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 primarily on providing government-sponsored managed care services to families, children, seniors and individuals with complex medical needs primarily through Medicaid, Medicare Advantage ("MA") and Medicare Prescription Drug Plans ("PDP"), as well as individuals in the Health Insurance Marketplace. As of
March 31, 2019
, we served approximately
6.3 million
members nationwide.
As of
March 31, 2019
, we operated Medicaid health plans, including states where we receive Medicaid premium revenues associated with dually eligible special needs plans, in Arizona, Florida, Georgia, Hawaii, Illinois, Kentucky, Michigan, Missouri, Nebraska, New Jersey, New York, South Carolina and Texas.
In addition, as of
March 31, 2019
, we also operated MA coordinated care plans ("CCPs") in Alabama, Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, South Carolina, Tennessee and Texas. We also offered stand-alone Medicare PDPs nationwide.
In September 2018, we completed the acquisition of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and MeridianRx, LLC, a pharmacy benefit manager ("PBM") (collectively, "Meridian"). As a result of the acquisition, we expanded our Medicaid portfolio through the addition of Michigan; expanded our Medicaid presence in Illinois; and acquired an integrated PBM platform. Meridian also serves MA members in Illinois, Indiana, Michigan, and Ohio, as well as Health Insurance Marketplace members in Michigan.
Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets and statements of comprehensive income, changes in stockholders' equity, and cash flows include our accounts and the accounts of our subsidiaries over which we have control or are the primary beneficiary. 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, 2018
, included in our Annual Report on Form 10-K ("2018 Form 10-K"), which was filed with the U.S. Securities and Exchange Commission ("SEC") in February 2019. 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 unaudited condensed consolidated 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 2018 financial information to conform to the 2019 presentation.
Pharmacy Benefit Manager
The external revenues and costs for our PBM business are reported within "Products and Services" and "Cost of Products and Services", respectively, on the condensed consolidated statements of comprehensive income. Products and services revenues from our PBM consist of the prescription price (ingredient cost plus dispensing fee) negotiated with the retail pharmacies with which we have contracted, plus any associated administrative fees. This revenue is recognized when the claim is processed. We have the contractual obligation to pay network pharmacies for benefits provided to participating members and, therefore, act as principal in the arrangement and reflect the total prescription price as revenue, on a gross basis, in accordance with applicable accounting guidance. Costs of products and services is recognized at the time prescriptions are dispensed by pharmacies in the PBM's network to eligible members and consists primarily of ingredient costs and dispensing fees paid to retail pharmacies with which we have contracted. The overall results of our PBM business are immaterial.
Aetna Part D Membership Reinsurance
In November 2018, we completed the purchase of Aetna Inc.'s ("Aetna") entire standalone Medicare Part D prescription drug plan membership ("Aetna Part D membership"). In connection with the purchase, we also entered into an administrative services agreement and a reinsurance agreement pursuant to which Aetna provides administrative services to, and retains financial risk of, the Aetna Part D membership, effective for plan year 2019. We remain primarily liable to policyholders under this ceded insurance contract and are contingently liable for amounts recoverable from Aetna in the event that they do not meet their contractual obligations. In the normal course, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our exposure to significant losses from reinsurer insolvencies. As of March 31, 2019, related to the Aetna Part D membership, our condensed consolidated balance sheet included reinsured receivables of
$30.8 million
, primarily related to premiums receivable, and reinsured payables of
$482.8 million
, primarily related to pharmacy claims payables. These reinsured receivables and payables were included in prepaid expenses and other current assets, net, and accounts payable and accrued liabilities, respectively. The resulting net reinsurance recoverables of
$452.0 million
was included in prepaid expenses and other current assets, net on the condensed consolidated balance sheet. There were no reinsurance recoverables or reinsurance liabilities relating to the Aetna Part D membership recorded as of December 31, 2018.
In our condensed consolidated statements of comprehensive income, premium revenue and medical benefits were reported net of amounts ceded under this Aetna reinsurance arrangement. Premium revenue and medical benefits expense ceded relating to the Aetna Part D membership were
$501.0 million
and
$473.7 million
, respectively, for the three months ended March 31, 2019.
Unconsolidated Subsidiaries
We work with physicians and other health care professionals to operate Accountable Care Organizations ("ACOs") under the Medicare Shared Saving Program ("MSSP") and Next Generation ACO Models. ACOs were established by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively the "ACA") to reward integrated, efficient care and allow providers to share in any savings they achieve as a result of improved quality and operational efficiency.
These ACOs are generally formed as limited liability companies. The ACOs are considered variable interest entities ("VIEs") under GAAP as these entities do not have sufficient equity to finance their own operations without additional financial support. We own a majority interest in our ACOs; however, we share the power to direct the activities that most significantly affect the ACOs with health care providers that are minority owners in the ACOs. This power is shared pursuant to the structure of the management committee of each of the ACOs. Accordingly, we have determined that we are not the primary beneficiary of the ACOs; therefore, we cannot consolidate their results. We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE.
We account for our participation in the ACOs using the equity method. Gains and losses are immaterial and are reported on the face of our condensed consolidated statements of comprehensive income as equity in earnings (losses) of unconsolidated subsidiaries.
Significant Accounting Policies
Below is a discussion of our significant accounting policies, which affected the comparability of our consolidated results of operations, financial condition or cash flows for the periods presented. Refer to Note 2 -
Summary of Significant Accounting Policies
to the consolidated financial statements included in our 2018 Form 10-K for a complete discussion of all of our significant accounting policies.
Premium Receivables and Unearned Premiums
We record premiums earned but not received as premiums receivable and record premiums received in advance of the period of service as unearned premiums in our condensed consolidated balance sheets. A complete discussion of premiums receivable and unearned premiums is included in Note 2 -
Summary of Significant Accounting Policies
to the consolidated financial statements included in our 2018 Form 10-K. The premium receivable balance at
March 31, 2019
is primarily related to Medicaid contracts with our state partners of approximately
$1.2 billion
, as well as net risk-adjusted premiums receivable under our MA and PDP contracts of approximately
$364.0 million
.
Medicaid Risk-Adjusted Premiums and Retroactive Rate Changes
As discussed further in Note 2 -
Summary of Significant Accounting Policies
to the consolidated financial statements included in our 2018 Form 10-K, Medicaid premium rate changes are recognized in the period the change becomes effective, when the effect of the change in the rate is reasonably estimable and collection is assured. In some instances, our Medicaid premiums are subject to risk score adjustments based on the health profile of our membership. Generally, the risk score is determined by the state agency's analysis of encounter submissions of processed claims data to determine the acuity of our membership relative to the entire state's Medicaid membership. The frequency of when states adjust premiums varies, but is usually done quarterly or semi-annually on a retrospective basis. We recognize periodic changes to risk-adjusted premiums as revenue when the amounts are determinable and collection is reasonably assured. Premiums receivable in our condensed consolidated balance sheets include net risk-adjusted premiums receivable from our Medicaid state partners related to retroactive rate changes and risk score adjustments of
$121.5 million
and
$54.4 million
as of
March 31, 2019
and
December 31, 2018
, respectively.
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 -
Summary of Significant Accounting Policies
to the consolidated financial statements included in our 2018 Form 10-K. CMS will fully reimburse these subsidies, or recoup overpaid subsidies made during the plan year, as part of its annual settlement process that typically 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, 2019
and
December 31, 2018
, our condensed consolidated balance sheets primarily include CMS Part D payables for the 2018 and 2016 plan years. Our condensed consolidated balance sheet as of
March 31, 2019
additionally includes a payable for the 2019 plan year. We expect to settle a majority of the 2016 and 2018 net payables during the remainder of 2019.
ACA Industry Fee
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 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 January 2018, Congress approved a one-year moratorium of the ACA industry fee for 2019, which also eliminated the Medicaid ACA industry fee reimbursement from our state government partners for 2019. Accordingly, we did not incur ACA industry fee expense nor recognize any Medicaid ACA industry fee reimbursement revenue for the three months ended
March 31, 2019
. We incurred
$81.5 million
for the ACA industry fee for the
three
months ended
March 31, 2018
. Additionally, we recognized
$64.7 million
of Medicaid ACA industry fee reimbursement revenue as premium revenue for the
three
months ended
March 31, 2018
.
Recently Adopted Accounting Standards
In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-07, “
Compensation-Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting
.” This update expands the scope of Topic 718, which currently only includes share-based payments issued to
employees, to include share-based payments issued to non-employees for goods and services. This guidance was effective for interim and annual periods beginning after December 15, 2018. We adopted this guidance on January 1, 2019. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.
In February 2018, the FASB issued ASU 2018-02 "
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
", which allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings. The guidance is effective for interim and annual periods beginning after December 15, 2018. We adopted this guidance prospectively on January 1, 2019. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.
In March 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. Previously, 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. We adopted this guidance on January 1, 2019 on a modified retrospective basis. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial condition or cash flows.
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. Subsequently, in July 2018, the FASB issued ASU 2018-11, “
Leases (Topic 842), Targeted Improvements
” which, among other things, allows companies to elect an optional transition method to apply the new lease standard through a cumulative-effect adjustment, if any, in the period of adoption, rather than in the earliest period presented. We adopted the standard on January 1, 2019 using the optional transition method. We elected the practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classifications for existing leases. Additionally, we elected the practical expedient to not separate non-lease components from the associated lease component. As part of the adoption process, we implemented a new lease accounting system. The adoption of this guidance resulted in the initial recognition of operating lease right-of-use assets of approximately
$259.5 million
, operating lease liabilities of approximately
$277.3 million
and the elimination of
$17.8 million
of straight-line lease liabilities, as of
January 1, 2019
. This guidance did not have a material effect on our consolidated results of operations or cash flows.
Accounting Standards Pending Adoption
In August 2018, the FASB issued ASU 2018-15, "
Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract",
which
requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. We are currently assessing the effect this guidance will have on our consolidated results of operations, financial condition or cash flows.
In June 2016, the FASB issued ASU 2016-13, "
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
" 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 results of operations, financial condition or cash flows.
2. CENTENE PLAN OF MERGER AND ACQUISITIONS
Centene Plan of Merger
On March 26, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Centene Corporation ("Centene") under which Centene will acquire us for a combination of cash and stock. Under the terms of the Merger Agreement, our shareholders will receive
$120.00
in cash and
3.38
shares of Centene common stock for each share of our common stock. The proposed transaction is subject to customary closing conditions, including, but not limited to, the approval of the Merger Agreement by our stockholders, the approval of the share issuance of Centene stock by Centene’s stockholders, and the receipt of U. S. federal antitrust clearance and certain other required regulatory approvals. The transaction is expected to close in the first half of 2020.
The Merger Agreement includes restrictions on the conduct of our business prior to completion of the Centene Transaction or termination of the Merger Agreement, generally requiring us to conduct our business in the ordinary course. However, we are subject to various specified restrictions unless we obtain Centene’s prior written consent, which may not be unreasonably withheld, delayed or conditioned, or expressly contemplated or permitted by the Merger Agreement or as required by applicable law. Among other things and in each case subject to certain exceptions, we may not:
|
|
|
|
•
|
incur additional indebtedness (excluding borrowings under our Revolving Credit Facility (as defined below) that are used to manage our ordinary course cash flow needs);
|
|
|
|
|
•
|
issue additional shares of our common stock, repurchase our common stock, or pay dividends;
|
|
|
|
|
•
|
acquire assets, securities or property, dispose of businesses or assets; or
|
|
|
|
|
•
|
authorize any payment of, accrual or commitment for capital expenditures in any calendar year that would exceed by more than 110% the aggregate amount of capital expenditures budgeted for such year.
|
Aetna Medicare Part D Asset Acquisition
As discussed in Note 1
- Organization, Basis of Presentation and Significant Accounting Policies
of this 2019 Form 10-Q,
in November 2018, we completed the purchase of Aetna's Part D membership for total cash consideration of
$107.2 million
, which is subject to certain true-up provisions. These membership assets are recorded within other intangible assets, net in the condensed consolidated balance sheets as of
March 31, 2019
and
December 31, 2018
, and have a weighted-average useful life of
eight years
beginning in 2020. Per the terms of the agreement, Aetna provides administrative services to, and retains financial risk of, the Aetna Part D membership through 2019. Therefore, the Aetna Part D membership is excluded from our membership and has had, or is expected to have, an immaterial effect on our results of operations until January 1, 2020.
Meridian Business Acquisition
On September 1, 2018 (the "Effective Date"), we acquired Meridian for an estimated purchase price of approximately
$2.5 billion
in cash, subject to certain purchase price adjustments, as described in the purchase agreement. The Meridian acquisition was funded through a combination of cash on hand, our Revolving Credit Facility, net proceeds from the August 2018 issuance of our
5.375%
of Senior Notes due 2026 ("2026 Notes") and net proceeds from an issuance of shares of our common stock. We included the results of Meridian's operations since the Effective Date in our condensed consolidated financial statements.
The following table summarizes the estimated fair values of major classes of assets acquired and liabilities assumed at the Effective Date, based on our valuation assumptions, reconciled to the total consideration transferred.
|
|
|
|
|
|
|
|
Assets
|
(in millions)
|
|
Cash, cash equivalents and restricted cash
|
$
|
484.4
|
|
|
Investments, including restricted investments
|
180.4
|
|
|
Premiums receivable, net
|
379.6
|
|
|
Other current assets
|
146.2
|
|
|
Property, equipment and capitalized software, net
|
49.3
|
|
|
Goodwill
|
1,539.4
|
|
|
Other intangible assets, net
|
622.0
|
|
|
Fair value of total assets acquired
|
$
|
3,401.3
|
|
|
|
|
|
Liabilities
|
|
|
Medical benefits payable
|
$
|
534.3
|
|
|
ACA Fee liability
|
66.5
|
|
|
Other liabilities
|
280.4
|
|
|
Fair value of liabilities assumed
|
881.2
|
|
|
Fair value of net assets acquired
|
$
|
2,520.1
|
|
|
|
|
The fair value results from judgments about future events, which reflect certain uncertainties and rely on estimates and assumptions. The judgments used to determine the fair value assigned to each class of assets acquired and liabilities assumed, as well as intangible asset lives, can materially affect our operating results. As of the Effective Date, the expected fair value of all current assets and liabilities approximated their historical cost. As of March 31, 2019, we have preliminarily determined the fair value of assets acquired and liabilities assumed; however, the final fair values may be subject to, (i) the final valuation of intangible assets related to memberships and trade names, (ii) the final assessment and valuation of certain other assets acquired and liabilities assumed, including premiums receivable, property, equipment and capitalized software, medical benefits payable and other liabilities and (iii) the final assessment and valuation of certain income tax amounts. Therefore, the final fair values of the assets acquired and liabilities assumed may vary significantly from our preliminary estimates.
Identifiable intangible assets acquired
Under the Hart-Scott-Rodino Antitrust Improvements Act and other relevant laws and regulations, there were significant limitations on our ability to obtain specific information about Meridian's intangible assets prior to completion of the acquisition in September 2018. As of March 31, 2019, certain of the more significant assumptions inherent in the development of intangible asset fair values, including the following, are preliminary.
•
final membership attrition rates;
•
final discount rates selected to measure the risks inherent in the future cash flows;
|
|
|
|
•
|
key assumptions in the valuation of the acquired technology, including, but not limited to, estimated costs associated with developers' salaries, external direct costs of materials and services; and the estimated time to replace the acquired software applications; and
|
•
working capital adjustments and the assessment of the assets' life cycle, among other key assumptions.
The following table summarizes the preliminary fair values and weighted average useful lives for identifiable intangible assets acquired in the Meridian acquisition as of the Effective Date of the acquisition. These preliminary estimates of fair value and weighted-average useful life may be different from the final acquisition accounting, and the difference could have a material effect on the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Fair Value
(in millions)
|
|
Weighted Average
Useful Life (in years)
|
|
Membership
|
|
$
|
406.6
|
|
|
8.1
|
|
Tradenames
|
|
110.4
|
|
|
4.9
|
|
Provider network
|
|
8.3
|
|
|
15.0
|
|
Technology and other
|
|
96.7
|
|
|
5.8
|
|
Total
|
|
$
|
622.0
|
|
|
7.3
|
|
|
|
|
|
|
Goodwill
We recorded
$1.5 billion
for the valuation of goodwill for the excess of the purchase price over the estimated fair value of the net assets acquired. The assignment of goodwill to our respective segments has not been completed at this time. The recorded goodwill related to the acquisition is deductible for tax purposes.
Deferred taxes
The Meridian acquisition included taxable and nontaxable components resulting in differences in amounts recognized for GAAP and tax purposes. In both taxable and nontaxable business combinations, the amounts assigned to the individual assets acquired and liabilities assumed for financial statement purposes are often different from the amounts assigned or carried forward for tax purposes. We recorded a
$49.9
million deferred tax liability based on the estimated bases differences.
Goodwill
A summary of changes in our goodwill by reportable segment is as follows for the
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid Health Plans
|
|
Medicare Health Plans
|
|
Not assigned
(1)
|
|
Total
|
|
Balance as of December 31, 2018
|
$
|
274.7
|
|
|
$
|
392.3
|
|
|
$
|
1,560.7
|
|
|
$
|
2,227.7
|
|
|
Acquisition related adjustments
|
—
|
|
|
—
|
|
|
(21.3
|
)
|
|
(21.3
|
)
|
|
Balance as of March 31, 2019
|
$
|
274.7
|
|
|
$
|
392.3
|
|
|
$
|
1,539.4
|
|
|
$
|
2,206.4
|
|
|
|
|
|
|
|
|
|
|
(1) Goodwill related to our September 1, 2018 Meridian acquisition is considered preliminary, pending the final allocation of the applicable purchase price. The assignment of goodwill to our respective segments has not been completed at this time.
Unaudited Pro Forma Financial Information
The results of operations and financial condition for the Meridian acquisition have been included in our condensed consolidated financial statements since the Effective Date. The unaudited pro forma financial information presented below reflects our 2018 acquisition of Meridian, assuming the acquisition occurred as of January 1, 2018. Pro forma results are not provided for the three months ended March 31, 2019, as Meridian's operations were included in our results of operations for this time period.
These pro forma results are based on estimates and assumptions and do not reflect any anticipated synergies, efficiencies or other cost savings that we expect to realize from the acquisition. The following unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the acquisition actually consummated at January 1, 2018, or project the future results of the combined company.
|
|
|
|
|
|
|
|
|
|
|
Pro Forma - Unaudited
|
|
(in millions, except per share data)
|
|
Three Months ended
March 31, 2018
|
|
Total revenues
|
|
$
|
5,673.6
|
|
|
Net income
|
|
$
|
100.9
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
Basic
|
|
$
|
2.02
|
|
|
Diluted
|
|
$
|
2.00
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
Basic
|
|
49,890,397
|
|
|
Diluted
|
|
50,446,757
|
|
|
|
|
|
The pro forma results presented in the schedule above include adjustments related to the following purchase accounting and other acquisition-related costs:
|
|
|
|
•
|
Elimination of historical intangible asset amortization expense and addition of amortization expense based on the current preliminary values of identified intangible assets;
|
|
|
|
|
•
|
Elimination of interest expense associated with retired obligations and addition of interest expense based on debt incurred to finance the Meridian transaction;
|
|
|
|
|
•
|
Elimination of results for Meridian operations not acquired;
|
|
|
|
|
•
|
Elimination of transaction and integration-related costs;
|
|
|
|
|
•
|
Include
5,207,547
shares of our common stock issued to finance the Meridian transaction;
|
|
|
|
|
•
|
Adjustments to align the acquisition to our accounting policies; and
|
|
|
|
|
•
|
Tax effects of the adjustments noted above.
|
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, Medicaid premium taxes, the 2018 ACA industry fee 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 ("SG&A"), 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.
Our Corporate and Other category includes net investment and other income, SG&A expenses, depreciation, amortization and interest. Also included in this category are results for operating segments that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles.
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"), Children's Health Insurance Program ("CHIP") and Long-Term Services and Supports ("LTSS") programs, among others. 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 LTSS 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 Florida, Illinois and Kentucky individually account for
10%
or more of our consolidated premium revenue for the three months ended March 31, 2019. These 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,
|
|
|
2019
|
|
2018
|
|
Florida
|
17%
|
|
13%
|
|
Illinois
|
13%
|
|
*
|
|
Kentucky
|
10%
|
|
15%
|
*Our Illinois Medicaid health plan accounted for less than 10% of our consolidated premium revenue for the three months ended March 31, 2018.
In July 2018, we received a Notice of Intent to Award a
five
-year contract from the Florida Department of Health to provide statewide-managed care services to children with medically complex conditions through the Children's Medical Services Managed Care Plan ("CMS Plan"). The five-year contract award began on February 1, 2019; however, this contract is still subject to protest and appeal. Additionally, in April 2018, we received a Notice of Agency Decision from the Florida Agency for Health Care Administration (“AHCA”) to award our subsidiary, Staywell, a new
five
-year contract to provide managed care services to Medicaid-eligible beneficiaries, including Managed Medical Assistance and Long-Term Care beneficiaries in
10
of
11
regions. As part of the Medicaid Managed Care program, we provide statewide-managed care services to beneficiaries in the Serious Mental Illness Specialty Plan; however, this contract is still subject to protest and appeal. We are one of two managed care plans providing services to the SMI beneficiaries. The new statewide Medicaid Managed Care program began on December 1, 2018.
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 from operations is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid Health Plan
|
Medicare Health Plan
|
Medicare PDP
|
Corporate & Other
|
Consolidated
|
|
For the Three Months Ended March 31, 2019
|
(in millions)
|
|
Premium
|
$
|
4,473.5
|
|
$
|
1,843.1
|
|
$
|
288.8
|
|
$
|
4.0
|
|
$
|
6,609.4
|
|
|
Products and services
|
—
|
|
—
|
|
—
|
|
115.8
|
|
115.8
|
|
|
Total premium and products and services revenues
|
4,473.5
|
|
1,843.1
|
|
288.8
|
|
119.8
|
|
6,725.2
|
|
|
|
|
|
|
|
|
|
Medical benefits
|
4,022.7
|
|
1,548.2
|
|
258.4
|
|
2.4
|
|
5,831.7
|
|
|
Costs of products and services
|
—
|
|
—
|
|
—
|
|
111.8
|
|
111.8
|
|
|
ACA industry fee
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Medicaid premium taxes
|
31.7
|
|
—
|
|
—
|
|
—
|
|
31.7
|
|
|
Total gross margin expenses
|
4,054.4
|
|
1,548.2
|
|
258.4
|
|
114.2
|
|
5,975.2
|
|
|
|
|
|
|
|
|
|
Gross margin
|
419.1
|
|
294.9
|
|
30.4
|
|
5.6
|
|
750.0
|
|
|
|
|
|
|
|
|
|
Investment and other income
|
—
|
|
—
|
|
—
|
|
37.0
|
|
37.0
|
|
|
Other expenses
|
—
|
|
—
|
|
—
|
|
(602.9
|
)
|
(602.9
|
)
|
|
Income from operations
|
$
|
419.1
|
|
$
|
294.9
|
|
$
|
30.4
|
|
$
|
(560.3
|
)
|
$
|
184.1
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
|
|
|
|
|
Premium
|
$
|
2,809.9
|
|
$
|
1,556.5
|
|
$
|
259.9
|
|
$
|
—
|
|
$
|
4,626.3
|
|
|
Products and services
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total premium and products and services revenues
|
2,809.9
|
|
1,556.5
|
|
259.9
|
|
—
|
|
4,626.3
|
|
|
|
|
|
|
|
|
|
Medical benefits
|
2,424.4
|
|
1,307.1
|
|
230.5
|
|
—
|
|
3,962.0
|
|
|
Costs of products and services
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
ACA industry fee
|
49.3
|
|
27.6
|
|
4.6
|
|
—
|
|
81.5
|
|
|
Medicaid premium taxes
|
32.1
|
|
—
|
|
—
|
|
—
|
|
32.1
|
|
|
Total gross margin expenses
|
2,505.8
|
|
1,334.7
|
|
235.1
|
|
—
|
|
4,075.6
|
|
|
|
|
|
|
|
|
|
Gross margin
(1)
|
304.1
|
|
221.8
|
|
24.8
|
|
—
|
|
550.7
|
|
|
|
|
|
|
|
|
|
Investment and other income
|
—
|
|
—
|
|
—
|
|
19.9
|
|
19.9
|
|
|
Other expenses
(2)
|
—
|
|
—
|
|
—
|
|
(409.4
|
)
|
(409.4
|
)
|
|
Income from operations
|
$
|
304.1
|
|
$
|
221.8
|
|
$
|
24.8
|
|
$
|
(389.5
|
)
|
$
|
161.2
|
|
|
|
|
|
(1)
|
Effective July 1, 2018, the Company redefined gross margin as total revenues less investment and other income, medical expenses, cost of products and services, the ACA industry fee expense, and Medicaid premium tax expense. Accordingly, results for the
three
months ended
March 31, 2018
were adjusted to include Medicaid premium taxes, which decreased gross margin by $
32.1 million
.
|
|
|
|
|
(2)
|
Effective July 1, 2018, other expenses include SG&A expenses, depreciation, amortization and interest. Accordingly, results for the
three
months ended
March 31, 2018
were adjusted to exclude Medicaid premium taxes, which decreased other expenses by $
32.1 million
.
|
4.
EQUITY AND EARNINGS PER SHARE
Issuance of Common Stock
In August 2018, we completed a public offering of our common stock and issued
5,207,547
shares of our common stock, at an offering price of
$265.00
per share. The net proceeds from the offering were approximately
$1.3 billion
, after deducting underwriting discounts and offering costs of approximately
$37.7 million
. We used the net proceeds to fund a portion of the acquisition of Meridian.
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,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Weighted-average common shares outstanding — basic
|
50,100,509
|
|
|
44,605,892
|
|
|
Dilutive effect of outstanding stock-based compensation awards
|
741,795
|
|
|
590,235
|
|
|
Weighted-average common shares outstanding — diluted
|
50,842,304
|
|
|
45,196,127
|
|
|
Anti-dilutive stock-based compensation awards excluded from computation
|
67,130
|
|
|
277,390
|
|
|
|
|
|
|
5. INVESTMENTS
The Company considers all of its investments as available-for-sale securities. Excluding restricted cash, cash equivalents and 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, 2019
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
$
|
154.2
|
|
|
$
|
0.2
|
|
|
$
|
(0.3
|
)
|
|
$
|
154.1
|
|
|
Corporate debt securities
|
1,127.9
|
|
|
3.5
|
|
|
(2.7
|
)
|
|
1,128.7
|
|
|
Municipal securities
|
197.1
|
|
|
2.7
|
|
|
(0.1
|
)
|
|
199.7
|
|
|
Residential mortgage-backed securities
|
10.1
|
|
|
—
|
|
|
(0.1
|
)
|
|
10.0
|
|
|
Short-term time deposits
|
237.5
|
|
|
—
|
|
|
—
|
|
|
237.5
|
|
|
Government and agency obligations
|
9.2
|
|
|
—
|
|
|
(0.1
|
)
|
|
9.1
|
|
|
Other securities
|
62.0
|
|
|
—
|
|
|
—
|
|
|
62.0
|
|
|
Total debt securities
|
1,798.0
|
|
|
6.4
|
|
|
(3.3
|
)
|
|
1,801.1
|
|
|
Equity securities
(1)
|
225.1
|
|
|
—
|
|
|
—
|
|
|
225.1
|
|
|
Total
|
$
|
2,023.1
|
|
|
$
|
6.4
|
|
|
$
|
(3.3
|
)
|
|
$
|
2,026.2
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
$
|
144.7
|
|
|
$
|
—
|
|
|
$
|
(0.5
|
)
|
|
$
|
144.2
|
|
|
Corporate debt securities
|
943.0
|
|
|
0.5
|
|
|
(10.1
|
)
|
|
933.4
|
|
|
Municipal securities
|
199.6
|
|
|
0.6
|
|
|
(0.9
|
)
|
|
199.3
|
|
|
Residential mortgage-backed securities
|
7.2
|
|
|
—
|
|
|
(0.2
|
)
|
|
7.0
|
|
|
Short-term time deposits
|
242.2
|
|
|
—
|
|
|
—
|
|
|
242.2
|
|
|
Government and agency obligations
|
44.9
|
|
|
—
|
|
|
(0.1
|
)
|
|
44.8
|
|
|
Other securities
|
72.5
|
|
|
—
|
|
|
(0.1
|
)
|
|
72.4
|
|
|
Total
(1)
|
$
|
1,654.1
|
|
|
$
|
1.1
|
|
|
$
|
(11.9
|
)
|
|
$
|
1,643.3
|
|
|
|
(1) Investments in equity securities primarily consists of exchange traded funds in fixed income and preferred and hybrid securities. Equity securities were not material as of December 31, 2018.
Contractual maturities of debt securities at
March 31, 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Due in one year or less
|
$
|
889.6
|
|
|
$
|
889.7
|
|
|
Due after one year through five years
|
571.6
|
|
|
573.2
|
|
|
Due after five years through ten years
|
147.3
|
|
|
149.1
|
|
|
Due after ten years
|
13.1
|
|
|
12.9
|
|
|
Asset-backed and mortgage-backed securities
|
176.4
|
|
|
176.2
|
|
|
Total
|
$
|
1,798.0
|
|
|
$
|
1,801.1
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities due to the exercise of pre-payment options.
We sold available-for-sale investments totaling
$420.6 million
and
$80.2 million
during the three months ended
March 31, 2019
and
2018
, respectively. Realized gains and losses resulting from sales and redemptions of our available-for-sale investments were immaterial for all periods presented. Additionally, we did not realize any other-than-temporary impairment during any of these periods.
6. RESTRICTED CASH, CASH EQUIVALENTS AND 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 cash, cash equivalents and 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 cash, cash equivalents and investment securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Cash
|
$
|
12.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12.8
|
|
|
Money market funds
|
86.2
|
|
|
—
|
|
|
—
|
|
|
86.2
|
|
|
U.S. government securities and other
|
175.6
|
|
|
—
|
|
|
(0.3
|
)
|
|
175.3
|
|
|
Total
|
$
|
274.6
|
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
274.3
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
11.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11.3
|
|
|
Money market funds
|
51.4
|
|
|
—
|
|
|
—
|
|
|
51.4
|
|
|
U.S. government securities and other
|
172.5
|
|
|
—
|
|
|
(0.5
|
)
|
|
172.0
|
|
|
Total
|
$
|
235.2
|
|
|
$
|
—
|
|
|
$
|
(0.5
|
)
|
|
$
|
234.7
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on sales and redemptions of our restricted cash, cash equivalents and investments were not material for all periods presented.
7. STOCK-BASED COMPENSATION
Our Compensation Committee awards certain equity-based compensation under our stock plans, including restricted stock units ("RSUs") and performance stock units ("PSUs"). Compensation expense related to our stock-based compensation awards was
$22.8 million
and
$12.1 million
for the three months ended
March 31, 2019
and
2018
, respectively. As of
March 31, 2019
, there was
$121.0 million
of unrecognized compensation cost related to unvested stock-based compensation arrangements that is expected to be recognized over a weighted-average period of
2 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
$269.75
as of March 29, 2019 and amounted to approximately
$33.9 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. We estimate stock-based compensation expense based on awards ultimately expected to vest over the related service period (generally the vesting period) of the award, or to an employee’s eligible retirement date under the award agreement, if earlier. We make assumptions of forfeiture rates at the time of grant and continuously reassess our assumptions based on actual forfeiture experience.
A summary of RSU and PSU award activity, at target, for the
three
months ended
March 31, 2019
, is presented in the table below. For our PSUs, 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
|
|
Total
|
|
Outstanding as of January 1, 2019
|
253,235
|
|
|
606,708
|
|
|
859,943
|
|
|
Granted
|
99,434
|
|
|
347,539
|
|
|
446,973
|
|
|
Vested
|
(99,668
|
)
|
|
(351,648
|
)
|
|
(451,316
|
)
|
|
Forfeited
|
(2,372
|
)
|
|
(8,276
|
)
|
|
(10,648
|
)
|
|
Outstanding as of March 31, 2019
|
250,629
|
|
|
594,323
|
|
|
844,952
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of all equity awards granted during the
three
months ended
March 31, 2019
was
$205.27
.
Refer to Note 2 -
Summary of Significant Accounting Policies
and Note 15 -
Stock-based Compensation
to the consolidated financial statements included in our 2018 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, 2019
|
|
December 31, 2018
|
|
Long-term debt, net:
|
|
|
|
|
5.25% Senior Notes, due April 1, 2025
|
$
|
1,200.0
|
|
|
$
|
1,200.0
|
|
|
5.375% Senior Notes, due August 15, 2026
|
750.0
|
|
|
750.0
|
|
|
Revolving Credit Facility
|
200.0
|
|
|
200.0
|
|
|
Debt issuance costs
|
(22.7
|
)
|
|
(23.6
|
)
|
|
Total long-term debt, net
|
$
|
2,127.3
|
|
|
$
|
2,126.4
|
|
|
|
|
|
|
Senior Notes
In August 2018, we completed the offering and sale of
5.375%
unsecured senior notes due 2026 in the aggregate principal amount of $
750.0 million
(the “2026 Notes”). The aggregate net proceeds from the issuance of the 2026 Notes were used to fund a portion of the cash consideration for our acquisition of Meridian.
In March 2017, we completed the offering and sale of
5.25%
unsecured 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 primarily used to redeem the full
$900.0 million
aggregate principal amount of our
5.75%
unsecured senior notes (the "2020 Notes") on April 7, 2017, and for general corporate purposes, including organic growth and working capital.
The 2026 Notes and 2025 Notes are classified as long-term debt in our condensed consolidated balance sheet at
March 31, 2019
, based on their maturity date. Refer to Note 10 -
Debt
to the consolidated financial statements included in our 2018 Form 10-K for additional information regarding these 2026 Notes and 2025 Notes, including applicable covenants.
Revolving Credit Facility
In January 2016, we entered into a credit agreement, which provided for a senior unsecured revolving loan facility (the "Revolving Credit Facility"). In July 2018, this credit agreement was amended and restated (“Amended and Restated Credit Agreement”) to increase the aggregate principle amount available under our Revolving Credit Facility from
$1.0 billion
to
$1.3 billion
, extend the maturity date for borrowings under the Revolving Credit Facility from January 2021 to July 2023 and decrease the applicable margins for borrowings under the Revolving Credit Facility, as calculated in accordance with the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also includes an accordion feature which allows the Company to increase the total commitments under the Revolving Credit Facility by up to an additional
$500 million
, subject to certain conditions.
Unutilized commitments under the Amended and Restated Credit Agreement are subject to a fee of
0.20%
to
0.30%
depending upon our ratio of total debt to consolidated EBITDA, as calculated in accordance with the Amended and Restated Credit Agreement.
As of
March 31, 2019
,
$200.0 million
was outstanding under the Revolving Credit Facility, which was drawn during the third quarter of 2018 to fund a portion of the Meridian acquisition in September 2018. These borrowings are classified as long-term debt in accordance with the contractual terms of the Amended and Restated Credit Agreement.
Subsequent to the balance sheet date, in April 2019, an additional
$140.0 million
was drawn on our Revolving Credit Facility for general corporate purposes, including organic growth and working capital.
As of
March 31, 2019
, and the date of this filing, we were in compliance with all covenants under the 2026 Notes, the 2025 Notes and the Amended and Restated 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 any 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 2018 Form 10-K.
Recurring Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis at
March 31, 2019
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:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
$
|
154.1
|
|
|
$
|
—
|
|
|
$
|
154.1
|
|
|
$
|
—
|
|
|
Corporate debt securities
|
1,128.7
|
|
|
—
|
|
|
1,128.7
|
|
|
—
|
|
|
Municipal securities
|
199.7
|
|
|
—
|
|
|
199.7
|
|
|
—
|
|
|
Residential mortgage-backed securities
|
10.0
|
|
|
—
|
|
|
10.0
|
|
|
—
|
|
|
Short-term time deposits
|
237.5
|
|
|
—
|
|
|
237.5
|
|
|
—
|
|
|
Government and agency obligations
|
9.1
|
|
|
9.1
|
|
|
—
|
|
|
—
|
|
|
Other securities
|
62.0
|
|
|
49.7
|
|
|
12.3
|
|
|
—
|
|
|
Total debt securities
|
1,801.1
|
|
|
58.8
|
|
|
1,742.3
|
|
|
—
|
|
|
Equity securities
(1)
|
225.1
|
|
|
220.9
|
|
|
4.2
|
|
|
—
|
|
|
Total investments
|
$
|
2,026.2
|
|
|
$
|
279.7
|
|
|
$
|
1,746.5
|
|
|
$
|
—
|
|
|
Restricted cash, cash equivalents and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
12.8
|
|
|
$
|
12.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Money market funds
|
86.2
|
|
|
86.2
|
|
|
—
|
|
|
—
|
|
|
U.S. government securities and other
|
175.3
|
|
|
175.1
|
|
|
0.2
|
|
|
—
|
|
|
Total restricted cash, cash equivalents and investments
|
$
|
274.3
|
|
|
$
|
274.1
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
(1) Investments in equity securities primarily consists of exchange traded funds in fixed-income and preferred and hybrid securities.
Assets and liabilities measured at fair value on a recurring basis at
December 31, 2018
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
|
$
|
144.2
|
|
|
$
|
—
|
|
|
$
|
144.2
|
|
|
$
|
—
|
|
|
Corporate debt securities
|
933.4
|
|
|
—
|
|
|
933.4
|
|
|
—
|
|
|
Municipal securities
|
199.3
|
|
|
—
|
|
|
199.3
|
|
|
—
|
|
|
Residential mortgage-backed securities
|
7.0
|
|
|
—
|
|
|
7.0
|
|
|
—
|
|
|
Short-term time deposits
|
242.2
|
|
|
—
|
|
|
242.2
|
|
|
—
|
|
|
Government and agency obligations
|
44.8
|
|
|
44.8
|
|
|
—
|
|
|
—
|
|
|
Other securities
|
72.4
|
|
|
49.8
|
|
|
22.6
|
|
|
—
|
|
|
Total Investments
(1)
|
$
|
1,643.3
|
|
|
$
|
94.6
|
|
|
$
|
1,548.7
|
|
|
$
|
—
|
|
|
Restricted cash, cash equivalents and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
11.3
|
|
|
$
|
11.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Money market funds
|
51.4
|
|
|
51.4
|
|
|
—
|
|
|
—
|
|
|
U.S. government securities and other
|
172.0
|
|
|
171.8
|
|
|
0.2
|
|
|
—
|
|
|
Total restricted cash, cash equivalents and investments
|
$
|
234.7
|
|
|
$
|
234.5
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
(1) Equity securities were not material as of December 31, 2018.
The following table presents the carrying value and fair value of our long-term debt outstanding as of
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
2,127.3
|
|
|
2,034.7
|
|
|
200.0
|
|
|
—
|
|
|
Long-term debt - December 31, 2018
|
2,126.4
|
|
|
1,885.2
|
|
|
200.0
|
|
|
—
|
|
The fair value of our 2026 Notes and 2025 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 March 31, 2019 and December 31, 2018, approximated the carrying value and would be classified within Level 2 of the fair value hierarchy.
10. MEDICAL BENEFITS PAYABLE
A reconciliation of the beginning and ending balances of medical benefits payable, by segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2019
|
|
|
|
Medicaid Health Plans
|
|
Medicare Health Plans
|
|
Medicare PDPs
|
|
Corporate and other
(2)
|
|
Consolidated
|
|
Beginning balance
(1)
|
|
$
|
2,012.8
|
|
|
$
|
823.5
|
|
|
$
|
59.1
|
|
|
$
|
2.0
|
|
|
$
|
2,897.4
|
|
|
Acquisitions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
4,182.7
|
|
|
1,612.7
|
|
|
284.7
|
|
|
3.2
|
|
|
6,083.3
|
|
|
Prior years
|
|
(160.0
|
)
|
|
(64.5
|
)
|
|
(26.3
|
)
|
|
(0.8
|
)
|
|
(251.6
|
)
|
|
Total
|
|
4,022.7
|
|
|
1,548.2
|
|
|
258.4
|
|
|
2.4
|
|
|
5,831.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
(2,769.2
|
)
|
|
(936.4
|
)
|
|
(187.7
|
)
|
|
(1.4
|
)
|
|
(3,894.7
|
)
|
|
Prior years
|
|
(1,147.9
|
)
|
|
(451.7
|
)
|
|
(21.6
|
)
|
|
(0.6
|
)
|
|
(1,621.8
|
)
|
|
Total
|
|
(3,917.1
|
)
|
|
(1,388.1
|
)
|
|
(209.3
|
)
|
|
(2.0
|
)
|
|
(5,516.5
|
)
|
|
Ending balance
(1)
|
|
$
|
2,118.4
|
|
|
$
|
983.6
|
|
|
$
|
108.2
|
|
|
$
|
2.4
|
|
|
$
|
3,212.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The Medicaid Health Plans and Consolidated beginning and ending balances for 2019 include a premium deficiency reserve for our Illinois Medicaid programs ("Illinois PDR"), which amounted to
$6.6 million
and
$16.1 million
at
March 31, 2019
and December 31, 2018, respectively. See Note 2 -
Summary of Significant Accounting Policies
in our 2018 Form 10-K for further discussion.
(2) The Corporate and Other category includes operating segments that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2018
|
|
|
|
Medicaid Health Plans
|
|
Medicare Health Plans
|
|
Medicare PDPs
|
|
Corporate and other
|
|
Consolidated
|
|
Beginning balance
(1)
|
|
$
|
1,373.2
|
|
|
$
|
722.5
|
|
|
$
|
50.6
|
|
|
$
|
—
|
|
|
$
|
2,146.3
|
|
|
Acquisitions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
2,523.8
|
|
|
1,383.1
|
|
|
256.9
|
|
|
—
|
|
|
4,163.8
|
|
|
Prior years
|
|
(99.4
|
)
|
|
(76.0
|
)
|
|
(26.4
|
)
|
|
—
|
|
|
(201.8
|
)
|
|
Total
|
|
2,424.4
|
|
|
1,307.1
|
|
|
230.5
|
|
|
—
|
|
|
3,962.0
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Medical benefits paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
(1,659.4
|
)
|
|
(859.9
|
)
|
|
(218.0
|
)
|
|
—
|
|
|
(2,737.3
|
)
|
|
Prior years
|
|
(758.6
|
)
|
|
(389.3
|
)
|
|
(12.8
|
)
|
|
—
|
|
|
(1,160.7
|
)
|
|
Total
|
|
(2,418.0
|
)
|
|
(1,249.2
|
)
|
|
(230.8
|
)
|
|
—
|
|
|
(3,898.0
|
)
|
|
Ending balance
(1)
|
|
$
|
1,379.6
|
|
|
$
|
780.4
|
|
|
$
|
50.3
|
|
|
$
|
—
|
|
|
$
|
2,210.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The Medicaid Health Plans and Consolidated beginning and ending balances for 2018 include a premium deficiency reserve for our Illinois Medicaid program ("Illinois PDR"), which amounted to
$41.0 million
and
$45.6 million
at March 31, 2018 and December 31, 2017, respectively.
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.
Medical benefits payable developed favorably by approximately
$251.6 million
and
$201.8 million
for the three months ended
March 31, 2019
and
2018
, 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 period in which the favorable development is recognized.
Excluding the prior year development related to the release of the provision for moderately adverse conditions, our estimates of consolidated medical benefits payable developed favorably by approximately
$108.2 million
and
$71.5 million
for the three months ended
March 31, 2019
and
2018
, respectively. Such amounts are net of the development relating to refunds due to government customers with minimum loss ratio provisions. The net favorable development recognized in both 2019 and 2018 resulted primarily due to a number of operational and clinical initiatives planned and executed, that contributed to lower than expected pharmacy and medical trends, and actual claim submission time being faster than we originally assumed (i.e., our completion factors were higher than we originally assumed) in establishing our medical benefits payable in the prior years. This development does not directly correspond to an increase in our current year operating results as these reductions were offset by estimated current period medical benefits expense when we established our estimate of the current year medical benefits payable. Both completion factor and medical trend assumptions are influenced by utilization levels, unit costs, mix of business, provider reimbursement levels, processing system conversions and changes, claim inventory levels, claim processing patterns, our ability and practices to manage medical and pharmaceutical costs, claim submission patterns and operational changes resulting from business combinations, among others. Our actual costs were ultimately less than expected.
Our Meridian acquisition in September 2018 resulted in an increase to medical benefits payable as of the acquisition date. See Note 2 -
Centene Plan of Merger and Acquisitions
, for additional information on the Meridian acquisitions.
11. LEASES
In determining whether a contract contains a lease, we assess whether the arrangement meets all three of the following criteria: 1) there is an identified asset; 2) we have the right to obtain substantially all the economic benefits from use of the identified asset; and 3) we have the right to direct the use of the identified asset. This involves evaluating whether we have the right to operate the asset or to direct others to operate the asset in a manner that it determines without the supplier having the right to change those operating instructions, as well as evaluating our involvement in the design of the asset.
We have right-of-use assets and liabilities for non-cancelable operating leases primarily for office space, data centers and other equipment. Our leases have remaining lease terms up to approximately
14
years. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For the three months ended March 31, 2019 operating lease expense of
$17.4 million
, was recorded as SG&A expense in our condensed consolidated statement of comprehensive income.
Balance sheet information related to our operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
March 31, 2019
|
|
Assets:
|
|
|
|
|
|
Right of use assets
|
|
Other assets
|
|
$
|
249.9
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Current
|
|
Accounts payable and accrued expenses
|
|
$
|
32.9
|
|
|
Noncurrent
|
|
Other liabilities
|
|
235.6
|
|
|
Total liabilities
|
|
|
|
$
|
268.5
|
|
|
|
|
|
|
|
Maturities of our operating lease liabilities are as follows:
|
|
|
|
|
|
|
|
Maturity of Operating Lease Liabilities
|
March 31, 2019
|
|
2019 (remaining)
|
$
|
33.5
|
|
|
2020
|
44.9
|
|
|
2021
|
44.4
|
|
|
2022
|
40.4
|
|
|
2023
|
37.2
|
|
|
2024
|
34.9
|
|
|
Thereafter
|
114.7
|
|
|
Total lease payments
|
$
|
350.0
|
|
|
Less: imputed interest
|
$
|
81.5
|
|
|
Present value of lease liabilities
|
$
|
268.5
|
|
|
|
|
As of March 31, 2019 the weighted-average remaining lease term was
8.5
years. Our lease agreements do not provide a readily determinable implicit rate nor is it available to us from our lessors. Instead, we estimate our incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value. The weighted-average discount rate of our operating leases was
5.9%
, as of March 31, 2019.
Supplemental cash flow information related to our operating leases is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
Cash paid for operating leases
|
$
|
11.6
|
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
10.4
|
|
12. INCOME TAXES
Our effective income tax rate on pre-tax income was
18.1%
for the
three
months ended
March 31, 2019
compared with
35.8%
fo
r the
three
months ended
March 31, 2018
. The year-over-year decrease was primarily driven by the one-year moratorium on the non-deductible ACA industry fee for 2019 and higher excess tax benefits resulting from the settlement of stock-compensation awards in 2019.
There were no significant changes to unrecognized tax benefits for the
three
months ended
March 31, 2019
. Our unrecognized tax benefits are not expected to change significantly during the next 12 months.
13. DISCONTINUED OPERATIONS
On August 3, 2016, our subsidiary, Universal American, completed the sale of its Traditional Insurance business prior to our acquisition of Universal American. This was accomplished by selling
two
life insurance subsidiaries, while retaining ownership of a third life insurance subsidiary, American Progressive Life & Health Insurance of New York ("Progressive"). The sale of the Traditional Insurance business underwritten by Progressive was accomplished through a 100% quota-share reinsurance treaty with a wholly-owned subsidiary of Nassau Re, that, when considered in combination with other reinsurance transactions previously entered into, resulted in the reinsurance of all of the Traditional Insurance policies that were underwritten by Progressive. Accordingly, the discontinued Traditional Insurance business did not materially affect our condensed consolidated statements of comprehensive income for any of the periods presented.
In accordance with ASC 360-10,
Property, Plant and Equipment
and ASC 205-20,
Presentation of Financial Statements—Discontinued Operations
, the Traditional Insurance business has been reported in discontinued operations in this 2019 Form 10-Q.
The following table summarizes the total assets and liabilities of our discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
(in millions)
|
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
Investments
|
|
40.6
|
|
|
42.8
|
|
|
Reinsurance recoverables
|
|
165.7
|
|
|
170.2
|
|
|
Other assets
|
|
0.4
|
|
|
0.5
|
|
|
Total Assets
|
|
$
|
207.2
|
|
|
$
|
213.6
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Reserves and other policy liabilities
|
|
$
|
166.1
|
|
|
$
|
166.9
|
|
|
Other liabilities
|
|
41.1
|
|
|
46.7
|
|
|
Total liabilities
|
|
$
|
207.2
|
|
|
$
|
213.6
|
|
|
|
|
|
|
|
Progressive's traditional insurance products are reinsured under quota share coinsurance treaties with unaffiliated insurers, while the life insurance risks are reinsured under either quota share coinsurance or yearly-renewable term treaties with unaffiliated insurers. Under quota share coinsurance treaties, we pay the reinsurer an agreed upon percentage of all premiums and the reinsurer reimburses us that same percentage of any losses. In addition, the reinsurer pays us certain allowances to cover commissions, the cost of administering the policies and premium taxes. Under yearly-renewable term treaties, the reinsurer receives premiums at an agreed upon rate for its share of the risk on a yearly-renewable term basis. We also use excess of loss reinsurance agreements for certain policies whereby we limit our loss in excess of specified thresholds.
We evaluate the financial condition of our Traditional Insurance reinsurers and monitor concentrations of credit risk to minimize our exposure to significant losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement. We are not aware of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured business.
14. 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 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 federal 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, Mr. Bereday, entered a guilty plea in June 2017 in connection with the federal criminal charges, which was accepted by the court in July 2017. Mr. Bereday was sentenced in November 2017.
We have also previously advanced legal fees and related expenses to these
five
individuals regarding: a dispute 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"); an action by the Commission filed in January 2012 against
three
of the
five
individuals, Messrs. Farha, Behrens and Bereday, and a
qui tam
action against Messrs. Farha, Behrens and Bereday in federal court. 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. Pursuant to the settlement agreements described below, Messrs. Farha, Behrens and Bereday were dismissed from the federal court and state derivative actions. Pursuant to the settlement agreement with Mr. Bereday described below, Mr. Bereday was dismissed from the fee advancement case in Delaware Chancery Court. The Commission action was closed in May 2018. The
qui tam
action is currently stayed and the stay is subject to being lifted at any time.
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 May 2018, the Commission and Mr. Bereday entered into a consent judgment to pay
$4.5 million
to the Commission and the case was closed.
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 and Florida state court matters have been dismissed.
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 with the Commission, 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 with the Commission, 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 June 2017, we entered into a settlement agreement with Mr. Bereday that became effective in July 2017, pursuant to which we agreed that we would not seek to recover 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
$2.5 million
.
In connection with these matters, we have advanced to the
five
individuals legal fees and related expenses from the inception of the investigations through
March 31, 2019
, the cumulative amounts of which has not changed materially from
December 31, 2018. We expense these costs as incurred and classify the costs as SG&A expense incurred in connection with the investigations and related matters.
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.
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, claims for indemnification under purchase agreements, 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.