NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (In millions, except member, per share and share data)
1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
WellCare Health Plans, Inc. (the "Company," "we," "us," or "our"), focuses exclusively on government-sponsored managed care services, primarily through Medicaid, Medicare Advantage ("MA") and Medicare Prescription Drug Plans ("PDPs") to families, children, seniors and individuals with complex medical needs. As of
March 31, 2017
, we served approximately
4.1 million
members. During the
three
months ended
March 31, 2017
, we operated Medicaid health plans in Arizona, Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, Nebraska, New Jersey, New York and South Carolina. We began serving Medicaid and Medicare members in Arizona, effective December 31, 2016, in connection with the acquisition of Care1st Health Plan Arizona, Inc. and One Care by Care1st Health Plan of Arizona, Inc. (together, "Care1st Arizona"). Effective January 1, 2017, we began serving Medicaid members statewide in Nebraska.
As of
March 31, 2017
, we also operated MA coordinated care plans ("CCPs") in Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Mississippi, New Jersey, New York, South Carolina, Tennessee and Texas, as well as stand-alone Medicare PDPs nation-wide.
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated balance sheets and statements of comprehensive income, changes in stockholders' equity, and cash flows include the accounts of the Company and all of its majority-owned subsidiaries. We eliminated all intercompany accounts and transactions.
The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Accordingly, certain financial information and footnote disclosures normally included in financial statements prepared in accordance with GAAP, but that are not required for interim reporting purposes, have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, for the fiscal year ended
December 31, 2016
, included in our Annual Report on Form 10-K ("2016 Form 10-K"), which was filed with the U.S. Securities and Exchange Commission ("SEC") in February 2017. Results for the interim periods presented are not necessarily indicative of results that may be expected for the entire year or any other interim period.
In the opinion of management, the interim financial statements reflect all normal recurring adjustments that we consider necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. In accordance with GAAP, we make certain estimates and assumptions that affect the amounts reported in the condensed consolidated interim financial statements and accompanying notes. We base these estimates, including assumptions as to the annualized tax rate, on our knowledge of current events and anticipated future events and evaluate and update our assumptions and estimates on an ongoing basis; however, actual results may differ from our estimates. We evaluated all material events subsequent to the date of these condensed consolidated interim financial statements. Certain reclassifications were made to 2016 financial information to conform to the 2017 presentation.
Significant Accounting Policies
Medicare Part D Settlements
We receive certain Part D prospective subsidy payments from the Centers for Medicare & Medicaid Services ("CMS") for our MA and PDP members as a fixed monthly per member amount, based on the estimated costs of providing prescription drug benefits over the plan year, as reflected in our bids. A discussion of the subsidy components under Part D is included in Note 2-
Significant Accounting Policies
to the Consolidated Financial Statements included in our 2016 Form 10-K. CMS will fully reimburse these subsidies as part of its annual settlement process that occurs in the fourth quarter of the subsequent year and, accordingly, there is no insurance risk to us. Therefore, amounts received for these subsidies are not considered premium revenue, and are reported, net of the subsidy benefits paid, as Funds receivable (payable) for the benefit of members in the condensed consolidated balance sheets. As of
March 31, 2017
, our condensed consolidated balance sheet includes a CMS Part D payable for the 2017 plan year, which is primarily comprised of a
$338.8 million
advance receipt of April 2017 CMS Medicare subsidy payments in March 2017. Our condensed consolidated balance sheet as of
March 31, 2017
also includes a
CMS Part D payable for the 2016 plan year. Both the 2017 and 2016 payables are reflected within current liabilities in Funds payable for the benefit of members. As of December 31, 2016, our condensed consolidated balance sheet included a CMS Part D payable primarily related to the 2016 plan year, as well as a net receivable relating to plan years prior to 2016.
ACA Industry Fee
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the "ACA"), imposed certain new taxes and fees, including an annual premium-based health insurance industry assessment (the "ACA industry fee") on health insurers, which began in 2014. In December 2015, President Obama signed the Consolidated Appropriations Act, 2016 which, among other provisions, included a one-year moratorium on the ACA industry fee for 2017, and, as a result, eliminated the associated Medicaid ACA industry fee reimbursements from our state government partners. Accordingly, we did not incur ACA industry fee expense for the three months ended March 31, 2017, compared with
$57.0 million
incurred for the three months ended
March 31, 2016
. Additionally, we did not recognize any Medicaid ACA industry fee reimbursement revenue for the three months ended March 31, 2017, compared with
$58.1 million
recognized for the three months ended March 31, 2016.
Refer to Note 2 -
Summary of Significant Accounting Policies
to the Consolidated Financial Statements included in our 2016 Form 10-K for a complete discussion of all of our significant accounting policies.
Recently Adopted Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, "
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
". This update eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We adopted this guidance prospectively on January 1, 2017. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.
In October 2016, the FASB issued ASU 2016-17, “
Consolidation (Topic 810).
” This update changes how a reporting entity evaluates consolidation, including whether an entity is considered a variable interest entity, determination of the primary beneficiary and how related parties are considered in the analysis. We adopted this guidance effective January 1, 2017. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.
In March 2016, the FASB issued ASU 2016-07, "
Simplifying the Transition to the Equity Method of Accounting,
" which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interest in the investee (if any) to the current basis of their previously held interest. The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. We adopted this guidance effective January 1, 2017. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.
Accounting Standards Pending Adoption
In April 2017, the FASB issued ASU No. 2017-08, "
Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
". This update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “
Business Combinations (Topic 805): Clarifying the Definition of a Business.
” The amendments in this update provide guidance to assist entities with evaluating when a group of transferred assets and activities (collectively referred to as a "set") is a business. This new guidance provides for a "screen", which requires a determination that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen's threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output, eliminating the evaluation of whether a market participant could replace missing elements. This guidance is effective for public entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "
Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments (Topic 230)
." This update targets eight specific areas to clarify how these cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for public entities for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "
Financial Instruments – Credit Losses (Topic 326),
" which requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The entity's estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses upon loan origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. We are currently assessing the effect this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "
Leases (Topic 842),
"
which for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments in its balance sheet. This standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "
Financial Instrument - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
" which requires entities to measure equity securities that are not consolidated or accounted for under the equity method at fair value through net income. This amendment also simplifies the impairment test of equity investments without readily determinable fair values. This guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. We are currently assessing the effect this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "
Revenue from Contracts with Customers (Topic 606).
" ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. In August 2015, the FASB issued ASU 2015-14, "
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
"
,
which deferred the effective dates of ASU 2014-09 by one year. As such, the standard becomes effective for annual and interim reporting periods beginning after December 15, 2017. Given that substantially all of our revenues are derived from insurance contracts accounted for in accordance with ASC 944,
Financial Services-Insurance
, which are specifically excluded from the scope of ASU 2014-09, we do not anticipate this guidance will have a material effect on our consolidated results of operations, financial condition or cash flows.
2. ACQUISITIONS
Care1st Arizona Acquisition
On December 31, 2016, we completed the acquisition of Care1st Arizona, from Care1st Health Plan, an affiliate of Blue Shield of California. The purchase price was approximately
$163.8 million
, inclusive of statutory capital and subject to certain adjustments. We included the results of Care1st Arizona's operations from the date of acquisition in our consolidated financial statements.
The preliminary allocation of the purchase price to assets acquired and liabilities assumed at the acquisition date included total tangible assets of
$169.9 million
, primarily comprised of cash and cash equivalents, and total liabilities of
$117.8 million
.
In addition, we recorded
$24.0 million
for the preliminary valuation of identified intangible assets, including acquired membership, provider networks and the Care1st tradename. We valued the acquired membership and tradename intangible assets using an income approach (discounted future cash flow analysis) based on our consideration of historical financial results and expected industry and market trends. We discounted the future cash flows by a weighted-average cost of capital based on an analysis of the cost of capital for comparable companies within our industry. We valued the acquired provider network using a cost approach, which utilizes cost assumptions applicable at the valuation date to determine the cost of constructing a similar asset. We amortize the intangible assets on a straight-line basis over the period we expect these assets to contribute directly or indirectly to our future cash flows. The weighted average amortization period for these intangible assets is
11.2 years
.
We recorded
$87.7 million
for the preliminary valuation of goodwill, assigned to our Medicaid segment, for the excess of the purchase price over the estimated fair value of the net assets acquired. The recorded goodwill and other intangible assets related to the Care1st Arizona acquisition are not deductible for tax purposes.
Any necessary adjustments from our preliminary estimates of the allocation will be finalized within one year from the date of acquisition. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.
Universal American Corp. and Phoenix Health Plan Acquisitions
On April 28, 2017, we acquired all of the issued and outstanding shares of Universal American Corp. ("Universal American"), a publicly traded managed care organization that serves Medicare beneficiaries in Texas, New York and Maine. Additionally, on May 1, 2017, we acquired Medicaid membership and certain provider contracts from Phoenix Health Plan ("PHP"), a wholly owned managed care subsidiary of Tenet Healthcare. Refer to Note 13
-
Subsequent Events
in this 2017 Form 10-Q for additional information on both the Universal American and PHP transactions.
3. SEGMENT REPORTING
On a regular basis, we evaluate discrete financial information and assess the performance of our
three
reportable segments, Medicaid Health Plans, Medicare Health Plans and Medicare PDPs, to determine the most appropriate use and allocation of Company resources.
We allocate premium revenue, medical benefits expense, the ACA industry fee incurred in 2016 and goodwill to our reportable segments. We do not allocate to our reportable segments any other assets and liabilities, investment and other income, selling, general and administrative expenses, depreciation and amortization, or interest expense. The Company's decision makers primarily use premium revenue, medical benefits expense and gross margin to evaluate the performance of our reportable segments.
Medicaid Health Plans
Our Medicaid Health Plans segment includes plans for beneficiaries of Temporary Assistance for Needy Families ("TANF"), Supplemental Security Income ("SSI"), Aged Blind and Disabled ("ABD") and other state-based programs that are not part of the Medicaid program, such as Children's Health Insurance Program ("CHIP") and Managed Long-Term Care ("MLTC") programs, including long-term services and supports. TANF generally provides assistance to low-income families with children. ABD and SSI generally provide assistance to low-income aged, blind or disabled individuals. CHIP provides assistance to qualifying families who are not eligible for Medicaid because their income exceeds the applicable income thresholds. The MLTC program is designed to help people with chronic illnesses or who have disabilities and need health and long-term care services, such as home care or adult day care, to enable them to stay in their homes and communities as long as possible.
Our Medicaid operations in certain states individually account for
10%
or more of our consolidated premium revenue. Those states and the respective Medicaid premium revenue as a percentage of total consolidated premium revenue are as follows:
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Kentucky
|
16%
|
|
18%
|
Florida
|
16%
|
|
17%
|
Georgia
|
10%
|
|
12%
|
Medicare Health Plans
Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical and prescription drug benefits. MA is Medicare's managed care alternative to the original Medicare program, which provides individuals standard Medicare benefits directly through CMS. Our MA CCPs generally require members to seek health care services and select a primary care physician from a network of health care providers. In addition, we offer coverage of prescription drug benefits under the Medicare Part D program as a component of most of our MA plans.
Medicare PDPs
We offer stand-alone Medicare Part D coverage to Medicare-eligible beneficiaries in our Medicare PDPs segment. The Medicare Part D prescription drug benefit is supported by risk sharing with the federal government through risk corridors designed to limit the losses and gains of the participating drug plans and by reinsurance for catastrophic drug costs. The government subsidy is based on the national weighted average monthly bid for this coverage, adjusted for risk factor payments. Additional subsidies are provided for dually-eligible beneficiaries and specified low-income beneficiaries. The Part D program offers national in-network prescription drug coverage that is subject to limitations in certain circumstances.
Summary of Financial Information
Reportable operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated on a regular basis by the enterprise's decision-makers to determine how resources should be allocated to an individual segment and to assess performance of those segments. Accordingly, we have
three
reportable segments: Medicaid Health Plans, Medicare Health Plans and Medicare PDPs.
A summary of financial information for our reportable segments through the gross margin level and reconciliation to income before income taxes is presented in the table below.
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2017
|
|
2016
|
|
(in millions)
|
Premium revenue:
|
|
Medicaid Health Plans
|
$
|
2,584.2
|
|
|
$
|
2,311.7
|
|
Medicare Health Plans
|
1,094.7
|
|
|
974.1
|
|
Medicare PDPs
|
268.1
|
|
|
250.2
|
|
Total premium revenue
|
3,947.0
|
|
|
3,536.0
|
|
Medical benefits expense:
|
|
|
|
|
Medicaid Health Plans
|
2,310.6
|
|
|
2,001.9
|
|
Medicare Health Plans
|
908.2
|
|
|
824.2
|
|
Medicare PDPs
|
259.8
|
|
|
235.8
|
|
Total medical benefits expense
|
3,478.6
|
|
|
3,061.9
|
|
ACA industry fee expense:
|
|
|
|
Medicaid Health Plans
|
—
|
|
|
36.6
|
|
Medicare Health Plans
|
—
|
|
|
16.2
|
|
Medicare PDPs
|
—
|
|
|
4.2
|
|
Total ACA industry fee expense
|
—
|
|
|
57.0
|
|
Gross margin
|
|
|
|
|
Medicaid Health Plans
|
273.6
|
|
|
273.2
|
|
Medicare Health Plans
|
186.5
|
|
|
133.7
|
|
Medicare PDPs
|
8.3
|
|
|
10.2
|
|
Total gross margin
|
468.4
|
|
|
417.1
|
|
Investment and other income
|
7.2
|
|
|
4.5
|
|
Other expenses
(1)
|
(372.4
|
)
|
|
(332.7
|
)
|
Income before income taxes
|
$
|
103.2
|
|
|
$
|
88.9
|
|
|
|
|
|
|
|
(1)
|
Other expenses include selling, general and administrative expenses, Medicaid Premium taxes, depreciation and amortization and interest.
|
4.
EARNINGS PER COMMON SHARE
We compute basic earnings per common share on the basis of the weighted-average number of unrestricted common shares outstanding. We compute diluted earnings per common share on the basis of the weighted-average number of unrestricted common shares outstanding plus the dilutive effect of our stock-based compensation awards using the treasury stock method.
The calculation of the weighted-average common shares outstanding — diluted is as follows:
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2017
|
|
2016
|
|
|
|
|
Weighted-average common shares outstanding — basic
|
44,365,987
|
|
|
44,165,200
|
|
Dilutive effect of outstanding stock-based compensation awards
|
460,676
|
|
|
328,555
|
|
Weighted-average common shares outstanding — diluted
|
44,826,663
|
|
|
44,493,755
|
|
Anti-dilutive stock-based compensation awards excluded from computation
|
4,192
|
|
|
57,400
|
|
|
|
|
|
5. INVESTMENTS
The Company considers all of its investments as available-for-sale securities. Excluding Restricted Investments, the amortized cost, gross unrealized gains or losses and estimated fair value of short-term and long-term investments by security type are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
March 31, 2017
|
|
|
|
|
|
|
|
Auction rate securities
|
$
|
13.8
|
|
|
$
|
—
|
|
|
$
|
(1.4
|
)
|
|
$
|
12.4
|
|
Corporate debt and other securities
|
217.2
|
|
|
0.1
|
|
|
(0.2
|
)
|
|
217.1
|
|
Money market funds
|
52.8
|
|
|
—
|
|
|
—
|
|
|
52.8
|
|
Municipal securities
|
88.5
|
|
|
0.3
|
|
|
(0.1
|
)
|
|
88.7
|
|
Short-term time deposits
|
150.0
|
|
|
—
|
|
|
—
|
|
|
150.0
|
|
Other securities
|
9.1
|
|
|
—
|
|
|
—
|
|
|
9.1
|
|
|
$
|
531.4
|
|
|
$
|
0.4
|
|
|
$
|
(1.7
|
)
|
|
$
|
530.1
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
$
|
13.8
|
|
|
$
|
—
|
|
|
$
|
(1.4
|
)
|
|
$
|
12.4
|
|
Corporate debt and other securities
|
70.5
|
|
|
—
|
|
|
—
|
|
|
70.5
|
|
Money market funds
|
52.8
|
|
|
—
|
|
|
—
|
|
|
52.8
|
|
Municipal securities
|
39.9
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
39.9
|
|
Other securities
|
6.0
|
|
|
—
|
|
|
(0.1
|
)
|
|
5.9
|
|
|
$
|
183.0
|
|
|
$
|
0.1
|
|
|
$
|
(1.6
|
)
|
|
$
|
181.5
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on sales and redemptions of investments were not material for the three months ended
March 31, 2017
or 2016.
Contractual maturities of available-for-sale securities at
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Within
1 Year
|
|
1 Through 5
Years
|
|
5 Through 10
Years
|
|
Thereafter
|
Auction rate securities
|
$
|
12.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12.4
|
|
Corporate debt and other securities
|
217.1
|
|
|
150.3
|
|
|
66.8
|
|
|
—
|
|
|
—
|
|
Money market funds
|
52.8
|
|
|
52.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal securities
|
88.7
|
|
|
35.6
|
|
|
38.7
|
|
|
14.4
|
|
|
|
Short-term time deposits
|
150.0
|
|
|
150.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other securities
|
9.1
|
|
|
6.1
|
|
|
3.0
|
|
|
—
|
|
|
—
|
|
|
$
|
530.1
|
|
|
$
|
394.8
|
|
|
$
|
108.5
|
|
|
$
|
14.4
|
|
|
$
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities due to the exercise of pre-payment options.
6. RESTRICTED INVESTMENTS
As a condition for licensure, we are required to maintain certain funds on deposit or pledged to various state agencies. Certain of our state contracts require the issuance of surety bonds. We classify restricted investments as long-term regardless of the contractual maturity date of the securities held, due to the nature of the states' requirements. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of our restricted investment securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
March 31, 2017
|
|
|
|
|
|
|
|
Cash
|
$
|
3.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.9
|
|
Money market funds
|
57.6
|
|
|
—
|
|
|
—
|
|
|
57.6
|
|
U.S. government securities and other
|
130.8
|
|
|
—
|
|
|
(0.2
|
)
|
|
130.6
|
|
|
$
|
192.3
|
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
192.1
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
92.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92.1
|
|
Money market funds
|
67.8
|
|
|
—
|
|
|
—
|
|
|
67.8
|
|
U.S. government securities and other
|
74.5
|
|
|
—
|
|
|
(0.1
|
)
|
|
74.4
|
|
|
$
|
234.4
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
234.3
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on restricted investments were not material for the
three
months ended
March 31, 2017
and 2016.
7. STOCK-BASED COMPENSATION
Our Compensation Committee awards certain equity-based compensation under our stock plans, including restricted stock units ("RSUs"), performance stock units ("PSUs") and market stock units ("MSUs"). Compensation expense related to our stock-based compensation awards was
$9.6 million
and $
6.5 million
for the three months ended
March 31, 2017
and 2016, respectively. As of
March 31, 2017
, there was
$70.7 million
of unrecognized compensation cost related to non-vested stock-based compensation arrangements that is expected to be recognized over a weighted-average period of
2.3 years
. The unrecognized compensation cost for certain of our PSUs, which are subject to variable accounting, was determined based on our closing common stock price of
$140.21
as of
March 31, 2017
and amounted to approximately
$20.6 million
of the total unrecognized compensation cost. Due to the nature of the accounting for these awards, future compensation cost will fluctuate based on changes in our common stock price.
A summary of RSU, PSU and MSU award activity, at target, for the
three
months ended
March 31, 2017
, is presented in the table below. For our PSUs and MSUs, shares attained over target upon vesting are reflected as awards granted during the period, while shares canceled due to vesting below target are reflected as awards forfeited during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
PSUs
|
|
MSUs
|
|
Total
|
Outstanding as of January 1, 2017
|
275,926
|
|
|
471,852
|
|
|
85,910
|
|
|
833,688
|
|
Granted
|
120,739
|
|
|
225,036
|
|
|
36,009
|
|
|
381,784
|
|
Vested
|
(97,327
|
)
|
|
(117,809
|
)
|
|
(74,471
|
)
|
|
(289,607
|
)
|
Forfeited
|
(670
|
)
|
|
(1,708
|
)
|
|
(106
|
)
|
|
(2,484
|
)
|
Outstanding as of March 31, 2017
|
298,668
|
|
|
577,371
|
|
|
47,342
|
|
|
923,381
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of all equity awards granted during the
three
months ended
March 31, 2017
was
$142.75
.
Refer to Note 2 -
Summary of Significant Accounting Policies
and Note 15 -
Stock-based Compensation
to the Consolidated Financial Statements included in our 2016 Form 10-K for additional information regarding our equity-compensation awards and related compensation cost measurement.
8. DEBT
The following table summarizes our outstanding debt obligations and their classification in the accompanying Condensed Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Current portion of long-term debt, net:
|
|
|
|
5.75% Senior Notes
(1)
|
$
|
909.0
|
|
|
$
|
—
|
|
Debt issuance costs
|
(9.0
|
)
|
|
—
|
|
Total current portion of long-term debt, net
|
$
|
900.0
|
|
|
$
|
—
|
|
|
|
|
|
Long-term debt, net:
|
|
|
|
5.25% Senior Notes
|
$
|
1,200.0
|
|
|
$
|
—
|
|
5.75% Senior Notes
(1)
|
—
|
|
|
909.6
|
|
Revolving Credit Facility
|
—
|
|
|
100.0
|
|
Debt issuance costs
|
(19.9
|
)
|
|
(12.0
|
)
|
Total long-term debt, net
|
$
|
1,180.1
|
|
|
$
|
997.6
|
|
Total debt
|
$
|
2,080.1
|
|
|
$
|
997.6
|
|
|
|
|
|
|
|
(1)
|
Inclusive of
$9.0 million
and
$9.6 million
of unamortized debt premium at March 31, 2017 and December 31, 2016, respectively.
|
5.25%
Senior Notes due 2025
On March 22, 2017, we completed the offering and sale of
5.25%
senior notes due 2025 in the aggregate principal amount of
$1,200.0 million
(the “2025 Notes”). The aggregate net proceeds from the issuance of the 2025 Notes were
$1,182.2 million
, with a portion of the net proceeds from the offering being used to repay the
$100.0 million
outstanding under our credit agreement dated January 8, 2016 (the "Credit Agreement", discussed further
below) and to redeem the full
$900.0 million
aggregate principal amount of our
5.75%
Senior Notes due 2020 (the "2020 Notes") on April 7, 2017, which is discussed further below. The remaining net proceeds from the offering of the 2025 Notes will be used for general corporate purposes, including organic growth and working capital.
The 2025 Notes will mature on April 1, 2025, and will bear interest at a rate of
5.25%
per annum, payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2017.
The 2025 Notes were issued under an indenture, dated as of March 22, 2017 (the "Base Indenture"), as supplemented by the First Supplemental Indenture, dated as of March 22, 2017 (the "First Supplemental Indenture" and, together with the Base Indenture, the "Indenture"), each between the Company and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”), as trustee. The indenture under which the notes were issued contains covenants that, among other things, limit our ability and the ability of our subsidiaries under certain circumstances to:
|
|
•
|
incur additional indebtedness and issue preferred stock;
|
|
|
•
|
pay dividends or make other distributions;
|
|
|
•
|
make other restricted payments and investments;
|
|
|
•
|
sell assets, including capital stock of restricted subsidiaries;
|
|
|
•
|
incur restrictions on the ability of restricted subsidiaries to pay dividends or make other payments, and in the case of our subsidiaries, guarantee indebtedness;
|
|
|
•
|
engage in transactions with affiliates; and
|
|
|
•
|
create unrestricted subsidiaries.
|
In addition, the indenture requires that for the company to merge, consolidate or sell all or substantially all of its assets, (i) either the company must be the surviving entity, or the surviving entity or purchaser must be a U.S. entity; (ii) the surviving entity or purchaser must assume all the obligations of the company under the notes and the indenture; (iii) no default or event of default (as defined under the indenture) exits and (iv) the surviving entity, after giving pro forma effect to the transaction, (x) may incur at least
$1.00
of additional indebtedness pursuant to the fixed charge coverage ratio or (y) have a fixed charge
coverage ratio that is no worse than the fixed charge coverage ratio of the company without giving pro forma effect to the transactions.
Ranking and Optional Redemption
The 2025 Notes are senior obligations of our company and rank equally in right of payment with all of our other existing and future unsecured and unsubordinated indebtedness. In addition, the 2025 Notes will be structurally subordinated to all indebtedness and other liabilities of our subsidiaries (unless our subsidiaries become guarantors of the 2025 Notes).
At any time prior to April 1, 2020, we may, on any one or more occasions redeem up to
40%
of the aggregate principal amount of 2025 Notes at a redemption price equal to
105.250%
of the principal amount of the 2025 Notes redeemed, plus accrued and unpaid interest, if any, with the net cash proceeds of an equity offering by the Company; provided that:
(1) at least
60%
of the aggregate principal amount of 2025 Notes issued under the Indenture (including any additional Senior Notes, but excluding Senior Notes held by the Company or its subsidiaries) remains outstanding immediately after the occurrence of such redemption; and
(2) the redemption occurs within
90 days
of the date of the closing of such equity offering.
At any time prior to April 1, 2020, we may on any one or more occasions redeem all or a part of the 2025 Notes, at a redemption price equal to
100%
of the principal amount of the 2025 Notes redeemed, plus the Applicable Premium, as defined in the Indenture.
Except pursuant to the preceding two paragraphs, the 2025 Notes will not be redeemable at our option prior to April 1, 2020.
On or after April 1, 2020, we may on any one or more occasions redeem all or a part of the 2025 Notes, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if any, on the 2025 Notes redeemed, to, but not including, the applicable date of redemption, if redeemed during the twelve-month period beginning on November 15 of the years indicated below, subject to the rights of holders of 2025 Notes on the relevant record date to receive interest due on the relevant interest payment date:
|
|
|
|
Period
|
Redemption Price
|
2020
|
103.938
|
%
|
2021
|
102.625
|
%
|
2022
|
101.313
|
%
|
2023 and thereafter
|
100.000
|
%
|
The 2025 Notes are classified as long-term debt in our Condensed Consolidated Balance Sheet at March 31, 2017 based on their April 2025 maturity date.
5.75%
Senior Notes due 2020
In November 2013, we issued
$600.0 million
in aggregate principal amount of our 2020 Notes. In June 2015, we issued an additional
$300.0 million
of 2020 Notes, pursuant to a reopening of such notes. As of
March 31, 2017
, our outstanding 2020 Notes totaled
$909.0 million
, including
$9.0 million
of unamortized debt premium. Refer to Note 10 -
Debt
to the Consolidated Financial Statements included in our 2016 Form 10-K for additional information regarding these 2020 Notes.
On April 7, 2017, we redeemed the full
$900.0 million
in aggregate principal amount outstanding of our 2020 Notes. Refer to Note 13
-
Subsequent Events
to the Condensed Consolidated Financial Statements in this 2017 Form 10-Q for additional information on the redemption of our 2020 Notes.
The 2020 Notes are classified as current in our Condensed Consolidated Balance Sheet as of March 31, 2017, as settlement was reasonably expected within 12 months following the balance sheet date.
Credit Agreement
In January 2016, we entered into the Credit Agreement, which provides for a senior unsecured revolving loan facility (the "Revolving Credit Facility"), which had an initial aggregate principal amount at any time outstanding not to exceed
$850.0 million
. On March 22, 2017, we increased the aggregate principal amount available under our Credit Agreement from
$850.0 million
to
$1.0 billion
.
In March 2017, we repaid the
$100.0 million
outstanding under our Revolving Credit Facility, and as a result, there were
no
borrowings outstanding under the Revolving Credit Facility as of March 31, 2017. Refer to Note 10 -
Debt
to the Consolidated Financial Statements included in our 2016 Form 10-K for additional information regarding the Credit Agreement, including applicable covenants.
As of
March 31, 2017
, we were in compliance with all covenants under the 2025 Notes, the 2020 Notes and the Credit Agreement. As of the date of this filing, we remain in compliance with all covenants under both the 2025 Notes and the Credit Agreement.
9. FAIR VALUE MEASUREMENTS
Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, accounts payable, medical benefits payable, long-term debt, including our current portion of long-term debt, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value due to the short period of time between the origination of these instruments and the expected realization or payment. Certain assets and liabilities are measured at fair value on a recurring basis and are disclosed below. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2016 Form 10-K.
Recurring Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis at
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Carrying Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Investments:
|
|
|
|
|
|
|
|
Asset backed securities
|
$
|
23.6
|
|
|
$
|
—
|
|
|
$
|
23.6
|
|
|
$
|
—
|
|
Auction rate securities
|
12.4
|
|
|
—
|
|
|
—
|
|
|
12.4
|
|
Corporate debt securities
|
193.5
|
|
|
—
|
|
|
193.5
|
|
|
—
|
|
Money market funds
|
52.8
|
|
|
52.8
|
|
|
—
|
|
|
—
|
|
Municipal securities
|
88.7
|
|
|
—
|
|
|
88.7
|
|
|
—
|
|
Short-term time deposits
|
150.0
|
|
|
—
|
|
|
150.0
|
|
|
—
|
|
Other securities
|
9.1
|
|
|
9.1
|
|
|
—
|
|
|
—
|
|
Total investments
|
$
|
530.1
|
|
|
$
|
61.9
|
|
|
$
|
455.8
|
|
|
$
|
12.4
|
|
Restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
3.9
|
|
|
3.9
|
|
|
—
|
|
|
—
|
|
Money market funds
|
57.6
|
|
|
57.6
|
|
|
—
|
|
|
—
|
|
U.S. government securities and other
|
130.6
|
|
|
130.4
|
|
|
0.2
|
|
|
—
|
|
Total restricted investments
|
$
|
192.1
|
|
|
$
|
191.9
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured at fair value on a recurring basis at
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Carrying Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Investments:
|
|
|
|
|
|
|
|
Asset backed securities
|
$
|
3.3
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
—
|
|
Auction rate securities
|
12.4
|
|
|
—
|
|
|
—
|
|
|
12.4
|
|
Corporate debt securities
|
67.2
|
|
|
—
|
|
|
67.2
|
|
|
—
|
|
Money market funds
|
52.8
|
|
|
52.8
|
|
|
—
|
|
|
—
|
|
Municipal securities
|
39.9
|
|
|
—
|
|
|
39.9
|
|
|
—
|
|
Other securities
|
5.9
|
|
|
5.9
|
|
|
—
|
|
|
—
|
|
Total investments
|
$
|
181.5
|
|
|
$
|
58.7
|
|
|
$
|
110.4
|
|
|
$
|
12.4
|
|
Restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
92.1
|
|
|
$
|
92.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
67.8
|
|
|
67.8
|
|
|
—
|
|
|
—
|
|
U.S. government securities and other
|
74.4
|
|
|
74.2
|
|
|
0.2
|
|
|
—
|
|
Total restricted investments
|
$
|
234.3
|
|
|
$
|
234.1
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
The following table presents the carrying value and fair value of our long-term debt (including our current portion of long-term debt) outstanding as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Carrying Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Long-term debt - March 31, 2017
|
$
|
2,080.1
|
|
|
$
|
2,163.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt - December 31, 2016
|
997.6
|
|
|
927.0
|
|
|
96.2
|
|
|
—
|
|
The fair values of our 2025 and 2020 Notes were determined based on quoted market prices; therefore, would be classified within Level 1 of the fair value hierarchy. The fair value of obligations outstanding under our Revolving Credit Facility, as of December 31, 2016, was determined based on a discounted cash flow analysis, utilizing current rates estimated to be available to us for debt of similar terms and remaining maturities; therefore, would be classified within Level 2 of the fair value hierarchy. There were
no
borrowings outstanding under our Revolving Credit Facility as of March 31, 2017.
The following table presents the changes in the fair value of our Level 3 auction rate securities for the
three
months ended
March 31, 2017
and 2016.
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
12.4
|
|
|
$
|
31.7
|
|
Realized gains (losses) in earnings
|
—
|
|
|
—
|
|
Unrealized gains (losses) in other comprehensive income
|
—
|
|
|
(0.5
|
)
|
Purchases, sales and redemptions
|
—
|
|
|
—
|
|
Net transfers in or (out) of Level 3
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
12.4
|
|
|
$
|
31.2
|
|
|
|
|
|
10. MEDICAL BENEFITS PAYABLE
A reconciliation of the beginning and ending balances of medical benefits payable, by segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid Health Plans
|
|
Medicare Health Plans
|
|
Medicare PDPs
|
|
Consolidated
|
|
|
For the three months ended March 31,
|
|
|
2017
|
2016
|
|
2017
|
2016
|
|
2017
|
2016
|
|
2017
|
2016
|
Beginning balance
|
|
$
|
1,135.8
|
|
$
|
1,040.2
|
|
|
$
|
510.0
|
|
$
|
473.9
|
|
|
$
|
44.7
|
|
$
|
21.9
|
|
|
$
|
1,690.5
|
|
$
|
1,536.0
|
|
Acquisitions
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Medical benefits incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
2,420.3
|
|
2,120.4
|
|
|
958.8
|
|
849.0
|
|
|
293.3
|
|
247.0
|
|
|
3,672.4
|
|
3,216.4
|
|
Prior years
|
|
(109.7
|
)
|
(118.5
|
)
|
|
(50.6
|
)
|
(24.8
|
)
|
|
(33.5
|
)
|
(11.2
|
)
|
|
(193.8
|
)
|
(154.5
|
)
|
Total
|
|
2,310.6
|
|
2,001.9
|
|
|
908.2
|
|
824.2
|
|
|
259.8
|
|
235.8
|
|
|
3,478.6
|
|
3,061.9
|
|
Medical benefits paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
(1,632.3
|
)
|
(1,428.2
|
)
|
|
(612.3
|
)
|
(537.1
|
)
|
|
(248.7
|
)
|
(239.9
|
)
|
|
(2,493.3
|
)
|
(2,205.2
|
)
|
Prior years
|
|
(612.5
|
)
|
(570.9
|
)
|
|
(265.8
|
)
|
(269.5
|
)
|
|
(9.9
|
)
|
(6.6
|
)
|
|
(888.2
|
)
|
(847.0
|
)
|
Total
|
|
(2,244.8
|
)
|
(1,999.1
|
)
|
|
(878.1
|
)
|
(806.6
|
)
|
|
(258.6
|
)
|
(246.5
|
)
|
|
(3,381.5
|
)
|
(3,052.2
|
)
|
Ending balance
|
|
$
|
1,201.6
|
|
$
|
1,043.0
|
|
|
$
|
540.1
|
|
$
|
491.5
|
|
|
$
|
45.9
|
|
$
|
11.2
|
|
|
$
|
1,787.6
|
|
$
|
1,545.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognize the cost of medical benefits in the period in which services are provided, including an estimate of the cost of medical benefits incurred but not reported ("IBNR"). Medical benefits expense includes direct medical expenses and certain medically-related administrative costs. We evaluate our estimates of medical benefits payable as we obtain more complete claims information and medical expense trend data over time. We record differences between actual experience and estimates used to establish the liability, which we refer to as favorable and unfavorable prior year reserve developments, as increases or decreases to medical benefits expense in the period we identify the differences.
Our consolidated medical benefits payable recorded developed favorably by approximately
$193.8 million
and
$154.5 million
for the three months ended March 31, 2017 and 2016, respectively. The release of the provision for moderately adverse conditions included in our prior year estimates was substantially offset by the provision for moderately adverse conditions established for claims incurred in the current year. Accordingly, the favorable development in our estimate of medical benefits payable related to claims incurred in prior years does not directly correspond to a decrease in medical benefits expense recognized during the current or prior period.
Excluding the prior year development related to the release of the provision for moderately adverse conditions, our estimates of consolidated medical benefits payable recorded developed favorably by approximately
$107.5 million
and
$65.1 million
in the three months ended March 31, 2017 and 2016, respectively. Such amounts are net of the development relating to refunds due to government customers with minimum loss ratio provisions.
11. INCOME TAXES
Our effective income tax rate was
34.8%
for the
three
months ended
March 31, 2017
, compared with
57.5%
for the
three
months ended
March 31, 2016
. The decline in our effective rate was driven by the one-year moratorium on the non-deductible ACA industry fee for 2017 and higher excess tax benefits resulting from the settlement of stock-compensation awards in 2017.
In September 2014, the IRS issued final regulations on the ACA's
$0.5 million
limit on the deduction for compensation for health insurance providers under Internal Revenue Code ("IRC") section 162(m)(6). We believe there is support that the deduction limitations do not apply to the Company and we have reflected deductions totaling
$6.9 million
, gross before the effect of taxes, for such compensation during the
three
months ended
March 31, 2017
. However, we are not able to conclude at this time that our tax position is more-likely-than-not to be sustained upon IRS review for certain periods. Therefore, we recognized cumulative liabilities for unrecognized tax benefits amounting to
$24.8 million
and
$22.2 million
at
March 31, 2017
and
December 31, 2016
, respectively.
12. COMMITMENTS AND CONTINGENCIES
Indemnification Obligations
Under Delaware law, our charter and bylaws and certain indemnification agreements to which we are a party, we are obligated to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors, officers and associates with respect to current and future investigations and litigation, including the matters discussed in this note. The indemnification agreements for our directors and executive officers with respect to events occurring prior to May 2009 require us to indemnify an indemnitee to the fullest extent permitted by law if the indemnitee was or is or becomes a party to or a witness or other participant in any proceeding by reason of any event or occurrence related to the indemnitee's status as a director, officer, associate, agent or fiduciary of the Company or any of our subsidiaries. The indemnification agreements require us to indemnify an indemnitee against all expenses, including attorney's fees, judgments, fines, settlement amounts and interest and other charges, and any taxes as a result of the receipt of payments under the indemnification agreement. We will not indemnify the indemnitee if not permitted under applicable law. We are required to advance all expenses incurred by the indemnitee. We are entitled to reimbursement by an indemnitee of expenses advanced if the indemnitee is not permitted to be reimbursed under applicable law after a final judicial determination is made and all rights of appeal have been exhausted or lapsed.
We amended and restated our indemnification agreements in May 2009. The revised agreements apply to our officers and directors with respect to events occurring after that time. Pursuant to the 2009 indemnification agreements, we will indemnify the indemnitee against all expenses, including attorney's fees, judgments, penalties, fines, settlement amounts and any taxes imposed as a result of payments made under the indemnification agreement incurred in connection with any proceedings that relate to the indemnitee's status as a director, officer or associate of the Company or any of our subsidiaries or any other enterprise that the indemnitee was serving at our request. We will also indemnify for expenses incurred by an indemnitee if the indemnitee, by reason of his or her corporate status, is a witness in any proceeding. Further, we are required to indemnify for expenses incurred by an indemnitee in defense of a proceeding to the extent the indemnitee has been successful on the merits or otherwise. Finally, if the indemnitee is involved in certain proceedings as a result of the indemnitee's corporate status, we are required to advance the indemnitee's reasonable expenses incurred in connection with such proceeding, subject to the requirement that the indemnitee repay the expenses if it is ultimately determined that the indemnitee is not entitled to be indemnified. We are not obligated to indemnify an indemnitee for losses incurred in connection with any proceeding if a determination has not been made by the Board of Directors, a committee of disinterested directors or independent legal counsel in the specific case that the indemnitee has satisfied any standards of conduct required as a condition to indemnification under Section 145 of the Delaware General Corporation Law.
Pursuant to our obligations, we have advanced, and will continue to advance, legal fees and related expenses to
three
former officers and
two
additional associates who were criminally indicted in connection with the government investigations of the Company that commenced in 2007 related to federal criminal health care fraud charges including conspiracy to defraud the United States, false statements relating to health care matters, and health care fraud in connection with their defense of criminal charges. In June 2013, the jury in the criminal trial reached guilty verdicts on multiple charges for the
four
individuals that were tried in 2013. In May 2014, the individuals were sentenced and our request for restitution was denied. All
four
individuals filed notices of appeal and the government filed notices of cross appeal on
three
of the
four
individuals, which the government has subsequently voluntarily dismissed. The appellate court affirmed the convictions in August 2016. Mr. Farha filed a petition for a writ of certiorari to the United States Supreme Court in January 2017. In April 2017, the United States Supreme Court declined to hear the appeal by Mr. Farha. The fifth individual is scheduled to be tried in September 2017.
We have also previously advanced legal fees and related expenses to these
five
individuals regarding: disputes in Delaware Chancery Court related to whether we were legally obligated to advance fees or indemnify certain of these individuals; the class actions titled
Eastwood Enterprises, L.L.C. v. Farha, et al
. and
Hutton v. WellCare Health Plans, Inc. et al
. filed in federal court;
six
stockholder derivative actions filed in federal and state courts between October 2007 and January 2008; an investigation by the United States Securities & Exchange Commission (the "Commission"); and an action by the Commission filed in January 2012 against
three
of the
five
individuals, Messrs. Farha, Behrens and Bereday. We settled the class actions in May 2011. In 2010, we settled the stockholder derivative actions and we were realigned as the plaintiff to pursue our claims against Messrs. Farha, Behrens and Bereday. We and Mr. Farha filed stipulations of dismissal in the derivative actions, as to Messrs. Farha and Behrens only, pursuant to the settlement agreements described below, and Mr. Farha has been dismissed from the federal court derivative action.
These actions are currently stayed with respect to Mr. Bereday. In April 2017, the Commission and Mr. Farha entered into a consent judgment to pay
$12.5 million
to the Commission and
$7.5 million
to us. In April 2017, the Commission and Mr. Behrens also entered into a consent judgment to pay
$4.5 million
to the Commission and
$1.5 million
to us.
In addition, we have advanced a portion of the legal fees and related expenses to Mr. Farha in connection with lawsuits he filed in Delaware and Florida state court to have certain restrictions lifted on WellCare stock purportedly awarded to him during his employment with us. The Delaware matter was dismissed by the court. We and Mr. Farha have filed a stipulation of dismissal in the Florida matter pursuant to the settlement agreement described below.
In September 2016, we entered into a settlement agreement with Mr. Farha pursuant to which he paid us
$7.5 million
, as referenced in the April 2017 consent judgment, and we agreed to lift certain restrictions on WellCare stock purportedly awarded to him during his employment with us, and we agreed that we would not seek to recover additional legal fees previously advanced related to these matters, and that our obligation to continue advancing fees would be limited to no more than an additional
$7.5 million
.
We also have advanced a portion of the legal fees and related expenses to Mr. Behrens in connection with his lawsuit in Delaware state court to have certain restrictions lifted on WellCare stock purportedly awarded to him during his employment with WellCare, which the court dismissed. In October 2016, we also entered into a settlement agreement with Mr. Behrens pursuant to which he paid us
$1.5 million
, as referenced in the April 2017 consent judgment, and we agreed to lift certain restrictions on WellCare stock purportedly awarded to him during his employment with WellCare, and we agreed that we would not seek to recover additional legal fees previously advanced in connection with these matters, and that our obligation to continue advancing fees would be limited to no more than an additional
$1.5 million
.
In connection with these matters, we have advanced to the
five
individuals cumulative legal fees and related expenses of approximately
$232.3 million
from the inception of the investigations through
March 31, 2017
. We incurred
$2.5 million
and
$5.4 million
of these fees and related expenses during the
three
months ended
March 31, 2017
and 2016, respectively. These fees are not inclusive of the amounts recovered from Mr. Farha and Mr. Behrens discussed above. We expense these costs as incurred and classify the costs as selling, general and administrative expense incurred in connection with the investigations and related matters.
We expect the continuing cost of our obligations to Mr. Bereday, with whom we have not entered into a settlement agreement in connection with his defense and related litigation, to be significant and to continue for a number of years. We have exhausted our insurance policies related to reimbursement of our advancement of fees related to these matters. We are unable to estimate the total amount of these costs or a range of possible loss. Accordingly, we continue to expense these costs as incurred. Even if it is eventually determined that we are entitled to reimbursement of the advanced expenses from the
three
individuals with whom we have not entered into settlement agreements, it is possible that we may not be able to recover all or any portion of our damages or advances. Our indemnification obligations and requirements to advance legal fees and expenses may continue to have a material adverse effect on our financial condition, results of operations and cash flows.
Other Lawsuits and Claims
Based on the nature of our business, we are subject to regulatory reviews or other investigations by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance and benefits companies and their reviews focus on numerous facets of our business, including claims payment practices, provider contracting, competitive practices, commission payments, privacy issues and utilization management practices, among others. Some of these reviews have historically resulted in fines imposed on us and
some have required changes to our business practices. We continue to be subject to such reviews, which may result in additional fines and/or sanctions being imposed, premium refunds or additional changes in our business practices.
Separate and apart from the legal matters described above, we are also involved in other legal actions in the normal course of our business, including, without limitation, protests and appeals related to Medicaid procurement awards, wage and hour claims and other employment claims, vendor disputes and provider disputes regarding payment of claims. Some of these actions seek monetary damages including claims for liquidated or punitive damages, which are not covered by insurance. We review relevant information with respect to these litigation matters and we update our estimates of reasonably possible losses and related disclosures. We accrue an estimate for contingent liabilities, including attorney's fees related to these matters, if a loss is probable and estimable. Currently, we do not expect that the resolution of any of these currently pending actions, either individually or in the aggregate, will differ materially from our current estimates or have a material adverse effect on our results of operations, financial condition and cash flows. However, the outcome of any legal actions cannot be predicted, and therefore, actual results may differ from those estimates.
13. SUBSEQUENT EVENTS
Redemption of
5.75%
Senior Notes due 2020
On April 7, 2017, we redeemed the full
$900.0 million
in aggregate principal amount outstanding of our 2020 Notes at a redemption price of
102.875%
of the principal amount, plus accrued and unpaid interest. Our obligations under the related base indenture and supplemental indenture, each dated as of November 14, 2013, by and among us and BNY Mellon as trustee, were satisfied and discharged on April 7, 2017. In connection with the redemption and repurchase of the 2020 Notes, we incurred a one-time loss on extinguishment of debt of approximately
$25.9 million
related to the redemption premium, the write-off of associated deferred financing costs and the write-off of the unamortized portion of associated premiums paid on the 2020 Notes. The loss on extinguishment of debt will be reflected in our condensed consolidated statement of comprehensive income for the three and six months ended June 30, 2017.
Universal American Acquisition
On April 28, 2017, we acquired all of the issued and outstanding shares of Universal American. With approximately
119,000
MA members in Texas, New York and Maine, Universal American is now a wholly owned subsidiary of the Company. The transaction is valued at approximately
$800 million
, including the purchase price of
$10.00
per share of Universal American's common stock and the assumption of Universal American's convertible debt, including the associated conversion premium. This transaction strengthens our business by increasing our MA membership by a third, deepening our presence in two key markets, Texas and New York, and diversifying our business portfolio. The transaction was funded with available cash on hand. Due to the timing of the acquisition, the initial accounting for the transaction was not complete at the date of this filing and, as a result, certain disclosures required under ASC 805,
Business Combinations
, cannot be made at this time. These disclosures include, among others, the amount of acquisition-related costs, the amounts of major classes of assets and liabilities acquired, the valuation of intangible assets acquired, the amount of goodwill recognized, if any, including qualitative discussion of the factors that make up that goodwill, the total amount of goodwill deductible for tax purposes, and the amount of goodwill reportable by segment.
Phoenix Health Plan Assets Acquisition
On May 1, 2017, we completed our previously announced acquisition of certain assets, including Arizona Medicaid membership and certain provider contracts, from PHP. The transaction included the transfer of approximately
44,000
Medicaid members to Care1st Arizona Health Plan, Inc., a wholly owned subsidiary of the Company. The transaction was funded with available cash on hand.