In
addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective
segment for the three months ended June 30, 2013 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
Segment
|
|
Term Date
|
|
2013
|
|
2014
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
June 30, 2014(1)
|
|
$
|
103,460
|
|
$
|
110,492
|
|
Customer B
|
|
December 31, 2019
|
|
|
70,919
|
|
|
90,923
|
|
Customer C
|
|
August 14, 2017
|
|
|
29,537
|
*
|
|
47,769
|
|
Customer D
|
|
December 14, 2013(1)
|
|
|
38,776
|
|
|
|
|
Public Sector
|
|
|
|
|
|
|
|
|
|
Customer E
|
|
June 30, 2015
|
|
|
129,471
|
|
|
213,000
|
|
Specialty Solutions
|
|
|
|
|
|
|
|
|
|
Customer E
|
|
December 31, 2015
|
|
|
60,602
|
|
|
69,988
|
|
Customer F
|
|
June 30, 2016(2)
|
|
|
30,580
|
|
|
26,515
|
|
Customer G
|
|
July 31, 2015
|
|
|
32,708
|
|
|
34,901
|
|
Customer A
|
|
November 30, 2016
|
|
|
1,154
|
*
|
|
26,577
|
|
Customer H
|
|
January 31, 2016
|
|
|
22,230
|
|
|
24,593
|
|
Pharmacy Management
|
|
|
|
|
|
|
|
|
|
Customer I
|
|
November 30, 2014 to December 31, 2014(3)
|
|
|
65,335
|
|
|
60,972
|
|
Customer J
|
|
December 31, 2013(4)
|
|
|
43,274
|
|
|
1,267
|
*
|
Customer K
|
|
March 31, 2014(1)(5)
|
|
|
31,466
|
|
|
18,055
|
*
|
-
*
-
Revenue
amount did not exceed ten percent of net revenues for the respective segment for the period presented. Amount is shown for comparative purposes only.
-
(1)
-
The
contract has terminated.
-
(2)
-
This
contract transitioned from risk to ASO based services effective July 1, 2014.
-
(3)
-
The
customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.
-
(4)
-
The
contract has terminated, however, the Company continues to provide services as the contract is transitioned to the new vendor.
-
(5)
-
This
customer represents a subcontract with a Public Sector customer and is eliminated in consolidation.
Concentration
of Business
The
Company also has a significant concentration of business with various counties in the State of Pennsylvania (the "Pennsylvania Counties") which are part of
the Pennsylvania Medicaid program. Net revenues from the Pennsylvania Counties in the aggregate totaled $178.0 million and $179.0 million for the six months ended June 30, 2013
and 2014, respectively.
In
addition, the Company has a significant concentration of business with the State of Florida. The Company currently has behavioral healthcare contracts with various areas in the State
of Florida (the "Florida Areas") which are part of the Florida Medicaid program. The State of Florida is
39
Table of Contents
implementing
a new system of mandated managed care through which Medicaid enrollees will receive integrated healthcare services, and it will phase out the behavioral healthcare programs under which
the Florida Areas' contracts operate by July 31, 2014. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program. Net revenues from
the State of Florida in the aggregate totaled $66.3 million and $56.5 million for the six months ended June 30, 2013 and 2014, respectively.
The
Company's contracts with customers typically have terms of one to three years, and in certain cases contain renewal provisions (at the customer's option) for successive terms of
between one and two years (unless terminated earlier). Substantially all of these contracts may be immediately terminated with cause and many of the Company's contracts are terminable without cause by
the customer or the Company either upon the giving of requisite notice and the passage of a specified period of time (typically between 60 and 180 days) or upon the occurrence of other
specified events. In addition, the Company's contracts with federal, state and local governmental agencies generally are conditioned on legislative appropriations. These contracts generally can be
terminated or modified by the customer if such appropriations are not made.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, valuation allowances
for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual
results could differ from those estimates. Except as noted below, the Company's critical accounting policies are summarized in the Company's Annual Report on Form 10-K, filed with the SEC on
March 3, 2014.
Income Taxes
The Company's effective income tax rates were 40.6 percent and 52.6 percent for the six months ended June 30, 2013
and 2014, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded
tax contingencies. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the six months ended
June 30, 2013 is lower than the effective rate for the six months ended June 30, 2014 mainly due to the non-deductible ACA fees and valuations allowances for certain deferred tax assets.
The
Company files a consolidated federal income tax return for the Company and its eighty percent or more owned subsidiaries, and the Company and its subsidiaries file income tax
returns in various states and local jurisdictions. With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years ended prior to 2010.
40
Table of Contents
Results of Operations
The accounting policies of the Company's segments are the same as those described in Note A"General." The Company
evaluates performance of its segments based on Segment Profit. Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions
regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Public Sector subcontracts with Pharmacy Management to provide pharmacy
benefits management services for certain of Public Sector's customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company's employees covered under its medical
plan. As such, revenue, cost of care, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company's segments are defined above.
The
following tables summarize, for the periods indicated, operating results by business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Public
Sector
|
|
Specialty
Solutions
|
|
Pharmacy
Management
|
|
Corporate
and
Elimination
|
|
Consolidated
|
|
Three Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care and other revenue
|
|
$
|
199,538
|
|
$
|
414,859
|
|
$
|
92,715
|
|
$
|
55,829
|
|
$
|
(16,221
|
)
|
$
|
746,720
|
|
PBM and dispensing revenue
|
|
|
|
|
|
|
|
|
|
|
|
96,028
|
|
|
|
|
|
96,028
|
|
Cost of care
|
|
|
(123,227
|
)
|
|
(357,402
|
)
|
|
(58,742
|
)
|
|
(14,480
|
)
|
|
16,221
|
|
|
(537,630
|
)
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
(90,175
|
)
|
|
|
|
|
(90,175
|
)
|
Direct service costs and other
|
|
|
(41,399
|
)
|
|
(28,934
|
)
|
|
(13,863
|
)
|
|
(31,374
|
)
|
|
(28,927
|
)
|
|
(144,497
|
)
|
Stock compensation expense(1)
|
|
|
133
|
|
|
267
|
|
|
457
|
|
|
380
|
|
|
3,365
|
|
|
4,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
35,045
|
|
$
|
28,790
|
|
$
|
20,567
|
|
$
|
16,208
|
|
$
|
(25,562
|
)
|
$
|
75,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Public
Sector
|
|
Specialty
Solutions
|
|
Pharmacy
Management
|
|
Corporate
and
Elimination
|
|
Consolidated
|
|
Three Months Ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care and other revenue
|
|
$
|
198,025
|
|
$
|
319,954
|
|
$
|
119,326
|
|
$
|
44,969
|
|
$
|
|
|
$
|
682,274
|
|
PBM and dispensing revenue
|
|
|
|
|
|
|
|
|
|
|
|
209,265
|
|
|
(3,525
|
)
|
|
205,740
|
|
Cost of care
|
|
|
(116,852
|
)
|
|
(275,108
|
)
|
|
(89,753
|
)
|
|
96
|
|
|
|
|
|
(481,617
|
)
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
(196,080
|
)
|
|
3,514
|
|
|
(192,566
|
)
|
Direct service costs and other
|
|
|
(42,530
|
)
|
|
(45,391
|
)
|
|
(17,897
|
)
|
|
(41,605
|
)
|
|
(31,611
|
)
|
|
(179,034
|
)
|
Stock compensation expense(1)
|
|
|
157
|
|
|
230
|
|
|
354
|
|
|
5,556
|
|
|
3,253
|
|
|
9,550
|
|
Less: non-controlling interest segment profit (loss)(2)
|
|
|
|
|
|
(648
|
)
|
|
|
|
|
|
|
|
|
|
|
(648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
38,800
|
|
$
|
333
|
|
$
|
12,030
|
|
$
|
22,201
|
|
$
|
(28,369
|
)
|
$
|
44,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Public
Sector
|
|
Specialty
Solutions
|
|
Pharmacy
Management
|
|
Corporate
and
Elimination
|
|
Consolidated
|
|
Six Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care and other revenue
|
|
$
|
387,375
|
|
$
|
821,479
|
|
$
|
182,993
|
|
$
|
108,928
|
|
$
|
(31,466
|
)
|
$
|
1,469,309
|
|
PBM and dispensing revenue
|
|
|
|
|
|
|
|
|
|
|
|
195,200
|
|
|
|
|
|
195,200
|
|
Cost of care
|
|
|
(236,498
|
)
|
|
(712,781
|
)
|
|
(116,809
|
)
|
|
(28,035
|
)
|
|
31,466
|
|
|
(1,062,657
|
)
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
(183,687
|
)
|
|
|
|
|
(183,687
|
)
|
Direct service costs and other
|
|
|
(82,791
|
)
|
|
(54,577
|
)
|
|
(27,234
|
)
|
|
(60,935
|
)
|
|
(58,587
|
)
|
|
(284,124
|
)
|
Stock compensation expense(1)
|
|
|
266
|
|
|
574
|
|
|
891
|
|
|
700
|
|
|
7,809
|
|
|
10,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
68,352
|
|
$
|
54,695
|
|
$
|
39,841
|
|
$
|
32,171
|
|
$
|
(50,778
|
)
|
$
|
144,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Public
Sector
|
|
Specialty
Solutions
|
|
Pharmacy
Management
|
|
Corporate
and
Elimination
|
|
Consolidated
|
|
Six Months Ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care and other revenue
|
|
$
|
386,916
|
|
$
|
817,897
|
|
$
|
224,760
|
|
$
|
100,347
|
|
$
|
(18,055
|
)
|
$
|
1,511,865
|
|
PBM and dispensing revenue
|
|
|
|
|
|
|
|
|
|
|
|
348,889
|
|
|
(6,265
|
)
|
|
342,624
|
|
Cost of care
|
|
|
(228,054
|
)
|
|
(697,626
|
)
|
|
(163,405
|
)
|
|
(16,295
|
)
|
|
18,055
|
|
|
(1,087,325
|
)
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
(324,111
|
)
|
|
6,247
|
|
|
(317,864
|
)
|
Direct service costs and other
|
|
|
(82,806
|
)
|
|
(88,349
|
)
|
|
(33,038
|
)
|
|
(77,156
|
)
|
|
(62,407
|
)
|
|
(343,756
|
)
|
Stock compensation expense(1)
|
|
|
312
|
|
|
504
|
|
|
768
|
|
|
5,859
|
|
|
6,579
|
|
|
14,022
|
|
Less: non-controlling interest segment profit (loss)(2)
|
|
|
|
|
|
(1,978
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
76,368
|
|
$
|
34,404
|
|
$
|
29,085
|
|
$
|
37,533
|
|
$
|
(55,846
|
)
|
$
|
121,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Stock
compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment
Profit since it is managed on a consolidated basis.
-
(2)
-
The
non-controlling portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.
The
following table reconciles Segment Profit to income before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
Segment profit
|
|
$
|
75,048
|
|
$
|
44,995
|
|
$
|
144,281
|
|
$
|
121,544
|
|
Stock compensation expense
|
|
|
(4,602
|
)
|
|
(9,550
|
)
|
|
(10,240
|
)
|
|
(14,022
|
)
|
Non-controlling interest segment profit (loss)
|
|
|
|
|
|
(648
|
)
|
|
|
|
|
(1,978
|
)
|
Depreciation and amortization
|
|
|
(16,946
|
)
|
|
(22,480
|
)
|
|
(33,116
|
)
|
|
(42,709
|
)
|
Interest expense
|
|
|
(792
|
)
|
|
(2,004
|
)
|
|
(1,402
|
)
|
|
(2,840
|
)
|
Interest income
|
|
|
358
|
|
|
275
|
|
|
711
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
53,066
|
|
$
|
10,588
|
|
$
|
100,234
|
|
$
|
60,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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42
Table of Contents
Quarter ended June 30, 2014 ("Current Year Quarter"), compared to the quarter ended June 30, 2013 ("Prior Year Quarter")
Commercial
Net Revenue
Net revenue related to Commercial decreased by 0.8 percent or $1.5 million from the Prior Year Quarter to the Current
Year Quarter. The decrease in revenue is mainly due to terminated contracts of $26.5 million, customer settlements in the Prior Year Quarter of $6.7 million and decreased membership from
existing customers of $3.0 million. These decreases were partially offset by favorable rate changes of $20.4 million, new contracts implemented after (or during) the Prior Year Quarter
of $3.9 million, customer settlements in the Current Year Quarter of $1.4 million, favorable prior period rate, membership and other adjustments of $0.9 million recorded in the
Current Year Quarter and other net favorable increases of $8.1 million (mainly related to higher care associated with a cost-plus contract).
Cost of Care
Cost of care decreased by 5.2 percent or $6.4 million from the Prior Year Quarter to the Current Year Quarter. The
decrease in cost of care is primarily due to terminated contracts of $21.4 million, decreased membership from existing customers of $3.5 million, favorable prior period medical claims
development recorded in the Current Year Quarter of $3.3 million and customer settlements in the Current Year Quarter of $1.3 million, which decreases were partially offset by new
business of $0.7 million and unfavorable care trends and other net variances of $22.4 million. Cost of care decreased as a percentage of risk revenue (excluding EAP business) from
81.4 percent in the Prior Year Quarter to 76.8 percent in the Current Year Quarter, mainly due to changes in business mix.
Direct Service Costs
Direct service costs increased by 2.7 percent or $1.1 million from the Prior Year Quarter to the Current Year Quarter
primarily due to new contracts implemented after (or during) the Prior Year Quarter of $1.5 million and other net unfavorable variances of $2.7 million, which increases were partially
offset by terminated contracts of $3.1 million. Direct service costs increased as a percentage of revenue from 20.7 percent in the Prior Year Quarter to 21.5 percent in the
Current Year Quarter, mainly due to changes in business mix.
Public Sector
Net Revenue
Net revenue related to Public Sector decreased by 22.9 percent or $94.9 million from the Prior Year Quarter to the
Current Year Quarter. This decrease is primarily due to terminated contracts of $190.5 million, decreased membership from existing customers of $2.3 million and other net unfavorable
variances of $1.6 million. These decreases were partially offset by new contracts implemented after the Prior Year Quarter of $85.1 million, revenue recorded for ACA tax of
$10.9 million and the revenue impact of favorable prior period care development recorded in the Current Year Quarter of $3.5 million.
Cost of Care
Cost of care decreased by 23.0 percent or $82.3 million from the Prior Year Quarter to the Current Year Quarter. This
decrease is primarily due to terminated contracts of $170.3 million and decreased membership from existing customers of $1.8 million. These decreases were partially offset by new
contracts of $70.0 million, unfavorable prior period medical claims development recorded in the
43
Table of Contents
Current
Year Quarter of $10.3 million, favorable prior period medical claims development recorded in the Prior Year Quarter of $6.2 million and unfavorable care trends and other net
variances of $3.3 million. Cost of care increased as a percentage of risk revenue from 87.9 percent in the Prior Year Quarter to 89.9 percent in the Current Year Quarter mainly
due to unfavorable prior period care development.
Direct Service Costs
Direct service costs increased by 56.9 percent or $16.5 million from the Prior Year Quarter to the Current Year Quarter,
mainly due to the accrual for ACA tax of $5.6 million in the Current Year Quarter, as well as costs to support new business and development costs for the Magellan Complete Care product. Direct
service costs increased as a percentage of revenue from 7.0 percent for the Prior Year Quarter to 14.2 percent in the Current Year Quarter mainly due to ACA taxes, cost to support new
business and development costs for the Magellan Complete Care product.
Specialty Solutions
Net Revenue
Net revenue related to Specialty Solutions increased by 28.7 percent or $26.6 million from the Prior Year Quarter to the
Current Year Quarter. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $30.5 million, increase in membership from existing customers of
$6.0 million, the revenue impact of favorable prior period medical claims development recorded in the Prior Year Quarter of $1.8 million and other net favorable variances of
$0.2 million. These increases were partially offset by unfavorable rate changes of $9.7 million and terminated contracts of $2.2 million.
Cost of Care
Cost of care increased by 52.8 percent or $31.0 million from the Prior Year Quarter to the Current Year Quarter. This
increase is primarily attributed to new contracts of $24.4 million, increased membership from existing customers of $3.8 million, favorable prior period medical claims development
recorded in the Prior Year Quarter of $4.1 million and other net unfavorable variances of $1.6 million. These increases were partially offset by terminated contacts of
$1.7 million and favorable prior period medical claims development for the Current Year Quarter of $1.2 million. Cost of care increased as a percentage of risk revenue from
70.7 percent in the Prior Year
Quarter to 82.9 percent in the Current Year Quarter mainly due to unfavorable rate changes and business mix.
Direct Service Costs
Direct service costs increased by 29.1 percent or $4.0 million from the Prior Year Quarter to the Current Year Quarter.
As a percentage of revenue, direct service costs in the Current Year Quarter of 15.0 percent were consistent with the Prior Year Quarter.
Pharmacy Management
Managed Care and Other Revenue
Managed care and other revenue related to Pharmacy Management decreased by 19.5 percent or $10.9 million from the Prior
Year Quarter to the Current Year Quarter. This decrease is primarily due to terminated contracts of $19.5 million and decreased rebate revenue due to term changes of $2.5 million. These
decreases were partially offset by revenue of $6.9 for CDMI which was acquired on April 30, 2014, new contracts implemented after the Prior Year Quarter of $3.6 million and other net
favorable variances of $0.6 million.
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PBM/Distribution Revenue
PBM and Distribution revenue related to Pharmacy Management increased by 117.9 percent or $113.2 million from the Prior
Year Quarter to the Current Year Quarter. This increase is primarily due to revenue of $87.4 million for Partners Rx which was acquired on October 1, 2013, new contracts implemented
after the Prior Year Quarter of $58.5 million and net increased dispensing activity from existing customers of $5.6 million. These increases were partially offset by terminated contracts
of $36.6 million and other net decreases of $1.7 million.
Cost of Care
Cost of care decreased by $14.6 million from the Prior Year Quarter to the Current Year Quarter due to a terminated contract.
Cost of Goods Sold
Cost of goods sold increased by 117.4 percent or $105.9 million from the Prior Year Quarter to the Current Year Quarter.
This increase is primarily due to cost of goods sold for Partners Rx of $79.3 million, new contracts implemented after the Prior Year Quarter of $57.2 million and increased dispensing
activity from existing customers of $4.1 million. These increases were partially offset by terminated contracts of $33.9 million and other net decreases of $0.8 million. As a
percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold in the Current Year Quarter of 93.7 percent was consistent with the Prior Year Quarter.
Direct Service Costs
Direct service costs increased by 32.6 percent or $10.2 million from the Prior Year Quarter to the Current Year Quarter.
This increase mainly relates to the Partners Rx and CDMI acquisitions, implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs decreased from
20.7 percent in the Prior Year Quarter to 16.4 percent in the Current Year Quarter, mainly due to business mix.
Corporate and Other
Other Operating Expenses
Other operating expenses related to the Corporate and Other segment increased by 9.3 percent or $2.7 million from the
Prior Year Quarter to the Current Year Quarter. The increase relates primarily to discretionary benefits of $1.3 million, legal fees of $0.8 million and severance cost of
$0.6 million. As a percentage of total net revenue, other operating expenses increased from 3.4 percent for the Prior Year Quarter to 3.6 percent for the Current Year Quarter due
to business mix.
Depreciation and Amortization
Depreciation and amortization expense increased by 32.7 percent or $5.5 million from the Prior Year Quarter to the
Current Year Quarter, primarily due to asset additions after the Prior Year Quarter and acquisition activity.
Interest Expense
Interest expense increased by 153.0 percent or $1.2 million from the Prior Year Quarter to the Current Year Quarter,
mainly due to the change in the present value of the contingent consideration liability related to CDMI acquisition.
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Interest Income
Interest income was consistent with the Prior Year Quarter.
Income Taxes
The Company's effective income tax rates were 40.7 percent and 59.1 percent for the Prior Year Quarter and Current Year
Quarter, respectively. The effective income tax rate for the Current Year Quarter differs from the Prior Year Quarter effective rate mainly due to the non-deductible ACA fees and valuation allowances
for certain deferred tax assets.
Six months ended June 30, 2014 ("Current Year Period"), compared to the six months ended June 30, 2013 ("Prior Year Period")
Commercial
Net Revenue
Net revenue related to Commercial decreased by 0.1 percent or $0.5 million from the Prior Year Period to the Current Year
Period. The decrease in revenue is mainly due to terminated contracts of $51.6 million, decreased membership from existing customers of $10.4 million and customer settlements in the
Prior Year Period of $6.7 million. These decreases were partially offset by favorable rate changes of $36.4 million, new contracts implemented after (or during) the Prior Year Period of
$8.4 million, favorable prior period rate, membership and other adjustments of $2.4 million in the Current Year Period and other net favorable increases of $21.0 million (mainly
related to higher care associated with a cost-plus contract).
Cost of Care
Cost of care decreased by 3.6 percent or $8.4 million from the Prior Year Period to the Current Year Period. The decrease
in cost of care is primarily due to terminated contracts of $41.7 million, decreased membership from existing customers of $8.4 million, favorable prior period medical claims development
recorded in the Current Year Period of $2.4 million and customer settlements in the Current Year Period of $2.4 million. These decreases were partially offset by unfavorable care trends
and other net variances of $41.1 million, favorable prior period medical claims development recorded in the Prior Year Period of $4.4 million and decreased membership from existing
customers of $1.0 million. Cost of care decreased as a percentage of risk revenue (excluding EAP business) from 79.0 percent in the Prior Year Period to 76.8 percent in the
Current Year Period, mainly due to business mix.
Direct Service Costs
Direct service was consistent from the Prior Year Period to the Current Year Period. Direct service costs as a percentage of revenue of
21.4 percent was consistent between periods.
Public Sector
Net Revenue
Net revenue related to Public Sector decreased by 0.4 percent or $3.6 million from the Prior Year Period to the Current
Year Period. This decrease is primarily due to terminated contracts of $190.5 million and decreased membership from existing customers of $2.3 million, which decreases were partially
offset by new contracts implemented after the Prior Year Period of $157.1 million, favorable rate changes of $16.4 million, revenue recorded for ACA tax of $14.1 million and other
net favorable variances of $1.6 million.
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Table of Contents
Cost of Care
Cost of care decreased by 2.1 percent or $15.2 million from the Prior Year Period to the Current Year Period. This
decrease is primarily due to terminated contracts of $170.4 million and decreased membership from existing customers of $1.2 million. These decreases were partially offset by new
contracts implemented after the Prior Year Period of $130.4 million, care
associated with rate changes for contracts with minimum care requirements of $14.1 million, favorable prior period medical claims development recorded in the Prior Year Period of
$7.8 million, unfavorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $2.3 million, unfavorable prior period medical claims
development recorded in the Current Year Period of $1.3 million and unfavorable care trends other net variances of $0.5 million. Cost of care decreased as a percentage of risk revenue
from 88.5 percent in the Prior Year Period to 88.3 percent in the Current Year Period mainly due to business mix.
Direct Service Costs
Direct service costs increased by 61.9 percent or $33.8 million from the Prior Year Period to the Current Year Period,
mainly due to the accrual for ACA tax of $10.7 million in the Current Year Period, costs to support new business and development costs for the Magellan Complete Care product. Direct service
costs increased as a percentage of revenue from 6.6 percent for the Prior Year Period to 10.8 percent in the Current Year Period mainly due to ACA taxes, costs to support new business
and development costs for the Magellan Complete Care product.
Specialty Solutions
Net Revenue
Net revenue related to Specialty Solutions increased by 22.8 percent or $41.8 million from the Prior Year Period to the
Current Year Period. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $49.3 million, increase in membership from existing customers of
$14.2 million, the revenue impact of favorable prior period medical claims development recorded in the Prior Year Period of $2.0 million and other net favorable variances of
$0.5 million. These increases were partially offset by unfavorable rate changes of $19.9 million and terminated contracts of $4.3 million.
Cost of Care
Cost of care increased by 39.9 percent or $46.6 million from the Prior Year Period to the Current Year Period. This
increase is primarily attributed to new contracts of $39.6 million, increased membership from existing customers of $10.0 million and favorable prior period medical claims development
recorded in the Prior Year Period of $5.0 million. These increases were partially offset by terminated contracts of $3.6 million, favorable prior period medical claims development
recorded in the Current Year Period of $2.1 million and other net favorable variances of $2.3 million. Cost of care increased as a percentage of risk revenue from 71.6 percent in
the Prior Year Period to 80.5 percent in the Current Year Period mainly due to unfavorable rate changes and care trends.
Direct Service Costs
Direct service costs increased by 21.3 percent or $5.8 million from the Prior Year Period to the Current Year Period. As
a percentage of revenue, direct service costs were consistent from the Prior Year Period to the Current Year Period.
47
Table of Contents
Pharmacy Management
Managed Care and Other Revenue
Managed care and other revenue related to Pharmacy Management decreased by 7.9 percent or $8.6 million from the Prior
Year Period to the Current Year Period. This
decrease is primarily due to terminated contracts of $23.7 million and decreased rebate revenue due to change in terms of $3.9 million. These decreases were partially offset by revenue
of $6.9 for CDMI which was acquired on April 30, 2014, new contracts implemented after the Prior Year Period of $7.5 million, increased revenue from a subcontract with Public Sector of
$2.8 million and increased Medical Pharmacy revenue of $1.8 million.
PBM/Distribution Revenue
PBM and Distribution revenue related to Pharmacy Management increased by 78.7 percent or $153.7 million from the Prior
Year Period to the Current Year Period. This increase is primarily due to revenue of $166.9 million for Partners Rx which was acquired on October 1, 2013, new contracts of
$58.6 million and net increased dispensing activity from existing customers of $2.5 million. These increases were partially offset by terminated distribution contracts of
$72.5 million and other net decreases of $1.8 million.
Cost of Care
Cost of care decreased by 41.9 percent or $11.7 million from the Prior Year Period to the Current Year Period. This
decrease is primarily due to a terminated contract of $14.6 million. Cost of care increased as a percentage of risk revenue from 89.1 percent in the Prior Year Period to
90.1 percent in the Current Year Period mainly due to unfavorable care trends.
Cost of Goods Sold
Cost of goods sold increased by 76.4 percent or $140.4 million from the Prior Year Period to the Current Year Period.
This increase is primarily due to cost of goods sold for Partners Rx of $151.0 million, new contracts implemented after the Prior Year Period of $57.3 million and increased dispensing
activity from existing customers of $1.6 million. These increases were partially offset by terminated contracts of $68.1 million and other net deceases of $1.4 million. As a
percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.1 percent in the Prior Year Period to 92.9 percent in the
Current Year Period, mainly due to business mix.
Direct Service Costs
Direct service costs increased by 26.6 percent or $16.2 million from the Prior Year Period to the Current Year Period.
This increase mainly relates to the Partners Rx acquisition, implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs decreased from
20.0 percent in the Prior Year Period to 17.2 percent in the Current Year Period, mainly due to business mix.
Corporate and Other
Other Operating Expenses
Other operating expenses related to the Corporate and Other segment increased by 6.5 percent or $3.8 million from the
Prior Year Period to the Current Year Period. The increase relates primarily to legal fees of $1.3 million, severance cost of $0.9 million, discretionary benefits of $0.7 million
and other net unfavorable one time items in the Current Year Period of $0.9 million. As a percentage of total net
48
Table of Contents
revenue,
other operating expenses decreased from 3.5 percent for the Prior Year Period to 3.4 percent for the Current Year Period business mix.
Depreciation and Amortization
Depreciation and amortization expense increased by 29.0 percent or $9.6 million from the Prior Year Period to the Current
Year Period, primarily due to asset additions after the Prior Year Period and acquisition activity.
Interest Expense
Interest expense increased by 102.6 percent or $1.4 million from the Prior Year Period to the Current Year Period, mainly
due to the change in the present value of the contingent consideration liability related to CDMI acquisition.
Interest Income
Interest income was consistent with Prior Year.
Income Taxes
The Company's effective income tax rates were 40.6 percent and 52.6 percent for the Prior Year Period and Current Year
Period, respectively. The effective income tax rate for the Current Year Period differs from the Prior Year Period effective rate mainly due to the non-deductible ACA fees and valuation allowances for
certain deferred tax assets.
OutlookResults of Operations
The Company's Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may
result from a variety of factors such as those set forth under Item 1A"Risk Factors" as well as a variety of other factors including: (i) changes in utilization levels by
enrolled members of the Company's risk-based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments;
(iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general);
(vi) the timing of acquisitions; and (vii) changes in estimates regarding medical costs and IBNR.
A
portion of the Company's business is subject to rising care costs due to an increase in the number and frequency of covered members seeking behavioral healthcare or radiology services,
and higher costs per inpatient day or outpatient visit for behavioral services, and higher costs per scan for radiology services. Many of these factors are beyond the Company's control. Future results
of operations will be heavily dependent on management's ability to obtain customer rate increases that are consistent with care cost increases and/or to reduce operating expenses.
In
relation to the managed behavioral healthcare business, the Company is a market leader in a mature market with many viable competitors. The Company is continuing its attempts to grow
its business in the managed behavioral healthcare industry through aggressive marketing and development of new products; however, due to the maturity of the market, the Company believes that the
ability to grow its current business lines may be limited. In addition, as previously discussed, substantially all of the Company's Commercial segment revenues are derived from Blue Cross Blue Shield
health plans and other managed care companies, health insurers and health plans. In the past, certain of the managed care customers of the Company have decided not to renew all or part of their
contracts with the Company, and to instead manage the behavioral healthcare services directly for their subscribers.
49
Table of Contents
Care Trends.
The Company expects that same-store normalized cost of care trend for the 12-month forward outlook to be 6 to
8 percent for
Commercial, 0 to 2 percent for Public Sector and 3 to 5 percent for Specialty Solutions.
Interest Rate Risk.
Changes in interest rates affect interest income earned on the Company's cash equivalents and investments, as well
as interest
expense on variable interest rate borrowings under the Company's 2014 Credit Facility. Based on the amount of cash equivalents and investments and the borrowing levels under the 2014 Credit Facility
as of June 30, 2014, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially
affect the Company's future earnings and cash outflows.
HistoricalLiquidity and Capital Resources
Operating Activities.
The Company reported net cash provided by operating activities of $86.9 million and $137.1 million for
the Prior
Year Period and Current Year Period, respectively. The $50.2 million increase in operating cash flows from the Prior Year Period to the Current Year Period is attributable to net favorable
working capital changes between periods and lower tax payments, partially offset by the decrease in Segment Profit between periods and the impact of the net shift of restricted funds between cash and
investments that results in an operating cash flow change that is directly offset by an investing cash flow change.
The
net favorable impact of working capital changes between periods totaled $90.6 million. Operating cash flows for the Prior Year Period were impacted by net unfavorable working
capital changes of $47.1 million, which were largely attributable to management incentive payments, an increase in accounts receivable, as well as a net increase in restricted cash requirements
associated with the Company's regulated entities, partially offset by accruals associated with the management incentive plan. For the Current Year Period, operating cash flows were impacted by net
favorable working capital changes of $43.5 million, largely attributable to a net decrease in restricted cash requirements associated with the Company's regulated entities, an increase in
medical claims payable, and accruals associated with the management incentive plan, partially offset by management incentive payments. Tax payments for the Current Year Period totaled
$40.3 million, which represents a decrease of $1.3 million from the Prior Year Period.
Segment
Profit for the Current Year Period decreased $22.7 million from the Prior Year Period. Restricted cash of $31.3 million and $12.3 million for the Prior Year
Period and Current Year Period, respectively, were shifted to restricted investments that increased operating cash flows. The net impact of the shift in restricted funds between periods is a decrease
in operating cash flows of $19.0 million.
During
the Current Year Period, the Company's restricted cash decreased $69.4 million. The change in restricted cash is attributable to decreases in restricted cash of
$52.2 million associated with the Company's regulated entities, the net shift of restricted cash of $12.3 million to restricted investments, and other net decreases of
$4.9 million. The net change in restricted cash for the Company's regulated entities is attributable to a net decrease in restricted cash requirements of $35.1 million that resulted in
an operating cash flow source and net decreases of $17.1 million that are offset by changes in other assets and liabilities, primarily accounts receivable, accrued liabilities, medical claims
payable and other medical liabilities, thus having no impact on operating cash flows.
Investing Activities.
The Company utilized $27.0 million and $32.0 million during the Prior Year Period and Current Year
Period,
respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, leaseholds) and capitalized software for the Prior Year Period were $7.9 million and
$19.1 million, respectively, as compared to additions for the Current Year Period related to hard assets and capitalized software of $10.9 million and $21.1 million, respectively.
During the Prior Year Period the Company used net cash of $26.3 million for the net purchase of "available-for-sale" securities, with the Company receiving net cash of $34.4 million
during the Current
50
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Year
Period from the net maturity of "available-for-sale" securities. In addition, during the Prior Year Period the Company executed a note receivable in the amount of $5.9 million and
purchased preferred stock of $2.0 million from AlphaCare, with the Company acquiring CDMI during the Current Year Period for $125.0 million.
Financing Activities.
During the Prior Year Period, the Company paid $49.5 million for the repurchase of treasury stock under the
Company's
share repurchase program, paid $1.8 million on capital lease obligations, and had other net unfavorable items of $0.7 million. In addition, the Company received $16.1 million from
the exercise of stock options.
During
the Current Year Period, the Company paid $65.3 million for the repurchase of treasury stock under the Company's share repurchase program and paid $2.1 million on
capital lease obligations. In addition, the Company received $34.2 million from the exercise of stock options and had other net favorable items of $1.2 million.
OutlookLiquidity and Capital Resources
Liquidity.
During the remainder of 2014, the Company expects to fund its estimated capital expenditures of $24.0 million to
$34.0 million with cash from operations. The Company does not anticipate that it will
need to draw on amounts available under the 2014 Credit Facility for cash flow needs related to its operations, capital needs or debt service in 2014. The Company also currently expects to have
adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. The Company may draw on the 2014 Credit Facility to fund a portion of cash required for
its acquisition activities. The Company plans to maintain its current investment strategy of investing in a diversified, high quality, liquid portfolio of investments and continues to closely monitor
the situation in the financial markets. The Company estimates that it has no risk of any material permanent loss on its investment portfolio; however, there can be no assurance that the Company will
not experience any such losses in the future.
Stock Repurchases.
On October 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the
Company to
purchase up to $200 million of its outstanding common stock through October 25, 2013. On July 24, 2013 the Company's board of directors approved an increase and extension of the
stock repurchase plan which authorizes the Company to purchase up to $300 million of its outstanding stock through October 25, 2015.
Stock
repurchases under the program may be purchased from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases
and the actual amount purchased will depend on a variety of factors including the market price of the Company's shares, general market and economic conditions, and other corporate considerations.
Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when
it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated
cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company's board of directors at any
time. The $250.0 million term loan under the 2014 Credit Facility may be drawn at any time, but no later
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than
September 30, 2014. Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total number
of Shares
Purchased
|
|
Average
Price Paid
per Share
|
|
Aggregate
Cost
|
|
November 11, 2011 - December 31, 2011
|
|
|
671,776
|
|
$
|
48.72
|
|
$
|
32.7
|
|
January 1, 2012 - December 31, 2012
|
|
|
459,252
|
|
|
50.27
|
|
|
23.1
|
|
January 1, 2013 - December 31, 2013
|
|
|
1,159,871
|
|
|
51.83
|
|
|
60.1
|
|
January 1, 2014 - June 30, 2014
|
|
|
1,137,037
|
|
|
59.20
|
|
|
67.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,427,936
|
|
|
|
|
$
|
183.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the period from July 1, 2014 through July 21, 2014, the Company made additional open market purchases of 223,821 shares of the Company's common stock at an aggregate
cost of $14.0 million (excluding broker commissions).
Off-Balance Sheet Arrangements.
As of June 30, 2014, the Company has no material off-balance sheet arrangements.
2011 Credit Facility.
On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility Credit Agreement
with Citibank,
N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S. Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to $70.0 million for the issuance
of letters of credit for the account of the Company (the "2011 Credit Facility"). Citibank, N.A., has assigned a portion of its interest in the 2011 Credit Facility to Bank of Tokyo. The 2011 Credit
Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011
Credit Facility will mature on December 9, 2014.
Under
the 2011 Credit Facility, the annual interest rate on revolving loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin
of 0.75 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or
(ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. The Company has the option to
borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of credit issued under the Revolving Loan Commitment bear interest at the rate of
1.875 percent. The commitment commission on the 2011 Credit Facility is 0.375 percent of the unused Revolving Loan Commitment.
On
July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that provides for Magellan Rx Management, Inc. to borrow up to
$250.0 million of revolving loans, with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company, and a term loan in an original aggregate
principal amount of $250.0 million (the "2014 Credit Facility"). At such point, the 2011 Credit Facility was terminated. The 2014 Credit Facility is guaranteed by substantially all of the
non-regulated subsidiaries of the Company and will mature on July 23, 2019, but the Company holds an option to extend the 2014 Credit Facility for an additional one year period. The term loan
is also subject to certain quarterly amortization payments.
Under
the 2014 Credit Facility, the annual interest rate on revolving and term loan borrowings is equal to (i) in the case of base rate loans, the sum of a borrowing margin of
0.50 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or
(ii) in the case of Eurodollar rate loans, the sum of
a borrowing margin of 1.50 percent plus the Eurodollar rate for the selected interest period, which rates shall be adjusted from time to time based on the Company's total leverage ratio. The
Company
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has
the option to borrow in base rate loans or Eurodollar rate loans at its discretion. Letters of credit issued bear interest at the rate of 1.625 percent. The commitment commission on the
2014 Credit Facility is 0.20 percent of the unused Revolving Loan Commitment, which rate shall be adjusted from time to time based on the Company's total leverage ratio.
Restrictive Covenants in Debt Agreements.
The 2014 Credit Facility contains covenants that limit management's discretion in operating
the Company's
business by restricting or limiting the Company's ability, among other things, to:
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incur or guarantee additional indebtedness or issue preferred or redeemable stock;
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pay dividends and make other distributions;
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repurchase equity interests;
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make certain advances, investments and loans;
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enter into sale and leaseback transactions;
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create liens;
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sell and otherwise dispose of assets;
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acquire or merge or consolidate with another company; and
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enter into some types of transactions with affiliates.
These
restrictions could adversely affect the Company's ability to finance future operations or capital needs or engage in other business activities that may be in the Company's
interest.
The
2014 Credit Facility also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 2014 Credit Facility
pursuant to its terms, would result in an event of default under the 2014 Credit Facility.
Net Operating Loss Carryforwards.
The Company has federal NOLs as of December 31, 2013 of $3.6 million available to reduce
future
federal taxable income. These NOLs, if not used, will expire in 2017 through 2019 and are subject to examination and adjustment by the Internal Revenue Service. Utilization of these NOLs is also
subject to certain timing limitations, although the Company does not believe these limitations will restrict its ability to use any federal NOLs before they expire. The Company has state NOLs as of
December 31, 2013 of $152.3 million available to reduce future state taxable income at certain subsidiaries. Most of these NOLs, if not used, will expire in 2017 through 2022 and are
subject to examination and adjustment by the respective state tax authorities.
Deferred
tax assets as of December 31, 2013 and June 30, 2014 are shown net of valuation allowances of $3.1 million and $6.8 million, respectively. These
valuation allowances mostly relate to uncertainties regarding the eventual realization of certain NOLs. Determination of the amount of deferred tax assets considered realizable requires significant
judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the
underlying businesses. Future changes in the estimated realizable portion of deferred tax assets could materially affect the Company's financial condition and results of operations.
Recent Accounting Pronouncements
In July 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-06, "Other
Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2011-06"), which addresses how fees mandated by the Patient
Protection and the Affordable Care Act ("ACA"), as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health
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Reform
Law"), should be recognized and classified in the income statements of health insurers. The Health Reform Law imposes a mandatory annual fee on health insurers for each calendar year beginning
on or after January 1, 2014. ASU 2011-06 stipulates that the liability incurred for that fee be amortized to expense over the calendar year in which it is payable. This ASU is effective for
calendar years beginning after December 31, 2013, when the fee initially becomes effective. The Company is currently pursuing rate adjustments to cover the direct costs of these fees and the
impact from non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has a state public sector customer that does not renew, there may be some impact due to
taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual
fee, the fee may have a material impact on the Company. As of June 30, 2014, the Company has obtained signed commitments from four of its customers to recover the economic impact of the ACA
fees. For 2014, the projected ACA fee is currently estimated to be $21.3 million and is included in accrued liabilities in the consolidated balance sheets. Of this amount $5.6 million
and $10.7 million was expensed in the three and six months ended June 30, 2014, respectively, which is included in direct service costs and other operating expenses in the consolidated
statements of income. The Company has recorded revenues of $10.9 million and $14.1 million in the three and six months ended June 30, 2014, respectively, associated with the
accrual for the reimbursement of the economic impact of the ACA fees from its customers. Of the revenues recorded in the three months ended June 30, 2014, $4.8 million are associated
with the three months ended March 31, 2014, due to signed commitments obtained in the three months ended June 30, 2014.
In
July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss,
or a Tax Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar
tax loss,
or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this
ASU do not require new recurring disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2013 and were adopted by the Company during the quarter
ended March 31, 2014. The effect of the guidance is immaterial to the Company's consolidated results of operations, financial position, and cash flows.
In
May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09), which is a new comprehensive revenue recognition standard
that will supersede virtually all existing revenue guidance under GAAP. This ASU is effective for calendar years beginning after December 15, 2016. The Company is currently assessing the
potential impact this ASU will have on the Company's consolidated results of operation, financial position, and cash flows.
In
June 2014, the FASB issued ASU No. 2014-12, "CompensationStock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("ASU 2014-12), which revises the accounting treatment for stock compensation tied to performance targets. This
ASU is effective for calendar years beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or
cash flows.