
      for an eight-year period. Mr. Giancursio’s maximum annual benefit will be
      $150,000, which accrues as to 12.5% of such amount for each year of
      participation in SERP III credited beginning January 1, 2005. The annual benefit
      is not reduced or offset for benefits under other Sierra plans or social
      security payments.




The
      table
      above shows the present value of accumulated benefits calculated as described
      in
      footnote (2) to the table, including the offset for SERP I participants’ account
      balances resulting from Sierra contributions under our qualified plans,
      including our 401(k) plan and Deferred Compensation Plan. An NEO’s right to
      benefits under SERP I vests when he or she has five years of service credited
      or, in the case of Mr. Giancursio under SERP III, at December 31,




26
 Return
          to Top


2008,
      or
      earlier upon the executive’s death or disability or upon occurrence of a change
      in control (defined in the same way as under our other compensatory plans).
      Upon
      the death of the executive, benefits will be payable to the executive’s
      beneficiary over the 15-year period (eight-year period in the case of Mr.
      Giancursio). Otherwise, benefits will begin after retirement at or after age
      65,
      a termination at or after age 55 if the executive has ten years of credited
      service, or a termination due to disability. In the case of other terminations
      (except a termination for “cause,” as defined, in which case all benefits are
      forfeited) before a change in control, benefits will begin at the later of
      termination or the date the executive would have completed ten years of service
      (or, in the case of Mr. Giancursio, five years of SERP III participation) but
      for the termination. Under this provision, Messrs. Palmer, Bunker or Collins
      could have voluntarily terminated at December 31, 2006 and received a SERP
      benefit with a present value exceeding the present value of SERP benefits shown
      in the above table (Mr. Palmer, $5.4 million; Mr. Bunker, $8.0 million; and
      Mr.
      Collins, $6.5 million).




Upon
      a
      change in control, the year of service then in progress will be deemed
      completed, and an additional year of service will be credited if the NEO’s
      employment terminates within six years after the change in control for any
      reason other than by us for cause or due to death. An executive’s benefits are
      payable in a lump sum in the event of a termination within six years following
      a
      change in control, if the termination would not otherwise have qualified as
      a
      normal or early retirement. Some payments under the SERP following termination
      of employment will be delayed for at least six months in order to meet
      requirements of Section 409A of the Internal Revenue Code.




We
      have
      provided a limited number of additional years of credited service to four of
      the
      NEOs, as stated in Note (1) to the above table. In most cases, this was done
      at
      the initiation of the plan (in 1997 in the case of SERP I and in 2005 in the
      case of SERP III) to provide a more competitive level of retirement benefits
      at
      an earlier date for the participant, at the inception of the particular
      plan.




Lump-sum
      payouts (payable for certain terminations that do not qualify as a retirement,
      including following a change in control) are converted to a present value using
      an interest rate specified in the SERP. For purposes of SERP I, this interest
      rate is fixed at 7.0%, which would have the effect of reducing the amount of
      any
      lump-sum payout as compared to the present value amount shown in the table
      above
      for SERP I (which uses 5.6% for present valuing purposes). Offset accounts
      have
      been present valued for purposes of the table above using the 7.0% rate, as
      required by SERP I (this has the effect of reducing the SERP I benefit by a
      greater amount than would be the case using a lower assumed interest rate in
      the
      present value calculation). The interest rate used under SERP III for
      determining lump-sum payouts currently is 6.0%.




**NON-QUALIFIED
      DEFERRED COMPENSATION FOR 2006**





Name
            Executive
                Contributions in Last FY
              ($)
                (1)
            Registrant
                Contributions in Last FY ($)
            Aggregate
                Earnings in Last FY
              ($)
                (2)
            Aggregate
                Withdrawals/Distributions
              ($)
            Aggregate
                Balance at Last FYE
              ($)
                (3)(a)
            (b)
            (c)
            (d)
            (e)
            (f)Anthony
                M. Marlon, M.D.
            1,441,600
            3⁄4
            3⁄4
            3⁄4
            6,054,720Paul
                H. Palmer
            3⁄4
            3⁄4
            4,016
            3⁄4
            2,432,901Jonathon
                W. Bunker
            1,009,120
            3⁄4
            3⁄4
            3⁄4
            4,468,960Frank
                E. Collins
            792,880
            3⁄4
            31,670
            3⁄4
            3,412,481Donald
                J. Giancursio
            302,736
            3⁄4
            3⁄4
            3⁄4
            302,736







(1)
            Amounts
                in this column represent the market value of shares deliverable in
                settlement of RSUs at their vesting date in 2006. Such RSUs are subject
                to
                a mandatory deferral of settlement until August 17, 2009. These amounts
                are the same as shown in the “Stock Awards” column of the*Option
                Exercises and Stock Vested - 2006 Table*.
                Such a deferral delays the date at which we will deliver shares but
                does
                not result in additional compensation expense for financial reporting
                purposes in connection with the award or enhance the value of the
                award to
                the executive, although the executive may benefit through the delay
                in
                taxation. The grant-date market value of the shares underlying the
                RSUs is
                reflected in full as compensation for each named executive in the
“Stock
                Awards” column of the*Summary
                Compensation Table*,
                and in the right-most column of the*Grants
                of Plan-Based Awards Table*.




27
 Return
          to Top


(2)
            Earnings
                represents the appreciation in value of cash-denominated deferrals
                under
                the Deferred Compensation Plan in 2006. Earnings excludes the decrease
                during 2006 in the value of shares deliverable in settlement of RSUs
                that
                had vested but the settlement of which has been mandatorily deferred,
                as
                follows: Dr. Marlon, a decrease of $504,320; Mr. Palmer, a decrease
                of
                $252,160; Mr. Bunker, a decrease of $378,240; Mr. Collins, a decrease
                of
                $252,160. This decrease resulted from the fact that the market price
                of
                our common stock was $39.98 per share on December 31, 2005 as compared
                to
                $36.04 on December 31, 2006.




(3)
            The
                aggregate balance at the end of the year consists of the market value
                of
                shares deliverable in the future to settle RSUs that have vested
                but the
                settlement of which has been deferred, and the aggregate value of
                the
                executive’s accounts under our Deferred Compensation Plan. Market value
                per share is equal to the $36.04 closing price per share of common
                stock
                on December 29, 2006. Deferred RSUs include those which resulted
                in the
                amounts reflected in column (b) (see footnote (1) above) and the
                following
                RSUs which, prior to 2006, were mandatorily deferred: (i) RSUs deferred
                until May 20, 2007: Dr. Marlon, 80,000; Mr. Palmer, 40,000; Mr. Bunker,
                60,000, and Mr. Collins, 40,000; and (ii) RSUs deferred until April
                21,
                2008: Dr. Marlon, 48,000; Mr. Palmer, 24,000; Mr. Bunker, 36,000,
                and Mr.
                Collins, 24,000.




We
      offer
      to our executive officers and other senior employees an opportunity to defer
      compensation under our Deferred Compensation Plan (the “DCP”). The DCP allows
      these employees to elect to defer up to 90% of salary and annual cash bonuses.
      The deferral period can extend for a specified number of years or until
      retirement or termination of employment, and participants have a right to elect
      to extend deferrals, subject to compliance with applicable rules under the
      tax
      laws. Hardship withdrawals are permitted, and amounts deferred before 2005
      and
      earnings thereon may be withdrawn with a 10% penalty. Compensation that is
      deferred may be treated as though invested in a variety of equity and debt
      mutual funds offered by Nationwide Life Insurance Company, or in an
      interest-bearing account. For 2006 and 2007, this rate was 5.0%. For 2006,
      the
      NEOs with deferral account balances earned the following returns: Mr. Palmer,
      3.3%; and Mr. Collins, 11.3%. Under the DCP, we also may make matching
      contributions to augment the 401(k) plan, in cases in which tax laws limit
      the
      right of highly compensated employees to receive such matching contributions
      under the 401(k) or the participant’s participation in the DCP adversely affects
      the 401(k) matching contribution. The DCP matching contribution feature permits
      a participant to receive combined matching contributions under the 401(k) plan
      and the DCP at the same rate that would apply under the 401(k) up to the maximum
      permissible company contribution under the 401(k). For 2006, all matching
      contributions to NEOs were made under the 401(k) plan and not under the
      DCP.




As
      discussed above, we have provided for mandatory deferral of some RSU awards
      to
      senior executives for an extended period following vesting. Such deferred RSUs
      are subject to accelerated settlement in the case of certain terminations or
      upon a change in control on the same basis as the mandatorily deferred RSUs
      granted in 2006 (see “Grants of Plan-Based Awards”).




**Potential
      Termination and Change-in-Control Payments**




We
      have
      entered into employment agreements with our CEO and the other NEOs. The
      agreements with Dr. Marlon and Mr. Palmer currently have a term extending until
      December 31, 2007, and the agreements with the other NEOs extend until
      December 31, 2009. Under the agreements, the employee may voluntarily terminate
      employment upon 60 days notice. We may terminate the employee’s employment,
      with or without cause, in accordance with our usual policies and procedures,
      except that the agreements impose some limitations on termination due to
      disability. The agreements provide that, in the event of a termination by us
      without cause, a severance payment will be paid as follows: Dr. Marlon,
      24 months salary; Messrs. Bunker and Collins, 15 months salary; Messrs.
      Palmer and Giancursio, 12 months salary. This amount would be payable in three
      payments during the year following the termination, subject to any restriction
      on payment during the six months following termination under Code Section 409A.
      We may terminate the executive’s employment due to disability if the disability
      has continued, beyond any period allowed for sick leave, for a period of 12
      months in the case of Dr. Marlon and Messrs. Bunker and Collins, and six months
      in the case of Messrs. Palmer and Giancursio. No severance is payable under
      the
      agreements in the case of a termination due to disability. We may terminate
      the
      executive’s employment if the executive has taken actions harmful to us,
      specifically conduct that is materially detrimental to our reputation or
      business relationships or misappropriation of our funds. In such case, we will
      pay the executive four weeks of salary as a severance amount. In the case of
      death, we would provide a payment to Mr. Giancursio’s beneficiary equal to three
      months’ pay at the rate of salary and annual incentive compensation in effect
      for the preceding year. Other named executives, who are




28
 Return
          to Top


covered
      by life insurance we previously provided, are not covered by a separate death
      benefit provision in their employment agreements. In all cases, we are obligated
      to provide any compensation and benefits that are provided under our plans
      and
      programs, including the SERPs and qualified retirement plans, and other
      compensation and benefits routinely provided upon separation of a senior
      executive.




In
      the
      event of a change in control, Dr. Marlon is entitled to terminate his employment
      and trigger a severance payment. The other NEOs’ employment agreements provide
      for severance payments if (i) our Board of Directors does not approve the change
      in control, or (ii) the Board of Directors does approve the change in control
      but the executive’s employment is terminated by us without cause within two
      years after the change in control, or within two years after the change in
      control the executive terminates his employment on account of (a) diminution
      of
      duties, (b) reduction of compensation, (c) relocation of our principal executive
      offices more than 75 miles from its current location, or (d) our failure to
      renew the employment agreement. The employment agreements provide for severance
      payments equal to a multiple of current salary and target annual bonus as
      follows: Dr. Marlon, four times; Messrs. Bunker, Collins and Palmer, 2.99 times;
      and Mr. Giancursio, two times. For purposes of the table below, termination
      by
      an NEO following a change in control in circumstances that will qualify for
      severance and other benefits is referred to as a termination for “good reason.”




In
      addition, under each NEO’s employment agreement, if Code Section 4999 would
      impose “golden parachute” excise taxes on the executive as a result of
      compensation paid by us (under the agreement or otherwise in connection with
      the
      change in control), we will provide a “gross-up” payment sufficient to cause the
      after-tax value of the compensation and the gross-up payment to the executive
      to
      be the same as if no such excise tax had applied.




The
      employment agreements impose restrictions on the NEOs intended to protect our
      business. These include restrictions on the executive’s use and disclosure of
      confidential information, interference with our business relationships and
      competition with us, including an agreement that, for a one-year period
      following any termination of employment, the executive is prohibited from
      working for any competitor which operates in Nevada. The non-competition
      covenant applies following a termination after a change in control as well
      as
      before a change in control.




Other
      programs provide for enhanced compensation to an NEO in the event of certain
      terminations of employment or a change in control. In the case of unvested
      RSUs,
      the RSUs will vest in full and any performance condition would be deemed met
      if
      the executive officer’s employment terminates due to death or disability, or in
      the event of a change in control (without regard to termination). In the event
      of termination of the NEO’s employment by us without cause, the RSUs would vest
      on a pro rata basis, determined by the percentage of the vesting period
      completed from the date of grant to the date of termination. Some RSUs provide
      for a mandatory deferral period following vesting; this period is disregarded
      for purposes of determining pro rata vesting, and in most cases in which vesting
      is accelerated (including upon a change in control) the RSUs would be
      immediately settled (subject to any limitation under Code Section 409A). Options
      held by NEOs that are not yet vested would become vested in full upon a change
      in control. Termination of employment, including due to death or disability,
      would not result in an acceleration of vesting of the options. Following a
      termination of employment, the optionee has up to one year to exercise options
      vested at the time of termination if due to death or disability and 90 days
      to
      exercise such vested options if termination was by us not for cause, but in
      no
      event may the option be exercised after the stated expiration date. In the
      case
      of termination in any other circumstance, the option terminates immediately.




Under
      the
      SERPs, in the event of a termination following a change in control other than
      due to death, disability or by us for cause, an NEO will be deemed to have
      completed a full year of service or year of participation for any year in
      progress that included the change in control, and in the case of a termination
      of employment for any reason other than cause within six years after the change
      in control, will be credited with an additional year of service or year of
      participation. The maximum benefit under SERP I is payable upon reaching 20
      years of service, so that Messrs. Bunker and Palmer, who have not completed
      20
      years of service, would have their SERP benefit enhanced in this case. In the
      case of SERP III, the maximum benefit is payable based on eight years of
      participation. As a participant in SERP III, Mr. Giancursio has not yet
      completed eight years of participation, so the crediting of a full and a partial
      year of participation in these circumstances would enhance his benefit, and
      two
      additional years of participation that are being credited based on service
      over
      the 2005 - 2010 period would be credited as well. In addition, vesting would
      accelerate under the SERPs upon a change in control. Of the current NEOs, only
      Mr. Giancursio remains unvested; in the absence of a change in control, he
      would
      vest under SERP III on December 31, 2008. As discussed above under the caption
      “Pension Benefits,” we have agreed to credit Mr. Palmer with a full year of
      service if he continues in employment until May 4, 2007, the agreed date of
      his
      resignation from full-time employment. At that




29
 Return
          to Top


date,
      Mr.
      Palmer would have served approximately three-fourths of a year of service,
      so,
      in effect, he will be credited with approximately three months of additional
      service.




In
      addition, in the case of any termination of employment other than by us for
      cause (whether before or after a change in control), we will provide health
      care
      benefits to each NEO and his family, at no expense to the executive, for a
      period equal to the length of the employee’s service or until the employee is
      eligible for Medicare, whichever occurs first. We have agreed to provide this
      benefit to Mr. Palmer and his eligible dependents upon his resignation from
      part-time employment, which is to take effect June 1, 2007; we will provide
      this
      benefit until he is Medicare eligible.




For
      purposes of our employment agreements, equity awards and the SERP plans, a
      change in control will have occurred if any person becomes the beneficial owner
      of 51% or more of the combined voting power of our voting securities. If we
      complete our proposed merger with a subsidiary of UnitedHealth Group
      Incorporated, in which UnitedHealth Group will become our parent company, the
      merger transaction will constitute a change in control for purposes of the
      employment agreements. Messrs. Bunker, Collins and Giancursio have entered
      into
      employment agreements with UnitedHealth Group that would become effective upon
      the closing of the merger and supersede and replace the employment agreements
      between each of them and Sierra. As a result, they would not be entitled to
      severance payments provided in their employment agreements with the Company.
      Dr.
      Marlon may be entitled to severance payments if the UnitedHealth Group merger
      is
      completed.




The
      following table shows the potential value of payments and benefits to each
      NEO
      serving at December 31, 2006 under their employment agreements and other
      applicable arrangements and plans, assuming various employment termination
      and
      change-in-control scenarios had occurred as of December 31, 2006. The table
      does not show all post-termination payments, but rather shows how a change
      in
      control or termination in the specified circumstances will enhance the payments
      in benefits to be received by each NEO. For information on the value of NEOs’
interests in our SERPs and Deferred Compensation Plan, which will result in
      post-termination payouts upon any termination of service (except for limitations
      in the case of a termination for cause), see *Pension
      Benefits for Fiscal Year 2006* and *Non-qualified
      Deferred Compensation for 2006* above.
      Health benefits continuation amounts are a good faith estimate based on average
      costs, and will vary in amount for a given executive following termination
      of
      employment.




30
 Return
          to Top







**Incremental
                Value of Payments and Benefits Upon Change in Control (“CIC”)and Various
                Types of Terminations****Termination
                Scenario (12/31/06)**
            
            **Dr.
                Marlon**
            
            **Mr.
                Bunker**
            
            **Mr.
                Collins**
            
            **Mr.
                Palmer**
            
            **Mr.
                Giancursio*****Events
                Not Within Two Years After Change in Control***Voluntary
                ResignationHealth
                benefits continuation
            
            $
            7,688
            
            $
            259,665
            
            $
            184,315
            
            $
            366,853
            
            $
            175,669Termination
                for CauseSeverance
                pay
            
            $
            118,269
            
            $
            40,385
            
            $
            28,385
            
            $
            25,231
            
            $
            16,927Termination
                by Us Without CauseSeverance
                pay
            
            $
            3,075,000
            
            $
            656,250
            
            $
            461,250
            
            $
            328,000
            
            $
            220,056Health
                benefits continuation
            
            
            7,688
            
            
            259,665
            
            
            184,315
            
            
            366,853
            
            
            175,669RSUs
                - Pro rata vesting(1)
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            48,576Total
            
            $
            3,082,688
            
            $
            915,915
            
            $
            645,565
            
            $
            694,853
            
            $
            444,301DisabilitySeverance
                pay (2)
            
            $
            3,072,116
            
            $
            932,308
            
            $
            737,308
            
            $
            311,307
            
            $
            175,797RSUs
                vesting(1)
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            201,824Health
                benefits continuation
            
            
            7,688
            
            
            259,665
            
            
            184,315
            
            
            366,853
            
            
            175,669Total
            
            $
            3,079,804
            
            $
            1,191,973
            
            $
            921,623
            
            $
            678,160
            
            $
            553,290DeathSeverance
                pay
            
            $
            3⁄4
            
            $
            3⁄4
            
            $
            3⁄4
            
            $
            3⁄4
            
            $
            230,264RSUs
                vesting(1)
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            201,824Total
            
            $
            3⁄4
            
            $
            3⁄4
            
            $
            3⁄4
            
            $
            3⁄4
            
            $
            432,088***Events
                Within Two Years After Change in Control***CIC
                -- Assuming no terminationOptions/RSUs
                vesting(1)
            
            $
            3⁄4
            
            $
            706,088
            
            $
            706,088
            
            $
            706,088
            
            $
            589,754CIC
                -- SERP Enhanced benefitforcertain
                terminations (3)
            
            
            3⁄4
            
            
            793,347
            
            
            3⁄4
            
            
            648,359
            
            
            721,298Termination
                Without Cause or for Good ReasonSeverance
                pay
            
            
            12,294,232
            
            
            2,963,550
            
            
            2,205,585
            
            
            1,862,539
            
            
            943,807Health
                benefits continuation
            
            
            7,688
            
            
            259,665
            
            
            184,315
            
            
            366,853
            
            
            175,669280G/4999
                Tax Gross-Up (4)
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4
            
            
            3⁄4Total
                (including CIC items)
            
            $
            12,301,920
            
            $
            4,722,650
            
            $
            3,095,988
            
            $
            3,583,839
            
            $
            2,430,528Death,
                disability, and voluntary termination (5)





(1)
            These
                amounts represent the market value of shares underlying RSUs and
                the
                aggregate in-the-money value of options which would become vested
                as a
                direct result of the termination event or change in control before
                the
                award's stated vesting date. This calculation of value does not attribute
                any additional value to options based on their remaining term and
                does not
                discount the value of awards based on the portion of the vesting
                period
                elapsed at the date of the termination event or change in control.
                Market
                value and in-the-money value are based on the closing price of our
                common
                stock, $36.04, on December 29,
                2006.




(2)
            The
                executive officer can be terminated by us for a disability only if
                a
                disability has continued for more than 12 months (for Dr. Marlon
                and
                Messrs. Collins and Bunker) or six months (for Messrs. Palmer and
                Giancursio) beyond the executive’s accrued sick leave. For purposes of
                calculating the severance payable in connection with a termination
                due to
                disability, we are showing the value of the applicable number of
                months of
                salary and target bonus as in effect during 2006.




31
 Return
          to Top


(3)
            These
                amounts represent the enhanced present value of SERP benefits resulting
                from crediting of full years of service upon certain terminations
                following a change in control, except in the case of Mr. Giancursio
                the
                amount represents the present value at December 31, 2006 of his entire
                SERP benefit which would be deemed vested upon a change in control.
                For
                Messrs. Bunker and Palmer, termination for any reason other than
                death,
                disability, or by us for cause before completing the year of service
                which
                includes the change in control would result in rounding up to a full
                year
                of service, which would confer one-half of the benefit amount shown,
                and
                any termination other than by us for cause within six years after
                the
                change in control would result in crediting of one additional year
                of
                service, which would confer one-half of the benefit amount
                shown.




(4)
            Executives
                are entitled to gross-up payments if a golden parachute excise tax
                would
                be imposed under Section 4999 of the Internal Revenue Code, but we
                estimate that in the illustrated change in control and termination
                scenarios no golden parachute excise taxes would be incurred so no
                tax
                gross-up would be payable.




(5)
            Severance
                payments and health benefits continuation provided to Messrs. Bunker,
                Collins, Palmer and Giancursio in the event of death, disability,
                or a
                voluntary termination of employment, which did not qualify as "good
                reason" in the two-year period following a change in control would
                be the
                same as shown for those termination events not within the two-year
                period
                following a change in control, but would qualify for enhanced SERP
                benefits as explained in footnote (3) above. RSUs and options would
                have
                vested upon the CIC, as shown in the row marked "CIC -- Assuming
                no
                termination."




**DIRECTOR
      COMPENSATION**




The
      table
      below summarizes the compensation we paid to our non-executive officer Directors
      for the fiscal year ended December 31, 2006.




**Director
      Compensation Table -- 2006**




Name
                (1)
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
                (2)
            
            Option
                Awards
              ($)
                (3)
            
            All
                Other Compensation
              ($)
            
            Total
              ($)(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)Albert
                L. Greene
            
            $
            38,188
            
            $
            36,356
            
            $
            159,185
            
            $
            3⁄4
            
            $
            233,728Thomas
                Y. Hartley
            
            
            46,500
            
            
            36,356
            
            
            159,185
            
            
            3⁄4
            
            
            242,041Michael
                E. Luce
            
            
            43,000
            
            
            36,356
            
            
            159,185
            
            
            3⁄4
            
            
            238,541Erin
                E. MacDonald (4)
            
            
            283,539
            
            
            3⁄4
            
            
            175,275
            
            
            16,489(5
            )
            
            475,303Charles
                L. Ruthe
            
            
            51,500
            
            
            36,356
            
            
            159,185
            
            
            7,000
                (6
            )
            
            254,041Anthony
                L. Watson (7)
            
            
            38,188
            
            
            36,356
            
            
            159,185
            
            
            3⁄4
            
            
            233,728William
                J. Raggio (8)
            
            
            16,000
            
            
            153,958
            
            
            3⁄4
            
            
            14,553
                (9
            )
            
            184,511





(1)
            Anthony
                M. Marlon, M.D., our Chief Executive Officer and Chairman of the
                Board, is
                not included in this table. He is an employee of the Company and
                thus
                receives no separate compensation for his services as a Director.
                His
                compensation is shown in the Summary Compensation Table and related
                compensation tables above.




(2)
            The
                amounts in column (c) reflect the amount of expense we recognized
                for
                financial statement reporting purposes for 2006, in accordance with
                SFAS
                123(R), for stock awards, without regard to estimated forfeitures
                of such
                awards. For the non-employee Directors, the amount includes expense
                from
                restricted stock units (“RSUs”) granted in 2006. No other unvested stock
                awards were held by any non-employee Director in 2006. Assumptions
                used in
                the calculation of these amounts were the same as those for stock
                awards
                granted to employees, as discussed in footnote (1) to the Summary
                Compensation Table. As of December 31, 2006, each Director held the
                following number of RSUs: Mr. Greene: 4,000; Mr. Hartley: 4,000;
                Mr. Luce:
                4,000; Mr. Ruthe: 4,000; and Mr. Watson: 4,000. All of Mr. Raggio’s 4,000
                RSUs vested on May 23, 2006, the
                date




32
 Return
          to Top


of his mandatory retirement from the Board pursuant to the terms of the 1995
      Non-Employee Directors Stock Plan. Under that Plan, those vested RSUs will
      be
      settled at the earlier of the date one year after retirement, or the date the
      RSUs would have been settled upon a change in control. As a result of this
      accelerated vesting on May 23, 2006, we recognized expense under SFAS 123(R)
      for
      all of his RSUs in 2006. Ms. MacDonald did not receive a grant of restricted
      stock units in 2006. As of December 31, 2006, Ms. MacDonald held 30,000 and
      24,000 vested RSUs resulting from grants to her on May 20, 2004 and April 21,
      2005, respectively. All of Ms. MacDonald’s RSUs vested in 2004 and 2005;
      consequently, there was no expense taken for her in 2006.




(3)
            The
                amounts in column (d) reflect the amount of expense we recognized
                for
                financial statement reporting purposes for 2006, in accordance with
                SFAS
                123(R), without regard to estimated forfeitures of such awards. The
                amounts include expense from options granted before 2006 which remained
                unvested in any part of 2006. The Company granted no stock options
                in
                2006. Assumptions used in the calculation of these amounts were the
                same
                as those for stock options granted to employees, as discussed in
                footnote
                (2) to the Summary Compensation Table. As of December 31, 2006, the
                non-employee Directors held the following number of outstanding options:
                Mr. Greene: 85,200; Mr. Hartley: 37,000; Mr. Luce: 46,000; Mr. Ruthe:
                81,000; and Mr. Watson: 85,000. Ms. MacDonald had 77,000 outstanding
                options at year-end 2006. On November 23, 2005, all of Mr. Raggio’s
                unvested options became immediately vested and exercisable pursuant
                to the
                terms of the 1995 Non-Employee Directors’ Stock Plan. Under that Plan, an
                option becomes exercisable in full at the date six months prior to
                the
                expiration of the Participant’s term of office as a Director during which
                term the Participant reaches the maximum age permitted for election
                as a
                Director our Bylaws. Consequently, all of the expense of Mr. Raggio’s
                options that became exercisable in 2005 was recognized as expense
                for 2005
                and no expense was recognized for Mr. Raggio’s options in 2006.




(4) Ms. MacDonald
      was a non-officer employee of Sierra in 2006. On October 25, 2006, she retired
      from the Board of Directors for health reasons. She continues to be an employee
      of the Company in a part-time capacity through May of 2007, as special assistant
      to the CEO. She was not compensated separately for her service as a Director.
      Until February 2001, she had served as President and Chief Operating
      Officer of the Company, at which time she assumed part-time duties in the
      capacity of Chief of Staff. She was compensated under the terms of an employment
      agreement, which provided for base salary, the rate of which was $233,539 per
      year in 2006, with eligibility for an annual incentive payment, subject to
      Sierra meeting specified financial and related targets applicable to executive
      officers under the Management Incentive Compensation Plan. In December 2006,
      the
      Compensation Committee approved an annual incentive award for her in the amount
      of $50,000. Ms. MacDonald did not receive any grants of stock options or awards
      during 2006. Other terms of Ms. MacDonald’s employment were similar to
      those of senior executives described above, including participation in
      compensatory plans for executives and employees (except that she began in 2001
      receiving her SERP I benefit in annual installments; in 2006, we made no future
      benefit contributions under that plan on her behalf and she otherwise accrued
      no
      additional benefits under that plan).




(5) Ms. MacDonald
      received a total of $5,689 in perquisites in 2006 for personal use of the
      Company’s aircraft. Ms. MacDonald also received a matching contribution from the
      Company of $10,800 for her contribution in the Company’s Profit Sharing/401(k)
      Plan and Trust.




(6) This
      amount is compensation paid to Mr. Ruthe in his capacity as Chairman of the
      Board of Health Plan of Nevada, Inc., a wholly-owned subsidiary of the Company.




(7) Mr.
      Watson earned $38,188 in fees in 2006. Of this amount, $269 was paid to Mr.
      Watson in cash and $37,919 was paid in shares of our stock.




(8) Mr.
      Raggio served as a non-employee Director in 2006 through May 23, 2006, the
      date
      of the Company’s 2006 Annual Meeting. At that time he retired in accordance with
      our mandatory retirement policy and was given the honorary title of Director
      Emeritus for a one-year term. As explained in footnote 2 above, all of Mr.
      Raggio’s outstanding RSUs received accelerated vesting on May 23, 2006, his
      mandatory retirement date.


(9) The
      amount shown includes a retirement gift to Mr. Raggio with a total value of
      $12,432; an expense of $2,022, for his spouse to accompany him on an educational
      Board Meeting retreat, at the invitation of the




33
 Return
          to Top


Board.
      Each of the non-employee directors is covered by a $50,000 group term life
      and
      $50,000 AD&D policy, paid for by the Company.




For
      2006,
      the Company paid Directors who are not officers or employees of Sierra $24,000
      per annum, plus a $1,000 meeting fee for the first two hours and $500 for
      each additional hour for Board meetings attended. The Company also paid
      additional annual retainer fees as follows: Chairman of the Audit Committee,
      $5,000; the Chairman of each of the Compensation Committee and the Nominating
      and Governance Committee, $2,000; and the Lead Director, $2,000. The Company
      paid Directors $1,000 for attendance at meetings of the Compensation Committee,
      the Nominating and Governance Committee, and the Audit Committee, plus, in
      the
      case of the Audit Committee, $500 for each hour after the first hour. Telephonic
      attendance at any meeting was paid at 50% of the standard rate. This payment
      structure was changed in January 2007 as a result of a performance and
      compensation evaluation conducted on the Directors by an independent consulting
      firm, Watson Wyatt. As a result of this evaluation, Watson Wyatt recommended,
      and the Nominating and Governance Committee approved and adopted, at its meeting
      on January 25, 2007, a new schedule of fees for Directors effective January
      2007, as follows: The Company pays Directors who are not officers or employees
      of Sierra $36,000 per annum, plus a $2,000 meeting fee for Board meetings
      attended. The Company also pays annual retainer fees as follows: Chairman of
      the
      Audit Committee, $10,000; the Chairman of each of the Compensation Committee
      and
      the Nominating and Governance Committee, $5,000; and the Lead Director, $10,000.
      The Company pays Directors $1,500 for attendance at meetings of the Compensation
      Committee, the Nominating and Governance Committee, and the Audit Committee.
      Telephonic attendance at any meeting is paid at 50% of the standard rate. This
      schedule of Board fees applies only to non-employee Directors. Directors who
      are
      also employees receive no additional compensation for service as a Director.




As
      in
      effect in 2005, the Non-Employee Directors’ Stock Plan (the “Directors’ Plan”)
      provided for an annual grant to each non-employee Director of an option to
      purchase 20,000 shares of Common Stock. Such grants were made automatically
      on
      the date on which a person was first elected to the Board of Directors and
      on
      each January 20 thereafter (unless the initial grant occurred within four
      months prior to such date). The options’ exercise price per share is equal to
      the fair market value of a share on the date of grant. Such options become
      exercisable (i) as to 20% of the underlying shares on each of the first
      five anniversaries of the date of grant, (ii) at the date six months prior
      to the expiration of a Director’s term, if such Director continues to serve
      through such date and will reach age 78 before the expiration of the term,
      or
      (iii) immediately (a) if the Director ceases to serve due to death or
      disability, or (b) upon a change in control more than six months after
      grant. The options expire at the earliest of (i) ten years after grant,
      (ii) one year after the optionee ceases to serve as a Director due to
      death, disability or retirement or (iii) six months after the optionee
      ceases to serve as a Director for any other reason (the post-termination period
      is extended for up to one year if the optionee dies during such period). Options
      not exercisable at or before the time a Director ceases to be a Director are
      canceled. The Directors’ Plan also permits a non-employee Director to elect to
      forego cash fees that are otherwise payable and receive instead the equivalent
      value in shares of Common Stock or credits of “deferred stock” that will be
      settled at a future date by issuance of Common Stock. During 2006, one of our
      Directors, Mr. Watson, elected to receive his board and committee fees in Common
      Stock in lieu of cash.




In
      2006,
      the Board discontinued option grants to non-employee Directors, replacing them
      with grants of restricted stock units. Stockholders approved an amendment to
      our
      Non-Employee Directors’ Stock Plan permitting grants of RSUs at the 2006 Annual
      Meeting. For 2006, the Board authorized an annual grant of 4,000 RSUs to each
      non-employee Director. These RSUs generally vest four years after grant, with
      one-half of the vested RSUs to be settled at the time of vesting and one-half
      of
      the RSUs required to be held by the Director until retirement or other
      termination of service. Vesting is subject to acceleration in the event of
      death, disability, mandatory retirement, and change in control of Sierra (the
      proposed merger with UnitedHealth Group, if completed, would constitute a change
      in control for purposes of the RSUs). For 2007, the Board authorized an annual
      grant of 2,000 RSUs in January 2007. The vesting of these RSUs is in two
      tranches: 50% vest on March 1, 2008 and 50% vest on January 22, 2011. On each
      vesting date, 50% of the 1,000 RSUs will settle (unless deferred at the election
      of the Director) and 50% will settle at retirement or other termination of
      service. Four of our five non-employee Directors elected to defer the settlement
      of their first tranche to January 22, 2011.




No
      stock
      options were granted to non-employee Directors in 2006 or to date in 2007.
      Options were granted to the Directors in earlier years, with vesting over five
      years. Due to this long vesting period, we are continuing to recognize expense
      for these options in 2006 and later years, which results in the dollar amounts
      shown in the “Option Awards” column of the Director Compensation Table above.




34
 Return
          to Top


Directors
      are subject to stock ownership guidelines that call for Directors to reach
      and
      maintain ownership of our Common Stock equal in value to at least two times
      the
      amount of the annual retainer for Directors in 2006 and at least four times
      the
      amount of the annual retainer in 2007. Each current non-employee Director
      currently owns Common Stock exceeding the level required by these guidelines.




**ITEM
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**




**Equity
      Compensation Plan Information**




The
      following table provides information as of December 31, 2006, regarding
      outstanding awards and shares remaining available for future issuance under
      our
      compensation plans under which equity securities are authorized for issuance
      (excluding 401(k) plans and similar tax-qualified plans):




(columns
      (a) and (c) in thousands)


(a)
            
            (b)
            
            (c)Number
                Of Securities
            
            
            
            Number
                Of SecuritiesTo
                Be Issued Upon
            
            Weighted-Average
            
            Remaining
                Available ForExercise
                Of
            
            Exercise
                Price Of
            
            Future
                Issuance UnderPlan
                Category
            
            Outstanding
                Awards
            
            Outstanding
                Awards
            
            Equity
                Compensation Plans
            (1)Equity
                  compensation plans approved bysecurity holders
            
            
            626
            
            $
            4.82
            
            
            1,580
            (2)Equity
                  compensation plans not approvedby security holders
                  (3)
            
            
            1,689
            
            
            11.81
            
            
            3,406Total
            
            
            2,315
            
            
            9.92
            
            
            4,986





See
      Note
      9 of the Notes to the Consolidated Financial Statements for additional
      information on our stock based compensation plans.




(1)
            All
                of the shares available for future issuance include: (i) 3,986,000
                shares
                under the 1995 Long-Term Incentive Plan (“LTIP”), as amended and restated,
                issuable as restricted stock, as a bonus, or otherwise as “full-value”
                awards; (ii) 230,000 shares under the 1995 Non-Employee Directors'
                Stock
                Plan (“Directors’ Plan”), as amended and restated, issuable as restricted
                stock units or as shares or deferred shares in lieu of directors’ fees;
                and (iii) 770,000 shares under the Amended and Restated 1985 Employee
                Stock Purchase Plan (“ESPP”), which may be sold directly to employees at a
                discount. Shares other than those under the ESPP may also be issued
                in
                connection with options, warrant and
                rights.




(2)
            Includes
                770,000 shares remaining available for future issuance under the
                ESPP, of
                which 49,000 were issued in January
                2007.




(3)
            The
                LTIP was approved by stockholders in 1995, with additional shares
                authorized by stockholders in 1998. Subsequent amendments to the
                Plan by
                the Board of Directors reserved additional shares for the LTIP, resulting
                in 1,354,000 shares in column (a) and 3,406,000 shares in column
                (c) at
                December 31, 2006. The LTIP authorizes grants of incentive and
                non-qualified stock options, stock appreciation rights, restricted
                stock,
                deferred stock, bonus stock (including in lieu of other payment
                obligations), dividend equivalents, and other stock-based awards.
                To date,
                we have granted primarily options and deferred stock (designated
                as
                restricted stock units) under the LTIP. Options must have an exercise
                price of at least 100% of the fair market value of our Common Stock
                on the
                grant date, and generally have a term not exceeding ten years. The
                exercise price may be paid in cash or by surrender of previously
                acquired
                shares. Restricted stock units granted under the LTIP are generally
                to be
                settled only in shares, and are subject to a risk of forfeiture upon
                termination of employment for a specified period, except more favorable
                terms apply to termination due to death, disability and in other
                specified
                cases. The LTIP provides that certain awards will become vested upon
                a
                change in control of Sierra.




The
      Directors' Plan was approved by stockholders in 1995 and, as amended and
      restated, was reapproved by stockholders in 2006. As amended, the Directors’
Plan accounts for 335,000 shares in column (a),




35
 Return
          to Top


representing
      shares subject to awards granted before the 2006 reapproval of the Directors’
Plan. The Directors’ Plan authorizes the grant of restricted stock units or
      stock options.




**SECTION 16(a) BENEFICIAL
      OWNERSHIP REPORTING COMPLIANCE**




Section 16(a) of
      the Securities Exchange Act of 1934, as amended, requires the Company’s
      Directors and executive officers and persons who beneficially own more than
      10%
      of the Company’s outstanding Common Stock to file with the SEC initial reports
      of beneficial ownership and reports of changes in beneficial ownership of Common
      Stock and other equity securities of the Company on Forms 3, 4 and 5, and to
      furnish the Company with copies of all Section 16(a) forms they file.
      To the Company’s knowledge, the Company’s Directors and executive officers and
      beneficial owners of more than 10% of the Company’s outstanding Common Stock
      complied with all Section 16(a) reporting requirements in a timely
      fashion during the fiscal year ended December 31, 2006.




**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
      following table and the notes thereto set forth information with respect to
      the
      beneficial ownership, as of March 26, 2007, of Sierra’s Common Stock by the only
      persons known to us to have beneficial ownership of more than 5% of such class,
      by each of our Directors, by each of our NEOs and by our Directors and executive
      officers as a group. Each person is believed to exercise sole voting and
      dispositive power over the shares reported, except (i) in the case of shares
      held for an employee’s account under our 401(k) plan, the employee has
      dispositive power but his or her right to vote is not explicitly provided in
      the
      plan and plan trust documents, and (ii) in other cases, as indicated in the
      footnotes to the table.




**Name of Beneficial 
                Owner**
            **Amount and Nature ofBeneficial Ownership**
            ****
            **Percentage of****Outstanding****CommonStock**Anthony
                M. Marlon, M.D.
            4,452,080
            (1)
            8.0%Jonathon
                W. Bunker
            126,240
            (2)
            *Frank
                E. Collins
            201,420
            (3)
            *Paul
                H. Palmer
            86,159
            (4)
            *Donald
                J. Giancursio
            13,437
            (5)
            *Albert
                L. Greene
            69,051
            (6)
            *Thomas
                Y. Hartley
            20,000
            (7)
            *Michael
                E. Luce
            25,000
            (8)
            *Charles
                L. Ruthe
            76,900
            (9)
            *Anthony
                L. Watson
            63,253
            (10)
            *All
                Directors and Executive Officers as a Group (12 persons)
            5,155,088
            (11)
            9.2%Putnam,
                LLC dba Putnam Investments
            3,533,127
            (12)
            6.4%UnitedHealth
                Group Incorporated
            4,452,080
            (13)
            8.0%


*
            Indicates
                beneficial ownership of less than
                1%.




(1)
            Includes
                104,000 shares that can be acquired within 60 days of March 26, 2007,
                upon
                the exercise of stock options and settlement of restricted stock
                units
                (“RSUs”) that vested before 2006 but which are subject to mandatory
                deferral of settlement until May 20, 2007. The number of shares reported
                as beneficially owned includes 3,826,954 shares held indirectly through
                a
                total of four trusts established by Dr. Marlon and his wife, 3,000
                shares
                held indirectly through a limited partnership (the "Partnership"),
                and
                305,296 shares held indirectly by the AMM&RM Family Limited
                Partnership ("ARFLP").  Dr. Marlon may be deemed to have or share
                voting power and/or dispositive power over the shares held by the
                four
                trusts and, therefore, to have beneficial ownership with respect
                to such
                shares. Dr. Marlon, as managing general partner of the Partnership,
                has
                sole voting and dispositive power over the shares held by the Partnership.
                Dr. Marlon, as a general




36
 Return
          to Top


partner of ARFLP, may be deemed to have or share voting and/or dispositive
      power
      over the shares held by ARFLP (a limited partnership of which Dr. Marlon, his
      spouse, and a trust for the benefit of Jeannine A. Zeller, Dr. Marlon's
      daughter, are general and/or limited partners).  Dr. Marlon disclaims
      beneficial ownership as to the shares held by the four trusts, other than the
      1,439,630 shares held by the Marlon Family Trust (a revocable trust of which
      he
      is a trustee), and the shares held by ARFLP. The number of shares reported
      as
      beneficially owned also includes 212,830 shares held for Dr. Marlon's account
      under our 401(k) plan for employees. Dr. Marlon's beneficial ownership does
      not
      include 552,020 shares held in five trusts for the benefit of family members,
      the trustee of each of which is Oshins & Associates, LLC.  Dr. Marlon's
      beneficial ownership also does not include 88,000 shares deliverable in the
      future in settlement of vested RSUs, which do not constitute beneficial
      ownership because the RSUs cannot be settled currently or within 60 days after
      March 26, 2007.




(2)
            Includes
                95,750 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options and settlement of RSUs that vested
                before 2006 but which are subject to mandatory deferral of settlement
                until May 20, 2007. Mr. Bunker’s beneficial ownership includes 8,000
                shares held in his 401(k) plan account; it does not include 64,000
                shares
                deliverable in the future in settlement of vested but deferred RSUs.




(3)
            Includes
                122,082 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options and settlement of RSUs that vested
                before 2006 but which are subject to mandatory deferral of settlement
                until May 20, 2007. Mr. Collins’ beneficial ownership includes 7,572
                shares held in his 401(k) plan account; it does not include 46,000
                shares
                deliverable in the future in settlement of vested but deferred
                RSUs.




(4)
            Includes
                75,750 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options and settlement of RSUs that vested
                before 2006 but which are subject to mandatory deferral of settlement
                until May 20, 2007. Mr. Palmer’s beneficial ownership includes 1,790
                shares held in his 401(k) plan account; it does not include 24,000
                shares
                deliverable in the future in settlement of vested but deferred
                RSUs.




(5)
            Includes
                11,000 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options. Mr. Giancursio’s beneficial ownership
                includes 2,314 shares held in his 401(k) plan account; it does not
                include
                14,000 shares deliverable in the future in settlement of unvested
                and
                vested but deferred RSUs.




(6)
            Includes
                62,200 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options. Mr. Greene’s beneficial ownership does
                not include 6,000 shares deliverable in the future in settlement
                of
                RSUs.




(7)
            Includes
                14,000 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options. Mr. Hartley’s beneficial ownership
                does not include 6,000 shares deliverable in the future in settlement
                of
                RSUs.




(8)
            Includes
                23,000 shares that can be acquired within 60 days of March 26, 2007,
                upon
                the exercise of stock options. Mr. Luce’s beneficial ownership does not
                include 6,000 shares deliverable in the future in settlement of
                RSUs.




(9)
            Includes
                58,000 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options. Mr. Ruthe’s beneficial ownership does
                not include 6,000 shares deliverable in the future in settlement
                of
                RSUs.




(10)
            Includes
                62,000 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options. Mr. Watson’s beneficial ownership does
                not include 6,000 shares deliverable in the future in settlement
                of
                RSUs.




(11)
            Includes
                645,182 shares that can be acquired within 60 days of March 26, 2007,
                upon the exercise of stock options and settlement of RSUs, and 232,957
                shares held in 401(k) plan accounts for employees.




37
 Return
          to Top





(12)
            This
                information is derived from this stockholder’s Schedule 13G/A filed with
                the SEC on February 13, 2007, reporting the number of shares beneficially
                owned at an unspecified date. The business address of Putnam LLC
                dba
                Putnam Investments (“Putnam”) is One Post Office Square, Boston, MA 02109.
                Putnam, a wholly-owned subsidiary of Marsh & McLennan Companies, Inc.
                (“MMC”), filed the Schedule 13G/A on behalf of itself and its parent, MMC,
                and two of its wholly-owned subsidiaries: Putnam Investment Management,
                LLC (“PIM”), which is the investment adviser to the Putnam family of
                mutual funds, and The Putnam Advisory Company, LLC (“PAC”), which is the
                investment adviser to Putnam’s institutional clients. Putnam reported
                having shared voting power over 343,532 shares and shared dispositive
                power over 3,533,127 shares, representing beneficial ownership of
                6.2% of
                the outstanding class. PIM reported having shared voting power over
                14,600
                shares and shared dispositive power over 2,918,183 shares, representing
                beneficial ownership of 5.1% of the outstanding class. PAC reported
                having
                shared voting power over 328,932 shares and shared dispositive power
                over
                614,944 shares, representing beneficial ownership of 1.1% of the
                outstanding class. MMC reported beneficial ownership of no shares
                of our
                Common Stock. PIM and PAC have dispositive power over the shares
                as
                investment managers, but the mutual fund’s trustees rather than PIM have
                voting power over the shares held by each fund, and PAC has shared
                voting
                power over the shares held by institutional clients. Pursuant to
                Rule
                13d-4, MMC and PIM declared that the filing of the Schedule 13G/A
                shall
                not be deemed an admission by either or both of them that they are
                the
                beneficial owner of the securities covered by the filing, and further
                stated that neither of them have any power to vote or dispose of,
                or
                direct the voting or disposition of, any of the securities covered
                by the
                filing.




(13)
            These
                shares may be deemed to be beneficially owned by UnitedHealth Group
                Incorporated (“UNH”) by virtue of a Voting and Support Agreement, dated as
                of March 11, 2007 (the “Voting Agreement”), between UNH and Anthony M.
                Marlon. These are the same shares as are shown in the table as
                beneficially owned by Dr. Marlon, as described more fully in footnote
                (1)
                above. UNH and Sierra entered into an Agreement and Plan of Merger,
                dated
                as of March 11, 2007, which provides for the merger of Sierra and a
                subsidiary of UNH. If the merger is completed, Sierra will become
                a
                subsidiary of UNH and each share held by Sierra’s stockholders will be
                converted into a right to receive $43.50. Before the merger is completed,
                it must be approved by Sierra’s stockholders; completion of the merger is
                also subject to a number of other conditions. Under the Voting Agreement,
                Dr. Marlon agreed that his Sierra shares will be voted (i) in favor
                of approval of the Merger Agreement and otherwise to cause the merger
                to
                be completed, and (ii) against any other action that could be
                expected to result in Sierra breaching its agreements with UNH relating
                to
                the merger, including any competing takeover proposal. Dr. Marlon
                also
                granted UNH an irrevocable proxy coupled with an interest to vote
                his
                shares as provided for in the Voting Agreement. Dr. Marlon’s commitment
                applies only to shares as to which he has the right to vote, including
                shares he may acquire, but does not require that he in fact exercise
                options or take other actions to acquire additional shares, and does
                not
                provide any right of UNH to acquire his shares. UNH disclaims beneficial
                ownership of the shares subject to the Voting Agreement. The principal
                executive offices of UNH are located at UnitedHealth Group Center,
                9900
                Bren Road East, Minnetonka, Minnesota.




**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




**Certain
      Relationships and Related Transactions**




Jeannine
      A. Zeller, the adult daughter of Dr. Marlon, our CEO, was formerly the
      Director of Health Services, of Sierra Military Health Services, LLC.
      During 2006, she worked as a part time attorney for the Legal Department. In
      2006, she earned an aggregate annual compensation of $8,479. Dr. Marlon’s
      adult son, Robert Marlon, was an employee of the Company during 2006, serving
      as
      Project Manager, Customer Service Operations. During 2006, he earned an
      aggregate annual compensation of $82,437.




From
      time
      to time, the Company places a portion of its available cash reserves in various
      investments. These investments have included equity participation in real estate
      joint ventures and high yield trust deeds for commercial acquisition and/or
      development of land by unrelated third-party developers and entities formed
      to
      invest in land that may be resold to developers. Licensed mortgage brokers
      are
      the source of proposals for such transactions and make proposals not only to
      the
      Company but to other investors. A committee of the Chief Financial Officer
      and
      other executives reviews and considers the terms based upon internally-developed
      guidelines and recommends whether or not to make the investments, based on
      its
      view of the merits of the project and developer. The Company generally


38
 Return
          to Top


attempts
      to invest slightly more than a majority in each loan that the committee
      determines is appropriate. The notes are secured by deeds of trusts and
      generally by the personal guarantee of the developer. Dr. Marlon, Mr.
      Palmer, Mr. Bunker, Mr. Collins, Mr. Briggs and certain other senior executives,
      Directors and employees of the Company, along with other unrelated third-party
      investors, also invest their personal funds in some of the same trust deeds
      and real estate joint ventures discussed below. At December 31, 2006,
      the Company had approximately $88.5 million invested in trust deed mortgage
      notes and real estate joint ventures. The Company’s investments in trust deed
      mortgage notes are with numerous independent borrowers and are secured by real
      estate in several states. The Company’s investments in real estate joint
      ventures consist of three independent projects and are secured by real estate
      in
      California, Nevada, and Utah. During 2006, the Company invested a total of
      $63.4
      million in new trust deed notes and real estate joint ventures, some of which
      were repaid during the year. The Company has invested an additional $8.7 million
      in new trust deed notes through the first three months of 2007.




On
      March
      11, 2007, we entered into separate Indemnity Agreements with each of our
      directors and with a number of our officers and our subsidiaries’ officers. Each
      of the Indemnity Agreements, which contain identical provisions, provides,
      subject to specified exceptions, that the Company will indemnify the respective
      director or officer to the fullest extent permitted by Nevada law and our
      articles of incorporation and bylaws in proceedings commenced by third parties,
      in derivative actions, and in situations where such director or officer is
      a
      witness or threatened to be made a witness. Each Indemnity Agreement also
      provides for contribution in situations where indemnification is not available,
      and contains provisions regarding advancement of expenses and our obligation,
      subject to specified qualifications, to maintain directors' and officers'
      liability insurance coverage.




Among
      the
      corporate officers who have separate Indemnity Agreements with us are: Anthony
      M. Marlon, M.D., Chairman of the Board and Chief Executive Officer; Jonathon
      W.
      Bunker, President and Chief Operating Officer; Frank E. Collins, Senior
      Executive Vice President, Legal and Administration; Donald J. Giancursio, Senior
      Vice President, Sales and Marketing; Paul H. Palmer, Senior Vice President,
      Chief Financial Officer and Treasurer; Darren G.D. Sivertsen, Senior Vice
      President, Operations; Marc R. Briggs, Vice President , and Chief Accounting
      Officer; and Lawrence S. Howard, Senior Vice President, Program Office. The
      directors, in addition to Dr. Marlon, who signed Indemnity Agreements with
      us
      are: Charles L. Ruthe, Albert L. Greene, Thomas Y. Hartley, Michael E. Luce,
      and
      Anthony L. Watson.




The
      foregoing description of the Indemnity Agreements does not purport to be
      complete and is qualified in its entirety by reference to the form of Indemnity
      Agreement, which is attached as Exhibit 10.1 to our Current Report on Form
      8-K
      filed with the SEC on March 13, 2007, and incorporated herein by
      reference.




**Director
      Independence.**




**The
      information presented above under Item 10 is incorporated into this Item 13
      by
      reference.**




39
 Return
          to Top


**ITEM
      14.**  **PRINCIPAL
      ACCOUNTING FEES AND SERVICES**




The
      following table sets forth the aggregate fees billed to the Company for services
      rendered by Deloitte & Touche LLP, the member firms of Deloitte Touche
      Tohmatsu, and their respective affiliates (collectively “Deloitte”) which
      includes Deloitte Consulting, for the 2006 and 2005 fiscal years.




**2006**
            
            **2005**Audit
                fees (1)
            
            $
            1,058,400
            
            $
            934,000Audit-related
                fees (2)
            
            
            81,000
            
            
            32,000Tax
                fees (3)
            
            
            3⁄4
            
            
            36,000All
                other fees (4)
            
            
            3⁄4
            
            
            3⁄4Total
            
            $
            1,126,400
            
            $
            1,002,000





(1)
            Audit
                fees consist of fees for the audit of our annual financial statements,
                the
                review of quarterly financial statements, consents related to SEC
                registration statements, as well as work that generally only the
                independent registered public accounting firm can reasonably be expected
                to provide, such as statutory audits and financial audits of subsidiaries.
                Audit fees also included fees for professional services rendered
                for the
                audit of (i) management’s assessment that the Company maintained effective
                internal control over financial reporting, and (ii) the effectiveness
                of
                the Company’s internal control over financial
                reporting.




(2)
            Audit-related
                fees consist principally of fees for assurance and related services
                that
                are reasonably related to the performance of an audit and fees for
                the
                audit of the Company’s employee benefit
                plans.




(3)
            There
                were no fees paid to Deloitte for tax compliance, tax advice, or
                tax
                planning in 2006 or 2005. Tax fees for 2005 consisted of fees for
                tax
                compliance software and associated training.




(4)
            There
                were no other fees and no fees paid to Deloitte Consulting during
                the
                years ended December 31, 2006 or
                2005.




The
      Audit
      Committee Charter sets forth the Company’s policy regarding retention of the
      independent registered public accounting firm, requiring the Audit Committee
      to
      review and approve in advance the retention of the independent registered public
      accounting firm for the performance of all audit and lawfully permitted
      non-audit services. The Chair of the Audit Committee, or in the absence of
      the
      Chair, any member of the Audit Committee designated by the Chair, has authority
      to approve in advance any lawfully permitted non-audit services. The Audit
      Committee is authorized to establish other policies and procedures for the
      pre-approval of such services. Where non-audit services are approved under
      delegated authority, the action must be reported to the full Audit Committee
      at
      its next regularly scheduled meeting. All of the audit-related fees, tax fees
      or
      other fees shown in the table above were approved pursuant to the Audit
      Committee’s pre-approval process, as such process was in effect at the time of
      the approval of the particular fee.




The
      Audit
      Committee has considered the compatibility of non-audit services performed
      by
      Deloitte with the auditors’ independence. The Audit Committee has concluded that
      the provision of non-audit services by Deloitte is compatible with that firm
      maintaining its independence from the Company and its management.




40
 Return
          to Top


**PART
      IV**




**ITEM
      15.**  **EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**




Item
      15
      is hereby supplemented as follows:




The
      following Exhibits are filed as part of this amended Report:




(31.1)
            Rule
                13a - 14(a) Certification of Chief Executive Officer.(31.2)
            Rule
                13a - 14(a) Certification of Chief Financial Officer.(32.1)
            Certification
              pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
              of
              the Sarbanes-Oxley Act of 2002 of Principal Executive Officer.(32.2)
            Certification
              pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
              of
              the Sarbanes-Oxley Act of 2002 of Principal Financial Officer.


41
 Return
            to Top


**SIGNATURES**Pursuant
                  to the requirements of Section 13 or 15(d) of the Securities Exchange
                  Act
                  of 1934, the Registrant has caused this report to be signed on
                  its behalf
                  by the undersigned thereto duly authorized.SIERRA
                  HEALTH SERVICES, INC.By:
              /s/
                  Anthony M. Marlon, M.D.Date:
                  April 30, 2007
              
              
              Anthony
                  M. Marlon, M.D.Pursuant
                  to the requirements of the Securities Exchange Act of 1934, this
                  report
                  has been signed below by the following persons on behalf of the
                  Registrant
                  and in the capacities and on the dates indicated.Signature
              
              Title
              
              Date/s/
                  Anthony M. Marlon, M.D.
                Anthony
                  M. Marlon, M.D.
              
              Chief
                  Executive Officer
                and
                  Chairman of the Board
                (Chief
                  Executive Officer)
              
              April
                  30, 2007/s/Marc R. Briggs
                Marc
                  R. Briggs
              
              Senior
                  Vice President of Finance,
                Chief
                  Financial Officer
                and
                  Treasurer
              
              April
                  30, 2007/s/
                  Thomas Y. Hartley
                Thomas
                  Y. Hartley
              
              Lead
                  Director
              
              April
                  30, 2007/s/
                  Charles L. Ruthe
                Charles
                  L. Ruthe
              
              Director
              
              April
                  30, 2007/s/
                  Albert L. Greene
                Albert
                  L. Greene
              
              Director
              
              April
                  30, 2007/s/
                  Michael E. Luce
              
              Director
              
              April
                  30, 2007Michael
                  E. Luce/s/
                  Anthony L. Watson
                Anthony
                  L. Watson
              
              Director
              
              April
                  30, 2007




42