My 98 Outback is currently in the shop (Subaru Dealer) as I write this. I had the same "classic" blown head gasket at 100,000 miles. Couldn't believe how much of an epidemic this is for this car! I am getting pretty much the same work you are getting done to your car. My price tag came at $1,700 with a 12 month/12,000 mile warranty which is good piece of mind since you never know what else could go after this. I could've got it done at an independent garage for cheaper but they won't guarantee anything! BTW, call Subaru direct and tell them your problem. They MAY help in the repair payment. I did! This problem left a bad taste in my mouth about Subaru's because this is a HUGE problem with their 2.5 engines! It was an obvious design flaw that they are not coming out and admitting to. They just say it is "normal" wear and tear (heating and cooling) on the engine. I bought a Subaru in the first place because of their reputation of running next to forever. Now I have to re-think that!
Good Luck!