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MAGELLAN HEALTH, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




FORM 10-K10‑K

ý

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


For the fiscal year ended December 31, 20142017


o



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


For the transition period from              to

Commission File No. 1-66391‑6639




MAGELLAN HEALTH, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

58-107693758‑1076937

(I.R.S. Employer

Identification No.)


4800 Scottsdale Rd, Suite 4400

Scottsdale, Arizona


(Address of principal executive offices)



85251

(Zip Code)

Registrant'sRegistrant’s telephone number, including area code:(602) 572-6050572‑6050

Securities registered pursuant to Section 12(b) of the Act:None.

Title of Each Class

Name of Each Exchange on which Registered

Ordinary Common Stock, par value $0.01 per share

The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:None.

Indicate by check mark if the registrant is a well-knownwell‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý  No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o  No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-TS‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-KS‑K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K10‑K or any amendment to this Form 10-K. ý10‑K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-acceleratednon‑accelerated filer. See definition of "accelerated“accelerated filer and large accelerated filer"filer” in Rule 12b-212b‑2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller

reporting company)

Smaller reporting company o

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act). Yes o  No ý

The aggregate market value of the Ordinary Common Stock ("(“common stock"stock”) held by non-affiliatesnon‑affiliates of the registrant based on the closing price on June 30, 20142017 (the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter) was approximately $1.8$1.7 billion.

The number of shares of Magellan Health, Inc.'s’s common stock outstanding as of February 23, 20152018 was 26,665,409.24,324,140.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 20152017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.10‑K.



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MAGELLAN HEALTH, INC.

REPORT ON FORM 10-K

10‑K

For the Fiscal Year Ended December 31, 2014
2017

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Page



Page

PART I

Item 1.

Business

Business

1

Item 1A.

Risk Factors

21
13

Item 1B.

Unresolved Staff Comments

35
25

Item 2.

Properties

Properties

35

25

Item 3.

Legal Proceedings

35
25

Item 4.

Mine Safety Disclosures

36
26

PART II

Item 5.

Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

37
27

Item 6.

Selected Financial Data

40
29

Item 7.

Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

42
30

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

71
47

Item 8.

Financial Statements and Supplementary Data

71
47

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

71
47

Item 9A.

Controls and Procedures

71

Item 9B.

Other Information

74
47

Item 9B.

PART III

Other Information

52

PART III

Item 10.

Directors and Executive Officers of the Registrant

74
53

Item 11.

Executive Compensation

74
53

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

74
53

Item 13.

Certain Relationships and Related Transactions and Director Independence

74
53

Item 14.

Principal Accounting Fees and Services

74
53

PART IV

Item 15.

Exhibits, Financial Statement Schedule and Additional Information

54

74Item 16.

Form 10-K Summary

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PART I

Cautionary Statement Concerning Forward-LookingForward‑Looking Statements

This Form 10-K10‑K includes "forward-looking statements"“forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). Examples of forward-lookingforward‑looking statements include, but are not limited to, statements the Company (as defined below) makes regarding our future operating results and liquidity needs. Although the Company believes that its plans, intentions and expectations reflected in such forward-lookingforward‑looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Prospective investors are cautioned that any such forward-lookingforward‑looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-lookingforward‑looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-lookingforward‑looking statements are set forth under the heading "Risk Factors"“Risk Factors” in Item 1A and elsewhere in this Form 10-K.10‑K. When used in this Form 10-K,10‑K, the words "estimate," "anticipate," "expect," "believe," "should"“estimate,” “anticipate,” “expect,” “believe,” “should” and similar expressions are intended to be forward-lookingforward‑looking statements.

Any forward-lookingforward‑looking statement made by the Company in this Form 10-K10‑K speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-lookingforward‑looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

You should also be aware that while the Company from time to time communicates with securities analysts, the Company does not disclose to them any material non-publicnon‑public information, internal forecasts or other confidential business information. Therefore, to the extent that reports issued by securities analysts contain projections, forecasts or opinions, those reports are not the Company'sCompany’s responsibility and are not endorsed by the Company. You should not assume that the Company agrees with any statement or report issued by any analyst, irrespective of the content of the statement or report.

Item 1.    Business

Magellan Health, Inc. ("Magellan"(“Magellan”) is a leader within the healthcare management business, and is focused on delivering innovative specialty solutions for the fastest growing, most complex areas of health, including special populations, complete pharmacy benefits, and other specialty carve-out areas of healthcare. The Company develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the customers we serve. The Company provides services to health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and governmental agencies and third party administrators (“TPAs”). Magellan operates three segments: Healthcare, Pharmacy Management and Corporate. In this report, references to the “Company” include Magellan and its subsidiaries. Magellan was incorporated in 1969 under the laws of the State of Delaware. Magellan's executive offices are located at 4800 Scottsdale Road, Suite 4400, Scottsdale, Arizona 85251,

Healthcare

The Healthcare segment (“Healthcare”) is broken down into two reporting units – Commercial and its telephone number at that location is (602) 572-6050. References in this report to the "Company"Government.

The Commercial reporting unit’s customers include health plans, accountable care organizations (“ACOs”), and employers for whom Magellan provides carve-out management services for behavioral health, employee assistance plans (“EAP”), and its subsidiaries.

Business Overview

        The Company is engaged in the healthcare management business, and is focused on meeting needs inother areas of specialty healthcare thatincluding diagnostic imaging, musculoskeletal management, cardiac, and physical medicine. These management services are fast growing, highlyapplied to a health plan’s or ACO’s entire book of business including commercial, Medicaid and Medicare members or targeted complex populations basis.

The Government reporting unit contracts with local, state and high cost, with an emphasis on special population management. The Company providesfederal governmental agencies to provide services to health plansrecipients under Medicaid, Medicare and other managed care organizations ("MCOs"), employers, labor unions, various militarygovernment programs. Currently these management services include behavioral health and governmental agencies, third party administrators, consultants and brokers.EAP. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.

Managed Healthcare

        Two of the Company's segments are in the managed healthcare business. This line of business reflects the Company's: (i) management of behavioral healthcaretotal medical cost, as well as long term support services, and (ii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations is delivered through Magellan Complete Care ("MCC"(“MCC”). The Company'sThese special populations include individuals with

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serious mental illness (“SMI”), dual eligibles, aged, blind and disabled (“ABD”) and other populations with unique and often complex healthcare needs.

Magellan’s coordination and management of physicalthese healthcare and behavioral healthcare includeslong term support services are provided through its comprehensive network of medical and


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behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed and privileged providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time managingmaking the cost of these services more affordable for our customers. The treatment services provided through the Company's provider network include outpatient programs, intermediate care programs, inpatient treatment and crisis intervention services. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medicalnon‑medical counseling under certain government contracts.

        The Company's integrated management of physical and behavioral healthcare includes full service health plans which provide for the holistic management of special populations. These special populations include individuals with serious mental illness ("SMI"), those covered under both Medicare and Medicaid (dual eligibles), those eligible for long term care and other populations with unique and often complex healthcare needs.

The Company provides its Healthcare management services primarily through: (i) risk-basedrisk‑based products, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month fee, or  (ii) administrative services only ("ASO"(“ASO”) products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment services, in exchange for an administrative fee and, (iii) employee assistance programs ("EAPs") where the Company provides short-term outpatient behavioral counseling services.

        The managed healthcare business includes the following two segments, which are differentiated based on the services provided and/or the customers served:

        Commercial.    The Managed Healthcare Commercial segment ("Commercial") generally reflects managed behavioral healthcare services and EAP services provided under contracts with health plans, insurance companies and MCOs forin some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations, governmental agencies, military and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements. As of December 31, 2014, Commercial's covered lives were 2.7 million, 14.3 million and 13.3 million for risk-based, ASO and EAP products, respectively. For the year ended December 31, 2014, Commercial's revenue was $362.6 million, $127.0 million and $184.4 million for risk-based, ASO and EAP products, respectively.

        Public Sector.    The Managed Healthcare Public Sector segment ("Public Sector") generally reflects: (i) the management of behavioral health services provided to recipients under Medicaid and other state sponsored programs under contracts with state and local governmental agencies, and (ii) the integrated management of physical, behavioral and pharmaceutical care for special populations covered under Medicaid and other government sponsored programs. Public Sector contracts encompass either risk-based or ASO arrangements. As of December 31, 2014, Public Sector's covered lives were 1.4 million and 1.8 million for risk-based and ASO products, respectively. For the year ended December 31, 2014, Public Sector's revenue was $1.6 billion and $55.6 million for risk-based and ASO products, respectively.

Specialty Solutions

        The Specialty Solutions segment ("Specialty Solutions") generally reflects the management of the delivery of diagnostic imaging (radiology benefits management or "RBM") andinstances, a variety of other specialty areas such as radiation oncology, obstetrical ultrasound, cardiology and musculoskeletal management to ensure that such services are clinically appropriate and cost effective. The Company's Specialty Solutions services are currently provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid


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recipients. The Company offers its Specialty Solutions services through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing services, and through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the services. As of December 31, 2014, covered lives for Specialty Solutions were 6.5 million and 14.2 million for risk-based and ASO products, respectively. For the year ended December 31, 2014, revenue for Specialty Solutions was $423.6 million and $47.7 million for risk-based and ASO products, respectively.

Pharmacy Management

The Pharmacy Management segment ("(“Pharmacy Management"Management”) comprisesis comprised of products and solutions that provide clinical and financial management of drugspharmaceuticals paid under both the medical and the pharmacy benefit programs.benefit. Pharmacy Management'sManagement’s services includeinclude: (i) traditional pharmacy benefit management ("PBM"(“PBM”) services; (ii) pharmacy benefit administration ("PBA"(“PBA”) for state Medicaid and other government sponsored programs; (iii) specialty pharmaceutical dispensing operations, contractingoperations; (iv) clinical and formulary optimizationmanagement programs; (iv)(v) medical pharmacy management programs; and (v)(vi) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement.

These services are available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to health plans, employers, third party administrators, managed care organizations, state governments, Medicare Part D, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy products to its existing customers and market its pharmacy solutions to the Healthcare customer base.

Pharmacy Management contracts with its customers for services using risk‑based, gain share or ASO arrangements. In addition, Pharmacy Management has subcontract arrangementsprovides services to provide PBM servicesthe Healthcare segment for certain Public Sector customers.

        The Company's Pharmacy Management programs are provided under contracts with health plans, employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass risk-based and fee-for-service ("FFS") arrangements. During 2014, Pharmacy Management paid 9.5 million adjusted commercial network claims in the Company's PBM business. As of December 31, 2014, the Company had a generic dispensing rate of 83.6 percent within its commercial PBM business. In addition, during 2014, the Company paid 68.5 million adjusted PBA claims and 0.1 million specialty dispensing claims. Adjusted claim totals apply a multiple of three for each 90-day and traditional mail claim. In addition, as of December 31, 2014, Pharmacy Management served 0.8 million commercial PBM members, 9.6 million members in its medical pharmacy management programs, and 25 states and the District of Columbia in its PBAMCC business.

Corporate

This segment of the Company is comprised primarily of operational support functions such as salesamounts not allocated to the Healthcare and marketing and information technology, as well as corporate support functions such as executive, finance, human resources and legal.Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.

See Note 10—"Business Segment Information"Information” to the consolidated financial statements for certain segment financial data relating to our business set forth elsewhere herein.

Recent Acquisitions

Healthcare Acquisitions

AcquisitionIn recent years, the Company has expanded its Healthcare segment with various acquisitions. The acquisitions of AlphaCare Holdings, Inc. (“AlphaCare Holdings”) in 2013, The Management Group, LLC (“TMG”) in 2016, Armed Forces Services Corporation (“AFSC”) in 2016 and SWH Holdings, Inc. (“SWH”) in 2017 expanded the Company’s government reporting unit.

Pharmacy Management Acquisitions

In recent years, the Company has expanded its Pharmacy Management segment with various acquisitions. The acquisitions of Partners Rx Management, LLC

        Pursuant to (“Partners Rx”) in 2013, 4D Pharmacy Management Systems, Inc. (“4D”) in 2015 and Veridicus Holdings, LLC (“Veridicus”) in 2016 expanded the September 6, 2013 Agreement and Plan of Merger (the "Merger Agreement") with Partners Rx Management, LLC ("Partners Rx"), on October 1, 2013Company’s presence in the Company acquired all of the outstanding ownership interests of Partners Rx. Partners Rx is a full-service commercial PBM with a strong focus on health plans and self-funded employers primarily through sales through third party administrators, consultants and brokers. As consideration for the transaction, the Company paid $99.3 million in cash, including net receipts of $0.7 million for working capital adjustments.market. The Company fundedexpanded its formulary management programs with the acquisition with cash on hand.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.


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Acquisition of AlphaCare Holdings, Inc.

        Pursuant to the August 13, 2013 stock purchase agreement (the "Stock Purchase Agreement"), on December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, Inc. ("AlphaCare Holdings"), the holding company for AlphaCare New York, Inc. ("AlphaCare"), a Health Maintenance Organization ("HMO") in New York that operates a New York Managed Long-Term Care Plan "(MLTCP") in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in Bronx, New York, Queens and Kings Counties.

        Prior to December 31, 2013, the Company held a 7% equity interest in AlphaCare through a previous equity investment of $2.0 million in preferred membership units of AlphaCare's previous holding company, AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to AlphaCare Holdings, LLC. As part of the Stock Purchase Agreement, AlphaCare Holdings, LLC was reorganized into a Delaware corporation, and on December 31, 2013 the preferred membership units and the loan were converted into Series A Participating Preferred Stock ("Series A Preferred") of AlphaCare Holdings and the Company purchased an additional $17.4 million of Series A Preferred. During 2014, the Company purchased $2.2 million in common shares from the minority owners of AlphaCare. During 2014, the Company also purchased an additional $8.9 million in shares of Series B Participating Preferred Stock and Series C Participating Preferred Stock issued by AlphaCare Holdings. As of December 31, 2014, the Company held a 75% voting interest and the remaining shareholders held a 25% voting interest in AlphaCare Holdings.

        Based on the Company's 75% equity and voting interest in AlphaCare Holdings, the Company has included the results of operations in its consolidated financial statements. The Company reports the results of operations of AlphaCare Holdings within the Public Sector segment.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.

Acquisition of CDMI, LLC (“CDMI”) in 2014.

        Pursuant to the March 31, 2014 purchase agreement (the "CDMI Agreement") with CDMI, LLC ("CDMI") on April 30, 2014 the Company acquired all of the outstanding equity interests of CDMI. CDMI provides a range of clinical consulting programs and negotiates and administers drug rebates for managed care organizations and other customers. As consideration for the transaction, the Company paid a base price of $201.1 million, including net receipts of $3.9 million for working capital adjustments. Pursuant to the CDMI Agreement, the sellers and certain key management of CDMI purchased a total of $80.0 million in Magellan restricted common stock, which will generally vest over a 42-month period, conditioned upon continued employment. In addition to the base purchase price, the CDMI Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016.Industry

        The Company reports the results of operations of CDMI within its Pharmacy Management segment.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.

Other Acquisitions

        Pursuant to the July 1, 2014 purchase agreement (the "Cobalt Agreement") with Cobalt Therapeutics, LLC ("Cobalt"), the Company acquired all of the outstanding equity interests of Cobalt. Cobalt provides computerized cognitive behavioral therapy self-service programs. As consideration for the transaction, the Company paid a base price of $8.0 million in cash, subject to working capital


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adjustments. In addition to the base purchase price, the Cobalt Agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017. The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. The Company will make appropriate adjustments to the purchase price allocations prior to the completion of the measurement period as required.

        The Company reports the results of operations of Cobalt within its Commercial segment.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.

Industry

According to the Centers for Medicare and Medicaid Services ("CMS"(“CMS”), total U.S. healthcare spending was projected to have increased 5.65.4 percent to $3.1nearly $3.5 trillion in 2014,2017, representing nearly 17.6approximately 18.3 percent of the gross domestic product. With the uncertain economic environment, rising healthcare costs, increased fiscal pressures on federal and state governments and the uncertainty around the full implementation of healthcare reform, healthcare spending will continue to be one of the greatest pressing issues for the American public and government agencies. The rapidly evolving clinical and technological environment demands the expertise of specialized healthcare management services to provide both high-qualityhigh‑quality and affordable care.

        Over the last several years, the Company has transformed itself into a healthcare management business focused on meeting needs in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special populations with complex care needs.

Business Strategy

The Company is engaged in the healthcare management business, and is focused on meeting needs in areas of healthcare that are fastdelivering innovative specialty management solutions for the fastest growing, highlymost complex and high cost, with an emphasis on special population management. It currently provides managed behavioral healthcare, specialty solutions, and pharmacy management services as well as integrated healthcare management for special populations. The Company's strategy is to expand its integrated management programs for special populations, expand its pharmacy management business, and further grow its other existing businesses. The Company believes that certain of its clients may prefer to consolidate outsourced vendors, and that as a vendor offering multiple outsourced products, it will have a competitive advantage in the market. The Companyhealth areas. Magellan seeks to grow its managed healthcare business through the following strategic initiatives:

Expanding integrated management services provided to special populations through its Magellan Complete Care business.Care.  The Company, through Magellan Complete Care, seeks to expand its focus onwill grow the clinically integrated management of complex populations including individuals with SMI, dual-eligibles, those eligible for long-term care, and other unique, high-costspecial populations. These programs holistically manage the behavioral and physical health care, including drug spend, of special populations and utilize the Company's unique expertise to improve health outcomes and lower costs. The CompanyMagellan believes its significant Medicaid, behavioral health and pharmacy experience will enable it to further develop and market programs to manage these special populations.populations, utilizing the Company’s unique expertise to improve health outcomes for members served and lower costs for our customers. The Company is developing independentcontinues to invest in special population management capabilities and may enter into partnerships, joint ventures or acquisitions that facilitate this effort. The Company believes it is positioned to grow its membership and revenues in the integrated care management of special populations over the long term.


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   ��    ExpandingContinuous innovation and opportunistic expansion upon the Pharmacy Management business.    The Company has operated in both the specialty pharmaceutical management and Medicaid pharmacy benefits management businesses for several years and acquired a commercial pharmacy benefit management company in October of 2013. The Company has integrated all of these businesses, leveraging their strength and assets, and has built out its commercial pharmacy benefit management capabilities in order to expand its presence in the pharmaceutical marketplace. This business segment offers clinical and financial management solutions that help customers manage the quality and cost of pharmaceutical care for any drug, under any benefit, at any site of service. Pharmacy Management provides a comprehensivecurrent suite of solutions, including traditional pharmacy benefit management; pharmacy benefit administrationcarve-out management services for state Medicaid and other government sponsored programs; specialty pharmacy solutions including formulary and rebate management solutions and specialty dispensing; and its medical pharmacy management product, which manages the cost and quality of therapeutic interventions for complex conditions covered under the medical benefit. These products are available individually, in combination, or inour Commercial Healthcare customers.  Magellan will continue to be a fully integrated manner. The Company is marketing its pharmacy management productsconsultative partner with our customers to existing and new health plans, employer groups, state governments, exchanges, Medicaid managed care organizations, third party administrators, brokers and consultants. The Company continues to cross-sell Pharmacy Management products to its other segments' customer base.

        Continued growth in our other existing businesses.    The Company has operated in both the commercial and public sectors of managed behavioral healthcare by ensuring the delivery ofprovide quality outcomes and appropriate care through its unique behavioral healthcareby leveraging our clinical expertise, in managing clinical care, provider networks, claims and customer service. The Company focuses

Expanding the Pharmacy Management business with continued focus on continually developing and providing innovative andspecialty drugs.  With advances in specialty drugs driving the majority of pharmaceutical cost effective solutionsincreases, our foundation as an industry leader in specialty drug management uniquely positions us to its customers, and expanding into new markets. Through its Commercial behavioral segment, the Company seeks to provide a superior outsourced behavioral health management alternative to its health plan, employer, and government customers. The Company has expanded its product offerings including population health solutions for Autism Spectrum Disorders, caregivers, managed long term care, military, seriously mentally ill, suicide prevention, child welfaredeliver programs and computerized cognitive behavioral therapy. Through its Public Sector segment, the Company seeks to help state and local governments deal with their fiscal pressures resulting from increasing Medicaid enrollment and rising behavioral healthcare costs. The Company intends to continue marketing both its risk-based and ASO products,across all aspects of drug spend – traditional drugs, as well as new products,specialty drugs paid under both the medical and pharmacy benefits. Our value based strategies are designed to its existing customer basesupport the 2-3% of patients driving the majority of spend through advanced analytics, high-touch clinical programs and new customers, and to cross-sell its behavioral product portfolio to its other segments' customer base.comprehensive specialty drug solutions centered around complex conditions. 

        In Specialty Solutions, the Company's strategy is to deliver innovative and clinically appropriateThe Company’s pharmacy management programs that create value for its clientsseek to grow through the reduction in the numberboth new customer acquisition and expansion of inappropriate services and by ensuring the delivery of appropriate services through quality providers. The Company seeks to distinguish itself in the marketplace through a focus on clinical excellence, provider partnerships, product and service innovation, and consumer engagement. The Company continuesexisting customers. We seek to expand its product portfolio beyond diagnostic imaging with customer-focused solutions in new areas of medical management including radiation oncology therapy management, cardiac management, obstetrical ultrasound management, musculoskeletal management, genetic testing, and other relevant areas.continue growing our comprehensive PBM client base. In addition, we will leverage our specialty drug management expertise to selling itsgrow our carve-out pharmacy programs, to new customers, the Company's growth strategy isincluding formulary management and medical pharmacy, targeting health plans and employers. We also remain focused on continuing to develop innovative new productsretention and to expand membership with current customers, upsell additional products to existing customers, and cross-sell to its other segments' customer base.expansion of state Medicaid PBA business.

Customer Contracts

The Company'sCompany’s contracts with customers typically have terms of one to three years, and in certain cases contain renewal provisions (at the customer'scustomer’s option) for successive terms of between one and two years (unless terminated earlier). Substantially all of these contracts may be immediately


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terminated with cause and many of the Company'sCompany’s contracts are terminable without cause by the customer or the Company either upon the giving of requisite notice and the passage of a specified period of time (typically between 6030 and 180 days) or upon the occurrence of other specified events. In addition, the Company'sCompany’s contracts with federal, state and local governmental agencies generally are conditioned on legislative appropriations. These contracts generally can be terminated or modified by the customer if such appropriations are not made. The Company'sCompany’s contracts for managed healthcare and specialty solutions services generally provide for payment of a per member per month fee to the Company. See "Risk“Risk Factors—Risk-Based Products"Risk‑Based Products” and "—“—Reliance on Customer Contracts."

        The Company's contract with the State of Arizona as the Regional Behavioral Health Authority in Maricopa County (the "Maricopa Contract") generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the year ended December 31, 2013. The Maricopa Contract terminated on March 31, 2014. The Company provides behavioral healthcare management and other related services to members in the state of IowaFlorida pursuant to contracts with the State of IowaFlorida (the "Iowa Contracts"“Florida Contracts”). The IowaFlorida Contracts generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the yearyears ended December 31, 2014.2016 and 2017, respectively.

The Company also has significant concentrations of business with various counties in the State of Pennsylvania (the "Pennsylvania Counties"“Pennsylvania Counties”) which are part of the Pennsylvania Medicaid Program.Program, with members under its contract with CMS, and with various agencies and departments of the United States federal government. See further discussion related to these significant customers in "Risk“Risk Factors—Reliance on Customer Contracts." In addition, see "Risk“Risk Factors—Dependence on Government Spending"Spending” for discussion of risks to the Company related to government contracts.

Provider Network

The Company'sCompany’s managed behavioral healthcare services, integrated healthcare services and EAP treatment services are provided by a contracted network of third-partythird‑party providers, including physicians, psychiatrists, psychologists, other behavioral and physical health professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities. The number and type of providers in a particular area depend upon customer preference, site, geographic concentration and demographic composition of the beneficiary population in that area. The Company'sCompany’s network consists of approximately 155,000190,000 healthcare providers, including facility locations, providing various levels of care nationwide. The Company'sCompany’s network providers are almost exclusively independent contractors located throughout the local areas in which the Company's customers'Company’s customers’ beneficiary populations reside. Outpatient network providers work out of their own offices, although the Company'sCompany’s personnel are available to assist them with consultation and other needs.

        Non-facilityNon‑facility network providers include both individual practitioners, as well as individuals who are members of group practices or other licensed centers or programs. Non-facilityNon‑facility network providers typically execute standard contracts with the Company under which they are generally paid on a fee-for-servicefee‑for‑service basis.

        Third-partyThird‑party network facilities include inpatient psychiatric and substance abuse hospitals, intensive outpatient facilities, partial hospitalization facilities, community health centers and other community-basedcommunity‑based facilities, rehabilitative and support facilities and other intermediate care and alternative care facilities or programs. This variety of facilities enables the Company to offer patients a full continuum of care and to refer patients to the most appropriate facility or program within that continuum. Typically, the Company contracts with facilities on a per diem or fee-for-servicefee‑for‑service basis and, in some limited cases, on a "case rate"“case rate” or capitated basis. The contracts between the Company and inpatient and other facilities typically are for one-yearone‑year terms and are terminable by the Company or the facility upon 30 to 120 days notice.


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The Company's RBMCompany’s radiology benefits management (“RBM”) services are provided by a network of providers including diagnostic imaging centers, radiology departments of hospitals that provide advanced imaging services on an outpatient basis, and individual physicians or physician groups that own advanced imaging equipment and specialize in certain specific areas of care. Certain providers belong to the Company'sCompany’s network, while others are members of networks belonging to the Company'sCompany’s customers. These providers are paid on a fee-for-servicefee‑for‑service basis.

CompetitionThe Company also has a national network of contracted retail pharmacies which is offered to its pharmacy benefit management customers.  We contract with and manage these pharmacies to optimize drug cost and member access to fill covered prescriptions.  Pharmacies can work with us both electronically and telephonically at the point of service for member eligibility, claim adjudication and member cost share, if applicable.

Competition

The Company'sCompany’s business is highly competitive. The Company competes with other healthcare organizations as well as with insurance companies, including HMOs,health maintenance organizations (“HMOs”), preferred provider organizations ("PPOs"(“PPOs”), third-party administrators ("TPAs"),TPAs, independent practitioner associations ("IPAs"(“IPAs”), multi-disciplinarymulti‑disciplinary medical groups, PBMs, healthcare information technology solutions,companies, and other specialty healthcare and managed care companies. Many of the Company'sCompany’s competitors, particularly certain insurance companies, HMOs, technology companies, and PBMs are significantly larger and have greater financial, marketing and other resources than the Company, and some of the Company'sCompany’s competitors provide a broader range of services. The Company competes based upon quality and reliability of its services, a focus on clinical excellence, product and service innovation and proven expertise inacross its business lines. The Company may also encounter competition in the future from new market entrants. In addition, some of the Company'sCompany’s customers that are managed care companies may seek to provide specialty managed healthcare services directly to their subscribers, rather than by contracting with the Company for such services. Because of these factors, the Company does not expect to be able to rely to a significant degree on price increases to achieve revenue growth, and expects to continue experiencing pricing pressures.

Insurance

The Company maintains a program of insurance coverage for a broad range of risks in its business. The Company has renewed its general, professional and managed care liability insurance policies with unaffiliated insurers for a one-yearone‑year period from June 17, 20142017 to June 17, 2015.2018. The general liability policy is written on an "occurrence"“occurrence” basis, subject to a $0.05 million per claim un-aggregated self-insuredun‑aggregated self‑insured retention. The professional liability and managed care errors and omissions liability policies are written on a "claims-made"“claims‑made” basis, subject to a $1.0 million per claim ($10.0 million per class action claim) un-aggregated self-insuredun‑aggregated self‑insured retention for managed care errors and omissions liability, and a $0.05 million per claim un-aggregated self-insuredun‑aggregated self‑insured retention for professional liability.

The Company maintains a separate general and professional liability insurance policy with an unaffiliated insurer for its specialty pharmaceutical dispensing operations. The specialty pharmaceutical dispensing operations insurance policy has a one-yearone‑year term for the period June 17, 20142017 to June 17, 2015.2018. The general liability policy is written on an "occurrence"“occurrence” basis and the professional liability policy is written on a "claims-made"“claims‑made” basis, subject to a $0.05 million per claim and $0.25 million aggregated self-insuredself‑insured retention.

        The Company maintains separate professional liability insurance policies with unaffiliated insurers for its Maricopa Contract business for the behavioral health direct care facilities, all of which were divested at various times prior to September 1, 2009. The Maricopa Contract professional liability insurance policies effective dates were from September 1, 2008 to September 1, 2009. The Company purchased a five-year extended reporting period for the professional liability policies effective September 1, 2009 for the period September 1, 2009 to September 1, 2014, subject to a $0.5 million per claim un-aggregated self-insured retention. The Company extended the reporting period for the professional liability policies for an additional two-year period to September 1, 2016, subject to a $0.5 million per claim un-aggregated self-insured retention. The professional liability policies are written on a "claims-made" basis.


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The Company is responsible for claims within its self-insuredself‑insured retentions, and for portions of claims reported after the expiration date of the policies if they are not renewed, or if policy limits are exceeded. The Company also purchases excess liability coverage in an amount that management believes to be reasonable for the size and profile of the organization.

See "Risk“Risk Factors—Professional Liability and Other Insurance," for a discussion of the risks associated with the Company'sCompany’s insurance coverage.

Regulation

General

The Company'sCompany’s operations are subject to extensive and evolving state and federal laws and regulation in the jurisdictions in which we do business. The Company believes its operations are structured to comply in all material respects withThis includes applicable federal and state laws and regulations in connection with its role in providing pharmacy benefit management; behavioral health benefit management; radiology benefit management; utilization review; customer employee benefit plan services; pharmacy; healthcare services; Medicaid; Medicare; health insurance, and that it has obtained all licenseslaws and approvals that are material to the operation ofregulations impacting its business. However, regulationfederal government contracts. Regulation of the healthcare industry as well as government contracting is constantly evolving, with new legislative enactments and regulatory initiatives at the state and federal levels being implemented on a regular basis. Consequently, it is possible that a court or regulatory agency may take a position under existing or future laws or regulations, or as a result of a change in the interpretation thereof that such laws or regulations apply to the Company in a different manner than the Company believes such laws or regulations apply. Moreover, any such positionIn addition, existing laws and regulations may be repealed or modified. Such changes may require significant alterations to the Company'sCompany’s business operations in order to comply with such laws or regulations, or interpretations thereof. Expansion of the Company'sCompany’s business to cover additional geographic areas, to serve different types of customers, to provide new services or to commence new operations could also subject the Company to additional licensure requirements and/or regulation. Failure to comply with applicable regulatory requirements could have a material adverse affecteffect on the Company.

State Licensure and Regulation

The Company is subject to certain state laws and regulations governing the licensing of insurance companies, HMOs, PPOs, TPAs, PBMs, pharmacies and companies engaged in utilization review. In addition, the Company is subject to state laws and regulations concerning the licensing of healthcare professionals, including restrictions on business corporations from providing, controlling or exercising excessive influence over healthcare services through the direct employment of physicians, psychiatrists or, in certain states, psychologists and other healthcare professionals. These laws and regulations vary considerably among states, and the Company may be subject to different types of laws and regulations depending on the specific regulatory approach adopted by each state to regulate the managed care and pharmaceutical management businesses and the provision of healthcare treatment services. In addition, the Company is subject to certain federal laws and regulations, including federal laws and regulations in connection with its role in managing its customers' employee benefit plans, Medicaid, Medicare, health insurance and laws and regulations impacting federal government contracts.

Further, certain regulatory agencies having jurisdiction over the Company possess discretionary powers when issuing or renewing licenses or granting approval of proposed actions such as mergers, a change in ownership, and certain intra-corporateintra‑corporate transactions. One or multiple agencies may require as a condition of such license or approval that the Company cease or modify certain of its operations or modify the way it operates in order to comply with applicable regulatory requirements or policies. In addition, the time necessary to obtain a license or approval varies from state to state, and difficulties in obtaining a necessary license or approval may result in delays in the Company'sCompany’s plans to expand operations in a particular state and, in some cases, lost business opportunities.

The Company has sought and obtained licenses as a utilization review agent, single service HMO, TPA, PBM, Pharmacy, PPO, HMO and Health Insurance Company in one or more jurisdictions.


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Numerous states in which the Company does business have adopted regulations governing entities engaging in utilization review. Utilization review regulations typically impose requirements with respect to the qualifications of personnel reviewing proposed treatment, timeliness and notice of the review of proposed treatment and other matters. Many states also license TPA activities. These regulations typically impose requirements regarding claims processing and payments and the handling of customer funds. Some states require TPA licensure for PBM entities as a way to regulate the PBM lines of business.

Other states regulate PBMs through a PBM specific license. The Company has obtained these licenses as required to support the PBM business. Certain insurance licenses are required for the Company to pursue Medicare Part D business; this is discussed further in the pharmacy section of this document. In some cases, single purpose HMO licenses are required for the Company to take risk on business in that state. Some states require PPO or other network licenses to offer a network of providers in the state. Almost all states require licensure for pharmacies dispensing or shipping medications into the state. The Company has obtained all of these necessary licenses.

To the extent that the Company operates or is deemed to operate in some states as an insurance company, HMO, PPO or similar entity, it may be required to comply with certain laws and regulations that, among other things, may require the Company to maintain certain types of assets and minimum levels of deposits, capital, surplus, reserves or net worth. Being licensed as an insurance company, HMO or similar entity could also subject the Company to regulations governing reporting and disclosure, coverage, mandated benefits, rate setting, grievances and appeals, prompt pay laws and other traditional insurance regulatory requirements.

Regulators in a few states have adopted policies that require HMOs or, in some instances, insurance companies, to contract directly with licensed healthcare providers, entities or provider groups, such as IPAs, for the provision of treatment services, rather than with unlicensed intermediary companies. In such states, the Company'sCompany’s customary model of contracting directly is modified so that, for example, the IPAs (rather than the Company) contract directly with the HMO or insurance company, as appropriate, for the provision of treatment services.

The National Association of Insurance Commissioners (the "NAIC"(“NAIC”) has developed a "health“health organizations risk-based capital"risk‑based capital” formula, designed specifically for managed care organizations, that establishes a minimum amount of capital necessary for a managed care organization to support its overall operations, allowing consideration for the organization'sorganization’s size and risk profile. The NAIC also adopted a model regulation in the area of health plan standards, which could be adopted by individual states in whole or in part, and could result in the Company being required to meet additional or new standards in connection with its existing operations. Certain states, for example, have adopted regulations based on the NAIC initiative, and as a result, the Company has been subject to certain minimum capital requirements in those states. Certain other states, such as Maryland, Texas, New York, Florida and New Jersey, have also adopted their own regulatory initiatives that subject entities, such as certain of the Company'sCompany’s subsidiaries, to regulation under state insurance laws. This includes, but is not limited to, requiring adherence to specific financial solvency standards. State insurance laws and regulations may limit the Company'sCompany’s ability to pay dividends, make certain investments and repay certain indebtedness.

Regulators may impose operational restrictions on entities granted licenses to operate as insurance companies or HMOs. For example, the California Department of Managed Health Care has imposed certain restrictions on the ability of the Company'sCompany’s California subsidiaries to fund the Company'sCompany’s operations in other states, to guarantee or cosign for the Company'sCompany’s financial obligations, or to pledge or hypothecate the stock of these subsidiaries and on the Company'sCompany’s ability to make certain operational changes with respect to these subsidiaries. In addition, regulators of certain of the Company'sCompany’s subsidiaries may exercise certain discretionary rights under regulations including, without limitation, increasing its supervision of such entities or requiring additional restricted cash or other security.


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        The licensing process under state insurance laws can be lengthy and the Company could experience a material adverse effect on its operating results and financial condition while its license applications are pending as we apply for new licenses to support business growth. In addition, failureFailure to obtain and maintain required licenses typically also constitutes an event of default under the Company'sCompany’s contracts with its customers. The loss of business from one or more of the Company'sCompany’s major customers as a result of such an event of default or otherwise could have a material adverse effect on the Company. Licensure requirements may increase the Company'sCompany’s cost of doing business in the event that compliance requires the Company to retain additional personnel to meet the regulatory requirements and to take other required actions and make necessary filings. Although compliance with licensure regulations has not had a material adverse effect on the Company, there can be no assurance that specific laws or regulations adopted in the future would not have such a result.

The provision of healthcare treatment services by physicians, psychiatrists, psychologists, pharmacists and other providers is subject to state regulation with respect to the licensing of healthcare professionals. The Company believes that the healthcare professionals, who provide healthcare treatment on behalf of or under contracts with the Company, and the case managers and other personnel of the health services business, are in compliance with the applicable state licensing requirements and current interpretations thereof. Regulations imposed upon healthcare providers include but are not limited to, provisions relating to the conduct of, and ethical considerations involved in, the practice of medicine, psychiatry, psychology, social work and related behavioral healthcare professions, radiology, pharmacy, privacy, accreditation, government healthcare program participation requirements, reimbursements for patient services, Medicare, Medicaid, federal and state laws governing fraud, waste and abuse and, in certain cases, the common law or statutory duty to warn others of danger or to prevent patient self-injury.self‑injury or the statutory duties to report matters of abuse or neglect of individuals. However, there can be no assurance that changes in such requirements or interpretations thereof will not adversely affect the Company'sCompany’s existing operations or limit expansion.

In California, the Company’s employee assistance programs are regulated by the California Department of Managed Health Care. This subjects the Company to regulations governing reporting and disclosure, coverage, mandated benefits, grievances and appeals and other traditional insurance regulatory requirements. With respect to the Company'sCompany’s employee assistance crisis intervention program, additional licensing of clinicians who provide telephonic assessment or stabilization services to individuals who are calling from out-of-stateout‑of‑state may be required if such assessment or stabilization services are deemed by regulatory agencies to be treatment provided in the state of such individual'sindividual’s residence. The Company believes that any such additional licenses could be obtained.

The laws of some states limit the ability of a business corporation to directly provide, control or exercise excessive influence over healthcare services through the direct employment of physicians, psychiatrists, psychologists, or other healthcare professionals, who are providing direct clinical services. In addition, the laws of some states prohibit physicians, psychiatrists, psychologists, or other healthcare professionals from splitting fees with other persons or entities. These laws and their interpretations vary from state to state and enforcement by the courts and regulatory authorities may vary from state to state and may change over time. The Company believes that its operations as currently conducted are in compliance with the applicable laws. However, thereThere can be no assurance that the Company'sCompany’s existing operations and its contractual arrangements with physicians, psychiatrists, psychologists and other healthcare professionals will not be successfully challenged under state laws prohibiting fee splitting or the practice of a profession by an unlicensed entity, or that the enforceability of such contractual arrangements will not be limited. The Company believes that it could, if necessary, restructure its operations to comply with changes in the interpretation or enforcement of such laws and regulations, and that such restructuring would not have a material adverse effect on its operations.

The Company has a group practice providing case management services to certain customers. The clinicians in the practice are licensed where they are practicing.

Employee Retirement Income Security Act ("ERISA"(“ERISA”)

Certain of the Company'sCompany’s services are subject to the provisions of ERISA. ERISA governs certain aspects of the relationship between employer-sponsoredemployer‑sponsored healthcare benefit plans and certain providers of services to such plans through a series of complex laws and regulations that are subject to periodic interpretation by the Internal Revenue Service ("IRS"(“IRS”) and the U.S. Department of Labor ("DOL"(“DOL”). In


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some circumstances, and under certain customer contracts, the Company may be expressly named as a "fiduciary"“fiduciary” under ERISA, or be deemed to have assumed duties that make it an ERISA fiduciary, and thus be required to carry out its operations in a manner that complies with ERISA in all material respects. In other circumstances, particularly in the administration of pharmacy benefits, the Company does not believe that its services are subject to the fiduciary obligations and requirements of ERISA. In addition, the DOL has not yet finalized guidance regarding whether discounts and other forms of remuneration from pharmaceutical manufacturers are required to be reported to ERISA-governedERISA‑governed plans in connection with ERISA reporting requirements.

Numerous states require the licensing or certification of entities performing utilization review, TPA and PBM activities; however, certain federal courts have held that such licensing requirements are preempted by ERISA. ERISA preempts state laws that mandate employee benefit structures or their administration, as well as those that provide alternative enforcement mechanisms. The Company believes that its TPA activities performed for its self-insuredself‑insured employee benefit plan customers are exempt from otherwise applicable state licensing or registration requirements based upon federal preemption under ERISA and have relied on this general principle in determining not to seek licenses for certain of the Company'sCompany’s activities in some states. Existing case law is not uniform on the applicability of ERISA preemption with respect to state regulation of utilization reviewPBM or TPA activities. In some states, the Company has licensed its self-fundedself‑funded pharmacy related business as a TPA or PBM after a review of state regulatory requirements and case law. There can be no assurance that additional licenses will not be required with respect to utilization review or TPA activities in certain states.

Some of the state regulatory requirements described herein may be preempted in whole or in part by ERISA, which provides for comprehensive federal regulation of employee benefit plans. However, the scope of ERISA preemption is uncertain and is subject to conflicting court rulings. As a result, the Company could be subject to overlapping federal and state regulatory requirements with respect to certain of its operations and may need to implement compliance programs that satisfy multiple regulatory regimes. The Company believes that it is in compliance with ERISA and that such compliance does not currently have a material adverse effect on its operations. However, thereThere can be no assurance that continuing ERISA compliance efforts or any future changes to ERISA will not have a material adverse effect on the Company.

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"(“HIPAA”) and Other Privacy Regulation

HIPAA requires the Secretary of the Department of Health and Human Services ("HHS") to adoptpromulgated standards relating to the transmission, privacy and security of health information by healthcare providers and healthcare plans. Confidentiality and patient privacy requirements are particularly strict in the Company'sCompany’s behavioral managed care business. Oversight responsibilities for HIPAA compliance are handled by the Company's Corporate Compliance Department. The Company believes it is currently in compliance with the provisions of HIPAA.

The Health Information Technology for Economic and Clinical Health Act ("(“HITECH Act"Act”), passed as part of the American Recovery and Reinvestment Act of 2009, representsrepresented a significant expansion of the HIPAA privacy and security laws. The HITECH Act provisions contain multiple effective dates. The Company believes it is currently in compliance with those provisions of the HITECH Act and associated regulations that are currently in effect including the January 2013 "Modifications to the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules under the Health Information Technology for Economic and Clinical Health Act" Rule, and will be in compliance with those portions of the law and regulations that become effective in the future. The Company believes that it can comply with future changes in these laws and regulations; however, there can be no assurance that compliance with such future laws and regulations would not have a material adverse effect on its operations.


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        The privacy regulation under HIPAA generally does not preempt state law except under the following limited circumstances: (i) the privacy rights afforded under state law are contrary to those provided by HIPAA so that compliance with both standards is not possible and (ii) HIPAA's privacy protections are more stringent than the state law in question. Becauselaw. Therefore, because many states have privacy laws that either provide more stringent privacy protections than those imposed by HIPAA, or laws that can be followed in addition to HIPAA, the Company must address privacy issues under HIPAA and state law as well. The Company believes it is in compliance with all applicablethose state laws governing privacy and security.as well.

In addition to HIPAA and the HITECH Act, the Company is also subject to federal laws and regulations governing patient records involving substance abuse treatment, as well as other federal privacy laws and regulations. The Company believes

There can be no assurance that it is currently in compliance with these applicablesuch future laws and regulations.regulations would not have a material adverse effect on its operations.

Fraud, Waste and Abuse Laws

The Company is subject to federal and state laws and regulations protecting against fraud, waste and abuse. Fraud, waste and abuse prohibitions cover a wide range of activities, including kickbacks and other inducements for referral of members or the coverage of products, billing for unnecessary services by a healthcare provider and improper marketing. Companies involved in public health carehealthcare programs such as Medicare and Medicaid are required to maintain compliance programs to detect and deter fraud, waste and abuse, and are often subject to audits. The regulations and contractual requirements applicable to the Company in relation to these programs are complex and subject to change.

The federal healthcare Anti-KickbackAnti‑Kickback Statute (the "Anti-Kickback Statute"“Anti‑Kickback Statute”) prohibits, among other things, an entity from paying or receiving, subject to certain exceptions and "safe“safe harbors," any remuneration, directly or indirectly, to induce the referral of individuals covered by federally funded healthcare programs, or the purchase, or the arranging for or recommending of the purchase, of items or services for which payment may be made in whole, or in part, under Medicare, Medicaid, TRICARE or other federally funded healthcare programs. Sanctions for violating the Anti-KickbackAnti‑Kickback Statute may include imprisonment, criminal and civil fines and exclusion from participation in the federally funded healthcare programs. The Anti-KickbackAnti‑Kickback Statute has been interpreted broadly by courts, the Office of Inspector General ("OIG"(“OIG”) within, the U.S. Department of Health and Human Services ("DHHS"(“DHHS”), and other administrative bodies.

It also is a crime under the Public Contracts Anti-KickbackAnti‑Kickback Statute, for any person to knowingly and willfully offer or provide any remuneration to a prime contractor to the United States, including a contractor servicing federally funded health programs, in order to obtain favorable treatment in a subcontract. Violators of this law also may be subject to civil monetary penalties. There have been a series of substantial civil and criminal investigations and settlements, at the state and federal level, by pharmacy benefit managers over the last several years in connection with alleged kickback schemes.

The federal civil monetary penalty ("CMP"(“CMP”) statute provides for civil monetary penalties for any person who provides something of value to a beneficiary covered under a federal health carehealthcare program, such as Medicare or Medicaid, in order to influence the beneficiary'sbeneficiary’s choice of a provider. For example, our HMO and specialty pharmacy business are subject to the CMP statute.

ERISA, to which certain of our customers'customers’ services are subject, generally prohibits any person from providing to a plan fiduciary a remuneration in order to affect the fiduciary'sfiduciary’s selection of or decisions with respect to service providers. Unlike the federal healthcare Anti-KickbackAnti‑Kickback Statute, ERISA regulations do not provide specific safe harbors and its application may be unclear.


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The Federal Civil False Claims Act imposes civil penalties for knowingly making or causing to be made false claims with respect to governmental programs, such as Medicare and Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. Private individuals may bringqui tam or whistleblower suits against providers under the Federal Civil False Claims Act, which authorizes the payment of a portion of any recovery to the individual bringing suit. Further, pursuant to the Patient Protection and Affordable Care Act ("ACA"(“ACA”), a violation of the Anti-KickbackAnti‑Kickback Statute is also a per se violation of the Federal Civil False Claims Act. The Federal Civil False Claims Act generally provides for the imposition of civil penalties and for treble damages, resulting in the possibility of substantial financial penalties for small billing errors.discrepancies. Criminal provisions that are similar to the Federal Civil False Claims Act provide that a corporation may be fined if it is convicted of presenting to any federal agency a claim or making a statement that it knows to be false, fictitious or fraudulent. Even in situations where the Company does not directly provide services to beneficiaries of federally funded health programs and, accordingly, does not directly submit claims to the federal government, it is possible that the Company could nevertheless become involved in a situation where false claim issues are raised based on allegations that it caused or assisted a government contractor in making a false claim.

The Company is subject to certain provisions of the Deficit Reduction Act of 2005 (the "Act"“Act”). The Act requires entities that receive $5 million or more in annual Medicaid payments to establish written policies that provide detailed information about the Federal Civil False Claims Act and the remedies thereunder, as well as any state laws pertaining to civil or criminal penalties for false claims and statements, the "whistleblower"“whistleblower” protections afforded under such laws, and the role of such laws in preventing and detecting fraud, waste and abuse. The written policies areCompany is also subject to be disseminated to all employees, contractors and agents which or who, on behalf of the entity, furnishes, or otherwise authorizes the furnishing of, Medicaid healthcare items or services, performs billing or coding functions, or is involved in the monitoring of healthcare provided by the entity. In addition, any such entity that has an employee handbook must include a specific discussion of the federal and state false claims laws, the rights of an employee to be protected as a whistleblower and the entity's policies and procedures for detecting and preventing fraud, waste, and abuse.

        On July 21, 2010, the President of the United States signed into lawThe Dodd-FrankDodd‑Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"(“Dodd‑Frank”). Under the law, those with independent knowledge of a financial fraud committed by a business required to report to the U.S. Securities and Exchange Commission ("SEC"(“SEC”) or the U.S. Commodity Futures Trading Commission ("CFTC"(“CFTC”) may be entitled to a percentage of the money recovered. Included in Dodd-FrankDodd‑Frank are provisions which protect employees of publicly traded companies from retaliation for reporting securities fraud, fraud against shareholders and violation of the SEC rules/regulations. Dodd-FrankDodd‑Frank also amends the Sarbanes-OxleySarbanes‑Oxley Act ("SOX"(“SOX”) and Federal Civil False Claims Act to expand their whistleblower protections. On May 25, 2011, the SEC adopted final rules (the "Rules") for the expanded whistleblower program established by Dodd-Frank. The Company believes it is in compliance with these Rules.

Many states have laws and/or regulations similar to the federal fraud, waste and abuse laws described above. Sanctions for violating these laws may include injunction, imprisonment, criminal and civil fines and exclusion from participation in the state Medicaid programs. The Company believeshas a corporate compliance and ethics program, policies and procedures and internal controls in place designed to ensure that it is in substantial compliance with the legal requirements imposed by such laws and regulations.Company conducts business appropriately. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under such laws or regulations and that any such challenge would not have a material adverse effect on the Company'sCompany’s business, results of operations, financial condition or cash flows.

        The Company has a corporate compliance and ethics program, policies and procedures and internal controls in place designed to ensure that the Company conducts business appropriately, and the Company believes it is in substantial compliance with the legal requirements imposed by all of these laws and regulations. However, there can be no assurance that the Company will not be subject


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to scrutiny or challenge under such laws or regulations and that any such challenge would not have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.

Mental Health Parity

        In October 2008, the United States Congress passed theThe Paul Wellstone and Pete Domenici Mental Health Parity Act of 2008 ("MHPAEA"(“MHPAEA”) establishingestablishes parity in financial requirements (e.g. co-pays,, co‑pays, deductibles, etc.) and treatment limitations (e.g., limits on the number of visits) between mental health and substance abuse benefits and medical/surgical benefits for health plan members. This law does not require coverage for mental health or substance abuse disorders, but if coverage is provided it must be provided at parity. No specific disorders are mandated for coverage; health plans are able to define mental health and substance abuse to determine what they are going to cover. Under the ACA, non-grandfatherednon‑grandfathered individual and small group plans (both on and off of the Health Insurance Exchange) are required to provide mental health and substance useabuse disorder benefits as essential health benefits. These mandated benefits under the ACA must be provided at parity in these plans. Under the ACA, grandfathered individual plans are required to comply with parity if they offer behavioral health benefits. Grandfathered small group plans are exempt from requirements to provide essential health benefits and parity requirements. State mandated benefits laws are not preempted. The law applies to ERISA plans, Medicaid managed care plans and State Children'sChildren’s Health Insurance Program ("SCHIP"(“SCHIP”) plans. On February 2, 2010, the Department of the Treasury, the Department of Labor and the Department of Health and Human Services issued Interim Final Rules interpreting the MHPAEA ("IFR"). The IFR applies to ERISA plans and insured business. A State Medicaid Director Letter was issued in January 2013 discussing applicability of parity to Medicaid managed care plans, SCHIP plans and Alternative Benefit (Benchmark) Plans. It is possible that some states will change their behavioral health plan benefits or management techniques as a result of this letter. On November 13, 2013 the Department of the Treasury, the Department of Labor and the Department of Health and Human Services issued Final Rules on the MHPAEA.MHPAEA (“Final Rules”). The Health Insurance Exchange regulations provide that plans offered on the exchange must offer behavioral health benefits that are compliant with federal parity law. The IFR includedFinal Rules include some concepts not included under the statute including the requirement to conduct the parity review at the category level within the plan, introducing the concept of non-quantitativenon‑quantitative treatment limitations, and prohibiting separate but equal deductibles. The Final Rules affirmed the content of the IFR with a few changes and some additional clarifications on the regulator's intent. The Company believes it is in compliance with these requirements.  In March 2016, CMS promulgated a final rule on the requirementsapplication of parity to Medicaid Managed Care Plans, CHIP, and alternative benefit plans. Compliance with this rule was required on or after October 2, 2017.  The Company has been working with our state Medicaid customers on compliance with these rules.  On December 7, 2016, the IFR andCongress adopted the Twenty-First Century Cures Act, which codified some concepts in the Final Rules. The Company anticipates that a parity regulation relating to Managed Medicaid business will be released in 2015. The Company'sCompany’s risk contracts do allow for repricing to occur effective the same date that any legislation/regulation becomes effective if that legislation/regulation is projected to have a material effect on cost of care.

Health Care Reform

The ACA is a broad and sweeping piece of legislation creating numerous changes in the healthcare regulatory environment. To date, numerous regulations implementing provisionsSome of the regulations interpreting the ACA, have been released in addition to many requests for information, frequently asked questions and other informational notices. Some of these regulations, most notably the Medical Loss Ratio regulations, the Internal Claims and Appeals and External Review Processes Regulations, and Health Insurance Exchanges have an impact on the Company and its business. Others, such as the regulation on dependent coverage to age 26 and coverage of preventative health services, could impact the nature of the members that we serve and the utilization rates. Medicaid expansion under the ACA has had some impact on the Company'sCompany’s Medicaid business. The Company has behavioral health and radiology customers that are participating in the state and federal Health Insurance Exchanges. The Company has taken necessary steps to support our customers in their administration of these new plans. The


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Supreme Court will decide the issue of continuing to allow premium tax credits for enrollees in the states that have federally facilitated exchanges. If these credits are no longer permitted in the federally facilitated exchanges it will impact customers of the Company that are participating in these exchanges and the Company as a vendor to these plans.

The ACA also contains provisions related to fees that impact the Company'sCompany’s direct public sector contracts and provisions regarding the non-deductibilitynon‑deductibility of those fees. Our state public sector customers have made rate adjustments to cover the direct costs of these fees and a majority of the impact from non-deductibilitynon‑deductibility of such fees for federal income tax purposes. There may be some impact due to taxes paid for non-renewingnon‑renewing customers where the timing and amount of recoupment of these additional costs is uncertain. There can be no guarantees regarding this adjustment from our state public sector customers and these taxes and fees may have a material impact on the Company.

Federal and State Medicaid Laws and Regulations

The Company directly contracts with various states to provide Medicaid services to states. In addition, the Company directly contracts with various states to provide Medicaid managed care services to state Medicaid beneficiaries. As such, it is subject to certain federal and state laws and regulations affecting Medicaid as well as state contractual requirements. TheIn addition to state regulation, certain Medicaid contracts require the Company believes itto maintain Medicare Advantage special needs plan status, which is in compliance with these laws, regulations, and contractual requirements.regulated by CMS.

The Company also is a sub-contractorsub‑contractor to health plans that provide Medicaid managed care services to state Medicaid beneficiaries. In the Company'sCompany’s capacity as a subcontractor with these health plans, the Company is indirectly subject to certain federal and state laws and regulations as well as contractual requirements pertaining to the operation of this business. If a state or a health plan customer determines that the Company has not performed satisfactorily as a subcontractor, the state or the health plan customer may require the Company to cease these activities or responsibilities under the subcontract. While the Company believes that it provides satisfactory levels of service under its respective subcontracts, the Company can give no assurances that a state or health plan will not terminate the Company'sCompany’s business relationships insofar as they pertain to these services.

On May 6, 2016, CMS published final regulations that significantly modified the existing federal Medicaid Managed Care and the SCHIP regulations. On June 30, 2017, CMS issued an Informational Bulletin regarding the applicable effective/compliance dates for the new Medicaid Managed Care and the SCHIP regulations. Magellan is working respectively with state Medicaid agencies and Medicaid Managed Care Plans (our Medicaid customers) to ensure ongoing compliance with those sections of the regulations that are specified as effective based on the determination made by the applicable state Medicaid agency.

In connection with its specialty pharmacyPBM business, the Company negotiates rebates with and provides services for drug manufacturers. The manufacturers which are subject to Medicaid "best price"“best price” regulations requiring essentially that the manufacturer provide its deepest level of discounts to the Medicaid program. In some instances, the government has challenged a manufacturer'smanufacturer’s calculation of best price and we cannot be certain what effect, if any, the outcome of any such investigation or proceeding will have on our ability to negotiate favorable terms.

Medicare Laws and Regulations

The Company is contracted with the CMS as a Medicare Advantage Organization (“MAO”) and Prescription Drug Plan (“PDP”) to provide health services and prescription drug benefits to Medicare beneficiaries. The regulations and contractual requirements applicable to the Company and other participants in Medicare programs are complex and subject to change. CMS regularly audits its contractors'contractors’ performance to determine compliance with contracts and CMS regulations, and to assess the quality of services provided to Medicare beneficiaries. The Company believes it substantially complies with all applicable federal laws, regulations and contractual requirements. However, CMS penalties for non-compliancenoncompliance include premium refunds, civil monetary penalties, prohibiting a company from continuing to market and/or enroll members in the company'scompany’s Medicare product,products, exclusion forfrom participation in federally funded healthcare programs and other sanctions.

In July 2017 CMS issued a civil monetary penalty against one of the Company’s subsidiaries for non-compliance with a contractual standard outlined in its Part D contract. In February 2018 CMS issued civil monetary penalties against this subsidiary for deficiencies cited as a result of CMS audits conducted in the 2nd and 3rd quarters of 2017. These penalties do not have a material impact on the Company nor its Part D business. The Company is also subcontractor to health plans that are Medicare Advantage OrganizationsMAOs and Medicare Prescription Drug Plans ("PDP") and provide benefits to Medicare beneficiaries.PDPs. In the Company'sCompany’s capacity as a subcontractor with these health plans, the Company administers benefits to Medicare beneficiaries and is indirectly subject to


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certain federal laws and regulations as well as contractual requirements pertaining to the operation of this business. If the CMS or a health plan customer determines that the Company has not performed satisfactorily as a subcontractor, CMS or the health plan customer may require the Company to cease these activities or responsibilities under the subcontract. While the Company believes that it provides satisfactory levels of service under its respective subcontracts, the Company can give no assurances that CMS or a health plan will not terminate the Company'sCompany’s business relationships insofar as they pertain to these services.

 The Company was approved by CMS to operate a Medicare PDP with respect to employer/union groups, beginning January 1, 2015. The Company has also applied to CMS to operate a PDP and offer Medicare Part D benefits to individual eligible beneficiaries in various CMS Regions. CMS has issued significant interpretive regulations and guidance regarding PDPs to which the Company is directly subject. If CMS determines that the Company has not performed satisfactorily, CMS may require the Company to cease its Part D activities or responsibilities under the contract. The Company can give no assurance as to whether its application will be approved. However, the Company believes that it will be in compliance with these requirements if approval is obtained and business operations commence.

        Moreover, in relation to its pharmaceutical management business, the Company contracts with PDPs and MA-PD plans (collectively, "Part D Plans") to provide various services. In the Company's capacity as a subcontractor with certain Part D Plan clients, the Company is subject to certain federal rules, regulations, and sub-regulatory guidance pertaining to the operation of Medicare Part D. If CMS or a Part D Plan determines that the Company has not performed satisfactorily as a subcontractor, CMS or the Part D Plan may require the Company to cease its Part D activities or responsibilities under the subcontract. While the Company believes that it provides satisfactory levels of service under its respective subcontracts, the Company can give no assurances that CMS or a Part D Plan will not terminate the Company's business relationships insofar as they pertain to Medicare Part D.

CMS requires Part D Plans to report all price concessions received for PBM services. The applicable CMS guidance requires Part D Plans to contractually require the right to audit their PBMs as well as require full transparency as to manufacturer rebates and administrative fees paid for drugs or services provided in connection with the sponsor'ssponsor’s plan, including the portion of such rebates retained by the PBM. Additionally, CMS requires Part D Plans to ensure through their contractual arrangements with first tier, downstream and related entities (which would include PBMs) that CMS has access to such entities'entities’ books and records pertaining to services performed in connection with Part D Plans. The CMS regulations also suggests that Part D Plans should contractually require their first tier, downstream and related entities to comply with certain elements of the Part D Plan'sPlan’s compliance program. The Company has not experienced, and does not anticipate, that such disclosure and auditing requirements, to the extent required by its Part D Plan partners, will have a materially adverse effect on the Company'sCompany’s business.

The Company expects CMS and the U.S. Congress to continue to closely scrutinize each component of the Medicare program, modify the terms and requirements of the program and possibly seek to limitmodify private insurers'insurers’ role. Therefore, it is not possible to predict the outcome of any Congressional or regulatory activity, either of which could have a material adverse effect on the Company.

Other Federal and State Laws and Regulations

Federal Laws and Regulations affecting Procurement.  The Company is subject to certain federal laws and regulations in connection with its contracts with the federal government. These laws and regulations affect how the Company conducts business with its federal agency customers and may impose added costs on its business. The Company'sCompany’s failure to comply with federal procurement laws and regulations could cause it to lose business, incur additional costs and subject it to a variety of civil


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and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to reputation, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. The Company’s wholly owned subsidiary, AFSC, conducts business with federal agency customers and federal contractors to such agencies. The Company believes that it is currently in the process of conducting an investigation into matters relating to compliance by AFSC with all applicable laws andSmall Business Administration (“SBA”) regulations and other federal laws applicable to government contractors, and the Company intends to make its findings available to the SBA during and upon concluding the investigation. The results of this investigation may give rise to contingencies, if any, that such compliance doescould require us to record balance sheet liabilities or accrue expenses, the amounts of which we are not able to currently have a material adverse effect on its operations.estimate. For 2017 AFSC’s total revenue comprised approximately 3% of the total revenues of the Company.

 

The Company also provides services to various state Medicaid programs. Services procurement related to Medicaid programs is governed in part by federal regulations because the federal government provides a substantial amount of funding for the services. The Company'sCompany’s state customers risk loss of federal funding if the Company is not in compliance with federal regulations. The Company's non-complianceCompany’s non‑compliance may also lead to unanticipated, negative financial consequences including corrective action plans or contract default risks. The Company believes the Company is in substantial compliance with various federal regulations and in compliance with contract provisions relating to the services provided by a commercial organization

        Federal PBM Transparency Laws.    Pursuant to the ACA, companies may participate in state and federally run health insurance exchanges. The Company has contracted to provide services to certain health insurance exchange products offered by insurers and may be subject to certain financial transparency and disclosure requirements. The ACA mandates that pharmacy benefit managers provide financial transparency and reporting in connection with Medicare Part D plans, as well as plans offered through exchanges. In the event that the Company is determined to be subject to these requirements, the Company does not anticipate that such requirements will have a materially adverse effect on the Company's business.

FDA Regulation.  The U.S. Food and Drug Administration ("FDA"(“FDA”) generally has authority to regulate drug promotional activities that are performed "by“by or on behalf of"of” a drug manufacturer. The Company's business includes the provision of educational seminars for prescribersCompany provides certain consulting and other of the Company's customers on behalf of manufacturer clientsrelated services to drug manufacturers and thus may be subject to the federal laws applicable to the promotion of prescription drugs. Therethere can be no assurance that the FDA will not attempt to assert jurisdiction over certain aspects of the Company's pharmaceutical management business in the future and, although the Company is not controlled directly or indirectly by any drug manufacturer, theCompany’s activities. The impact of future FDA regulation could materially adversely affect the Company's pharmaceutical managementCompany’s business, results of operations, financial condition or cash flows.

State PBM Regulation.  States continue to introduce broad legislation to regulate PBM activities. This legislation encompasses some of the productsservices offered by the pharmaceutical management business of the Company.Company’s PBM business. Legislation in this area is varied and encompasses licensing, audit provision,provisions, network access, recoupment of funds, submission of claims data to state all payor claims databases, potential fiduciary duties;duties, pass through of cost savings and disclosure obligations. The Districtobligations, including the disclosure of Columbia has enacted a statute designed to impose certain fiduciary obligations on entities providing PBM services, although a federal appeals court has heldinformation regarding the law to be pre-empted by ERISA. Maryland has also implemented comprehensive PBM registration and examination legislation. Other states require PBMs to registercompany’s maximum allowable cost pricing with the state or be licensed. The Company has obtained these licenses as necessary to support current business and future opportunities. Furthermore, numerous states subject PBMs to audit provisions and generally require certain financial disclosures.pharmacies. In some circumstances, claims or inquiries against PBMs have been asserted under state consumer protection laws, which exist in most states. The Company has obtained licenses as necessary to support current business and future opportunities. The various state laws do not appear to be havinghave a material adverse effect on the Company'sCompany’s pharmaceutical management business. However, the Company can give no assurance that these and other states will not enact legislation with more adverse consequences in the near future; nor can the Company be certain that future regulations or interpretations of existing laws will not adversely affect its business.

State Legislation Affecting Plan or Benefit Design.  Some states have enacted legislation that prohibits certain types of managed care plan sponsors from implementing certain restrictive formulary


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and network design features, and many states have legislation regulating various aspects of managed care plans, including provisions relating to pharmacy benefits. Other states mandate coverage of certain benefits or conditions and require health plan coverage of specific drugs, if deemed medically necessary by the prescribing physician. Such legislation does not generally apply to the Company directly, but may apply to certain clients of the Company, such as HMOs and health insurers. These types of laws would generally have an adverse effect on the ability of a PBM to reduce cost for its plan sponsor customers.

Prompt Pay Laws.  Under Medicare Part D and some state laws, the Company or customer may be required to pay network pharmacies within certain time periods and/or by electronic transfer instead of by check. The shorter time periods may negatively impact our cash flow. We cannot predict whether additional states will enact some form of prompt pay legislation.

Legislation and Regulation Affecting Drug Prices.  Specialty pharmaceutical manufacturers generally report various price metrics to the federal government, including "average“average sales price" ("ASP"price” (“ASP”), "average“average manufacturer price" ("AMP"price” (“AMP”) and "best price" ("BP"“best price” (“BP”). The Company does not calculate these price metrics, but the Company notes that the ASP, AMP and BP methodologies may create incentives for some drug manufacturers to reduce the levels of discounts or rebates available to purchasers, including the Company, or their clients with respect to specialty drugs. Any changes in the guidance affecting pharmaceutical manufacturer price metric calculations could materially adversely affect the Company'sCompany’s business.

Additionally, most of the Company'sCompany’s pharmacy benefit management and dispensing contracts with its customers use "average“average wholesale price" ("AWP"price” (“AWP”) as a benchmark for establishing pricing. At least one major third party publisher of AWP pricing data has ceased to publish such data in the past few years, and there can be no guarantee that AWP will continue to be an available pricing metric in the future. The discontinuance of AWP reporting by one data source has not had a material adverse affecteffect on the Company'sCompany’s results of operations and the Company expects that were AWP data to no longer be available, other equitable pricing measures would be available to avoid a material adverse impact on the Company'sCompany’s business. Separately, on a monthly basis CMS and several states have taken an interest in attemptingpublishes the National Average Drug Acquisition Cost (“NADAC”), a data set that purports to determineprovide the "actualaverage acquisition costs"cost of pharmacies. In 2012, CMS began conducting surveys and releasing preliminary dataretail drugs based on pharmacy acquisition costs.a nationwide voluntary survey of retail pharmacies. At this time, the Company does not anticipate that actual acquisition cost surveys or pricing shouldNADAC will materially adversely impact its operations, but it is too early to speculate what impact, if any, such a reimbursement shift might have in pharmacy reimbursement and/or costs in the future.

Regulations Affecting the Company'sCompany’s Pharmacies.  The Company owns twofive pharmacies that provide services primarily to members of certain of the Company'sCompany’s health plan customers. The activities undertaken by the Company'sCompany’s pharmacies subject the pharmacies to state and federal statutes and regulations governing, among other things, the licensure and operation of mail order and non-residentnonresident pharmacies, repackaging of drug products, stocking of prescription drug products and dispensing of prescription drug products, including controlled substances. The Company'sCompany’s pharmacy facilities are located in Florida, Utah and New York and are duly licensed to conduct business in those states. Many states, however, require out-of-stateout‑of‑state mail order pharmacies to register with or be licensed by the state board of pharmacy or similar governing body when pharmaceuticals are delivered by mail into the state, and some states require that an out-of-stateout‑of‑state pharmacy employ a pharmacist that is licensed in the state into which pharmaceuticals are shipped. The Company holds mail order and non-residentnonresident pharmacy licenses where required. The Company also maintains Medicare and Medicaid provider licenses where required for the pharmacies to provide services to these plans. In some states the Company is not able to obtain Medicaid licenses to dispense because those states require that the pharmacy have a physical location in the state to participate in the Medicaid network.

Regulation of Controlled Substances.  The Company'sCompany’s pharmacies must register with the United States Drug Enforcement Administration (the "DEA"“DEA”) and individual state controlled substance authorities in order to dispense controlled substances. Federal law requires the Company to comply with the DEA'sDEA’s security, recordkeeping, inventory control and labeling standards in order to dispense


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controlled substances. State controlled substance law requires registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state pharmacy licensing authority.authority and in some states drug database reporting requirements.

Employees of the Registrant

At December 31, 2014,2017, the Company had approximately 6,600 full-time10,700 full‑time and part-time employees. The Company believes it has satisfactory relations with itspart‑time employees.

History

        Magellan was incorporated in 1969 under the laws of the State of Delaware. The Company is engaged in the healthcare management business. Through 2005, the Company predominantly operated in the managed behavioral healthcare business. As a result of certain acquisitions and material growth since 2005, the Company expanded into integrated healthcare management for special populations, specialty solutions and pharmacy management.Available Information

Available Information

The Company makes its annual reports on Form 10-K,10‑K, quarterly reports on Form 10-Q,10‑Q, current reports on Form 8-K,8‑K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and Section 16 filings available, free of charge, on the Company'sCompany’s website atwww.magellanhealth.com as soon as practicable after the Company has electronically filed such material with, or furnished it to, the SEC. The information on the Company'sCompany’s website is not part of or incorporated by reference in this report on Form 10-K.


10‑K.

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Item 1A.  Risk Factors

Reliance on Customer Contracts—The Company'sCompany’s inability to renew, extend or replace expiring or terminated contracts could adversely affect the Company'sCompany’s liquidity, profitability and financial condition.

Substantially all of the Company'sCompany’s net revenue is derived from contracts that may be terminated immediately with cause and many, including some of the Company'sCompany’s most significant contracts, are terminable without cause by the customer upon notice and the passage of a specified period of time (typically between 60 and 180 days), or upon the occurrence of certain other specified events. The Company'sCompany’s ten largest customers accounted for 65.0approximately 50.0 percent, 63.143.9 percent and 52.240.3 percent of the Company'sCompany’s net revenue in the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. Loss of all of these contracts or customers would, and loss of any one of these contracts or customers could, materially reduce the Company'sCompany’s net revenue and have a material adverse effect on the Company'sCompany’s liquidity, profitability and financial condition.

See Note 2—“Summary of Significant Customers

        Through March 31, 2014, the Company provided behavioral healthcare management and other related services to approximately 680,000 members pursuantAccounting Policies—Significant Customers” to the Maricopa Contract. The Maricopa Contract wasconsolidated financial statements set forth elsewhere herein for the managementa discussion of the publicly funded behavioral health system that delivered mental health, substance abuse and crisis services for adults, youth, and children. The Maricopa Contract terminated on March 31, 2014. The Maricopa Contract generated net revenues of $758.3 million, $755.0 million and $216.6 million for the years ended December 31, 2012, 2013 and 2014, respectively.Company’s significant customers.

        The Iowa Contracts generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the years ended December 31, 2014. The Company currently has two contracts; the Iowa Medicaid Contract and Iowa Medicaid Integrated Health Home Provider Agreement ("IHH Agreement"). Under the Iowa Medicaid Contract, the Company is responsible for providing managed mental health and substance abuse treatment to enrollees under a Medicaid 1915(b) waiver, as well as substance abuse treatment services plan funded by federal block grant and state appropriations under the authority of the Iowa Department of Public Health. The Iowa Health and Wellness Plan for members who qualify as an "exempt individual", as defined in 441 of the Iowa Administrative Code, were also added to the contract on January 1, 2014. The latest Iowa Medicaid Contract began on January 1, 2010 and extends through June 30, 2015 unless sooner terminated by the parties. The Iowa Department of Human Services and the Iowa Department of Public Health has the right to terminate the Iowa Medicaid Contract upon thirty days notice for any reason or no reason at all. We expect that the Iowa Medicaid Contract will be extended to coincide with the start date of new Iowa High Quality Healthcare Initiative, as discussed below, however there can be no assurance that the Iowa Medicaid Contract will be extended. Under the IHH Agreement, the Company establishes a health home for individuals identified with serious and persistent mental illness through enrolled provider organizations capable of providing enhanced care. The IHH Agreement began on July 1, 2013 and extends through June 30, 2016 unless sooner terminated by either party with 60 days notice for any reason or no reason at all. The IHH program is part of the new Iowa High Quality Healthcare Initiative and we expect that the end of the IHH agreement will coincide with the start date of the new initiative. The Iowa Contracts generated net revenues of $240.2 million, $321.1 million and $465.0 million for the years ended December 31, 2012, 2013 and 2014, respectively.

        On February 16, 2015 the Iowa Department of Human Services (the "Agency") released the Iowa High Quality Healthcare Initiative Request for Proposal ("RFP"). The Agency intends to contract on a statewide basis with two to four successful bidders with a demonstrated capacity to coordinate care and provide quality outcomes for the Medicaid and Children's Health Insurance Program ("CHIP")


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populations. The program will enroll the majority of the Iowa Medicaid and CHIP populations and will also provide services for individuals qualifying for Iowa Department of Public Health ("IDPH") funded substance abuse services. The anticipated start of the contract is January 1, 2016 for an initial period of three years and the ability for the Agency to extend the contract for two additional two year terms. The RFP includes the services provided by the Company's current Iowa Contracts. The Company intends to submit a proposal on this RFP. There can be no assurance that the Company will be awarded a contract pursuant to the RFP, or that the terms of any contract awarded pursuant to the RFP will be similar to the current Iowa Contracts.

        In addition to the Maricopa Contract and the Iowa Contracts previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the years ended December 31, 2012, 2013 and 2014 (in thousands):

Segment
 Term Date 2012 2013 2014 

Commercial

            

Customer A

 June 30, 2014(1) $192,415 $207,080 $110,153 

Customer B

 December 31, 2019  134,885  141,444  184,981 

Customer C

 August 14, 2017  12,722* 70,390* 107,247 

Customer D

 December 14, 2013(1)  118,351  74,203*  

Customer E

 December 31, 2017  67,959* 71,085* 67,426 

Public Sector

            

Customer F

 December 31, 2018(2)  133,864* 128,607* 253,661 

Specialty Solutions

            

Customer G

 December 31, 2017(3)  117,739  130,895  146,930 

Customer H

 June 30, 2016(4)  60,094  55,078  33,492*

Customer I

 June 30, 2017  57,455  61,838  76,580 

Customer A

 November 30, 2016  1,339* 6,399* 54,413 

Customer J

 January 31, 2016  38,366  47,311  52,310 

Pharmacy Management

            

Customer K

 April 4, 2015 to December 31, 2015(5)  129,209  133,724  123,812 

Customer L

 December 31, 2013(6)  60,350  59,125* 14,312*

Customer E

 December 31, 2013(6)  73,785  92,647  2,612*

Customer M

 March 31, 2014(1)(7)  69,090  66,153* 18,055*

Customer N

 December 16, 2016      171,936 

*
Revenue amount did not exceed ten percent of net revenues for the respective segment for the year presented. Amount is shown for comparative purposes only.

(1)
The contract has terminated.

(2)
The Company had behavioral healthcare contracts with various areas in the State of Florida (the "Florida Areas") which were part of the Florida Medicaid program. The State of Florida implemented a new system of mandated managed care through which Medicaid enrollees will receive integrated healthcare services, and has phased out the behavioral healthcare programs under which the Florida Areas' contracts operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program.

(3)
On December 31, 2014, this contract was amended and extended through December 31, 2017. Historically the Company provided services on a risk basis. Under the amended contract, the funding arrangement will be a combination of risk and ASO based services.

(4)
The contract transitioned from risk to ASO based services effective July 1, 2014.

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(5)
The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(6)
The contract has terminated, however, the Company continues to provide services as the contract is transitioned to the new vendor.

(7)
This customer represented a subcontract with a Public Sector customer and was eliminated in consolidation.

        The Company also has a significant concentration of business with various counties in the State of Pennsylvania (the "Pennsylvania Counties") which are part of the Pennsylvania Medicaid program. Net revenues from the Pennsylvania Counties in the aggregate totaled $354.1 million, $359.0 million and $369.9 million for the years ended December 31, 2012, 2013 and 2014, respectively.

Integration of Companies Acquired by Magellan—The Company'sCompany’s profitability could be adversely affected if the integration of companies acquired by Magellan is not completed in a timely and effective manner.

One of the Company'sCompany’s growth strategies is to make strategic acquisitions which are complementary to its existing operations. After Magellan closes on an acquisition, it must integrate the acquired company into Magellan'sMagellan’s policies, procedures and systems. Failure to effectively integrate an acquired business or the failure of the acquired business to perform as anticipated could result in excessive costs being incurred, a delay in obtaining targeted synergies, decreased customer performance (which could result in contract penalties and/or terminations), increased employee turnover, and lost sales opportunities. Finally, difficulties assimilating acquired operations and services could result in the diversion of capital and management'smanagement’s attention away from other business issues and opportunities.

Changes in the Medical Managed Care Carve-OutCarve‑Out Industry—Certain changes in the business practices of this industry could negatively impact the Company'sCompany’s resources, profitability and results of operations.

        Substantially allA portion of the Company's Commercial, Specialty SolutionsCompany’s Healthcare and Pharmacy Management segments'segments’ net revenues are derived from customers in the medical managed healthcare industry, including managed care companies, health insurers and other health plans. Some types of changes in this industry'sindustry’s business practices could negatively impact the Company. For example, if the Company'sCompany’s managed care customers seek to provide services directly to their subscribers, instead of contracting with the Company for such services, the Company could be adversely affected. In this regard, certain of the Company'sCompany’s major customers in the past have not renewed all or part of their contracts with the Company, and instead provided managed healthcare services directly to their subscribers. Other of the Company's customers that are managed care companies could also seek to provide services directly to their subscribers, rather than by contracting with the Company for such services. In addition, the Company has a significant number of contracts with Blue Cross Blue Shield plans and other regional health plans. Consolidation of the healthcare industry through acquisitions and mergers could potentially result in the loss of contracts for the Company. Any of these changes could reduce the Company'sCompany’s net revenue, and adversely affect the Company'sCompany’s profitability and financial condition.

Changes in the Contracting Model for Medicaid Contracts—Certain changes in the contracting model used by states for managed healthcare services contracts relating to Medicaid lives could negatively impact the Company'sCompany’s resources, profitability and results of operations.

        Substantially allA portion of the Company's Public SectorCompany’s Healthcare segment net revenue is derived from direct contracts that it has with state or county governments for the provision of services to Medicaid


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enrollees. Certain states have recently contracted with managed care companies to manage both the behavioral and physical medical care of their Medicaid enrollees. If other governmental entities change the method for contracting for Medicaid business to a fully integrated model, the Company will attempt to subcontract with the managed care organizations to provide behavioral healthcare management for such Medicaid business; however, there is no assurance that the Company would be able to secure such arrangements. Alternatively, the Company may choose to pursue licensure as a health plan to bid on this integrated business. Accordingly, if such a change in the contracting model were to occur, it is possible that the Company could lose current contracted revenues, as well as be unable to bid on potential new business opportunities, thus negatively impacting the Company'sCompany’s profitability and financial condition.

Risk-BasedRisk‑Based Products—Because the Company provides services at a fixed fee, if the Company is unable to maintain historical margins, or is unable to accurately predict and control healthcare costs, the Company'sCompany’s profitability could decline.

The Company derives its net revenue primarily from arrangements under which the Company assumes responsibility for costs of treatment in exchange for a fixed fee. The Company refers to such arrangements as "risk-based contracts"“risk‑based contracts” or "risk-based“risk‑based products," which include EAP services. These arrangements provided 78.358.8 percent, 79.449.1 percent and 67.849.6 percent of the Company'sCompany’s net revenue in the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

The profitability of the Company'sCompany’s risk contracts could be reduced if the Company is unable to maintain its historical margins. The competitive environment for the Company'sCompany’s risk products could result in pricing pressures which cause the Company to reduce its rates. In addition, customer demands or expectations as to margin levels could cause the Company to reduce its rates. A reduction in risk rates which are not accompanied by a reduction in services covered or expected underlying care trend could result in a decrease in the Company'sCompany’s operating margins.

Profitability of the Company'sCompany’s risk contracts could also be reduced if the Company is unable to accurately estimate the rate of service utilization by members or the cost of such services when the Company prices its services. The Company'sCompany’s assumptions of utilization and costs when the Company prices its services may not ultimately reflect actual utilization rates and costs, many aspects of which are beyond the Company'sCompany’s control. If the cost of services provided to members under a contract together with the administrative costs exceeds the aggregate fees received by the Company under such contract, the Company will incur a loss on the contract.

The Company'sCompany’s profitability could also be reduced if the Company is required to make adjustments to estimates made in reporting historical financial results regarding cost of care, reflected in the Company'sCompany’s financial statements as medical claims payable. Medical claims payable includes reserves for incurred but not reported ("IBNR"(“IBNR”) claims, which are claims for covered services rendered by the Company'sCompany’s providers which have not yet been submitted to the Company for payment. The Company estimates and reserves for IBNR claims based on past claims payment experience, including the average interval between the date services are rendered and the date the claims are received and between the date services are rendered and the date claims are paid, enrollment data, utilization statistics, adjudication decisions, authorized healthcare services and other factors. This data is incorporated into contract-specificcontract‑specific reserve models. The estimates for submitted claims and IBNR claims are made on an accrual basis and adjusted in future periods as required. If such risk-basedrisk‑based products are not correctly underwritten, the Company'sCompany’s profitability and financial condition could be adversely affected.


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Factors that affect the Company'sCompany’s ability to price the Company'sCompany’s services, or accurately make estimates of IBNR claims and other expenses for which the Company creates reserves may include differences between the Company'sCompany’s assumptions and actual results arising from, among other things:

·

changes in the delivery system;

·

changes in utilization patterns;

·

changes in the number of members seeking treatment;

·

unforeseen fluctuations in claims backlogs;

·

unforeseen increases in the costs of the services;

·

the occurrence of catastrophes;

·

regulatory changes; and

·

changes in benefit plan design.

Some of these factors could impact the ability of the Company to manage and control the medical costs to the extent assumed in the pricing of its services.

If the Company'sCompany’s membership in risk-basedrisk‑based business continues to grow (which is a major focus of the Company'sCompany’s strategy), the Company'sCompany’s exposure to potential losses from risk-basedrisk‑based products will also increase.

Expansion of Risk-BasedRisk‑Based Products—Because the Company intends to expandcontinue its expansion into clinically integrated management of special populations eligible for Medicaid and Medicare including individuals with SMI, and other unique high-costhigh‑cost populations, if the Company is unable to accurately underwrite the healthcare cost risk for this new business and control associated costs, the Company'sCompany’s profitability could decline.

The Company believes that it can leverage its information systems, call center, claims and network infrastructure as well as its financial strength and underwriting expertise to facilitate the development of risk product offerings to states that include behavioral healthcare and physical medical care for their special Medicaid and dual eligible populations, particularly individuals with SMI. As this represents athe Company expands into new business for the Company,markets, the Company will incur start-upstart‑up costs to develop and grow this business. The Company'sCompany’s profitability may be negatively impacted until such time that sufficient business is generated to offset these start-upstart‑up costs.

Furthermore, since this is a new business foras the Company expands into new markets, there is an increased risk associated with the underwriting and implementation for this business. Profitability of any such business could be adversely affected if the Company is unable to accurately estimate the rate of service utilization or the cost of such services when the Company prices its services. The Company'sCompany’s assumptions of utilization and costs when the Company prices its services may not ultimately reflect actual utilization rates and costs, many aspects of which are beyond the Company'sCompany’s control. If the cost of services provided to members under a contract together with the administrative costs exceeds the aggregate fees received by the Company under such contract, the Company will incur a loss on the contract.

The Company may partner with managed care organizations to create joint ventures in some states. Conflicts or disagreements between the Company and any joint venture partner may negatively impact the benefits to be achieved by the relevant joint venture or may ultimately threaten the ability of any such joint venture to continue. The Company is also subject to additional risks and uncertainties because the Company may be dependent upon, and subject to, liability, losses or reputational damage relating to systems, controls and personnel that are not entirely under the Company'sCompany’s control.


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Provider Agreements—Failure to maintain or to secure cost-effectivecost‑effective healthcare provider contracts may result in a loss of membership or higher medical costs.

The Company'sCompany’s profitability depends, to an extent, upon the ability to contract favorably with certain healthcare providers. The Company may be unable to enter into agreements with providers in new markets on a timely basis or under favorable terms. If the Company is unable to retain its current provider contracts or enter into new provider contracts timely or on favorable terms, the Company'sCompany’s profitability could be reduced. The Company cannot provide any assurance that it will be able to continue to renew its existing provider contracts or enter into new contracts.

Pharmacy Management—Loss of Relationship with Providers—If we lose our relationship, or our relationship otherwise changes in an unfavorable manner, with one or more key pharmacy providers or if significant changes occur within the pharmacy provider marketplace, or if other issues arise with respect to our pharmacy networks, our business could be adversely affected.

Our operations are dependent to a significant extent on our ability to obtain discounts on prescription purchases from retail pharmacies that can be utilized by our clients and their members. Our contracts with retail pharmacies, which are non-exclusive,non‑exclusive, are generally terminable by either party on short notice. If one or more of our top pharmacy chains elects to terminate its relationship with us, or if we are only able to continue our relationship on terms less favorable to us, access to retail pharmacies by our clients and their health plan members, and consequently our business, results of operations, financial condition or cash flows could be adversely affected.

Pharmacy Management—Loss of Relationship with Vendors—Our specialty pharmacies, pharmacy claims processing, and mail processing are dependent on our relationships with a limited number of vendors and suppliers and the loss of any of these relationships could significantly impact our ability to sustain our financial performance.

We acquire a substantial percentage of our specialty pharmacies prescription drug supply from a limited number of suppliers. Our agreements with these suppliers may be short-termshort‑term and cancelable by either party without cause with a relatively short time-frametime‑frame of prior notice. These agreements may limit our ability to provide services for competing drugs during the term of the agreement and allow the supplier to dispense through channels other than us. Further, certain of these agreements allow pricing and other terms of these relationships to be periodically adjusted for changing market conditions or required service levels. A termination or modification to any of these relationships could have an adverse effect on our business, financial condition and results of operations. An additional risk related to supply is that many products dispensed by our specialty pharmacy business are manufactured with ingredients that are susceptible to supply shortages. If any products we dispense are in short supply for long periods of time, this could result in a material adverse effect on our business, financial condition and results of operations. Further, we source from a limited number of vendors certain aspects of our pharmacy claims and mail processing capabilities. An interruption of service, termination or modification to the terms to any of these agreements may adversely affect our business and financial condition.

Pharmacy Management—Loss of Relationship with Manufacturers—If we lose relationships with one or more key pharmaceutical manufacturers or third party rebate administrators or if rebate payments we receive from pharmaceutical manufacturers and rebate processing service providers decline, our business, results of operations, financial condition or cash flows could be adversely affected.

We receive fees from our clients for administering rebate programs with pharmaceutical manufacturers based on the use of selected drugs by members of health plans sponsored by our clients,


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as well as fees for other programs and services. Our business, results of operations, financial condition or cash flows could be adversely affected if:

·

we lose relationships with one or more key pharmaceutical manufacturers or third party rebate administrators;

·

we are unable to renew or finalize rebate contracts with one or more key pharmaceutical manufacturers in the future, or are unable to negotiate interim arrangements;

·

rebates decline due to the failure of our health plan sponsors to meet market share or other thresholds;

·

legal restrictions are imposed on the ability of pharmaceutical manufacturers to offer rebates or purchase our programs or services;

·

pharmaceutical manufacturers choose not to offer rebates or purchase our programs or services; or

·

rebates decline due to contract branded products losing their patients.

Fluctuation in Operating Results—The Company experiences fluctuations in quarterly operating results and, as a consequence, the Company may fail to meet or exceed market expectations, which could cause the Company'sCompany’s stock price to decline.

The Company'sCompany’s quarterly operating results have varied in the past and may fluctuate significantly in the future due to seasonal and other factors, including:

·

changes in utilization levels by enrolled members of the Company’s risk‑based contracts, including seasonal utilization patterns (for example, members generally tend to seek services less during the third and fourth quarters of the year than in the first and second quarters of the year);

·

performance‑based contractual adjustments to net revenue, reflecting utilization results or other performance measures;

·

changes in estimates for contractual adjustments under commercial contracts;

·

retrospective membership adjustments;

·

the timing of implementation of new contracts, enrollment changes and contract terminations;

·

pricing adjustments upon contract renewals;

·

the timing of acquisitions;

·

changes in estimates regarding medical costs and IBNR claims;

·

the timing of recognition of pharmacy revenues, including rebates and Medicare Part D; and

·

changes in estimates of contingent consideration.

These factors may affect the Company'sCompany’s quarterly and annual net revenue, expenses and profitability in the future and, accordingly, the Company may fail to meet market expectations, which could cause the Company'sCompany’s stock price to decline.

Dependence on Government Spending—The Company can be adversely affected by changes in federal, state and local healthcare policies, programs, funding and enrollments.

        All of the Company's Public Sector segment net revenue, and aA portion of the Company'sCompany’s net revenue in the Company's other segmentsrevenues are derived, directly or indirectly, from governmental agencies, including state Medicaid programs. Contract rates vary from state to state, are subject to periodic negotiation and may limit the Company'sCompany’s ability to maintain or increase rates. The Company is unable to predict the impact on the Company'sCompany’s operations of future regulations or legislation affecting Medicaid programs, or the healthcare industry in general. Future regulations or legislation may have a material adverse effect on the Company. Moreover, any reduction in government spending for such programs could also have a material adverse effect on the Company (See "Reliance“Reliance on Customer


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Contracts" Contracts”). In addition, the Company'sCompany’s contracts with federal, state and local governmental agencies, under both direct contract and subcontract arrangements, generally are conditioned upon financial appropriations by one or more governmental agencies, especially in the case of state Medicaid programs. These contracts generally can be terminated or modified by the customer if such appropriations are not made. The Company faces increased risks in this regard as state budgets have come under increasing pressure due to the recent economic downturn.pressure. Finally, some of the Company'sCompany’s contracts with federal, state and local governmental agencies, under both direct contract and subcontract arrangements, require the Company to perform additional services if federal, state or local laws or regulations imposed after the contract is signed so require, in exchange for additional compensation, to be negotiated by the parties in good faith. Government and other third-partythird‑party payors generally seek to impose lower contract rates and to renegotiate reduced contract rates with service providers in a trend toward cost control.

Restrictive Covenants in the Company'sCompany’s Debt Instruments—Restrictions imposed by the Company'sCompany’s debt agreements limit the Company'sCompany’s operating and financial flexibility. These restrictions may adversely affect the Company'sCompany’s ability to finance the Company'sCompany’s future operations or capital needs or engage in other business activities that may be in the Company'sCompany’s interest.

On July 23, 2014,September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of September 22, 2017 (the “Base Indenture”), between the Company, as issuer and U.S. Bank National Association, as trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee.

The Indenture contains certain covenants which restrict the Company’s ability to, among other things, create liens on its and its subsidiaries’ assets; engage in sale and lease-back transactions; and engage in a consolidation, merger or sale of assets.

On September 22, 2017, the Company entered into a $500.0 million Credit Agreementcredit agreement with various lenders that provides for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan Health, Inc.)a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to borrow up to $250.0 million of revolving loans, with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company, and a term loan in an original aggregate principal amount of $250.0 millionas the borrower (the "2014“2017 Credit Facility"Agreement”). The 20142017 Credit FacilityAgreement is guaranteed by substantially all of the non-regulated subsidiaries of the Company and willscheduled to mature on July 23, 2019, but the Company holds an option to extend the 2014September 22, 2022.

The 2017 Credit Facility for an additional one year period. The 2014 Credit FacilityAgreement contains a number of covenants.

        These covenants that limit management'smanagement’s discretion in operating the Company'sCompany’s business by restricting or limiting the Company'sCompany’s ability, among other things, to:

These restrictions could adversely affect the Company'sCompany’s ability to finance future operations or capital needs or engage in other business activities that may be in the Company'sCompany’s interest. The 20142017 Credit FacilityAgreement also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 20142017 Credit Facility,Agreement, pursuant to its terms, would result in an event of default. The 2014 Credit Facility is guaranteed by most of the Company's subsidiaries and is secured by most of the Company's assets and the Company's subsidiaries' assets.


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Required Assurances of Financial Resources—The Company'sCompany’s liquidity, financial condition, prospects and profitability can be adversely affected by present or future state regulations and contractual requirements that the Company provide financial assurance of the Company'sCompany’s ability to meet the Company'sCompany’s obligations.

Some of the Company'sCompany’s contracts and certain state regulations require the Company or certain of the Company'sCompany’s subsidiaries to maintain specified cash reserves or letters of credit and/or to maintain certain minimum tangible net equity in certain of the Company'sCompany’s subsidiaries as assurance that the Company has financial resources to meet the Company'sCompany’s contractual obligations. Many of these state regulations also restrict the investment activity of certain of the Company'sCompany’s subsidiaries. Some state regulations also restrict the ability of certain of the Company'sCompany’s subsidiaries to pay dividends to Magellan. Additional state regulations could be promulgated that would increase the cash or other security the Company would be required to maintain. In addition, the Company'sCompany’s customers may require additional restricted cash or other security with respect to the Company'sCompany’s obligations under the Company'sCompany’s contracts, including the Company'sCompany’s obligation to pay IBNR claims and other medical claims not yet processed and paid. In addition, certain of the Company'sCompany’s contracts and state regulations limit the profits that the Company may earn on risk-basedrisk‑based business. The Company'sCompany’s liquidity, financial condition, prospects and profitability could be adversely affected by the effects of such regulations and contractual provisions. See Note 2—"Summary of Significant Accounting Policies—Restricted Assets"Assets” to the consolidated financial statements set forth elsewhere herein for a discussion of the Company'sCompany’s restricted assets.

Competition—The competitive environment in the managed healthcare industry may limit the Company'sCompany’s ability to maintain or increase the Company'sCompany’s rates, which would limit or adversely affect the Company'sCompany’s profitability, and any failure in the Company'sCompany’s ability to respond adequately may adversely affect the Company'sCompany’s ability to maintain contracts or obtain new contracts.

The Company'sCompany’s business is highly competitive. The Company competes with other healthcare organizations as well as with insurance companies, including HMOs, PPOs, TPAs, IPAs, multi-disciplinarymulti‑disciplinary medical groups, PBMs, specialty pharmacy companies, RBM companies and other specialty healthcare and managed care companies. Many of the Company'sCompany’s competitors, particularly certain insurance companies, HMOs and PBMs are significantly larger and have greater financial, marketing and other resources than the Company, which can create downward pressure on prices through economies of scale. The entrance or expansion of these larger companies in the managed healthcare industry (including the Company'sCompany’s customers who have in-sourcedin‑sourced or who may choose to in-sourcein‑source healthcare services) could increase the competitive pressures the Company faces and could limit the Company'sCompany’s ability to maintain or increase the Company'sCompany’s rates. If this happens, the Company'sCompany’s profitability could be adversely affected. In addition, if the Company does not adequately respond to these competitive pressures, it could cause the Company to not be able to maintain its current contracts or to not be able to obtain new contracts.

Possible Impact of Federal Healthcare Reform Law—can significantly impact the Company'sCompany’s revenues or profitability.

The ACA is a comprehensive piece of legislation intended to make significant changes to the healthcare system in the United States. The ACA contains various effective dates extending through 2020. Numerous regulations have been promulgated related to the ACA with hundreds more expected in the future.

Significant provisions in the ACA include requiring individuals to purchase health insurance, minimum medical loss ratios for health insurance issuers, significant changes to the Medicare and Medicaid programs and many other changes that affect healthcare insurance and managed care. See "Regulation"“Regulation” above for more information. Therefore, it is uncertain at this time what the financial


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impact of healthcare reform will be to the Company. The Company cannot predict the effect of this legislation or other legislation that may be adopted by the United States Congress or by the states, and such legislation, if implemented, could have an adverse effect on the Company.

The ACA also contains provisions related to fees that impact the Company'sCompany’s direct public sector contracts and provisions regarding the non-deductibilitynon‑deductibility of those fees. We believe that our state public sector customers will make rate adjustments to cover the direct costs of these fees and a majority of the impact from non-deductibilitynon‑deductibility of such fees for federal income tax purposes. There may be some impact due to taxes paid for non-renewingnon‑renewing customers where the timing and amount of recoupment of these additional costs is uncertain. There can be no guarantees regarding this adjustment from our state public sector customers and these taxes and fees may have a material impact on the Company.

Possible Impact of Federal Mental Health Parity—can significantly impact the Company'sCompany’s revenues or profitability.

In October 2008, the United States Congress passed the Paul Wellstone and Pete Dominici Mental Health Parity Act of 2008 ("MHPAEA"(“MHPAEA”) establishing parity in financial requirements (e.g. co-pays,co‑pays, deductibles, etc.) and treatment limitations (e.g., limits on the number of visits) between mental health and substance abuse benefits and medical/surgical benefits for health plan members. This law does not require coverage for mental health or substance abuse disorders but if coverage is provided it must be provided at parity. No specific disorders are mandated for coverage; health plans are able to define mental health and substance abuse to determine what they are going to cover. Under the ACA non-grandfatherednon‑grandfathered individual and small group plans (both on and off of the exchange) are required to provide mental health and substance use disorder benefits as essential health benefits. These mandated benefits under the ACA must be provided at parity in these plans. Under the ACA, grandfathered individual plans are required to comply with parity if they offer behavioral health benefits. Grandfathered small group plans are exempt from requirements to provide essential health benefits and parity requirements. State mandated benefits laws are not preempted. The law applies to ERISA plans, Medicaid managed care plans and State Children's Health Insurance Program ("SCHIP")SCHIP plans. On February 2, 2010, the Department of the Treasury, the Department of Labor and the Department of Health and Human Services issued Interim Final Rules interpreting the MHPAEA ("IFR"(“IFR”). The IFR applies to ERISA plans and insured business. A State Medicaid Director Letter was issued in January 2013 discussing applicability of parity to Medicaid managed care plans, SCHIP plans and Alternative Benefit (Benchmark) Plans. It is possible that some states will change their behavioral health plan benefits or management techniques as a result of this letter. On November 13, 2013 the Department of the Treasury, the Department of Labor and the Department of Health and Human Services issued Final Rules on the MHPAEA ("(“Final Rules"Rules”). The IFR included some concepts not included under the statute including the requirement to conduct the parity review at the category level within the plan, introducing the concept of non-quantitativenon‑quantitative treatment limitations, and prohibiting separate but equal deductibles. While some of the regulatory requirements in the IFR were not anticipated, the Company believes it is in compliance with the requirements of the IFR. The Company does not anticipate any significant impacts from the Final Rules however it is still reviewing and assessing the Final Rules with customers. The Company'sCompany’s risk contracts do allow for repricing to occur effective the same date that any legislation/regulation becomes effective if that legislation/regulation is projected to have a material effect on cost of care.

Government Regulation—The Company is subject to substantial government regulation and scrutiny, which increase the Company'sCompany’s costs of doing business and could adversely affect the Company'sCompany’s profitability.

The managed healthcare industry is subject to extensive and evolving federal and state regulation. Such laws and regulations cover, but are not limited to, matters such as licensure, accreditation,


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government healthcare program participation requirements, information privacy and security, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. The Company'sCompany’s pharmaceutical management business is also the subject of substantial federal and state governmental regulation and scrutiny.

The Company is subject to certain state laws and regulations and federal laws as a result of the Company’s role in management of customers’ employee benefit plans.

Regulatory issues may also affect the Company’s operations including, but not limited to:

·

additional state licenses that may be required to conduct the Company’s businesses, including utilization review, PBM, pharmacy, HMO and TPA activities;

·

limits imposed by state authorities upon corporations’ control or excessive influence over managed healthcare services through the direct employment of physicians, psychiatrists, psychologists or other professionals, and prohibiting fee splitting;

·

laws that impose financial terms and requirements on the Company due to the Company’s assumption of risk under contracts with licensed insurance companies or HMOs;

·

laws in certain states that impose an obligation to contract with any healthcare provider willing to meet the terms of the Company’s contracts with similar providers;

·

compliance with HIPAA (including the federal HITECH Act, which strengthens and expands HIPAA) and other federal and state laws impacting the confidentiality of member information;

·

state legislation regulating PBMs or imposing fiduciary status on PBMs;

·

pharmacy laws and regulation;

·

legislation imposing benefit plan design restrictions, which limit how our clients can design their drug benefit plans; and

·

network pharmacy access laws, including “any willing provider” and “due process” legislation, that affect aspects of our pharmacy network contracts.

The imposition of additional licensing and other regulatory requirements may, among other things, increase the Company’s equity requirements, increase the cost of doing business or force significant changes in the Company’s operations to comply with these requirements.

The costs associated with compliance with government regulation as discussed above may adversely affect the Company’s financial condition and results of operation.

Noncompliance With Regulations—Noncompliance with regulations may have a material adverse effect on the Company’s business, financial condition and results of operations, including from monetary or criminal liabilities and penalties, investigations or regulatory actions, additional compliance requirements, heightened governmental scrutiny, or exclusion from participating in government programs.

Extensive laws and regulation are applicable to all of our business operations. Noncompliance by the Company with these laws and regulations may have a material adverse effect on the Company’s business, financial condition and results of operations.

Government investigations and allegations have become more frequent concerning possible violations of fraud and abuse and false claims statutes and regulations by healthcare organizations. ViolatorsThe Company also conducts its own investigations into these matters and may bechoose to self-report its findings to governmental agencies. Violations by the Company with certain laws and regulations may result in it being excluded from participating in government healthcare programs, subject to fines or penalties or required to repay amounts received from the government for previously billed services. In addition, alleged violations may result in litigation or regulatory action. A violationsubsequent legal liability or a significant regulatory action against the Company could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, even if the Company ultimately prevails in any litigation, regulatory action or investigation, such lawslitigation, regulatory action or investigation could have a material adverse effect on the Company’s business, financial condition and regulationsresults of operations.

The Company also receives notifications from and engages in discussions with various government agencies concerning the Company’s businesses and operations. As a result of these contacts with regulators, the Company may, as appropriate, be required to implement changes to the Company’s operations, revise the Company’s filings with such agencies and/or seek additional licenses to conduct the Company’s business. The Company’s inability to comply with the various regulatory requirements may have a material adverse effect on the Company.Company’s business.

Reference is made to information set forth under “Regulation—Other Federal and State Laws and Regulations” under Item 1 of this Report.

Medicare Part D—The CompanyCompany’s participation in Medicare Part D is subject to certaingovernment regulation and failure to comply with regulatory requirements could adversely impact the Company’s profitability.

There are many uncertainties about the financial and regulatory risks of participating in the Medicare Part D program, and we can give no assurance these risks will not materially adversely impact the Company’s results. Certain of the Company’s subsidiaries have been approved by CMS to offer Medicare Part D prescription drug plans to individual beneficiaries and employer groups. Such subsidiaries are required to comply with Medicare Part D laws and regulations and, because CMS requires that Medicare Part D sponsors be licensed as risk‑bearing entities, also with applicable state laws and regulations regarding the business of insurance. The Company also provides services in support of our clients’ Medicare Part D plans and must be able to deliver such services in a manner that complies with applicable regulatory requirements. We have made substantial investments in both human resources and the technology required to administer Medicare Part D benefits. The adoption of new or more complex regulatory requirements or changes in the interpretation of existing regulatory requirements associated with Medicare Part D may require us to incur significant costs or otherwise impact our ability to earn a profit on such business. In addition, the Company’s receipt of federal funds made available through the Medicare Part D program is subject to compliance with the laws as a result ofand regulations governing the Company's role in management of customers' employee benefit plans.

        Regulatory issuesfederal government’s payment for healthcare goods and services, including the federal anti‑kickback law and false claims acts. If we fail to comply materially with applicable regulatory or contractual requirements, whether identified through CMS or other government audits, client audits, or otherwise, we may also affect the Company's operationsbe subject to certain sanctions, penalties, or other remedies, including, but not limited to:

        The imposition of additional licensingcontract(s) with CMS or Part D clients, and other regulatory requirements may, among other things, increase the Company's equity requirements, increase the cost of doing business or force significant changes in the Company's operations to comply with these requirements.exclusion from federal healthcare programs.

        The costs associated with compliance with government regulation as discussed above may adversely affect the Company's financial condition and results of operation.

The Company faces risks related to unauthorized disclosure of sensitive or confidential member and other information.

As part of its normal operations, the Company collects, processes and retains confidential member information making the Company subject to various federal and state laws and rules regarding the use and disclosure of confidential member information, including HIPAA. The Company also maintains other confidential information related to its business and operations. Despite appropriate security measures, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Noncompliance with any privacy or security laws and regulations or any security breach, whether by the Company or by its


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vendors, could result in enforcement actions, material fines and penalties and could also subject the Company to litigation.

Cyber-Security -TheCyber‑Security—The Company faces risks related to a breach or failure in our operational security systems or infrastructure, or those of third parties with which we do business.

Our business requires us to securely store, process and transmit confidential, proprietary and other information in our operations. Security breaches may arise from computer hackers penetrating our systems to obtain personal information for financial gain, attempting to cause harm to our operations, or intending to obtain competitive information. Our systems are also subject to the attack of viruses, worms, and other malicious software programs. We maintain a comprehensive system of preventive and detective controls through our security programs; however, our prevention and detection controls may not prevent or identify all such attacks. The costs to update our security protocols to mitigate a security breach could be significant. A breach or failure in our operational security systems may result in loss of data or an unauthorized disclosure of sensitive or confidential member or employee information and could result in significant penalties or fines, litigation, loss of customers, or significant damage to our reputation and business, which could adversely impact the Company'sCompany’s financial condition and results of operations.

The Company faces additional regulatory risks associated with its Pharmacy Management segment which could subject it to additional regulatory scrutiny and liability and which could adversely affect the profitability of the Pharmacy Management segment in the future.

Various aspects of the Company'sCompany’s Pharmacy Management segment are governed by federal and state laws and regulations. Pharmaceutical management services are provided by the Company to Medicaid and Medicare plans as well as commercial insurance plans. There has been enhanced scrutiny on federal programs and the Company must remain vigilant in ensuring compliance with the requirements of these programs. In addition, there are provisions of the ACA which may impact the Company'sCompany’s business. For example, the ACA imposes new transparency requirements on PBMs, and the Centers for Medicare and Medicaid Services ("CMS") issued a final rule implementing these requirements in April 2012.PBMs. PBMs have also increasingly become the target of federal and state litigation over alleged practices relating to prescription drug switching, soliciting, and receiving unlawful remuneration, handling rebates, and fiduciary duties, among others. Significant sanctions may be imposed for violations of these laws and compliance programs are a significant operational requirement of the Company'sCompany’s business. There are significant uncertainties involving the application of many of these legal requirements to the Company. Accordingly, the Company may be required to incur additional administrative and compliance expenses in determining the applicable requirements and in adapting its compliance practices, or modifying its business practices, in order to satisfy changing interpretations and regulatory policies. In addition, there are numerous proposed healthcare laws and regulations at the federal and state levels, many of which, if adopted, could adversely affect the Company'sCompany’s business. See "Regulation"“Regulation” above.

Risks Related Toto Realization of Goodwill and Intangible Assets—The Company'sCompany’s profitability could be adversely affected if the value of intangible assets is not fully realized.

The Company'sCompany’s total assets at December 31, 20142017 reflect goodwill of approximately $566.1 million,$1.0 billion, representing approximately 27.134.0 percent of total assets. The Company completed its annual impairment analysis of goodwill as of October 1, 20142017, noting that no impairment was identified.

At December 31, 2014,2017, identifiable intangible assets (customer lists, contracts, provider networks and provider networks)trade names) totaled approximately $133.7$268.3 million. Intangible assets are generally amortized over their estimated useful lives, which range from approximately one to eighteen years. The amortization periods used may differ from those used by other entities. In addition, the Company may be required to shorten the amortization period for intangible assets in future periods based on changes in the Company'sCompany’s business. There can be no assurance that such goodwill or intangible assets will be realizable.


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The Company evaluates, on a regular basis, whether for any reason the carrying value of the Company'sCompany’s intangible assets and other long-livedlong‑lived assets may no longer be completely recoverable, in which case a charge to earnings for impairment losses could become necessary. When events or changes in circumstances occur that indicate the carrying amount of long-livedlong‑lived assets may not be recoverable, the Company assesses the recoverability of long-livedlong‑lived assets other than goodwill by determining whether the carrying value of such assets will be recovered through the future cash flows expected from the use of the asset and its eventual disposition.

Any event or change in circumstances leading to a future determination requiring write-offwrite‑off of a significant portion of unamortized intangible assets or goodwill would adversely affect the Company'sCompany’s profitability.

Claims for Professional Liability—Pending or future actions or claims for professional liability (including any associated judgments, settlements, legal fees and other costs) could require the Company to make significant cash expenditures and consume significant management time and resources, which could have a material adverse effect on the Company'sCompany’s profitability and financial condition.

The Company'sCompany’s operating activities entail significant risks of liability. In recent years, participants in the healthcare industry generally, as well as the managed healthcare industry, have become subject to an increasing number of lawsuits. From time to time, the Company is subject to various actions and claims of professional liability alleging negligence in performing utilization review and other managed healthcare activities, as well as for the acts or omissions of the Company'sCompany’s employees, including employed physicians and other clinicians, network providers, pharmacists, or others. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company, the Company'sCompany’s employees or the Company'sCompany’s network providers. The Company is also subject to actions and claims for the costs of services for which payment was denied. Many of these actions and claims seek substantial damages and require the Company to incur significant fees and costs related to the Company'sCompany’s defense and consume significant management time and resources. While the Company maintains professional liability insurance, there can be no assurance that future actions or claims for professional liability (including any judgments, settlements or costs associated therewith) will not have a material adverse effect on the Company'sCompany’s profitability and financial condition.

Professional Liability and Other Insurance—Claims brought against the Company that exceed the scope of the Company'sCompany’s liability coverage or denial of coverage could materially and adversely affect the Company'sCompany’s profitability and financial condition.

The Company maintains a program of insurance coverage against a broad range of risks in the Company'sCompany’s business. As part of this program of insurance, the Company carries professional liability insurance, subject to certain deductibles and self-insuredself‑insured retentions. The Company also is sometimes required by customer contracts to post surety bonds with respect to the Company'sCompany’s potential liability on professional responsibility claims that may be asserted in connection with services the Company provides. As of December 31, 2014,2017, the Company had approximately $143.0$67.7 million of such bonds outstanding. The Company'sCompany’s insurance may not be sufficient to cover any judgments, settlements or costs relating to present or future claims, suits or complaints. Upon expiration of the Company'sCompany’s insurance policies, sufficient insurance may not be available on favorable terms, if at all. To the extent the Company'sCompany’s customers are entitled to indemnification under their contracts with the Company relating to liabilities they incur arising from the operation of the Company'sCompany’s programs, such indemnification may not be covered under the Company'sCompany’s insurance policies. To the extent that certain actions and claims seek punitive and compensatory damages arising from the Company'sCompany’s alleged


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intentional misconduct, such damages, if awarded, may not be covered, in whole or in part, by the Company'sCompany’s insurance policies. If the Company is unable to secure adequate insurance in the future, or if the insurance the Company carries is not sufficient to cover any judgments, settlements or costs relating to any present or future actions or claims, such judgments, settlements or costs may have a material adverse effect on the Company'sCompany’s profitability and financial condition. If the Company is unable to obtain needed surety bonds in adequate amounts or make alternative arrangements to satisfy the requirements for such bonds, the Company may no longer be able to operate in those states, which would have a material adverse effect on the Company.

Class Action Suits and Other Legal Proceedings—The Company is subject to class action and other lawsuits that could result in material liabilities to the Company or cause the Company to incur material costs, to change the Company'sCompany’s operating procedures in ways that increase costs or to comply with additional regulatory requirements.

Managed healthcare companies and PBM companies have been targeted as defendants in national class action lawsuits regarding their business practices. The Company has in the past been subject to such national class actions as defendants and is also subject to or a party to other class actions, lawsuits and legal proceedings in conducting the Company'sCompany’s business. In addition, certain of the Company'sCompany’s customers are parties to pending class action lawsuits regarding the customers'customers’ business practices for which the customers could seek indemnification from the Company. These lawsuits may take years to resolve and cause the Company to incur substantial litigation expense, and the outcomes could have a material adverse effect on the Company'sCompany’s profitability and financial condition. In addition to potential damage awards, depending upon the outcomes of such cases, these lawsuits may cause or force changes in practices of the Company'sCompany’s industry and may also cause additional regulation of the industry through new federal or state laws or new applications of existing laws or regulations. Such changes could increase the Company'sCompany’s operating costs.

Negative Publicity—The Company may be subject to negative publicity which may adversely affect the Company'sCompany’s business, financial position, results of operations or cash flows.

From time to time, the managed healthcare industry has received negative publicity. This publicity has led to increased legislation, regulation, review of industry practices and private litigation. These factors may adversely affect the Company'sCompany’s ability to market our services, require the Company to change its services, or increase the overall regulatory burden under which the Company operates. Any of these factors may increase the costs of doing business and adversely affect the Company'sCompany’s business, financial position, results of operations or cash flows.

Government Investigations—The Company may be subjected to additional regulatory requirements and to investigations or regulatory action by governmental agencies, each of which may have a material adverse effect on the Company's business, financial condition and results of operations.

        From time to time, the Company receives notifications from and engages in discussions with various government agencies concerning the Company's businesses and operations. As a result of these contacts with regulators, the Company may, as appropriate, be required to implement changes to the Company's operations, revise the Company's filings with such agencies and/or seek additional licenses to conduct the Company's business. The Company's inability to comply with the various regulatory requirements may have a material adverse effect on the Company's business.

        In addition, the Company may become subject to regulatory investigations relating to the Company's business, which may result in litigation or regulatory action. A subsequent legal liability or a significant regulatory action against the Company could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, even if the Company ultimately prevails in the litigation, regulatory action or investigation, such litigation, regulatory action


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or investigation could have a material adverse effect on the Company's business, financial condition and results of operations.

Investment Portfolio—The value of the Company'sCompany’s investments is influenced by varying economic and market conditions, and a decrease in value may result in a loss charged to income.

All of the Company'sCompany’s investments are classified as "available-for-sale"“available‑for‑sale” and are carried at fair value. The Company's available-for-saleCompany’s available‑for‑sale investment securities were $267.7$327.9 million and represented 12.811.1 percent of the Company'sCompany’s total assets at December 31, 2014.2017.

The current economic environment and recent volatility of securities markets increase the difficulty of assessing investment impairment and the same influences tend to increase the risk of potential impairment of these assets. The Company believes it has adequately reviewed its investment securities for impairment and that its investment securities are carried at fair value. However, over time, the economic and market environment may provide additional insight regarding the fair value of certain securities, which could change the Company'sCompany’s judgment regarding impairment. This could result in realized losses relating to other-than-temporaryother‑than‑temporary declines being charged against future income. Given the current market conditions and the significant judgments involved, there is a risk that declines in fair value may occur and material other-than-temporaryother‑than‑temporary impairments may be charged to income in future periods, resulting in realized losses. In addition, if it became necessary for the Company to liquidate its investment portfolio on an accelerated basis, it could have an adverse effect on the Company'sCompany’s results of operations.

Adverse Economic Conditions—The state of the national economy and adverseAdverse changes in national economic conditions could adversely affect the Company'sCompany’s business and results of operations.

        The state of the economy has negatively affected state budgets andChanges in national economic conditions could adversely affect the Company'sCompany’s reimbursement from state Medicaid programs in its Public SectorHealthcare segment. The state of the economy and adverseAdverse economic conditions could also adversely affect the Company'sCompany’s customers in the Commercial, Specialty SolutionsHealthcare and Pharmacy Management segments resulting in increased pressures on the Company'sCompany’s operating margins. In addition, the economic conditions may result in decreased membership in the Commercial, Specialty SolutionsHealthcare and Pharmacy Management segments, thereby adversely affecting the revenues to the Company from such customers as well as the Company'sCompany’s operating profitability.

Adverse economic conditions in the debt markets maycould affect the Company'sCompany’s ability to refinance the Company'sCompany’s existing 2014 Credit FacilityAgreement upon its maturity July 23, 2019 on acceptable terms, or at all.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

The Company currently leases approximately 900,0001.1 million square feet of office space comprising 4971 offices in 2428 states and the District of Columbia with terms expiring between January 2015February 28, 2018 and JanuaryNovember 30, 2025. The Company'sCompany’s principal executive offices are located in Scottsdale, Arizona, which lease expires in October 2019. The Company believes that its current facilities are suitable for and adequate to support the level of its present operations.

Item 3.    Legal Proceedings

The Company'sCompany’s operating activities entail significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees,


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network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require the Company to incur significant fees and costs related to their defense.

The Company is also subject to or party to certain class actions and other litigation and claims relating to its operations or business practices. In the opinion of management, theThe Company has recorded reserves that, in the opinion of management, are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company'sCompany’s financial condition or results of operations; however, there can be no assurance in this regard.

Item 4.    Mine Safety Disclosures

        Not applicable.


Table of ContentsNot applicable.


PART II

Item 5.    Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Since January 6, 2004, sharesShares of the Company'sCompany’s Ordinary Common Stock, $0.01 par value per share ("(“common stock"stock”) have traded on the NASDAQ Stock Market under the symbol "MGLN."“MGLN.” For further information regarding the Company'sCompany’s common stock, see Note 6—"Stockholders' Equity"“Stockholders’ Equity” to the consolidated financial statements set forth elsewhere herein. The following tables set forth the high and low closing bid prices of the Company'sCompany’s common stock as reported by the NASDAQ Stock Market for the years ended December 31, 20132016 and 2014,2017, as follows:

 

 

 

 

 


 Common Stock
Sales Prices
 

 

Common Stock

 


 High Low 

 

Sales Prices

 

2013

     

    

High

    

Low

 

2016

 

 

 

 

 

First Quarter

 $54.23 $47.45 

$

68.31

$

52.57

 

Second Quarter

 56.75 48.72 

 

71.57

 

62.42

 

Third Quarter

 59.97 55.69 

 

71.25

 

52.34

 

Fourth Quarter

 61.44 56.91 

 

76.80

 

49.90

 

2014

 
 
 
 
 

2017

 

 

 

 

 

First Quarter

 61.14 58.22 

 

80.10

 

64.63

 

Second Quarter

 63.06 54.77 

 

73.90

 

66.50

 

Third Quarter

 63.62 54.29 

 

86.30

 

71.95

 

Fourth Quarter

 62.38 52.78 

 

98.90

 

81.10

 

As of December 31, 2014,2017, there were approximately 295236 stockholders of record of the Company'sCompany’s common stock. The stockholders of record data for common stock does not reflect persons whose stock was held on that date by the Depository Trust Company or other intermediaries.


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The following graph compares the change in the cumulative total return on the Company'sCompany’s common stock to (a) the change in the cumulative total return on the stocks included in the Standard & Poor's ("Poor’s (“S&P"&P”) 500 Stock Index and (b) the change in the cumulative total return on the stocks included in the S&P 500 Managed Health Care Index, assuming an investment of $100 made at the close of trading on December 31, 2009,2012, and comparing relative values on December 31, 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2014.2017. The Company did not pay any dividends during the period reflected in the graph. The common stock price performance shown below should not be viewed as being indicative of future performance.


Comparison of Cumulative Total Return

Comparison of Cumulative Five Year Total Return

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

    

2012

    

2013

    

2014

    

2015

    

2016

    

2017

 

Magellan Health, Inc.

 

$

100

 

$

122.27

 

$

122.51

 

$

125.84

 

$

153.57

 

$

197.04

 

S&P 500 Index

 

 

100

 

 

132.39

 

 

150.51

 

 

152.59

 

 

170.84

 

 

208.14

 

S&P 500 Managed Health Care Index(1)

 

 

100

 

 

147.87

 

 

197.56

 

 

240.77

 

 

287.75

 

 

414.57

 

 
 December 31, 
 
 2009 2010 2011 2012 2013 2014 

Magellan Health, Inc. 

 $100.00 $116.08 $121.46 $120.30 $147.09 $147.39 

S&P 500 Index

  100.00  115.06  117.49  136.30  180.44  205.14 

S&P 500 Managed Health Care Index(1)

  100.00  108.88  146.33  155.05  229.27  306.31 

(1)
The S&P 500 Managed Health Care Index consists of Aetna, Inc., CIGNA Corp., Humana, Inc., UnitedHealth Group, Inc. and Anthem, Inc.

(1)

The S&P 500 Managed Health Care Index consists of Aetna, Inc., Anthem, Inc., Centene Corporation, Cigna Corporation, Humana, Inc. and UnitedHealth Group, Inc.

The information set forth above under the "Comparison“Comparison of Cumulative Total Returns"Return” does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other of the Company'sCompany’s filings under the Securities Act or the Exchange Act, except to the extent the filing specifically incorporates such information by reference therein.

Stock Repurchases

The Company'sCompany’s board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such


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amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice.

On October 25, 201126, 2015, the Company'sCompany’s board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013.26, 2017 (the “2015 Repurchase Program”). On July 24, 201326, 2017, the Company'sCompany’s board of directors approved an increase and extension of the stock repurchase plan which authorized the Company to purchase up to $300 million of its outstanding stock2015 Repurchase Program through October 25, 2015. On November 21, 2014, the Company reached aggregate purchases of $300 million and the program was completed.

26, 2018. Pursuant to this program,the 2015 Repurchase Program, the Company made open market purchases during the three months ended December 31, 2017 as follows (aggregate cost excludes broker commissions and is reflected in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total number

    

Average

    

Total Number of Shares

    

Approximate Dollar Value of

 

 

 

of Shares

 

Price Paid

 

Purchased as Part of Publicly

 

Shares that May Yet Be

 

Period

 

Purchased

 

per Share(1)

 

Announced Plans or Programs

 

Purchased Under the Plans(1)(2)

 

October 1 - 31, 2017

 

25,708

 

$

84.61

 

25,708

 

$

57.2

 

November 1-30, 2017

 

49,551

 

 

83.37

 

49,551

 

 

53.0

 

December 1-31, 2017

 

 —

 

 

 —

 

 —

 

 

53.0

 

 

 

75,259

 

 

 

 

75,259

 

 

 

 

Period
 Total Number
of Shares
Purchased
 Average
Price Paid
per Share
 Aggregate
Cost
 

November 11, 2011 - December 31, 2011

  671,776 $48.72 $32.7 

January 1, 2012 - December 31, 2012

  459,252  50.27  23.1 

January 1, 2013 - December 31, 2013

  1,159,871  51.83  60.1 

January 1, 2014 - November 21, 2014

  3,183,306  57.82  184.1 

  5,474,205    $300.0 

(1)

Excludes amounts that could be used to repurchase shares acquired under the Company’s equity incentive plans to satisfy withholding tax obligations of employees and non-employee directors upon the vesting of restricted stock units.

(2)

Excludes broker commissions

        On October 22, 2014 the Company's board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016. Pursuant to this program, theThe Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period
 Total Number
of Shares
Purchased
 Average
Price Paid
per Share
 Aggregate
Cost
 

November 24, 2014 - December 31, 2014

  232,170 $60.65 $14.1 

        Following is a summary of stockno share repurchases made during the three months ended December 31, 2014 (approximate dollar value of shares that may be purchased under the plans is reflected in millions):

Period
 Total number
of Shares
Purchased
 Average
Price Paid
per Share(1)
 Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
 Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans(1)(2)
 

October 1–31, 2014

  494,230 $55.74  494,230 $214.4 

November 1–30, 2014

  259,817  60.73  259,817  198.6 

December 1–31, 2014

  208,205  60.53  208,205  186.0 

  962,252     962,252    

(1)
Excludes broker commissions.

(2)
Excludes amounts that could be used to repurchase shares acquired under the Company's equity incentive plans to satisfy withholding tax obligations of employees and non-employee directors upon the vesting of restricted stock units.

        During the period from January 1, 20152018 through February 23, 2015, the Company made additional open market purchases of 352,592 shares of the Company's common stock at an aggregate cost of $21.3 million (excluding broker commissions).


Table of Contents2018.

Dividends

The Company did not declare any dividends during either of the years ended December 31, 20132016 or 20142017 and does not expect to pay a dividend in 2015.2018. The Company is prohibited from paying dividends on its common stock under the terms of the 20142017 Credit Facility,Agreement, except in limited circumstances. The declaration and payment of any dividends in the future by the Company will be subject to the sole discretion of the Company'sCompany’s board of directors and will depend upon many factors, including the Company'sCompany’s financial condition, earnings, covenants associated with the Company's 2014Company’s 2017 Credit FacilityAgreement and any similar future agreement, legal requirements, regulatory constraints and other factors deemed relevant by the Company'sCompany’s board of directors. Moreover, should the Company pay any dividends in the future, there can be no assurance that the Company will continue to pay such dividends.

Recent Sales of Unregistered Securities

        On September 6, 2013,During the quarter ended December 31, 2017, the Company and Partners Rx entered into a merger agreement pursuant to which on October 1, 2013 certain principal ownershad no sales of Partners Rx purchased 175,596 shares of the Company's restricted stock for a total purchase price of $10 million. The purchase price of the shares was equal to the average of the closing prices of the Company's stock for the five trading day period on the day prior to the execution of the Merger Agreement. The shares received by such principal owners of Partners Rx are subject to vesting over three years with 50% vesting on the second anniversary of the acquisition and 50% vesting on the third anniversary of the acquisition, conditioned on continued employment with the Company on the applicable vesting dates. The shares were issued to the principal owners of Partners Rx in a private placement pursuant to Section 4(a)(2) of the Securities Act.

        On March 31, 2014, the Company and CDMI, LLC entered into a purchase agreement pursuant to which on April 30, 2014 the sellers and key management of CDMI purchased 1,433,946 shares of the Company's restricted stock for a total purchase price of $80 million. The aggregate number of shares issued was determined by dividing $80.0 million by the volume weighted average trading prices per share of Magellan's ordinary common stock on the NASDAQ as reported by Bloomberg US L.P. using its "Volume at Price" function over the five trading days ended on the trading day prior to the closing of the purchase agreement. The shares received by such sellers and key management of CDMI are subject to vesting over 42 months with 25% vesting after 18 months and 75% vesting after 42 months, conditioned on continued employment. The shares were issued to the sellers and key management of CDMI in a private placement pursuant to Section 4(a)(2) of the Securities Act.unregistered securities.

Item 6.    Selected Financial Data

The following table sets forth selected historical consolidated financial information of the Company as of and for the years ended December 31, 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2014.2017.

Selected consolidated financial information for the years ended December 31, 2012, 20132015, 2016 and 20142017 and as of December 31, 20132016 and 20142017 presented below, have been derived from, and should be read in conjunction with, the audited consolidated financial statements and the notes thereto included elsewhere herein. Selected consolidated financial information for the years ended December 31, 20102013 and 20112014 has been derived from the Company'sCompany’s audited consolidated financial statements not included in this Form 10-K.10‑K. The selected financial data set forth below also should be read in conjunction with the Company'sCompany’s financial statements and accompanying notes and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” appearing elsewhere herein.


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 Year Ended December 31, 

 

Year Ended December 31,

 


 2010 2011 2012 2013 2014 

    

2013

    

2014

    

2015

    

2016

    

2017

 

Statement of Operations Data:

           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 $2,969,240 $2,799,400 $3,207,397 $3,546,317 $3,760,118 

 

$

3,546,317

 

$

3,760,118

 

$

4,597,400

 

$

4,836,884

 

$

5,838,583

 

Cost of care

 1,907,985 1,784,724 2,071,890 2,232,976 2,088,595 

 

 

2,232,976

 

 

2,088,595

 

 

2,274,755

 

 

1,882,614

 

 

2,413,770

 

Cost of goods sold

 218,630 232,038 328,414 455,601 732,949 

 

 

455,601

 

 

732,949

 

 

1,321,877

 

 

1,818,720

 

 

2,211,910

 

Direct service costs and other operating expenses(1)(2)

 566,582 529,634 557,512 619,546 723,498 

 

 

619,546

 

 

723,498

 

 

822,392

 

 

876,612

 

 

941,883

 

Depreciation and amortization

 54,682 58,623 60,488 71,994 91,070 

 

 

71,994

 

 

91,070

 

 

102,844

 

 

106,046

 

 

115,706

 

Interest expense

 2,233 2,502 2,247 3,000 7,387 

 

 

3,000

 

 

7,387

 

 

6,581

 

 

10,193

 

 

25,977

 

Interest and other income

 (3,275) (2,781) (2,019) (1,985) (1,301)

 

 

(1,985)

 

 

(1,301)

 

 

(2,165)

 

 

(2,818)

 

 

(5,887)

 

Income before income taxes

 222,403 194,660 188,865 165,185 117,920 

 

 

165,185

 

 

117,920

 

 

71,116

 

 

145,517

 

 

135,224

 

Provision for income taxes

 83,744 65,037 37,838 39,924 43,689 

 

 

39,924

 

 

43,689

 

 

42,409

 

 

69,728

 

 

25,083

 

Net income

 138,659 129,623 151,027 125,261 74,231 

 

 

125,261

 

 

74,231

 

 

28,707

 

 

75,789

 

 

110,141

 

Less: net income (loss) attributable to non-controlling interest

     (5,173)

Net income attributable to Magellan Health, Inc.

 $138,659 $129,623 $151,027 $125,261 $79,404 

Net income per common share attributable to Magellan Health, Inc.:

           

Less: net loss attributable to non-controlling interest

 

 

 —

 

 

(5,173)

 

 

(2,706)

 

 

(2,090)

 

 

(66)

 

Net income attributable to Magellan

 

$

125,261

 

$

79,404

 

$

31,413

 

$

77,879

 

$

110,207

 

Net income per common share attributable to Magellan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 $4.10 $4.25 $5.51 $4.63 $2.98 

 

$

4.63

 

$

2.98

 

$

1.26

 

$

3.36

 

$

4.72

 

Diluted

 $4.03 $4.17 $5.42 $4.53 $2.90 

 

$

4.53

 

$

2.90

 

$

1.21

 

$

3.22

 

$

4.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

    

2013

    

2014

    

2015

    

2016

    

2017

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

989,358

 

$

1,140,323

 

$

1,097,682

 

$

1,319,267

 

$

1,483,353

 

Current liabilities

 

 

476,267

 

 

585,840

 

 

724,235

 

 

1,092,850

 

 

892,303

 

Property and equipment, net

 

 

172,333

 

 

171,916

 

 

174,745

 

 

172,524

 

 

158,638

 

Total assets

 

 

1,759,218

 

 

2,068,943

 

 

2,069,060

 

 

2,443,687

 

 

2,957,234

 

Total debt and capital lease obligations

 

 

26,725

 

 

269,841

 

 

257,309

 

 

618,379

 

 

853,737

 

Stockholders’ equity

 

 

1,156,485

 

 

1,133,558

 

 

1,066,183

 

 

1,099,719

 

 

1,276,494

 

 
 December 31, 
 
 2010 2011 2012 2013 2014 

Balance Sheet Data:

                

Current assets

 $858,487 $732,709 $871,418 $989,358 $1,167,549 

Current liabilities

  390,169  369,550  393,202  476,267  585,840 

Property and equipment, net

  111,814  118,022  136,548  172,333  171,916 

Total assets

  1,549,432  1,341,167  1,512,133  1,759,218  2,094,157 

Total debt and capital lease obligations

  559      26,725  271,521 

Stockholders' equity

  1,039,015  845,274  1,017,333  1,156,485  1,133,558 

(1)
Includes stock compensation expense of $15.1 million, $17.4 million, $17.8 million, $21.3 million and $40.6 million in 2010, 2011, 2012, 2013 and 2014, respectively.

(1)

Includes stock compensation expense of $21.3 million, $40.6 million, $50.4 million, $37.4 million and $39.1 million in 2013, 2014, 2015, 2016 and 2017, respectively.


(2)

Includes changes in fair value of contingent consideration of $6.2 million, $44.3 million, $(0.1) million and $0.7 million in 2014, 2015, 2016 and 2017, respectively.

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Item 7.    Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company'sCompany’s financial condition and results of operations should be read in conjunction with the Company'sCompany’s selected financial data and the Company'sCompany’s financial statements and the accompanying notes included herein. The following discussion may contain "forward-looking statements"“forward‑looking statements” within the meaning of the Securities Act and the Exchange Act. When used in this Form 10-K,10‑K, the words "estimate," "anticipate," "expect," "believe," "should"“estimate,” “anticipate,” “expect,” “believe,” “should” and similar expressions are intended to be forward-lookingforward‑looking statements. Although the Company believes that its plans, intentions and expectations reflected in such forward-lookingforward‑looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Prospective investors are cautioned that any such forward-lookingforward‑looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-lookingforward‑looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-lookingforward‑looking statements are set forth under the heading "Risk Factors"“Risk Factors” in Item 1A and elsewhere in this Form 10-K.10‑K. Capitalized or defined terms included in this Item 7 have the meanings set forth in Item 1 of this Form 10-K.10‑K.

Business Overview

        Magellan Health, Inc. ("Magellan") was incorporated in 1969 under the laws of the State of Delaware. Magellan's executive offices are located at 4800 Scottsdale Road, Suite 400, Scottsdale, Arizona 85251, and its telephone number at that location is (602) 572-6050. References in this report to the "Company" include Magellan and its subsidiaries.

Business Overview

The Company is engaged in the healthcare management business, and is focused on meeting needs in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special population management. The Company provides services to health plans and other managed care organizations ("MCOs"),MCOs, employers, labor unions, various military and governmental agencies, third party administrators,TPAs, consultants and brokers. The Company'sCompany’s business is divided into the following fivethree segments, based on the services it provides and/or the customers that it serves, as described below.serves. See Item 1—“Business” for more information on the Company’s business segments.

Managed Healthcare

        Two of the Company's segments are in the managed healthcare business. This line of business reflects the Company's: (i) management of behavioral healthcare services, and (ii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations, delivered through Magellan Complete Care ("MCC"). The Company's coordination and management of physical and behavioral healthcare includes services provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals and ancillary service providers. This network of credentialed and privileged providers is integrated with clinical and quality improvement programs to enhance the healthcare experience for individuals in need of care, while at the same time managing the cost of these services for our customers. The treatment services provided through the Company's provider network include outpatient programs, intermediate care programs, inpatient treatment and crisis intervention services. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.

        The Company's integrated management of physical and behavioral healthcare includes full service health plans which providefollowing tables summarize, for the holistic management of special populations. These special populations include individuals with serious mental illness, dual eligibles, those eligibleperiods indicated, revenues and covered lives for long term careHealthcare by product classification and other populations with unique and often complex healthcare needs.customer type (in thousands):


 

 

 

 

 

 

 

 

Covered lives as of

 

 

 

December 31, 2017

 

 

    

Risk-based

    

ASO

 

Commercial

 

 

 

 

 

Behavioral(1)

 

14,521

 

11,176

 

Specialty

 

8,890

 

15,583

 

Government(2)

 

4,210

 

1,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue for the year ended

 

 

 

December 31, 2017

 

 

    

Risk-based

    

ASO

    

Total

 

Commercial

 

 

 

 

 

 

 

 

 

 

Behavioral(1)

 

$

421,323

 

$

132,383

 

$

553,706

 

Specialty

 

 

592,685

 

 

79,560

 

 

672,245

 

Government(2)

 

 

1,883,113

 

 

97,213

 

 

1,980,326

 

Total

 

$

2,897,121

 

$

309,156

 

$

3,206,277

 


(1)

Includes revenues of $49.4 million from EAP services provided on a risk basis to health plans and employers with 10.8 million covered lives.

(2)

Includes revenues of $332.6 million from EAP services provided on a risk basis to federal governmental entities with 3.7 million covered lives.

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        The Company provides its management services primarily through: (i) risk-based products, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month fee, (ii) administrative services only ("ASO") products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume responsibility for the cost of the treatment services, and (iii) employee assistance programs ("EAPs") where the Company provides short-term outpatient behavioral counseling services.

        The managed healthcare business includes the following two segments, which are differentiated based on the services provided and/or the customers served:

        Commercial.    The Managed Healthcare Commercial segment ("Commercial") generally reflects managed behavioral healthcare services and EAP services provided under contracts with health plans, insurance companies and MCOs for some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations, governmental agencies, military and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements.

        Public Sector.    The Managed Healthcare Public Sector segment ("Public Sector") generally reflects: (i) the management of behavioral health services provided to recipients under Medicaid and other state sponsored programs under contracts with state and local governmental agencies, and (ii) the integrated management of physical, behavioral and pharmaceutical care for special populations covered under Medicaid and other government sponsored programs. Public Sector contracts encompass either risk-based or ASO arrangements.

Specialty Solutions

        The Specialty Solutions segment ("Specialty Solutions") generally reflects the management of the delivery of diagnostic imaging (radiology benefits management or "RBM") and a variety of other specialty areas such as radiation oncology, obstetrical ultrasound, cardiology and musculoskeletal management to ensure that such services are clinically appropriate and cost effective. The Company's Specialty Solutions services are currently provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid recipients. The Company offers its Specialty Solutions services through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing services, and through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the services.

Pharmacy Management

        TheDuring 2017, Pharmacy Management segment ("Pharmacy Management") comprises productspaid 29.1 million adjusted commercial network claims in its PBM business, 80.7 million adjusted PBA claims and solutions that provide clinical0.1 million specialty dispensing claims. Adjusted claim totals apply a multiple of three for each 90‑day and financial management of drugs paid under medical and pharmacy benefit programs. Pharmacy Management's services include (i) traditional pharmacy benefit management ("PBM") services; (ii) pharmacy benefit administration ("PBA") for state Medicaid and other government sponsored programs; (iii) specialty pharmaceutical dispensing operations, contracting and formulary optimization programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement. In addition, Pharmacy Management has subcontract arrangements to provide PBM services for certain Public Sector customers.

        The Company's Pharmacy Management programs are provided under contracts with health plans, employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass risk-based and fee-for-service ("FFS") arrangements.


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Corporate

        This segment of the Company is comprised primarily of operational support functions such as sales and marketing and information technology, as well as corporate support functions such as executive, finance, human resources and legal.

Acquisition of Partners Rx Management LLC

        Pursuant to the September 6, 2013 Agreement and Plan of Merger (the "Merger Agreement") with Partners Rx Management, LLC ("Partners Rx"), on October 1, 2013 the Company acquired all of the outstanding ownership interests of Partners Rx. Partners Rx is a full-service commercial PBM with a strong focus on health plans and self-funded employers primarily through sales through third party administrators, consultants and brokers. As consideration for the transaction, the Company paid $99.3 million in cash, including net receipts of $0.7 million for working capital adjustments. The Company funded the acquisition with cash on hand.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.

Acquisition of AlphaCare Holdings, Inc.

        Pursuant to the August 13, 2013 stock purchase agreement (the "Stock Purchase Agreement"), on December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, Inc. ("AlphaCare Holdings"), the holding company for AlphaCare New York, Inc. ("AlphaCare"), a Health Maintenance Organization ("HMO") in New York that operates a New York Managed Long-Term Care Plan ("MLTCP") in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in Bronx, New York, Queens and Kings Counties.

        Prior to December 31, 2013, the Company held a 7% equity interest in AlphaCare through a previous equity investment of $2.0 million in preferred membership units of AlphaCare's previous holding company, AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to AlphaCare Holdings, LLC. As part of the Stock Purchase Agreement, AlphaCare Holdings, LLC was reorganized into a Delaware corporation, and on December 31, 2013 the preferred membership units and the loan were converted into Series A Participating Preferred Stock ("Series A Preferred") of AlphaCare Holdings and the Company purchased an additional $17.4 million of Series A Preferred. During 2014, the Company purchased $2.2 million in common shares from the minority owners of AlphaCare. During 2014, the Company also purchased an additional $8.9 million in shares of Series B Participating Preferred Stock and Series C Participating Preferred Stock issued by AlphaCare Holdings.mail claim. As of December 31, 2014, the Company held2017, Pharmacy Management had a 75% voting interestgeneric dispensing rate of 87.3 percent within its commercial PBM business and served 1.9 million commercial PBM members, 13.1 million members in its medical pharmacy management programs, and 27 states and the remaining shareholders held a 25% voting interest in AlphaCare Holdings.

        Based on the Company's 75% equity and voting interest in AlphaCare Holdings, the Company has included the resultsDistrict of operationsColumbia in its consolidated financial statements. PBA business.

Critical Accounting Policies and Estimates

The Company reports the resultspreparation of operations of AlphaCare Holdings within the Public Sector segment.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.

Acquisitionin conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of CDMI, LLC

        Pursuant toassets and liabilities and the March 31, 2014 purchase agreement (the "CDMI Agreement") with CDMI, LLC ("CDMI"), on April 30, 2014 the Company acquired alldisclosure of the outstanding equity interests of CDMI. CDMI provides a range of clinical consulting programscontingent assets and negotiates and administers drug rebates for managed care organizations and other customers. As consideration for the transaction, the Company paid a base price of $201.1 million, including net receipts of $3.9 million for working capital adjustments. Pursuant to the CDMI Agreement, the sellers and certain key management of CDMI


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purchased a total of $80.0 million in Magellan restricted common stock, which will generally vest over a 42-month period, conditioned upon continued employment. In addition to the base purchase price, the CDMI Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016.

        The Company reports the results of operations of CDMI within its Pharmacy Management segment.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.

Other Acquisitions

        Pursuant to the July 1, 2014 purchase agreement (the "Cobalt Agreement") with Cobalt Therapeutics, LLC ("Cobalt"), the Company acquired all of the outstanding equity interests of Cobalt. Cobalt provides computerized cognitive behavioral therapy self-service programs. As consideration for the transaction, the Company paid a base price of $8.0 million in cash, subject to working capital adjustments. In addition to the base purchase price, the Cobalt Agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017. The purchase price has been allocated based upon the estimated fair value of net assets acquiredliabilities at the date of acquisition.the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company will make appropriate adjustmentsconsiders the following to the purchase price allocations prior to the completion of the measurement period as required.be its critical accounting policies and estimates:

        The Company reports the results of operations of Cobalt within its Commercial segment.

        For further discussion, see Note 3—"Acquisitions" to the consolidated financial statements set forth elsewhere herein.

Managed Care and Other Revenue

        Managed Care Revenue.    Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period that terms to the amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $2.5 billion, $2.7 billion and $2.6 billion for the years ended December 31, 2012, 2013 and 2014, respectively.

        Fee-For-Service and Cost-Plus Contracts.    The Company has certain fee-for-service contracts, including cost-plus contracts, with customers under which the Company recognizes revenue as services are performed and as costs are incurred. This includes revenues received in relation to ACA fees billed on a cost reimbursement basis. Revenues from these contracts approximated $151.4 million, $215.1 million and $290.9 million for the years ended December 31, 2012, 2013 and 2014, respectively.

        Block Grant Revenues.    The Maricopa Contract (as defined below) was partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $124.8 million, $131.5 million and $33.3 million for the years ended December 31, 2012, 2013 and 2014, respectively.


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        Performance-Based Revenue.    The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were $25.4 million, $14.0 million and $12.0 million for the years ended December 31, 2012, 2013 and 2014, respectively.

        Rebate Revenue.    The Company administers a rebate program for certain clients through which the Company coordinates the achievement, calculation and collection of rebates and administrative fees from pharmaceutical manufacturers on behalf of clients. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company's clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues for the years ended December 31, 2012, 2013 and 2014 were $40.2 million, $34.8 million and $43.6 million, respectively.

        In relation to the Company's PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers are recorded as a reduction of cost of goods sold.

PBM and Dispensing Revenue

        Pharmacy Benefit Management Revenue.    The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments collected by the pharmacy and any associated administrative fees, when claims are adjudicated. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as the principal in the arrangement and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client's members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. Prior to the year ended December 31, 2013 the Company had no PBM business. PBM revenues were $106.7 million and $575.7 million for the years ended December 31, 2013 and 2014, respectively.

        Dispensing Revenue.    The Company recognizes dispensing revenue, which includes the co-payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the Company's customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund. Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were $350.3 million, $376.6 million and $216.0 million for the years ended December 31, 2012, 2013 and 2014, respectively.

Cost of Care, Medical Claims Payable and Other Medical Liabilities

Cost of care is recognized in the period in which members receive managed healthcare services. In addition to actual benefits paid, cost of care in a period also includes the impact of accruals for


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estimates of medical claims payable. Medical claims payable represents the liability for healthcare claims reported but not yet paid and claims IBNR related to the Company'sCompany’s managed healthcare businesses. Such liabilities are determined by employing actuarial methods that are commonly used by health insurance actuaries and that meet actuarial standards of practice. Cost of care for the Company’s EAP contracts, which are mainly with the United States federal government, pertain to the costs to employ licensed behavioral health counselors to deliver non-medical counseling for these contracts.

The IBNR portion of medical claims payable is estimated based on past claims payment experience for member groups, enrollment data, utilization statistics, authorized healthcare services and other factors. This data is incorporated into contract-specificcontract‑specific actuarial reserve models and is further analyzed to create "completion factors"“completion factors” that represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Factors that affect estimated completion factors include benefit changes, enrollment changes, shifts in product mix, seasonality influences, provider reimbursement changes, changes in claims inventory levels, the speed of claims processing and changes in paid claim levels. Completion factors are applied to claims paid through the financial statement date to estimate the ultimate claim expense incurred for the current period. Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims. For the most recent incurred months (generally the most recent two months), the percentage of claims paid for claims incurred in those months is generally low. This makes the completion factor methodology less reliable for such months. Therefore, incurred claims for any month with a completion factor that is less than 70 percent are generally not projected from historical completion and payment patterns; rather they are projected by estimating claims expense based on recent monthly estimated cost incurred per member per month times membership, taking into account seasonality influences, benefit changes and healthcare trend levels, collectively considered to be "trend“trend factors."” For new contracts, the Company estimates IBNR based on underwriting data until it has sufficient data to utilize these methodologies.

Medical claims payable balances are continually monitored and reviewed. If it is determined that the Company'sCompany’s assumptions in estimating such liabilities are significantly different than actual results, the Company'sCompany’s results of operations and financial position could be impacted in future periods. Adjustments of prior period estimates may result in additional cost of care or a reduction of cost of care in the period an adjustment is made. Further, due to the considerable variability of healthcare costs, adjustments to claim liabilities occur each period and are sometimes significant as compared to the net income recorded in that period. Prior period development is recognized immediately upon the actuary'sactuary’s judgment that a portion of the prior period liability is no longer needed or that additional


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liability should have been accrued. The following table presents the components of the change in medical claims payable for the years ended December 31, 2012, 20132015, 2016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Claims payable and IBNR, beginning of period

 

$

278,803

 

$

253,299

 

$

188,618

 

Cost of care:

 

 

 

 

 

 

 

 

 

 

Current year

 

 

2,297,255

 

 

1,892,914

 

 

2,421,270

 

Prior years(3)

 

 

(22,500)

 

 

(10,300)

 

 

(7,500)

 

Total cost of care

 

 

2,274,755

 

 

1,882,614

 

 

2,413,770

 

Claim payments and transfers to other medical liabilities(1):

 

 

 

 

 

 

 

 

 

 

Current year

 

 

2,077,729

 

 

1,733,310

 

 

2,210,346

 

Prior years

 

 

222,530

 

 

213,985

 

 

161,798

 

Total claim payments and transfers to other medical liabilities

 

 

2,300,259

 

 

1,947,295

 

 

2,372,144

 

Acquisition of SWH

 

 

 —

 

 

 —

 

 

96,398

 

Claims payable and IBNR, end of period

 

 

253,299

 

 

188,618

 

 

326,642

 

Withhold (receivables) payable, end of period(2)

 

 

(2,850)

 

 

(4,482)

 

 

983

 

Medical claims payable, end of period

 

$

250,449

 

$

184,136

 

$

327,625

 

 
 2012 2013 2014 

Claims payable and IBNR, beginning of period

 $157,099 $222,929 $242,229 

Cost of care:

          

Current year

  2,076,190  2,264,276  2,097,395 

Prior years(3)

  (4,300) (31,300) (8,800)

Total cost of care

  2,071,890  2,232,976  2,088,595 

Claim payments and transfers to other medical liabilities(1):

          

Current year

  1,877,459  2,053,274  1,845,325 

Prior years

  128,601  160,402  206,696 

Total claim payments and transfers to other medical liabilities

  2,006,060  2,213,676  2,052,021 

Claims payable and IBNR, end of period

  222,929  242,229  278,803 

Withhold receivables, end of period(2)

  (24,500) (13,888) (321)

Medical claims payable, end of period

 $198,429 $228,341 $278,482 

(1)
For any given period, a portion of unpaid medical claims payable could be covered by reinvestment liability (discussed below) and may not impact the Company's results of operations for such periods.

(2)
Medical claims payable is offset by customer withholds from capitation payments in situations in which the customer has the contractual requirement to pay providers for care incurred.

(3)
Favorable development in 2012, 2013, and 2014 was $4.3 million, $31.3 million, and $8.8 million, respectively.

(1)

For any given period, a portion of unpaid medical claims payable could be covered by reinvestment liability (discussed below) and may not impact the Company’s results of operations for such periods.

(2)

Medical claims payable is offset by customer withholds from capitation payments in situations in which the customer has the contractual requirement to pay providers for care incurred.

(3)

Favorable development in 2015, 2016 and 2017 was $22.5 million, $10.3 million and $7.5 million, respectively, and was mainly related to lower medical trends and faster claims completion than originally assumed.

Actuarial standards of practice require that the claim liabilities be adequate under moderately adverse circumstances. Adverse circumstances are situations in which the actual claims experience could be higher than the otherwise estimated value of such claims. In many situations, the claims paid amount experienced will be less than the estimate that satisfies the actuarial standards of practice. Any prior period favorable cost of care development related to a lack of moderately adverse conditions is excluded from "Cost“Cost of Care—Prior Years"Years” adjustments, as a similar provision for moderately adverse conditions is established for current year cost of care liabilities and therefore does not generally impact net income.


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Care trend factors and completion factors can have a significant impact on the medical claims payable liability. The following example provides the estimated impact to the Company'sCompany’s December 31, 20142017 unpaid medical claims payable liability assuming hypothetical changes in care trend factors and completion factors:

 

 

 

 

 

 

 

 

 

Care Trend Factor(1)Care Trend Factor(1) Completion Factor(2) 

Care Trend Factor(1)

 

Completion Factor(2)

 

(Decrease) Increase(Decrease) Increase (Decrease) Increase 

(Decrease) Increase

 

(Decrease) Increase

 

Trend Factor
Trend Factor
 Medical Claims Payable Completion Factor Medical Claims Payable 

    

Medical Claims Payable

    

Completion Factor

    

Medical Claims Payable

 



 (in thousands)
  
 (in thousands)
 

 

 

(in thousands)

 

 

 

 

(in thousands)

 

–3%$(9,000) –3%$(49,000)
–2% (6,000) –2% (32,500)
–1% (3,000) –1% (16,000)
1% 3,000 1% 16,000 
2% 6,000 2% 32,500 
3% 9,000 3% 49,000 

−4

%  

$

(20,500)

 

−2

%  

$

(45,000)

 

−3

%  

 

(15,500)

 

−1.5

%  

 

(34,000)

 

−2

%  

 

(10,500)

 

−1

%  

 

(22,500)

 

−1

%  

 

(5,000)

 

−0.5

%  

 

(11,500)

 

1

%  

 

5,000

 

0.5

%  

 

11,500

 

2

%  

 

10,500

 

 1

%  

 

23,000

 

3

%  

 

15,500

 

1.5

%  

 

35,000

 

4

%  

 

20,500

 

 2

%  

 

46,500

 

Approximately 70 percent of IBNR dollars is based on care trend factors.


(1)
Assumes a change in the care trend factor for any month that a completion factor is not used to estimate incurred claims (which is generally any month that is less than 70 percent complete).

(2)
Assumes a change in the completion factor for any month for which completion factors are used to estimate IBNR (which is generally any month that is 70 percent or more complete).

(1)

Assumes a change in the care trend factor for any month that a completion factor is not used to estimate incurred claims (which is generally any month that is less than 70 percent complete).

(2)

Assumes a change in the completion factor for any month for which completion factors are used to estimate IBNR (which is generally any month that is 70 percent or more complete).

Due to the existence of risk sharing and reinvestment provisions in certain customer contracts, a change in the estimate for medical claims payable does not necessarily result in an equivalent impact on cost of care.

The Company believes that the amount of medical claims payable is adequate to cover its ultimate liability for unpaid claims as of December 31, 2014;2017; however, actual claims payments may differ from established estimates.

Other medical liabilities consist primarily of "reinvestment"amounts payable to pharmacies for claims that have been adjudicated by the Company but not yet paid. Other medical liabilities also include “reinvestment” payables under certain managed healthcare contracts with Medicaid customers and "profit share"“profit share” payables under certain risk-basedrisk‑based contracts. Under a contract with reinvestment features, if the cost of care is less than certain minimum amounts specified in the contract (usually as a percentage of revenue), the Company is required to "reinvest"“reinvest” such difference in behavioral healthcare programs when and as specified by the customer or to pay the difference to the customer for their use in funding such programs. Under a contract with profit share provisions, if the cost of care is below certain specified levels, the Company will "share"“share” the cost savings with the customer at the percentages set forth in the contract. In addition, certain contracts include provisions to provide the Company additional funding if the cost of care is above the specified levels.

Long-lived AssetsGoodwill

        Long-lived assets, including property and equipment and definite lived intangible assets to be held and used, are currently reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is determined by comparing the carrying value of these long-lived assets to management's best estimate of the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The cash flow projections used to make this assessment are consistent with the cash flow projections that management uses internally in making key decisions. In the event an impairment exists, a loss is recognized based on the


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amount by which the carrying value exceeds the fair value of the asset, which is generally determined by using quoted market prices for similar assets or the discounted present value of expected future cash flows.

Goodwill

The Company is required to test its goodwill for impairment on at least an annual basis. The Company has selected October 1 as the date of its annual impairment test. The goodwill impairment test is a two-steptwo‑step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit with goodwill based on various valuation techniques, with the primary technique being a discounted cash flow analysis, which requires the input of various assumptions with respect to revenues, operating margins, growth rates and discount rates. The estimated fair value for each reporting unit is compared to the carrying value of the reporting unit, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an "implied“implied fair value"value” of goodwill. The determination of a reporting unit's "impliedunit’s “implied fair value"value” of goodwill requires the Company to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the "implied“implied fair value"value” of goodwill, which is compared to its corresponding carrying value.

Goodwill is tested for impairment at a level referred to as a reporting unit, with the Company'sCompany’s reporting units with goodwill as of December 31, 20142017 comprised of Health Plan, Specialty Solutions,Commercial, Government and Pharmacy Management and Magellan Complete Care.Management.

The fair value of the Health PlanCommercial (a component of the CommercialHealthcare segment), Specialty Solutions, and Magellan Complete CareGovernment (a component of the Public SectorHealthcare segment) and Pharmacy Management reporting units were determined using a discounted cash flow method. This method involves estimating the present value of estimated future cash flows utilizing a risk adjusted discount rate. Key assumptions for this method include cash flow projections, terminal growth rates and discount rates.

        The fair value of the Pharmacy Management reporting unit was determined using discounted cash flow, guideline company and similar transaction methods. Key assumptions for the discounted cash flow method are consistent with those described above. For the guideline company method, revenue and earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiples for guideline companies were applied to the reporting unit's pro forma revenue and EDITDA for 2014, which represents actual results for the nine-month period ended September 30, 2014 and projected results for the three-month period ended December 31, 2014, and to the reporting unit's projected revenue and EBITDA for 2015. For the similar transaction method, revenue and EBITDA multiples based on merger and acquisition transactions for similar companies were applied to the reporting unit's pro forma revenue and EBITDA for 2014, which represents actual results for the nine-month period ended September 30, 2014 and projected results for the three-month period ended December 31, 2014. The weighting applied to the fair values determined using the discounted cash flow, guideline company and similar transaction methods to determine an overall fair value for the Pharmacy Management reporting unit was 75 percent, 22.5 percent and 2.5 percent, respectively. The weighting of each of the methods described above was based on the relevance of the approach. A change in the weighting would not change the outcome of the first step of the impairment test.

        As a result of the first step of the 2014 annual goodwill impairment analysis, the fair value of each reporting unit with goodwill exceeded its carrying value with a range of 40.0 percent to 66.5 percent. Therefore, the second step was not necessary.


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Goodwill for each of the Company'sCompany’s reporting units with goodwill at December 31, 20132016 and 20142017 were as follows (in thousands):

 
 2013 2014 

Health Plan

 $120,485 $129,042 

Specialty Solutions

  104,549  104,549 

Pharmacy Management

  242,290  311,636 

Magellan Complete Care

  20,882  20,879 

Total

 $488,206 $566,106 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

2016

 

2017

 

Commercial

 

$

242,255

 

$

242,255

 

Government

 

 

108,321

 

 

368,612

 

Pharmacy Management

 

 

391,478

 

 

395,421

 

Total

 

$

742,054

 

$

1,006,288

 

 

The changes in the carrying amount of goodwill for the years ended December 31, 20132016 and 20142017 are reflected in the table below (in thousands):

 
 2013 2014 

Balance as of beginning of period

 $426,939 $488,206 

Acquisition of Partners Rx(1)

  40,385  254 

Acquisition of AlphaCare Holdings(1)

  20,882  (3)

Acquisition of CDMI

    69,092 

Acquisition of Cobalt

    8,557 

Balance as of end of period

 $488,206 $566,106 

(1)
Activity for the year ended December 31, 2014 represents measurement period adjustments.

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

2016

 

2017

 

Balance as of beginning of period

 

$

621,390

 

$

742,054

 

Acquisition of AFSC

 

 

76,736

 

 

 —

 

Acquisition of Veridicus

 

 

30,705

 

 

1,647

 

Acquisition of SWH

 

 

 —

 

 

260,139

 

Other acquisitions and measurement period adjustments

 

 

13,223

 

 

2,448

 

Balance as of end of period

 

$

742,054

 

$

1,006,288

 

Stock Compensation

        At December 31, 2013 and 2014, the Company had equity-based employee incentive plans, which are described more fully in Note 6—"Stockholders' Equity" to the consolidated financial statements set forth elsewhere herein. In addition, the Company issued restricted stock awards associated with the Partners Rx and CDMI acquisitions, which are described more fully in Item 5—"Recent Sales of Unregistered Securities". The Company recorded stock compensation expense of $21.3 million and $40.6 million for the years ended December 31, 2013 and 2014, respectively. The Company recognizes compensation costs for awards that do not contain performance conditions on a straight-line basis over the requisite service period, which is generally the vesting term of three years. For restricted stock units that include performance conditions, stock compensation is recognized using an accelerated method over the vesting period.

        The Company estimates the fair value of substantially all stock options using the Black-Scholes-Merton option pricing model that employs certain factors including expected volatility of stock price, expected life of the option, risk-free interest rate and expected dividend yield. For the years ended December 31, 2013 and 2014, such volatility was based on the historical volatility of the Company's stock price. The expected term of the option is based on historical employee stock option exercise behavior and the vesting terms of the respective option. Risk-free interest rates are based on the U.S. Treasury yield in effect at the time of grant.

        The Company recognizes compensation expense for only the portion of options, restricted stock or restricted stock units that are ultimately expected to vest. Therefore, estimated forfeiture rates are derived from historical employee termination behavior. The Company's estimated forfeiture rate for the years ended December 31, 2013 and 2014 was four percent. If the actual number of forfeitures differs from those estimated, additional adjustments to compensation expense may be required in future periods. If vesting of an award is conditioned upon the achievement of performance goals,


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compensation expense during the performance period is estimated using the most probable outcome of the performance goals, and adjusted as the expected outcome changes.

Income Taxes

        The Company files a consolidated federal income tax return for the Company and its eighty-percent or more owned subsidiaries, and a consolidated federal income tax return for AlphaCare and its parent, AlphaCare Holdings. The Company and its subsidiaries also file income tax returns in various state and local jurisdictions.

The Company estimates income taxes for each of the jurisdictions in which it operates. This process involves determining both permanent and temporary differences resulting from differing treatment for tax and book purposes. Deferred tax assets and/or liabilities are determined by multiplying the temporary differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The Company then assesses the likelihood that the deferred tax assets will be recovered from the reversal of temporary differences, the implementation of feasible and prudent tax planning strategies, and future taxable income. To the extent the Company cannot conclude that recovery is more likely than not, it establishes a valuation allowance. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.

        The Company has $3.0 million of federal net operating loss carryforwards ("NOLs") available to reduce its consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2017 through 2019 if not used and are subject to examination and adjustment by the Internal Revenue Service ("IRS"). AlphaCare has $24.5 million of federal NOLs available to reduce its consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2033 through 2034 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $160.5 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2015 and subsequent years. Most of these NOLs will expire in 2017 through 2034 if not used and are subject to examination and adjustment by the respective state tax authorities.

        The Company's valuation allowances against deferred tax assets were $3.1 million and $12.4 million as of December 31, 2013 and 2014, respectively, mostly relating to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and certain state NOLs. Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. Future changes in the estimated realizable portion of deferred tax assets could materially affect the Company'sCompany’s financial condition and results of operations.

        AsOn December 22, 2017, the President of the United States signed into law the “Tax Cuts and Jobs Act” (the “Tax Act”). The legislation includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. The legislation also provides for the acceleration of depreciation on certain assets placed in service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on the deduction of executive compensation.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to determine a reasonable estimate to be included as provisional amounts and provides a measurement period by which the accounting must be completed.

The measurement period ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740 but under no circumstances is the measurement period to extend beyond one year from the enactment date (i.e. December 22, 2018). The Company has recognized the provisional tax impacts related to the re-measurement of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The Company will continue to analyze the Tax Act and additional technical and interpretive guidance on the Tax Act from the government and will complete its accounting no later than December 22, 2018. 

The Company did not identify any items for which a reasonable estimate of the income tax effects of the Tax Act could not be determined as of December 31, 2014, $13.5 million2017. However, the Company has recognized the provisional tax impacts related to the remeasurement of unrecognizeddeferred tax benefits wereassets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. Additionally, any changes to the tax contingencies. basis for temporary differences between the estimates in these statements and the 2017 federal return filed by the Company will result in a corresponding adjustment to the remeasurement of deferred taxes as of the enactment date of the Tax Act. Any such adjustments will be recorded to tax expense in the quarter of 2018 when the analysis is complete.

The tax benefit from an uncertain tax position is recognized when it is more likely than not that, based on the technical merits, the position will be sustained by the taxing authorities upon examination, including resolution of related appeals or litigation processes. If all unrecognizedSignificant judgment is required in determining the Company’s uncertain tax benefits had been realizedpositions. Accruals for uncertain tax positions are established using the Company’s best judgment and adjustments are made, as of December 31, 2014, $9.2 million would have reduced income tax expense.

        The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2010 expired during 2014. As a result, $19.5 million of unrecognized tax benefits recorded as of December 31, 2013 were reversed in the current year, of which $16.0 million was reflected as a reduction to income tax expense, $2.6 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued interest was


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reversed in 2014 and reflected as a reduction to income tax expensewarranted, due to the closing of statutes of limitations on tax assessments.

changing facts and circumstances. The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2009 expired during 2013. As a result, $28.6 million of unrecognized tax benefits recorded as of December 31, 2012 were reversed in 2013, of which $23.2 million was reflected as a reduction to income tax expense, $3.9 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1 million of accrued interest was reversed in 2013 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

        The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2008 expired during 2012. As a result, $43.3 million of unrecognized tax benefits recorded as of December 31, 2011 were reversed in 2012, of which $35.7 million was reflected as a reduction to income tax expense, $6.2 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued interest and $0.8 million of unrecognized state tax benefits were reversed in 2012 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments and changes in tax return elections, respectively.

        With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years ended prior to 2011. Further, it is reasonably possible the statutes of limitations regarding the assessment of federal and most state and local income taxes for 2011 could expire during 2015. Also, unrecognized tax benefits could be reversed during 2015 as the result of resolution of certain state tax examinations. Up to $4.2 million of unrecognized tax benefits recorded as of December 31, 2014 could be reversed during 2015 as a result of statute expirations and settlement of these state examinations, of which $2.7 million would be reflected as a reduction to income tax expense, $1.4 million as a decrease to deferred tax assets, and the remainder as an increase to additional paid-in capital. All reversals from statute expirations and examination resolutions would be reflected as discrete adjustments during the quarter in which the respective event occurs.

        In addition to reversals for statute closings, the Company also adjusts its tax contingency liabilities for unrecognized tax benefits when its judgment changes as a result of the evaluation of new information not previously available. However, the ultimate resolution of a disputed tax position following an examination by a taxing authority could result in a payment that is materially different from that accrued by the Company. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. However, reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the related book expense are recorded as increases in additional paid-in capital. To the extent reversals of unrecognized tax benefits cannot be specifically traced to these excess deductions due to complexities in the tax law, the Company records the tax benefit for such reversals to additional paid-in-capital on a pro-rata basis.

Results of Operations

The accounting policies of the Company'sCompany’s segments are the same as those described in Note 1—"General." The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes ("(“Segment Profit"Profit”). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Public SectorHealthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Public Sector's


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Healthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company'sCompany’s employees covered under its medical plan. As such, revenue, cost of care, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company's segments are defined above.

The following tables summarize, for the periods indicated, operating results by business segment (in thousands):

 
 Commercial Public
Sector
 Specialty
Solutions
 Pharmacy
Management
 Corporate
and
Elimination
 Consolidated 

Year Ended December 31, 2012

                   

Managed care and other revenue

 $728,512 $1,620,875 $349,133 $227,669 $(69,090)$2,857,099 

Dispensing revenue

        350,298    350,298 

Cost of care

  (437,518) (1,413,320) (228,383) (61,759) 69,090  (2,071,890)

Cost of goods sold

        (328,414)   (328,414)

Direct service costs and other

  (172,035) (89,129) (55,418) (111,593) (129,337) (557,512)

Stock compensation expense(1)

  532  1,111  1,567  1,007  13,566  17,783 

Segment profit (loss)

 $119,491 $119,537 $66,899 $77,208 $(115,771)$267,364 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Corporate

    

 

 

 

 

 

 

 

 

Pharmacy

 

and

 

 

 

 

 

 

Healthcare

 

Management

 

Elimination

 

Consolidated

 

Year Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other revenue

 

$

2,959,252

 

$

238,456

 

$

(63)

 

$

3,197,645

 

PBM and dispensing revenue

 

 

 —

 

 

1,510,180

 

 

(110,425)

 

 

1,399,755

 

Cost of care

 

 

(2,274,755)

 

 

 —

 

 

 —

 

 

(2,274,755)

 

Cost of goods sold

 

 

 —

 

 

(1,427,680)

 

 

105,803

 

 

(1,321,877)

 

Direct service costs and other (1)

 

 

(510,811)

 

 

(284,968)

 

 

(26,613)

 

 

(822,392)

 

Stock compensation expense (1)

 

 

8,502

 

 

36,351

 

 

5,531

 

 

50,384

 

Changes in fair value of contingent consideration (1)

 

 

(1,404)

 

 

45,661

 

 

 —

 

 

44,257

 

Less: non-controlling interest segment profit (loss) (2)

 

 

(2,439)

 

 

 —

 

 

(195)

 

 

(2,634)

 

Segment profit (loss)

 

$

183,223

 

$

118,000

 

$

(25,572)

 

$

275,651

 

 

 
 Commercial Public
Sector
 Specialty
Solutions
 Pharmacy
Management
 Corporate
and
Elimination
 Consolidated 

Year Ended December 31, 2013

                   

Managed care and other revenue

 $766,841 $1,757,933 $375,818 $228,705 $(66,248)$3,063,049 

PBM and dispensing revenue

        483,268    483,268 

Cost of care

  (469,478) (1,523,023) (247,496) (59,227) 66,248  (2,232,976)

Cost of goods sold

        (455,601)   (455,601)

Direct service costs and other

  (172,491) (122,819) (57,334) (128,427) (138,475) (619,546)

Stock compensation expense(1)

  503  1,038  1,630  1,172  16,909  21,252 

Segment profit (loss)

 $125,375 $113,129 $72,618 $69,890 $(121,566)$259,446 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Corporate

    

 

 

 

 

 

 

 

 

Pharmacy

 

and

 

 

 

 

 

 

Healthcare

 

Management

 

Elimination

 

Consolidated

 

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other revenue

 

$

2,659,685

 

$

243,561

 

$

(304)

 

$

2,902,942

 

PBM and dispensing revenue

 

 

 —

 

 

2,053,188

 

 

(119,246)

 

 

1,933,942

 

Cost of care

 

 

(1,882,614)

 

 

 —

 

 

 —

 

 

(1,882,614)

 

Cost of goods sold

 

 

 —

 

 

(1,933,086)

 

 

114,366

 

 

(1,818,720)

 

Direct service costs and other (1)

 

 

(573,706)

 

 

(261,570)

 

 

(41,336)

 

 

(876,612)

 

Stock compensation expense (1)

 

 

4,440

 

 

20,509

 

 

12,473

 

 

37,422

 

Changes in fair value of contingent consideration (1)

 

 

(231)

 

 

127

 

 

 —

 

 

(104)

 

Impairment of intangible assets (1)

 

 

4,800

 

 

 —

 

 

 —

 

 

4,800

 

Less: non-controlling interest segment profit (loss) (2)

 

 

(567)

 

 

 —

 

 

(170)

 

 

(737)

 

Segment profit (loss)

 

$

212,941

 

$

122,729

 

$

(33,877)

 

$

301,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Corporate

    

 

 

 

 

 

 

 

 

Pharmacy

 

and

 

 

 

 

 

 

Healthcare

 

Management

 

Elimination

 

Consolidated

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other revenue

 

$

3,206,277

 

$

273,489

 

$

(584)

 

$

3,479,182

 

PBM and dispensing revenue

 

 

 —

 

 

2,491,044

 

 

(131,643)

 

 

2,359,401

 

Cost of care

 

 

(2,413,770)

 

 

 —

 

 

 —

 

 

(2,413,770)

 

Cost of goods sold

 

 

 —

 

 

(2,341,979)

 

 

130,069

 

 

(2,211,910)

 

Direct service costs and other (1)

 

 

(601,201)

 

 

(302,525)

 

 

(38,157)

 

 

(941,883)

 

Stock compensation expense (1)

 

 

10,689

 

 

19,881

 

 

8,546

 

 

39,116

 

Changes in fair value of contingent consideration (1)

 

 

696

 

 

 —

 

 

 —

 

 

696

 

Less: non-controlling interest segment profit (loss) (2)

 

 

(56)

 

 

 —

 

 

(3)

 

 

(59)

 

Segment profit (loss)

 

$

202,747

 

$

139,910

 

$

(31,766)

 

$

310,891

 

 
 Commercial Public
Sector
 Specialty
Solutions
 Pharmacy
Management
 Corporate
and
Elimination
 Consolidated 

Year Ended December 31, 2014

                   

Managed care and other revenue

 $673,996 $1,635,609 $471,300 $205,524 $(18,055)$2,968,374 

PBM and dispensing revenue

        844,512  (52,768) 791,744 

Cost of care

  (364,780) (1,385,858) (339,714) (16,298) 18,055  (2,088,595)

Cost of goods sold

        (784,758) 51,809  (732,949)

Direct service costs and other

  (160,341) (187,966) (71,785) (182,833) (120,573) (723,498)

Stock compensation expense(1)

  618  894  1,387  28,829  8,856  40,584 

Changes in fair value of contingent consideration(1)

  38      6,134    6,172 

Less: non-controlling interest segment profit (loss)(2)

    (5,087)       (5,087)

Segment profit (loss)

 $149,531 $67,766 $61,188 $101,110 $(112,676)$266,919 

(1)
Stock compensation expense and changes in the fair value of contingent consideration recorded in relation to acquisitions are included in direct service costs and other operating expenses, however these amounts are excluded from the computation of Segment Profit.

(1)

Stock compensation expense, changes in the fair value of contingent consideration recorded in relation to the acquisitions and impairment of intangible assets are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.


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(2)
The non-controlling interest portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.

(2)

The non‑controlling interest portion of AlphaCare’s segment profit (loss) is excluded from the computation of Segment Profit.

The following table reconciles Segment Profit to consolidated income before income taxes to Segment Profit for the years ended December 31, 2012, 20132015, 2016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 


 2012 2013 2014 

    

2015

    

2016

    

2017

 

Segment Profit

 $267,364 $259,446 $266,919 

Income before income taxes

 

$

71,116

 

$

145,517

 

$

135,224

 

Stock compensation expense

 (17,783) (21,252) (40,584)

 

 

50,384

 

 

37,422

 

 

39,116

 

Changes in fair value of contingent consideration

   (6,172)

 

 

44,257

 

 

(104)

 

 

696

 

Impairment of intangible assets

 

 

 —

 

 

4,800

 

 

 —

 

Non-controlling interest segment profit (loss)

   (5,087)

 

 

2,634

 

 

737

 

 

59

 

Depreciation and amortization

 (60,488) (71,994) (91,070)

 

 

102,844

 

 

106,046

 

 

115,706

 

Interest expense

 (2,247) (3,000) (7,387)

 

 

6,581

 

 

10,193

 

 

25,977

 

Interest and other income

 2,019 1,985 1,301 

 

 

(2,165)

 

 

(2,818)

 

 

(5,887)

 

Income before income taxes

 $188,865 $165,185 $117,920 

Segment Profit

 

$

275,651

 

$

301,793

 

$

310,891

 

Non-GAAP Measures

        The Company reports its financial results in accordance with GAAP, however the Company's management also assesses business performance and makes business decisions regarding the Company's operations using certain non-GAAP measures. In addition to Segment Profit, as defined above, the Company also uses adjusted net income attributable to Magellan Health, Inc. ("Adjusted Net Income") and adjusted net income per common share attributable to Magellan Health, Inc. on a diluted basis ("Adjusted EPS"). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, as well as amortization of identified acquisition intangibles. The Company believes these non-GAAP measures provide a more useful comparison of the Company's underlying business performance from period to period and is more representative of the earnings capacity of the Company. Non-GAAP financial measures we disclose, such as Segment Profit, Adjusted Net Income, and Adjusted EPS, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

        The following table reconciles Adjusted Net Income to net income attributable to Magellan Health, Inc. for the years ended December 31, 2012, 2013, and 2014 (in thousands):

 
 2012 2013 2014 

Adjusted Net Income

 $151,027 $126,683 $110,555 

Adjusted for acquisitions starting in 2013

          

Amortization of acquired intangibles

    (1,453) (13,696)

Stock compensation relating to acquisitions

    (831) (27,594)

Changes in fair value of contingent consideration

      (9,304)

Tax impact

    862  19,443 

Net income attributable to Magellan Health, Inc. 

 $151,027 $125,261 $79,404 

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        The following table reconciles Adjusted EPS to net income per common share attributable to Magellan Health, Inc.—diluted for the years ended December 31, 2012, 2013, and 2014:

 
 2012 2013 2014 

Adjusted EPS

 $5.42 $4.58 $4.04 

Adjusted for acquisitions starting in 2013

          

Amortization of acquired intangibles

    (0.05) (0.50)

Stock compensation relating to acquisitions

    (0.03) (1.01)

Changes in fair value of contingent consideration

      (0.34)

Tax impact

    0.03  0.71 

Net income per common share attributable to Magellan Health, Inc.—Diluted

 $5.42 $4.53 $2.90 

Year ended December 31, 2014 ("2014"2017 (“2017”) compared to the year ended December 31, 2013 ("2013"2016 (“2016”)

CommercialHealthcare

Net Revenue

Net revenue related to CommercialHealthcare increased by 20.6 percent or $546.6 million from 2016 to 2017. The increase in revenue is mainly due to higher membership and net favorable rate changes of $220.5 million, contracts implemented after (or during) 2016 of $210.8 million, revenue for Senior Whole Health acquired on October 31, 2017 of $186.6 million, revenue for AFSC acquired on July 1, 2016 of $92.3 million, net retroactive program changes recorded in 2017 of $23.3 million, revenue for TMG acquired February 29, 2016 of $8.5 million, retroactive profit share in 2017 of $2.6 million, customer settlements in 2017 of $2.0 million and retroactive rate adjustments in 2017 of $1.5 million. These increases were partially offset by terminated contracts of $139.9 million, net revenue recorded for the Patient Protection and Affordable Care Act health insurer fee (“HIF”) in 2016 of $44.0 million, program changes of $5.5 million, performance penalty in 2017 of $4.6 million, the revenue impact of net favorable prior period medical claims development recorded in 2017 of $4.1 million, favorable retroactive rate adjustments recorded in 2016 of $3.3 million and other net decreases of $0.1 million.

Cost of Care

Cost of care increased by 28.2 percent or $531.2 million from 2016 to 2017. The increase in cost of care is primarily due to new contracts implemented after (or during) 2016 of $197.2 million, increased membership and higher care associated with net favorable rate changes of $187.6 million, care cost for Senior Whole Health acquired on October 31, 2017 of $158.9 million, care cost for AFSC acquired on July 1, 2016 of $77.5 million, net retroactive program changes recorded in 2017 of $21.2 million, net favorable prior period medical claims development recorded in 2016 of $10.3 million, litigation settlements in 2017 of $3.0 million and other net unfavorable variances of $15.3 million. These increases were partially offset by terminated contracts of $109.1 million, favorable customer settlements of $11.1 million, net favorable prior period medical claims development recorded in 2017 of $7.5 million, program changes of $6.4 million and favorable 2016 medical claims development recorded after 2016 of $5.7 million. For our commercial contracts, cost of care as a percentage of risk revenue (excluding EAP business) increased from 82.1 percent in 2016 to 86.1 percent in 2017, mainly due to unfavorable care trends. For our government contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 81.8 percent in 2016 to 85.2 percent in 2017, mainly due to business mix and increased revenue due to HIF fees in 2016.

Direct Service Costs

Direct service costs increased by 4.8 percent or $27.5 million from 2016 to 2017 primarily due to costs related to TMG, AFSC, and Senior Whole Health, new business and contract implementation costs, partially offset by terminated contracts, an impairment of intangible assets in 2016 and HIF fees in 2016. Direct service costs decreased as a percentage of revenue from 21.6 percent in 2016 to 18.8 percent in 2017, mainly due to an increase in revenue from business growth and acquisition activity, partially offset by terminated contracts and the acquisitions of TMG, AFSC and Senior Whole Health.

Pharmacy Management

Managed Care and Other Revenue

Managed care and other revenue related to Pharmacy Management increased by 12.3 percent or $29.9 million from 2016 to 2017. This increase is primarily due to Medical pharmacy revenue of $11.7 million,  new contracts implemented after (or during) 2016 of $8.3 million, increased rebate revenue of $6.2 million, revenue for Veridicus acquired on December 13, 2016 of $4.8 million and other net favorable variances of $2.1 million. These increases were partially offset by terminated contracts of $3.2 million.

PBM and Dispensing Revenue

PBM and dispensing revenue related to Pharmacy Management increased by 21.3 percent or $437.9 million from 2016 to 2017. This increase is primarily due to Medicare revenue of $238.5 million, new contracts implemented after (or during) 2016 of $210.2 million, revenue for Veridicus acquired on December 13, 2016 of $173.9 million, pharmacy employer revenue of $49.7 million, pharmacy MCO revenue of $25.1 million, government pharmacy revenue of $11.1 million and other net favorable variances of $1.2 million. These increases were partially offset by terminated  contracts of $252.9 million and net decreased dispensing activity from existing customers of $18.9 million.

Cost of Goods Sold

Cost of goods sold increased by 21.2 percent or $408.9 million from 2016 to 2017. This increase is primarily due to an increase in Medicare of $233.8 million, new contracts implemented after (or during) 2016 of $207.5 million, Veridicus acquired on December 13, 2016 of $159.8 million, an increase in pharmacy employer of $40.5 million, an increase in pharmacy MCO of $21.1 million, government pharmacy of $10.9 million and other net unfavorable variances of $3.9 million. These increases were partially offset by terminated contracts of $247.3 million and net decreased dispensing activity from existing customers of $21.3 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.2 percent in 2016 to 94.0 percent in 2017, mainly due to increases in rebate and medical pharmacy revenue.

Direct Service Costs

Direct service costs increased by 15.7 percent or $41.0 million from 2016 to 2017. This increase is mainly due to the acquisition of Veridicus, contract implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs decreased from 11.4 percent in 2016 to 10.9 percent in 2017, mainly due to an increase in revenue from business growth and acquisitions and a decrease in stock compensation expense.

Corporate and Elimination

Net expenses related to Corporate, which includes eliminations, decreased by 12.113.3 percent or $92.8$6.2 million, primarily due to lower stock compensation expense and discretionary benefits in 2017, partially offset by a litigation settlement in 2017. As a percentage of revenue, corporate and elimination decreased from 1.0 percent in 2016 to 0.7 percent in 2017, mainly due to higher revenue due to acquisitions and new business, lower discretionary benefits and stock compensation expenses.

Depreciation and Amortization

Depreciation and amortization expense increased by 9.1 percent or $9.7 million from 2016 to 2017, primarily due to asset additions after 2016 and acquisition activity.

Interest Expense

Interest expense increased by $15.8 million from 2016 to 2017 mainly due to an increase in interest rates, an increase in the amount of outstanding debt and higher amortization cost related to debt financing.

Interest and Other Income

Interest and other income increased by $3.1 million from 2016 to 2017 primarily due to higher yields and invested balances.

Income Taxes

The Company’s effective income tax rate was 47.9 percent in 2016 and 18.6 percent in 2017. These rates differ from the 2017 federal statutory income tax rate primarily due to state income taxes, remeasurement of deferred tax balances due to the Tax Act, permanent differences between book and tax income, and changes to the valuation allowances. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income taxes. The effective income tax rate for 2017 was lower than 2016 mainly due to suspension for 2017 of the non-deductible HIF fees, reversal of valuation allowances in 2017 of AlphaCare net operating loss carryforwards (“NOLs”) as a result of a change in judgment about their realizability due to planned internal restructuring as a result of the acquisition of SWH, re-measurement of deferred tax balances as a result of the Tax Act, and more significant excess tax deductions from equity compensation in 2017.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2013 expired during 2017. As a result, $3.0 million of tax contingency reserves recorded as of December 31, 2016 were reversed in 2017, of which $2.0 million was reflected as a reduction to 2014.income tax expense and $1.0 million as a decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2017 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2012 expired during 2016. As a result, $2.2 million of tax contingency reserves recorded as of December 31, 2015 were reversed in 2016, of which $1.5 million was reflected as a reduction to income tax expense and $0.7 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in 2016 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

2016 compared to the year ended December 31, 2015 (“2015”)

Healthcare

Net Revenue

Net revenue related to Healthcare decreased by 10.1 percent or $299.6 million from 2015 to 2016. The decrease in revenue is mainly due to terminated contracts of $193.4$665.8 million, unfavorable rate changes of $58.8 million, program changechanges of $16.5$54.3 million, customer settlements in 2013profit share of $5.6$8.0 million and retroactive rate and membership adjustments recorded in 2013other net decreases of $2.9$0.3 million. These decreases were partially offset by revenue related to cost-plus contracts with higher care in 2014 of $37.7 million, favorable rate changes of $33.2 million, increased membership from existing customers of $29.3$311.4 million, newrevenue for AFSC acquired on July 1, 2016 of $88.0 million, contracts implemented after (or during) 20132015 of $17.2$43.1 million, performance based revenue recorded in 2014for TMG acquired February 29, 2016 of $2.4$41.8 million and favorable retroactive rate and membership adjustments recorded in 20142016 of $1.2 million and other net favorable increases of $4.6$3.3 million.

Cost of Care

Cost of care decreased by 22.317.2 percent or $104.7$392.1 million from 20132015 to 2014.2016. The decrease in cost of care is primarily due to terminated contracts of $147.3$571.9 million, lower care associated with unfavorable rate changes of $64.2 million, program changechanges of $12.4$47.5 million, customer settlementsfavorable 2015 medical claims development recorded after 2015 of $16.7 million, net favorable prior period medical claims development recorded in 20142016 of $7.7$10.3 million and care trends and other net favorable variances of $69.1 million. These decreases were partially offset by increased membership from existing customers of $282.5 million, care costs for AFSC acquired on July 1, 2016 of $56.2 million, new contracts implemented after (or during) 2015 of $26.4 million and favorable prior period medical claims development recorded in 20142015 of $2.3$22.5 million. These decreases were partially offset byFor our commercial contracts, cost of care trends and other net variancesas a percentage of $39.5 million, increased membership from existing customers of $18.4 million, favorable prior period medical claims development recordedrisk revenue (excluding EAP business) was 82.1 percent in 2013 of $5.4 million and new2016 which was consistent with 2015. For our government contracts, of $1.7 million. Costcost of care decreased as a percentage of risk revenue (excluding EAP business) from 79.388.1 percent in 20132015 to 69.281.8 percent in 2014,2016, mainly due to business mix, favorable rates changescare development and business mix.favorable care trends.

Direct Service Costs

Direct service costs decreasedincreased by 7.012.3 percent or $12.2$62.9 million from 20132015 to 20142016 primarily due to costs related to TMG and AFSC and a $4.8 million impairment of intangible assets, partially offset by the impact of terminated contracts, andas well as severance and restructuringother contract termination cost pertaining to terminated contractsof $3.8 million recorded in 2013 of $4.7 million.2015. Direct service costs increased as a percentage of net revenue from 22.517.3 percent in 20132015 to 23.821.6 percent in 2014,2016, mainly due to acquisitions and new business, mix.partially offset by terminated contracts.

Public SectorPharmacy Management

NetManaged Care and Other Revenue

        NetManaged care and other revenue related to Public Sector decreasedPharmacy Management increased by 7.02.1 percent or $122.3$5.1 million from 20132015 to 2014. This decrease is primarily due to terminated contracts of $637.9 million, which decrease was partially


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offset by new contracts implemented after (or during) 2013 of $246.9 million, increased membership from existing customers of $197.0 million, revenue recorded for ACA fees of $36.5 million, favorable rate changes of $26.0 million in 2014, performance incentive revenue of $5.6 million and other net favorable variances of $3.6 million.

Cost of Care

        Cost of care decreased by 9.0 percent or $137.2 million from 2013 to 2014. This decrease is primarily due to terminated contracts of $565.7 million and favorable prior period medical claims development recorded in 2014 of $3.5 million. These decreases were partially offset by new contracts of $194.4 million, increased membership from existing customers of $191.5 million, care associated with rate changes for contracts with minimum care requirements of $23.1 million, favorable prior period medical claims development recorded in 2013 of $19.9 million (including $15.1 million of adjustments of block funding to providers resulting from an annual reconciliation process) and care trends and other net variances of $3.1 million. Cost of care increased as a percentage of risk revenue from 88.3 percent in 2013 to 87.7 percent in 2014 mainly due to business mix.

Direct Service Costs

        Direct service costs increased by 53.0 percent or $65.1 million from 2013 to 2014 primarily due to expense incurred for ACA tax of $21.4 million and costs to support new business and development for the Magellan Complete Care product, which increases were partially offset by severance and restructuring costs of terminated contracts recorded in 2013 of $6.8 million. Direct service costs increased as a percentage of net revenue from 7.0 percent for 2013 to 11.5 percent in 2014 mainly due to costs to support new business and development costs for the Magellan Complete Care product.

Specialty Solutions

Net Revenue

        Net revenue related to Specialty Solutions increased by 25.4 percent or $95.5 million from 2013 to 2014.2016. This increase is primarily due to new contracts implemented after (or during) 20132015 of $120.2$5.9 million, customer settlements in 2014government pharmacy revenue of $3.9 million, the revenue impact of favorable medical claims development for 2012 recorded in 2013 of $2.0$3.8 million and other net increasesfavorable variances of $2.6$3.2 million. These increases were partially offset by unfavorable rate changesdecreased rebate revenue of $22.8 million, decreased membership from existing customers of $5.9$6.7 million and terminated contracts of $4.5$1.1 million.

Cost of Care

        Cost of care increased by 37.3 percent or $92.2 million from 2013 to 2014. This increase is primarily attributed to new contracts of $101.2 million and favorable prior period medical claims development recorded in 2013 of $6.0 million, which increases were partially offset by decreased membership from existing customers of $5.7 million, terminated contracts of $3.6 million, favorable prior period medical claims development recorded in 2014 of $3.0 million and care trends and other net favorable variances of $2.7 million. Cost of care increased as a percentage of risk revenue from 74.0 percent in 2013 to 80.2 percent in 2014 mainly due to unfavorable rate changes.

Direct Service Costs

        Direct service costs increased by 25.2 percent or $14.5 million from 2013 to 2014, mainly due to the cost to support new business. As a percentage of net revenue, direct service costs decreased from 15.3 percent in 2013 to 15.2 percent in 2014, mainly due to changes in business mix.


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Pharmacy Management

Managed Care and Other Revenue

        Managed care and other revenue related to Pharmacy Management decreased by 10.1 percent or $23.2 million from 2013 to 2014. This decrease is primarily due to terminated contracts of $63.7 million and decreased rebate revenue due to change in terms of $5.4 million. These decreases were partially offset by revenue of $31.4 for CDMI which was acquired on April 30, 2014, new contracts implemented after (or during) 2013 of $7.5 million, increased government pharmacy revenue of $4.3 million, increased medical pharmacy revenue of $1.8 million and other net favorable variances of $0.9 million.

PBM and Dispensing Revenue

PBM and dispensing revenue related to Pharmacy Management increased by 74.836.0 percent or $361.2$543.0 million from 20132015 to 2014. This increase is primarily due to new contracts of $252.7 million, higher revenue of $245.3 million for Partners Rx which was acquired on October 1, 2013, an increase in pharmacy employer revenue of $19.8 million and other net increases of $1.6 million. These increases were partially offset by terminated distribution and rebate contracts of $151.7 million and net decreased dispensing activity from existing customers of $6.5 million.

Cost of Care

        Cost of care decreased by 72.5 percent or $42.9 million from 2013 to 2014. This decrease is primarily due to terminated contracts. Cost of care as a percentage of risk revenue was 89.5 percent in 2013 and 90.1 percent in 2014.

Cost of Goods Sold

        Cost of goods sold increased by 72.2 percent or $329.2 million from 2013 to 2014.2016. This increase is primarily due to new contracts implemented after (or during) 20132015 of $246.1$457.5 million, higher costrevenue for 4D acquired on April 1, 2015 of goods sold for Partners Rx of $220.4$107.5 million, pharmacy employer businessrevenue of $15.3$89.4 million, revenue for Veridicus acquired on December 13, 2016 of $7.5 million and other net increasesfavorable variances of $0.9$2.4 million. These increases were partially offset by terminated  contracts of $143.2$108.5 million and net decreased dispensing activity from existing customers of $10.3$12.8 million.

Cost of Goods Sold

Cost of goods sold increased by 35.4 percent or $505.4 million from 2015 to 2016. This increase is primarily due to new contracts implemented after (or during) 2015 of $451.3 million, 4D acquired April 1, 2015 of $103.9 million, an increase in pharmacy employer of $60.4 million, Veridicus acquired on December 13, 2016 of $6.9 million and other net unfavorable variances of $5.6 million. These increases were partially offset by terminated contracts of $107.9 million and net decreased dispensing activity from existing customers of $14.8 million. As a percentage of the portion of net revenue that relates to PBM and dispensing revenue,activity, cost of goods sold decreased from 94.394.5 percent in 20132015 to 92.994.2 percent in 2014,2016, mainly due to business mix.

Direct Service Costs

Direct service costs increaseddecreased by 42.48.2 percent or $54.4$23.4 million from 20132015 to 2014.2016. This increasedecrease mainly relates to costs for Partners Rx, changes in the presentfair value of contingent consideration related to the CDMI and 4D acquisitions of $45.5 million in 2015 and lower stock compensation expense of $14.6 million, which decreases were partially offset by additional costs from the acquisitions of 4D and Veridicus, contract implementation costs and ongoing costs to support new business. As a percentage of net revenue, direct service costs decreased from 18.016.3 percent in 20132015 to 17.411.4 percent in 2014,2016, mainly due to an increase in revenue from business mix.growth and acquisitions and the decrease in expense for fair value of contingent consideration and stock compensation expense.

Corporate and OtherElimination

Other Operating Expenses

        Other operatingNet expenses related to the Corporate, and Other segment decreasedwhich includes eliminations, increased by 12.948.6 percent or $17.9$15.2 million, from 2013primarily due to 2014. The decrease results primarily from severance and other one time items incurred in 2013 of $12.4 million and a decrease inhigher project costs, stock compensation expense of $8.1 million. These decreases were partially offset by other net unfavorable variances of $2.6 million.and discretionary benefits in 2016. As a percentage of total net revenue, other operating expenses decreasedcorporate and elimination increased from 3.90.7 percent for 2013in 2015 to 3.21.0 percent for 2014, primarilyin 2016, mainly due to business mix.


Table of Contentshigher project cost and discretionary benefits, partially offset by higher revenue due to acquisitions and new business.

Depreciation and Amortization

Depreciation and amortization expense increased by 26.53.1 percent or $19.1$3.2 million from 20132015 to 2014,2016, primarily due to asset additions after 20132015 and acquisition activity.

Interest Expense

Interest expense increased by $4.4$3.6 million from 20132015 to 2014,2016 mainly due to an increase in interest rates and the amount of outstanding debt.

Interest and Other Income

Interest and other income increased by $0.7 million from 2015 to 2016 primarily due to capital lease additions after 2013, current year borrowings under the 2014 Credit Facility, and due to changes in the fair value of contingent consideration of $3.1 million recorded to interest expense in 2014.higher yields.

Interest Income

        Interest income decreased by 34.5 percent or $0.7 million from 2013 to 2014 primarily due to lower cash balances as a result of acquisition activity after (or during) 2013.

Income Taxes

The Company'sCompany’s effective income tax rate was 24.259.6 percent in 20132015 and 37.047.9 percent in 2014.2016. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded tax contingencies and valuation allowances. The Company also accrues interest and penalties related to unrecognizeduncertain tax benefitspositions in its provision for income taxes. The effective income tax rate for 20132016 was lower than 20142015 mainly due to (i) improved results at AlphaCare which reduced the non-deductible ACA feesvaluation allowance added in 2014, lower reversals of tax contingencies2016 compared to 2015, and (ii) a less significant impact in 20142016 from the closure of statutes of limitations, and increased valuation allowances in 2014 for certain deferred tax assets.non‑deductible HIF fees due to greater overall income.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 20102012 expired during 2014.2016. As a result, $19.5$2.2 million of unrecognized tax benefitscontingency reserves recorded as of December 31, 20132015 were reversed in the current year,2016, of which $16.0$1.5 million was reflected as a reduction to income tax expense $2.6and $0.7 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4$0.1 million of accrued interest was reversed in 20142016 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 20092011 expired during 2013.2015. As a result, $28.6$3.1 million of unrecognized tax benefitscontingency reserves recorded as of December 31, 20122014 were reversed in 2013,2015, of which $23.2$2.0 million was reflected as a reduction to income tax expense, $3.9$1.0 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1 million of accrued interest was reversed in 2013 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

2013 compared to the year ended December 31, 2012 ("2012")

Commercial

Net Revenue

        Net revenue related to Commercial increased by 5.3 percent or $38.3 million from 2012 to 2013. The increase in revenue is mainly due to new contracts implemented after (or during) 2012 of $51.2 million, favorable rate changes of $26.7 million, increased membership from existing customers of $18.0 million, customer settlements in 2013 of $5.6 million, retroactive rate and membership adjustments recorded in 2013 of $2.9 million, retroactive risk share adjustments recorded in 2012 of $1.6 million and other net increases (mainly utilization revenue) of $5.4 million, which increases were


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partially offset by terminated contracts of $62.6 million and performance-based revenue recorded in 2012 of $10.5 million.

Cost of Care

        Cost of care increased by 7.3 percent or $32.0 million from 2012 to 2013. The increase in cost of care is primarily due to new contracts of $33.9 million, increased membership from existing customers of $10.2 million, favorable prior period medical claims development recorded in 2012 of $3.8 million and unfavorable care trends and other net variances of $42.7 million, which increases were partially offset by terminated contracts of $50.7 million, favorable prior period medical claims development recorded in 2013 of $5.4 million and favorable medical claims development for 2012 which was recorded after 2012 of $2.5 million. Cost of care increased as a percentage of risk revenue (excluding EAP business) from 78.0 percent in 2012 to 79.3 percent in 2013, mainly due to business mix.

Direct Service Costs

        Direct service costs increased by 0.3 percent or $0.5 million from 2012 to 2013 primarily due to severance and restructuring cost pertaining to terminated contracts of $4.7 million, partially offset by reduced costs as a result of cost containment efforts. Direct service costs decreased as a percentage of net revenue from 23.6 percent in 2012 to 22.5 percent in 2013, mainly due to cost containment effortsassets, and the impact of increased revenue from favorable rate changes.

Public Sector

Net Revenue

        Net revenue related to Public Sector increased by 8.5 percent or $137.1 million from 2012 to 2013. This increase is primarily due to new contracts implemented after (or during) 2012 of $131.9 million, favorable rate changes of $7.7 million in 2013 and other net favorable variances of $3.4 million, which increases were partially offset by decreased membership from existing customers of $5.9 million.

Cost of Care

        Cost of care increased by 7.8 percent or $109.7 million from 2012 to 2013. This increase is primarily due to new contracts of $111.7 million, care associated with rate changes for contracts with minimum care requirements of $7.0 million, favorable contractual settlements of $2.2 million in 2012 and unfavorable care trends and other net unfavorable variances of $20.8 million. These increases were partially offset by favorable prior period medical claims development recorded in 2013 of $19.9 million (including $15.1 million of adjustments of block funding to providers resulting from an annual reconciliation process), decreased membership from existing customers of $6.7 million and favorable medical claims development for 2012 which was recorded after 2012 of $5.4 million. Cost of care decreased as a percentage of risk revenue from 88.7 percent in 2012 to 88.3 percent in 2013 mainly due to favorable medical claims development.

Direct Service Costs

        Direct service costs increased by 37.8 percent or $33.7 million from 2012 to 2013, mainly due to severance and restructuring costs of terminated contracts of $6.8 million, costs to support new business and development for the Magellan Complete Care product. Direct service costs increased as a percentage of net revenue from 5.5 percent for 2012 to 7.0 percent in 2013 mainly due to development costs for the Magellan Complete Care product.


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Specialty Solutions

Net Revenue

        Net revenue related to Specialty Solutions increased by 7.6 percent or $26.7 million from 2012 to 2013. This increase is primarily due to new contracts implemented after (or during) 2012 of $38.0 million and increased membership from existing customers of $32.0 million, which increases were partially offset by unfavorable rate changes of $26.4 million, terminated contracts of $10.2 million, contractual settlements of $4.4 million in 2012, the revenue impact of favorable medical claims development for 2012 recorded in 2013 of $2.0 million and other net unfavorable variances of $0.3 million.

Cost of Care

        Cost of care increased by 8.4 percent or $19.1 million from 2012 to 2013. This increase is primarily attributed to new contracts of $32.3 million and increased membership from existing customers of $25.1 million, which increases were partially offset by favorable prior period medical claims development recorded in 2013 of $6.0 million, terminated contracts of $7.9 million, favorable medical claims development for 2012 which was recorded after 2012 of $4.7 million and care trends and other net favorable variances of $19.7 million. Cost of care was consistent as a percentage of risk revenue at 74.0 percent in 2012 and 2013.

Direct Service Costs

        Direct service costs increased by 3.5 percent or $1.9 million from 2012 to 2013, mainly due to the cost to support new business. As a percentage of net revenue, direct service costs decreased from 15.9 percent in 2012 to 15.3 percent in 2013, mainly due to changes in business mix.

Pharmacy Management

Managed Care and Other Revenue

        Managed care and other revenue related to Pharmacy Management increased by 0.4 percent or $1.0 million from 2012 to 2013. This increase is primarily due to new contracts implemented after (or during) 2012 of $6.0 million and increased pharmacy revenue of $3.8 million, which increases were partially offset by decreased formulary optimization revenue of $3.6 million, a reduction to revenue associated with profit share recorded due to favorable cost of care trends of $2.9 million, terminated contracts of $1.5 million and other net unfavorable variances of $0.8 million.

PBM and Dispensing Revenue

        PBM and dispensing revenue related to Pharmacy Management increased by 38.0 percent or $133.0 million from 2012 to 2013. This increase is primarily due to revenue for Partners Rx which was acquired on October 1, 2013 of $84.8 million, net increased dispensing activity from existing customers of $34.6 million and new business of $22.8 million, which increases were partially offset by terminated contracts of $8.7 million and other net unfavorable variances of $0.5 million.

Cost of Care

        Cost of care decreased by 4.1 percent or $2.5 million from 2012 to 2013. This decrease is primarily due to favorable care trends. Cost of care as a percentage of risk revenue was 89.4 percent in 2012 and 89.5 percent in 2013.


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Cost of Goods Sold

        Cost of goods sold increased by 38.7 percent or $127.2 million from 2012 to 2013. This increase is primarily due to cost of goods sold for Partners Rx of $77.7 million, increased dispensing activity of $35.5 million and new business of $22.2 million, which increases were partially offset by terminated contracts of $8.2 million. As a percentage of PBM and dispensing revenue, cost of goods sold increased from 93.8 percent in 2012 to 94.3 percent in 2013, mainly due to business mix.

Direct Service Costs

        Direct service costs increased by 15.1 percent or $16.8 million from 2012 to 2013. This increase mainly relates to costs for Partners Rx, implementation costs and ongoing costs to support new business. As a percentage of net revenue, direct service costs decreased from 19.3 percent in 2012 to 18.0 percent in 2013, mainly due to business mix.

Corporate and Other

Other Operating Expenses

        Other operating expenses related to the Corporate and Other segment increased by 7.1 percent or $9.1 million from 2012 to 2013. The increase results primarily from severance and other one time items in 2013 of $12.4 million, an increase in stock compensation expense of $3.3 million and other net unfavorable variances of $4.0 million, which increases were partially offset by costs related to growth initiatives of $10.6 million incurred in 2012. As a percentage of total net revenue, other operating expenses decreased from 4.0 percent for 2012 to 3.9 percent for 2013, primarily due to increased revenue from new business, as well as the inclusion in 2012 of expenses incurred to support growth initiatives.

Depreciation and Amortization

        Depreciation and amortization expense increased by 19.0 percent or $11.5 million from 2012 to 2013, primarily due to asset additions after 2012 and the acquisition of Partners Rx.

Interest Expense

        Interest expense increased by 33.5 percent or $0.8 million from 2012 to 2013, primarily due to capital lease additions after 2012.

Interest and Other Income

        Interest and other income of $2.0 million were consistent from 2012 to 2013.

Income Taxes

        The Company's effective income tax rate was 20.0 percent in 2012 and 24.2 percent in 2013. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded tax contingencies. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for 2012 was lower than 2013 mainly due to lower reversals of tax contingencies in 2013 from the closure of statutes of limitations.

        The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2009 expired during 2013. As a result, $28.6 million of unrecognized tax benefits recorded as of December 31, 2012 were reversed in 2013, of which $23.2 million was reflected as a reduction to income tax expense, $3.9 millionremainder as an increase to additional paid-in capital, and the remainder as a


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decrease to deferred tax assets.paid‑in capital. Additionally, $2.1 million of accrued interest was reversed in 2013 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

        The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2008 expired during 2012. As a result, $43.3 million of unrecognized tax benefits recorded as of December 31, 2011 were reversed in 2012, of which $35.7 million was reflected as a reduction to income tax expense, $6.2 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4$0.4 million of accrued interest and $0.8$0.7 million of unrecognized state tax benefitscontingency reserves were reversed in 20122015 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments and the favorable settlement of state income tax examinations.

Non‑GAAP Measures

The Company reports its financial results in accordance with GAAP, however the Company’s management also assesses business performance and makes business decisions regarding the Company’s operations using certain non‑GAAP measures. In addition to Segment Profit, as defined above, the Company also uses adjusted net income attributable to Magellan (“Adjusted Net Income”) and adjusted net income per common share attributable to Magellan on a diluted basis (“Adjusted EPS”). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non‑cash stock compensation expense resulting from restricted stock purchases by sellers, changes in tax return elections, respectively.the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition intangibles. The Company believes these non‑GAAP measures provide a more useful comparison of the Company’s underlying business performance from period to period and are more representative of the earnings capacity of the Company. Non‑GAAP financial measures we disclose, such as Segment Profit, Adjusted Net Income and Adjusted EPS, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

The following table reconciles net income attributable to Magellan. to Adjusted Net Income for the years ended December 31, 2015, 2016, and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Net income attributable to Magellan

 

$

31,413

 

$

77,879

 

$

110,207

 

Adjusted for acquisitions starting in 2013

 

 

 

 

 

 

 

 

 

 

Stock compensation expense relating to acquisitions

 

 

32,235

 

 

19,181

 

 

16,215

 

Changes in fair value of contingent consideration

 

 

44,257

 

 

(104)

 

 

696

 

Amortization of acquired intangibles

 

 

21,371

 

 

25,324

 

 

37,265

 

Impairment of intangible assets, net of non-controlling interest

 

 

 —

 

 

3,936

 

 

 —

 

Tax impact

 

 

(37,501)

 

 

(16,676)

 

 

(19,558)

 

Adjusted Net Income

 

$

91,775

 

$

109,540

 

$

144,825

 

The following table reconciles net income per common share attributable to Magellan—diluted to Adjusted EPS for the years ended December 31, 2015, 2016, and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Net income per common share attributable to Magellan—diluted

 

$

1.21

 

$

3.22

 

$

4.51

 

Adjusted for acquisitions starting in 2013

 

 

 

 

 

 

 

 

 

 

Stock compensation expense relating to acquisitions

 

 

1.25

 

 

0.79

 

 

0.66

 

Changes in fair value of contingent consideration

 

 

1.71

 

 

 —

 

 

0.03

 

Amortization of acquired intangibles

 

 

0.83

 

 

1.05

 

 

1.52

 

Impairment of intangible assets, net of non-controlling interest

 

 

 —

 

 

0.16

 

 

 —

 

Tax impact

 

 

(1.45)

 

 

(0.69)

 

 

(0.80)

 

Adjusted EPS

 

$

3.55

 

$

4.53

 

$

5.92

 

Outlook—Results of Operations

The Company'sCompany’s Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may result from a variety of factors such as those set forth under Item 1A—"Risk Factors"Factors” as well as a variety of other factors including: (i) changes in utilization levels by enrolled members of the Company's risk-basedCompany’s risk‑based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general); and (vi) the timing of acquisitions; (vii) changes in estimates regarding medical costs and IBNR.IBNR; (viii) the timing of recognition of pharmacy revenues, including rebates and Medicare Part D; and (ix) changes in the estimates of contingent consideration.

A portion of the Company'sCompany’s business is subject to rising care costs due to an increase in the number and frequency of covered members seeking behavioral healthcare or radiology services and higher costs per inpatient day or outpatient visit for behavioral services, and higher costs per scan for radiologyof such services. Many of these factors are beyond the Company'sCompany’s control. Future results of operations will be heavily dependent on management'smanagement’s ability to obtain customer rate increases that are consistent with care cost increases and/or to reduce operating expenses.

        In relation to the managed behavioral healthcare business, the Company is a market leader in a mature market with many viable competitors. The Company is continuing its attempts to grow its business in the managed behavioral healthcare industry through aggressive marketing and development of new products; however, due to the maturity of the market, the Company believes that the ability to grow its current business lines may be limited. In addition, as previously discussed, substantially all of the Company's Commercial segment revenues are derived from Blue Cross Blue Shield health plans and other managed care companies, health insurers and health plans. In the past, certain of the managed care customers of the Company have decided not to renew all or part of their contracts with the Company, and to instead manage the behavioral healthcare services directly for their subscribers.

Care Trends.  The Company expects that same-storesame‑store normalized cost of care trend for the 12 month forward outlook to be 63 to 87 percent for Commercial,commercial products and 0 to 2 percent for Public Sector and 3 to 5 percent for Specialty Solutions.government business.

Interest Rate Risk.  Changes in interest rates affect interest income earned on the Company'sCompany’s cash equivalents and investments, as well as interest expense on variable interest rate borrowings under the Company's 20142017 Credit Facility.Agreement. In addition, interest rates on the Notes are subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments and the borrowing levels under the 20142017 Credit FacilityAgreement and the principal amount of the Notes as of December 31, 2014,2017, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company'sCompany’s future earnings and cash outflows.


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Historical—Liquidity and Capital Resources

20142017 compared to 20132016

Operating Activities.  The Company reported net cash provided by operating activities of $183.2$66.7 million and $211.0$162.3 million for 20132016 and 2014,2017, respectively. The $27.8$95.6 million increase in operating cash flows from 20132016 to 20142017 is mainly attributable to favorable working capital changes and an increase in Segment Profit lower tax payments and net favorable working capital changes between periods, partially offset by the impact of the net shift of restricted fundsincreased tax payments between cash and investments that results in an operating cash flow change that is directly offset by an investing cash flow change.years. 

 Segment Profit for 2014 increased $7.5 million from 2013. Tax payments for 2014 totaled $57.7 million, which represents a decrease of $7.8 million from 2013.

The net favorable impact of working capital changes between periods totaled $15.7$91.5 million. Operating cash flows for 2013 were impacted by net unfavorable working capital and other changes totaling $39.9 million, which were largely attributable to a net increase in restricted cash requirements associated with the Company's regulated entities. For 2014,2016, operating cash flows were impacted by net unfavorable working capital and other changes of $24.2$180.7 million, which were largely attributable to thecontingent consideration payments of $91.7 million, of which $51.1 million is reflected as operating activities, working capital changes of approximately $113.8 million related to our Medicare Part D business, primarily receivables, and other net impact of ACA fee activityunfavorable working capital changes due to timing related to receivables and the run-out of medical claims payable associated with terminated Commercial contracts, partially offset by a net decrease in restricted cash requirements associated with the Company's regulated entities. In 2013, the Company was required to restrict additional funds of $45.9 million, as compared to the release of restricted funds of $22.1 million in 2014. Revenues of $36.5 million associated with the reimbursement of the economic impact of the ACA fee from its customers were recorded in 2014, with the majority of these revenues uncollected as of year-end.

        Restricted cash of $29.2 million and $26.0 million in 2013 and 2014, respectively, were shifted to restricted investments that increased operating cash flows. The net impact of the shift in restricted funds between periods is a decrease inpayables. For 2017, operating cash flows were impacted by net unfavorable working capital changes of $3.2 million.

        During 2014, the Company's restricted cash decreased $21.4 million. The change in restricted cash is$89.2 million, which were largely attributable to the net shift of restricted cash of $26.0timing related to receivables and payables.  

Segment Profit for 2017 increased $9.1 million to restricted investments and other net decreases of $2.4from 2016. Tax payments for 2017 increased $5.0 million partially offset by the net increase in restricted cash of $7.0 million associated with the Company's regulated entities. The net change in restricted cash for the Company's regulated entities is attributable to a net increase in restricted cash of $29.1 million that is offset by changes in other assets and liabilities, primarily accounts receivable, accrued liabilities, medical claims payable and other medical liabilities, thus having no impact on operating cash flows, partially offset by a net decrease in restricted cash requirements of $22.1 million that resulted in an operating cash flow source.from 2016. 

Investing Activities.  The Company utilized $64.5$60.9 million and $62.3$57.2 million during 20132016 and 2014,2017, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, and leaseholds) and capitalized software for 20132016 were $24.4$15.2 million and $40.1$45.7 million, respectively, as compared to additions for 20142017 related to hard assets and capitalized software of $16.9$16.0 million and $45.4 million, respectively. During 2013, the Company had non-cash capital lease additions of $26.9 million and $2.8 million associated with properties and software, respectively, as compared to non-cash capital lease additions for 2014 related to properties and software of $0.1 million and $2.7$41.2 million, respectively.

        TheDuring 2016 the Company received net cash of $16.2$15.8 million from the net maturity of "available for sale""available-for-sale" securities, during 2013, with the Company using net cash of $64.5$26.8 million during 20142017 for the net purchase of "available for sale""available-for-sale" securities. In 2013,During 2016, the Company used net cash of $88.5$16.0 million, $110.9 million and $19.1$72.8 million for the acquisitionsacquisition of Partners RxTMG, AFSC and AlphaCare,Veridicus, respectively, withpartially offset by a working capital adjustment of $0.5 million related to the acquisition of 4D Pharmacy Management Systems, Inc. During 2017, the Company usingused net cash of $121.1$232.4 million related to investments in businesses and $7.9the acquisition of Veridicus and SWH.

Financing Activities.  During 2016, the Company paid $106.8 million for the acquisitionsrepurchase of CDMItreasury stock under the Company’s share repurchase program, $15.6 million on debt obligations and Cobalt, respectively, in 2014.$5.3 million on capital lease obligations.  The Company made a contingent consideration payment totaling $91.7 million, of which $40.6 million was related to financing activities. In addition, the Company received cash$375.0 million from the issuance of $0.7debt, $25.2 million in 2014 related to the settlementfrom exercise of working capital associated with the Partners Rx acquisition.


stock options, and had other net favorable items of $1.2 million.

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        Financing Activities.During 2013,2017, the Company paid $60.7$798.1 million on debt obligations, $21.8 million for the repurchase of treasury stock under the Company's share repurchase program, $9.9 million in debt issuance fees, $5.3 million on capital lease obligations and $3.0had other net unfavorable items of $2.7 million. In addition, the Company received $1,041.7 million from the issuance of debt and $44.4 million from the exercise of stock options.

2016 compared to 2015

Operating Activities.  The Company reported net cash provided by operating activities of $157.5 million and $66.7 million for 2015 and 2016, respectively. The $90.8 million decrease in operating cash flows from 2015 to 2016 is attributable to unfavorable working capital changes offset by an increase in Segment Profit and lower tax payments between years.

The net unfavorable impact of working capital changes between years totaled $126.4 million. For 2015, operating cash flows were impacted by net unfavorable working capital changes of $54.3 million, which were largely attributable to timing related to receivables and payables. For 2016, operating cash flows were impacted by net unfavorable working capital changes of $180.7 million, which were largely attributable to contingent consideration payments of $91.7 million, of which $51.1 million is reflected as operating activities, working capital changes of approximately $113.8 million related to our Medicare Part D business, primarily receivables, and other net unfavorable working capital changes due to timing related to receivables and payables.

Segment Profit for 2016 increased $26.1 million from 2015. Tax payments from 2016 totaled $54.4 million, which represents a decrease of $9.5 million from 2015.

Investing Activities.  The Company utilized $71.6 million and $60.9 million during 2015 and 2016, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, and leaseholds) and capitalized software for 2015 were $27.3 million and $44.3 million, respectively, as compared to additions for 2016 related to hard assets and capitalized software of $15.2 million and $45.7 million, respectively.

The Company used net cash of $65.8 million during 2015 for the net purchase of "available-for-sale" securities, with the Company receiving net cash of $15.8 million during 2016 from the net maturity of "available-for-sale" securities. In 2015, the Company used net cash of $13.6 million and $42.2 million for the acquisition of HSM and 4D, respectively. In 2016, the Company used net cash of $16.0 million, $110.9 million and $72.8 million for the acquisition of TMG, AFSC and Veridicus, respectively, partially offset by a working capital adjustment of $0.5 million related to the acquisition of 4D.

Financing Activities.  During 2015, the Company paid $206.0 million for the repurchase of treasury stock under the Company’s share repurchase program, $12.5 million on debt obligations, and $4.5 million on capital lease obligations. The Company made contingent consideration payments totaling $29.3 million of which $20.8 million was related to financing activities. In addition, the Company received $47.5$53.5 million from the exercise of stock options and had other net favorable items of $2.6$4.4 million.

During 2014, the Company received $250.0 million from the issuance of debt and $53.0 million from the exercise of stock options. In addition,2016, the Company paid $197.5$106.8 million for the repurchase of treasury stock under the Company's share repurchase program, $4.9 million on capital lease obligations and $3.1$15.6 million on debt obligations, and had other net unfavorable items of $1.2 million.

2013 compared to 2012

        Operating Activities.$5.3 million on capital lease obligations. The Company reported net cash provided by operating activitiesmade contingent consideration payments totaling $91.7 million of $181.3which $40.6 million and $183.2 million for 2012 and 2013, respectively. The $1.9 million increase in operating cash flows from 2012 to 2013 is primarily attributable to the net shift of restricted funds between cash and investments, which results in an operating cash flow change that is directly offset by an investing cash flow change. Partially offsetting these items is the net unfavorable impact of working capital changes, reduction in Segment Profit and increase in tax payments between years.

        During 2012, restricted investments of $16.7 million were shifted to restricted cash that reduced operating cash flows, with restricted cash of $29.2 million shifted to restricted investments in 2013 that increased operating cash flows. The net impact of the shift in restricted funds between periods is an increase in operating cash flows of $45.9 million. The net unfavorable impact of working capital changes between years totaled $28.3 million, and was primarily attributable to an increase in restricted cash requirements for the Company's regulated entities. In 2012 and 2013, the Company was required to restrict additional funds of $5.4 million and $45.9 million, respectively. Segment Profit for 2013 decreased $7.9 million from 2012. Tax payments for 2013 totaled $65.5 million, which is an increase of $7.8 million from 2012.

        During 2013, the Company's restricted cash increased $10.1 million. The change in restricted cash is attributable to an increase in restricted cash of $31.4 million associated with the Company's regulated entities and restricted cash of $7.9 million associated with the acquisition of AlphaCare, partially offset by the net shift of restricted cash of $29.2 million. The net change in restricted cash for the Company's regulated entities is attributable to a net increase of $45.9 million in restricted cash requirements that resulted in an operating cash flow use, partially offset by a net decrease in restricted cash of $14.5 million that is offset by changes in other assets and liabilities, primarily accounts receivable, accrued liabilities, medical claims payable and other medical liabilities, thus having no impact on operating cash flows.

        Investing Activities.    The Company utilized $69.5 million and $64.5 million during 2012 and 2013, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, leaseholds) and capitalized software for 2012 were $31.7 million and $37.8 million, respectively, as compared to additions for 2013 related to hard assets and capitalized software of $24.4 million and $40.1 million, respectively. During 2013, the Company had non-cash capital lease additions of $26.9 million and $2.8 million associated with properties and software, respectively. In addition, during 2012 the Company used net cash of $39.8 million for the net purchase of "available for sale" securities, with the Company receiving net cash during 2013 of $16.2 million from the net maturity of "available for sale" securities. In 2012, the Company had other net uses of $1.2 million. In 2013, the Company used cash of $88.5 million and $19.1 million for the acquisitions of Partners Rx and AlphaCare, respectively.

        Financing Activities.    During 2012, the Company paid $21.9 million for the repurchase of treasury stock under the Company's share repurchase program.financing activities. In addition, the Company received $20.5$375.0 million from the issuance of debt, $25.2 million from the exercise of stock options, and had other net favorable items of $0.3$1.2 million.


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        During 2013, the Company paid $60.7 million for the repurchase of treasury stock under the Company's share repurchase program and paid $3.0 million on capital lease obligations. In addition, the Company received $47.5 million from the exercise of stock options and had other net favorable items of $2.6 million.

Outlook—Liquidity and Capital Resources

Liquidity

        During 2015, the Company expects to fund its estimated capital expenditures of $64 to $74 million with cash from operations. The Company does not anticipate that it will need tomay draw on additional amounts available under the 20142017 Credit Facility for cash flow needs relatedAgreement as required to its operations,meet working capital needs associated with the timing of receivables and payables, fund share repurchases or debt service in 2015.support acquisition activities. The Company also currently expects to have adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. The Company may draw on the 2014 Credit Facility to fund a portion of cash required for its acquisition activities. The Company plans to maintain its current investment strategy of investing in a diversified, high quality, liquid portfolio of investments and continues to closely monitor the situation in the financial markets. The Company estimates that it has no risk of any material permanent loss on its investment portfolio; however, there can be no assurance that the Company will not experience any such losses in the future.

Income Taxes

The Company estimates its future free cash flow will meaningfully benefit from the Tax Act, primarily due to the lower U.S. federal tax rate of 21 percent, although such benefit will be partially offset by the additional limitations imposed on the deduction of executive compensation.

Contractual Obligations and Commitments

The following table sets forth the future financial commitments of the Company as of December 31, 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

    

 

 

    

Less than

    

1‑3

    

3‑5

    

More than

 

Contractual Obligations

 

Total

 

1 year

 

years

 

years

 

5 years

 

Senior Notes

 

$

400,000

 

$

 —

 

$

 —

 

$

 —

 

$

400,000

 

Term loan

 

 

345,625

 

 

17,500

 

 

35,000

 

 

293,125

 

 

 —

 

Operating leases(1)

 

 

83,783

 

 

20,814

 

 

33,123

 

 

19,991

 

 

9,855

 

Letters of credit(2)

 

 

26,471

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Capital lease obligations(3)

 

 

26,512

 

 

4,875

 

 

6,723

 

 

7,290

 

 

7,624

 

Purchase commitments(4)

 

 

969

 

 

969

 

 

 —

 

 

 —

 

 

 —

 

Income tax contingencies(5)

 

 

13,580

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

896,940

 

$

44,158

 

$

74,846

 

$

320,406

 

$

417,479

 

 
 Payments due by period 
Contractual Obligations
 Total Less than
1 year
 1 - 3
years
 3 - 5
years
 More than
5 years
 

Term loan

 $246,875 $12,500 $40,625 $193,750 $ 

Operating leases(1)

  96,836  16,528  30,992  23,620  25,696 

Letters of credit(2)

  32,938         

Capital lease obligations(3)

  31,095  600  5,810  6,245  18,440 

Purchase commitments(4)

  7,588  7,588       

Tax contingency reserves(5)

  11,645  372       

 $426,977 $37,588 $77,427 $223,615 $44,136 

(1)
Operating lease obligations include estimated future lease payments for both open and closed offices.

(2)
These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions.

(3)
Capital lease obligations include imputed interest of $6.5 million and are net of leasehold improvement allowances.

(4)
Purchase commitments include open purchase orders as of December 31, 2014 relating to ongoing capital expenditure and operational activities.

(5)
Other than the estimated amount to be paid during 2015, the Company is unable to make a reasonably reliable estimate of the period of the cash settlement (if any) with the respective taxing authorities for the $11.6 million balance of its tax contingency reserves. However, settlement of such amounts could require the utilization of working capital. See further discussion in Note 7—"Income Taxes" to the consolidated financial statements set forth elsewhere herein.

(1)

Operating lease obligations include estimated future lease payments for both open and closed offices.


(2)

These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions.

(3)

Capital lease obligations include imputed interest of $3.6 million and are net of leasehold improvement allowances.

(4)

Purchase commitments include open purchase orders as of December 31, 2017 relating to ongoing capital expenditure and operational activities.

(5)

The Company is unable to make a reasonably reliable estimate of the period of the cash settlement (if any) with the respective taxing authorities for these contingencies. However, settlement of such amounts could require the utilization of working capital. See further discussion in Note 7—“Income Taxes” to the consolidated financial statements set forth elsewhere herein.

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        In addition to the contractual obligations and commitments discussed above, as of December 31, 2014 the Company had liabilities of $58.1 million associated with business acquisitions which are contingently payable through 2017. For additional detail see Note 2—"Summary of Significant Accounting Policies—Fair Value Measurements" to the consolidated financial statements set forth elsewhere herein. The Company also has a variety of other contractual agreements related to acquiring materials and services used in the Company'sCompany’s operations. However, the Company does not believe these other agreements contain material noncancelable commitments.

Stock Repurchases

The Company'sCompany’s board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice.

        On October 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013. On July 24, 2013 the Company's board of directors approved an increase and extension of the stock repurchase plan which authorizes the Company to purchase up to $300 million of its outstanding stock through October 25, 2015.

        Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period
 Total Number
of Shares
Purchased
 Average
Price Paid
per Share
 Aggregate
Cost
 

November 11, 2011 - December 31, 2011

  671,776 $48.72 $32.7 

January 1, 2012 - December 31, 2012

  459,252  50.27  23.1 

January 1, 2013 - December 31, 2013

  1,159,871  51.83  60.1 

January 1, 2014 - November 21, 2014

  3,183,306  57.82  184.1 

  5,474,205    $300.0 

        On October 22, 2014 the Company's board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016. Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period
 Total Number
of Shares
Purchased
 Average
Price Paid
per Share
 Aggregate
Cost
 

November 24, 2014 - December 31, 2014

  232,170 $60.65 $14.1 

        During the period from January 1, 2015 through February 23, 2015, the Company made additional open market purchases of 352,592 shares of the Company's common stock at an aggregate cost of $21.3 million (excluding broker commissions).

Recent Sales of Unregistered Securities

        On September 6, 2013, the Company and Partners Rx entered into a merger agreement pursuant to which on October 1, 2013 certain principal owners of Partners Rx purchased 175,596 shares of the Company's restricted stock for a total purchase price of $10 million. The purchase price of the shares


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was equal See Note 6—“Stockholders’ Equity” to the average of the closing prices of the Company's stockconsolidated financial statements for the five trading day periodmore information on the day prior to the execution of the Merger Agreement. The shares received by such principal owners of Partners Rx are subject to vesting over three years with 50% vesting on the second anniversary of the acquisition and 50% vesting on the third anniversary of the acquisition, conditioned on continued employment with the Company on the applicable vesting dates. The shares were issued to the principal owners of Partners Rx in a private placement pursuant to Section 4(a)(2) of the Securities Act.Company’s share repurchase program.

        On March 31, 2014, the Company and CDMI, LLC entered into a purchase agreement pursuant to which on April 30, 2014 the sellers and key management of CDMI purchased 1,433,946 shares of the Company's restricted stock for a total purchase price of $80 million. The aggregate number of shares issued was determined by dividing $80.0 million by the volume weighted average trading prices per share of Magellan's ordinary common stock on the NASDAQ as reported by Bloomberg US L.P. using its "Volume at Price" function over the five trading days ended on the trading day prior to the closing of the purchase agreement. The shares received by such sellers and key management of CDMI are subject to vesting over 42 months with 25% vesting after 18 months and 75% vesting after 42 months, conditioned on continued employment. The shares were issued to the sellers and key management of CDMI in a private placement pursuant to Section 4(a)(2) of the Securities Act.

Off-BalanceOff‑Balance Sheet Arrangements

As of December 31, 2014,2017, the Company has no material off-balanceoff‑balance sheet arrangements.

Senior Notes

2014 Credit FacilityOn September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of September 22, 2017 (the “Base Indenture”), between the Company, as issuer and U.S. Bank National Association, as trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee.

For more information on the Company’s Senior Notes see Note 5—“Long‑Term Debt and Capital Lease Obligations” to the consolidated financial statements set forth elsewhere herein.

Credit Agreements

On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that providesprovided for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan Health, Inc.)Magellan) to borrow up to $250.0 million of revolving loans, with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company, and a term loan in an original aggregate principal amount of $250.0 million (the "2014“2014 Credit Facility"Facility”). At such point, the previous credit facility was terminated. The 2014 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries ofOn December 2, 2015, the Company and will mature on July 23, 2019, but the Company holdsentered into an optionamendment to extend the 2014 Credit Facility for an additional one year period.

under which Magellan Pharmacy Services, Inc. (a wholly owned subsidiary of Magellan) became a party to the $500.0 million Credit Agreement as the borrower and assumed all of the obligations of Magellan Rx Management, Inc. Under the 2014 Credit Facility, the annual interest rate on revolving and term loan borrowings is equal to (i) in the case of base rate loans, the sum of a borrowing margin of 0.50 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar rate loans, the sum of a borrowing margin of 1.50 percent plus the Eurodollar rate for the selected interest period, which rates shall be adjusted from time to time based on the Company's total leverage ratio. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. Letters of credit issued bear interest at the rate of 1.625 percent. The commitment commission on the 2014 Credit Facility is 0.20 percent of the unused Revolving Loan Commitment, which rate shall be adjusted from time to time based on the Company's total leverage ratio.

        On September 30, 2014, the Company completed a draw-down of the $250.0 million term loan. The borrowings will initially be maintained as a Eurodollar loan. The term loan is subject to certain quarterly amortization payments. As of December 31, 2014 the remaining balance on the term loan was $246.9 million. The term loan will mature on July 22, 2019. As of December 31, 2014, the term loan bore interest at a rate of 1.50 percent plus the London Interbank Offered Rate ("LIBOR"(the “2014 Term Loan”), which was equivalent to a total interest rate of 1.66925 percent. During the period the term loan was outstanding, from September 30, 2014 through December 31, 2014, the weighted average interest rate was 1.65496 percent.


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. The 2014 Credit Facility was scheduled to mature on July 23, 2019. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2014 Credit Facility was terminated.

On June 27, 2016, the Company entered into a $200.0 million Credit Agreement with various lenders that provided for a $200.0 million term loan (the “2016 Term Loan”) to Magellan Pharmacy Services, Inc. (the “2016 Credit Facility”). The 2016 Credit Facility was guaranteed by substantially all of the non-regulated subsidiaries of the Company and was scheduled to mature on December 29, 2017. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2016 Credit Facility was terminated.

On January 10, 2017, the Company entered into a Credit Agreement with various lenders that provided for a $200.0 million delayed draw term loan (the “2017 Term Loan”) to Magellan Pharmacy Services, Inc. (the “2017 Credit Facility”). The 2017 Credit Facility was guaranteed by substantially all of the non-regulated subsidiaries of the Company and was scheduled to mature on December 29, 2017. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2017 Credit Facility was terminated.

On September 22, 2017, the Company entered into a Credit Agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the borrower (the “2017 Credit Agreement”). The 2017 Credit Agreement is scheduled to mature on September 22, 2022.

The proceeds from the 2017 Credit Agreement were and will be used for (a) working capital and general corporate purposes of the Company and its subsidiaries, including investments and the funding of acquisitions, (b) the repayment of all outstanding loans and other obligations (and the termination of all commitments) under the 2014 Credit Facility, 2016 Credit Facility and 2017 Credit Facility (collectively, the “Previous Credit Agreements”) (the termination and repayment of the obligations under the Previous Credit Agreements, collectively, the “Refinancing”) and (c) payment of fees and expenses incurred in connection with (i) the entering into the 2017 Credit Agreement and related documents and the incurrence of loans and issuance of letters of credit thereunder and (ii) the consummation of the Refinancing. Upon consummation of the Refinancing, the Previous Credit Agreements were terminated.

For more information on the Company’s Credit Agreements see Note 5—“Long‑Term Debt and Capital Lease Obligations” to the consolidated financial statements set forth elsewhere herein.

Restrictive Covenants in Debt Agreements

The 2017 Credit Agreement contains covenants that limit management'smanagement’s discretion in operating the Company'sCompany’s business by restricting or limiting the Company'sCompany’s ability, among other things, to:

·

incur or guarantee additional indebtedness or issue preferred or redeemable stock;

·

pay dividends and make other distributions;

·

repurchase equity interests;

·

make certain advances, investments and loans;

·

enter into sale and leaseback transactions;

·

create liens;

·

sell and otherwise dispose of assets;

·

acquire, merge or consolidate with another company; and

·

enter into some types of transactions with affiliates.

These restrictions could adversely affect the Company'sCompany’s ability to finance future operations or capital needs or engage in other business activities that may be in the Company'sCompany’s interest.

The 20142017 Credit FacilityAgreement also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 20142017 Credit Facility,Agreement, pursuant to its terms, would result in an event of default under the 20142017 Credit Facility.Agreement. As of December 31, 2014,2017, the Company was in compliance with all covenants, including financial covenants, under the 20142017 Credit Facility.Agreement.

Net Operating Loss Carryforwards

        The Company has $3.0 million of federal NOLs available to reduce its consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2017 through 2019 if not used and are subject to examination and adjustment by the IRS. AlphaCare has $24.5 million of federal NOLs available to reduce its consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2033 through 2034 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $160.5 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2015 and subsequent years. Most of these NOLs will expire in 2017 through 2034 if not used and are subject to examination and adjustment by the respective state tax authorities.

        As of December 31, 2014, the Company's valuation allowances against deferred tax assets were $12.4 million, mostly relating to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and certain state NOLs. Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. Future changes in the estimated realizable portion of deferred tax assets could materially affect the Company's financial condition and results of operations.

Recent Accounting Pronouncements

        In July 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-06, "Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2011-06"), which addresses how fees mandated by the Patient Protection and the Affordable Care Act ("ACA"), as


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amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law"), should be recognized and classified in the income statements of health insurers. The Health Reform Law imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. ASU 2011-06 stipulates that the liability incurred for that fee be amortized to expense over the calendar year in which it is payable. This ASU is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. The Company has obtained rate adjustments which the Company expects will cover the direct costs of these fees and the impact from non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has a state public sector customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. For 2014, the ACA fee was $21.4 million which has been paid, and which is included in direct service costs and other operating expenses in the consolidated statements of income. The Company has recorded revenues of $36.5 million for 2014, associated with the accrual for the reimbursement of the economic impact of the ACA fees from its customers.

        In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2013 and were adopted by the Company during the quarter ended March 31, 2014. The effect of the guidance is immaterial to the Company's consolidated results of operations, financial position, and cash flows.

        In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which is a new comprehensive revenue recognition standard that will supersede virtually all existing revenue guidance under GAAP. This ASU is effective for calendar years beginning after December 15, 2016. The Company is currently assessing the potential impact this ASU will have on the Company's consolidated results of operations, financial position, and cash flows.

        In June 2014, the FASB issued ASU No. 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("ASU 2014-12"), which revises the accounting treatment for stock compensation tied to performance targets. This ASU is effective for calendar years beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40)" ("ASU 2014-15"), which provides guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This amendment should reduce diversity in the timing and content of footnote disclosures. This ASU is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.


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Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

Changes in interest rates affect interest income earned on the Company'sCompany’s cash equivalents and restricted cash and investments, as well as interest expense on variable interest rate borrowings under the 20142017 Credit Facility.Agreement. In addition, interest rates on the Notes are subject to adjustment upon the occurrence of certain credit rating events. Based on the Company's investment balances,amount of cash equivalents and investments and the borrowing levels under the 20142017 Credit FacilityAgreement and the principal amount of the Notes as of December 31, 2014,2017, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company'sCompany’s future earnings and cash outflows.

Item 8.    Financial Statements and Supplementary Data

Information with respect to this item is contained in the Company'sCompany’s consolidated financial statements, including the reports of independent accountants, set forth elsewhere herein and financial statement schedule indicated in the Index on Page F-1F‑1 of this Report on Form 10-K,10‑K, and is included herein.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company'sCompany’s management evaluated, with the participation of the Company'sCompany’s principal executive and principal financial officers, the effectiveness of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e)13a‑15(e) and 15d-15(e)15d‑15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”)), as of December 31, 2014.2017. Based on their evaluation, management hasthe CEO and CFO concluded that the Company's disclosureour controls and procedures were not effective due to a material weakness in internal control over financial reporting at AFSC which we acquired on July 1, 2016, and which operates as a component of December 31, 2014.our Healthcare segment.  

Notwithstanding the identified material weakness, management, including our CEO (principal executive officer) and CFO (principal financial officer), believes the consolidated financial statements included in this annual report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

        InExcept as noted in the fourthpreceding paragraph, there has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2014, there have been no changes in the Company's internal controls over financial reporting2017 that havehas materially affected, or areis reasonably likely to materially affect, the Company'sour internal controlscontrol over financial reporting.

MANAGEMENT'SMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company'sCompany’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)13a‑15(f) under the Securities Exchange Act of 1934, as amended). The Company'sCompany’s internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including the Company'sCompany’s Chief Executive Officer and Chief Financial Officer, the Company assessed the effectiveness of internal control over financial reporting as of December 31, 2014.2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”) in its statement "Internal Control-Integrated“Internal Control‑Integrated Framework (2013)."

        Management'sAFSC was acquired on July 1, 2016 and generated about 3% of our total net revenues for the year ended December 31, 2017. Prior to 2017, AFSC was not included in assessments of the effectiveness of our internal control over financial reporting as the Securities and Exchange Commission (“SEC”) rules provide companies one year to assess controls at an acquired entity. Accordingly, within this period, we performed our first comprehensive assessment of the design and effectiveness of internal controls at AFSC and determined that AFSC’s internal control over financial reporting was ineffective as of December 31, 2017. Specifically, AFSC did not adequately identify, design and implement appropriate process-level controls for its processes, including AFSC’s contract accounting and information technology general controls. There were no material errors in the financial results or balances identified as a result of the control deficiencies, and there was no restatement of prior period financial statements and no change in previously released financial results were required as the result of these control deficiencies.

Management’s assessment of the effectiveness of internal control over financial reporting excludes the evaluation of the internal controls over reporting of CDMI and Cobalt,SWH, which werewas acquired on


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April 1, 2014 and July 1, 2014, respectively. These October 31, 2017. SWH’s operations represent 11.46.8 percent and 12.14.2 percent of total and net assets of the Company respectively, as of December 31, 2014,2017, and 0.93.2 percent and 9.84.1 percent of revenues and Segment Profit,income before income taxes, respectively, of the Company for the year then ended.

Based on this assessment, which excluded an assessment of internal control of the acquired operations of CDMI and Cobalt,SWH, management has concluded that, as of December 31, 2014,2017, internal control over financial reporting is not effective based on these criteria.due to the material weakness described above.

The Company'sCompany’s independent registered public accounting firm has issued an audit report on the Company'sCompany’s internal control over financial reporting. This report dated February 26, 2015March 1, 2018 appears on page 73pages 50 and 51 of this Form 10-K.


10‑K.

TableRemediation Plan for Material Weakness

We are actively engaged in developing a remediation plan to address the material weakness reported as of ContentsDecember 31, 2017. The remediation efforts we expect to implement include the enhanced and revised design of existing financial reporting controls related to contract accounting and information technology general controls at AFSC. 


We believe these measures will remediate the material weakness identified above and will strengthen our internal control over financial reporting for the AFSC operations.  We currently are targeting to complete the implementation of the control enhancements during 2018. We will test the ongoing operating effectiveness of the new controls subsequent to implementation, and consider the material weakness remediated after the applicable remedial controls and information technology general controls operate effectively for a sufficient period of time.

If the remedial measures described above are insufficient to address the material weakness described above, or are not implemented timely, or additional deficiencies arise in the future, material misstatements in our interim or annual financial statements may occur in the future.

Report of Independent Registered Public Accounting Firm

The

To the Shareholders and Board of Directors and Stockholders of Magellan Health, Inc.

 

Opinion on Internal Control over Financial Reporting

We have audited Magellan Health, Inc. and subsidiaries'subsidiaries’ internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Magellan Health, Inc. and subsidiaries'subsidiaries (the Company) has not maintained effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SWH Holdings, Inc., which is included in the 2017 consolidated financial statements of Magellan Health, Inc. and subsidiaries and which constituted  6.8% and 4.2% of total and net assets, respectively, as of December 31, 2017 and 3.2% and 4.1% of revenues and income before income taxes, respectively, for the year then ended.  Our audit of internal control over financial reporting ofMagellan Health, Inc. and subsidiaries also did not include an evaluation of the internal control over financial reporting of SWH Holdings, Inc.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management identified a material weakness in the design and operation of internal controls within AFSC’s processes (including contract accounting and information technology general controls).

We also have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheets of Magellan Health, Inc. and subsidiaries as of December 31, 2016 and 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules listed in the Index at Item 15 (a) 1 and 2  (collectively referred to as the “financial statements”)  of the Company.  This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report dated March 1, 2018, which expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management'sManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company'sCompany’s internal control over financial reporting based on our audit.  We are a public accounting firm registered with the PCAOB and are required to independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definitions and Limitation of Internal Control Over Financial Reporting

A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of CDMI and Cobalt, which are included in the 2014 consolidated financial statements of Magellan Health, Inc. and subsidiaries and collectively constituted 11.4% and 12.1% of total and net assets, respectively, as of December 31, 2014 and 0.9% and 9.8% of revenues and segment profit, respectively, for the year then ended. Our audit of internal control over financial reporting of Magellan Health, Inc. and subsidiaries also did not include an evaluation of the internal control over financial reporting of CDMI and Cobalt.

        In our opinion, Magellan Health, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Magellan Health, Inc. and subsidiaries as of December 31, 2013 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 26, 2015 expressed an unqualified opinion thereon.

/s/ERNST & YOUNG LLP

Baltimore, Maryland

March 1, 2018

Baltimore, Maryland
February 26, 2015


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Item 9B.  Other Information

None.

PART III

The information required by Items 10 through 14 is incorporated by reference to the Registrant'sRegistrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2014,2017, except for the following information required by Item 12 of this Part III.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth certain information as of December 31, 20142017 with respect to the Company'sCompany’s compensation plans under which equity securities are authorized for issuance:

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Number of securities

 

 

 

 

 

 

 

 

remaining available

 

 

 

 

 

 

 

 

for future issuance

 

 

 

Number of securities

 

 

 

 

under equity

 

 

 

to be issued upon

 

Weighted average

 

compensation plans

 

 

 

exercise of

 

exercise price of

 

(excluding securities

 

 

 

outstanding options,

 

outstanding options,

 

reflected in

 

Plan category

 

warrants and rights

 

warrants and rights

 

column(a))

 

 

 

(a)

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

2,823,841

(1)

$

61.50

(2)

3,724,939

(3)

Equity compensation plans not approved by security holders

 

 —

 

 

 —

 

 —

 

Total

 

2,823,841

 

$

61.50

 

3,724,939

(3)

Plan category
 Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
 Weighted average
exercise price of
outstanding options,
warrants and rights
 Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column(a))
 
 
 (a)
  
  
 

Equity compensation plans approved by security holders

  3,321,063 $50.58  2,097,552(1)

Equity compensation plans not approved by security holders

       

Total

  3,321,063 $50.58  2,097,552(1)

(1)
Consists of shares remaining available for issuance as of December 31, 2014 under the Company's equity compensation plans (pursuant to which the Company may issue stock options, restricted stock awards, stock bonuses, stock purchase rights and other equity incentives), after giving effect to the shares issuable upon the exercise of outstanding options and the shares of restricted stock.

(1)

Consists of outstanding stock options and unvested restricted stock units and performance-based restricted stock units as of December 31, 2017.

(2)

Weighted average exercise price of outstanding stock options as of December 31, 2017.

(3)

Consists of shares remaining available for issuance as of December 31, 2017 under the Company’s equity compensation plans (pursuant to which the Company may issue stock options, restricted stock awards, stock bonuses, stock purchase rights and other equity incentives), after giving effect to the shares issuable upon the exercise of outstanding options and the shares of restricted stock.

For further discussion, see Note 6—"Stockholders' Equity"“Stockholders’ Equity” to the consolidated financial statements set forth elsewhere herein.

PART IV

Item 15.    Exhibits, Financial Statement Schedule and Additional Information

(a)

        (a)   Documents furnished as part of the Report:

1.     Financial1.Financial Statements

Information with respect to this item is contained on Pages F-1F‑1 to F-53F‑44 of this Report on Form 10-K.10‑K.

2.     Financial2.Financial Statement ScheduleSchedules

Information with respect to this item is contained on page S-1S‑1 to S-5 of this Report on Form 10-K.


Table of Contents10‑K.

3.     Exhibits3.Exhibit Index

Exhibit No.

Description of Exhibit

1.1
2.1

Share Purchase

Underwriting Agreement, betweendated September 15, 2017, among Magellan Health, Services,Inc., as issuer, and J.P. Morgan Securities LLC, MUFG Securities Americas Inc. and California Physicians' Service D/B/A Blue ShieldWells Fargo Securities, LLC, as representatives of California, dated January 28, 2011,the several underwriters named therein, which was filed as Exhibit 2.31.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2010, which was filed on February 25, 2011 and is incorporated herein by reference.



2.2


Purchase Agreement, dated as of March 31, 2014, among Magellan Health Services, Inc., CDMI, LLC, and each Seller's party thereto, which was filed as Exhibit 2.1 to the Company'sCompany’s current report on Form 8-K, which was filed on April 1, 2014September 18, 2017.

2.1

Agreement and Plan of Merger, dated July 13, 2017, among Magellan Healthcare, Inc., SWH Holdings, Inc., certain of the stockholders of SWH Holdings, Inc., certain of the vested optionholders of SWH Holdings, Inc., TA Associates Management, L.P. and Silver Merger Sub, Inc., which was filed as Exhibit 2.1 to the Company’s quarterly report on Form 10-Q, which was filed on July 28, 2017 and is incorporated herein by reference.


3.1

2.3



Amendment No. 1 to Purchase Agreement, dated as

Second Amended and Restated Certificate of April 30, 2014, among Magellan Health Services, Inc., CDMI, LLC and eachIncorporation of the Sellers' party thereto,Company, as amended and restated on May 25, 2017, which was filed as Exhibit 2.23.1 to the Company'sCompany’s current report on Form 8-K, which was filed on April 30, 2014May 25, 2017 and is incorporated herein by reference.


3.2

3.1



Bylaws of the Company which were filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, which was filedamended and restated on May 2, 2008, and is incorporated herein by reference.



3.2


Amended and Restated Certificate of Incorporation of the Company,24, 2017, which was filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the period ended December 31, 2004, which was filed on March 30, 2004, and is incorporated herein by reference.


3.3


Certificate of Ownership and Merger dated June 4, 2014, which was filed as Exhibit 3.1 to the Company'sCompany’s current report on Form 8-K, which was filed on June 4, 2014May 25, 2017 and is incorporated herein by reference.


4.1

3.4



Bylaws of the Company as amended and restated on June 4, 2014, which was filed as Exhibit 3.2 to the Company's current report on Form 8-K, which was filed on June 4, 2014 and is incorporated herein by reference.


4.1


Credit Agreement, dated December 9, 2011, among the Company, various lenders listed therein and Citibank, N.A., as administrative agent, which was filed as Exhibit 4.1 to the Company's current report on Form 8-K, which was filed on December 13, 2011 and is incorporated herein by reference.


4.2


$500,000,000 Credit Agreement, dated as of July 23, 2014, among Magellan Rx Management, Inc., as borrower, Magellan Health, Inc., various lenders and Citibank, N.A., as administrative agent, which was filed as Exhibit 4.1 to the Company'sCompany’s quarterly report on Form 10-Q,10‑Q, which was filed on July 25, 2014 and is incorporated herein by reference.


4.2

*10.1



Consent and Amendment No. 1 to Credit Agreement, dated December 2, 2015, among Magellan Rx Management, Inc., as borrower, Magellan Health, Services, Inc.—2003 Management Incentive Plan, effective various lenders and Citibank N.A., as of January 5, 2004,administrative agent, which was filed as Exhibit 2.144.3 to the Company'sCompany’s annual report on Form 10‑K, which was filed on February 29, 2016 and is incorporated herein by reference.

4.3

$200,000,000 Credit Agreement, dated June 27, 2016, among Magellan Pharmacy Services, Inc., as borrower, Magellan Health, Inc., various lenders and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent, which was filed as Exhibit 4.1 to the Company’s quarterly report on Form 10‑Q, which was filed on July 29, 2016 and is incorporated herein by reference.

4.4

$200,000,000 Credit Agreement, dated January 10, 2017, among Magellan Pharmacy Services, Inc., as borrower, Magellan Health, Inc., various lenders and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent., which was filed as Exhibit 4.5 to the Company’s annual report on Form 10-K, which was filed on February 24, 2017 and is incorporated herein by reference.

4.5

Base Indenture, dated as of September 22, 2017, between the Company, as issuer and U.S. Bank National Association, as trustee, which was filed as Exhibit 4.1 to the Company’s current report on Form 8-K, which was filed on January 6, 2004, and is incorporated herein by reference.September 25, 2017.


4.6

*10.2



Magellan Health Services, Inc.—2005 Director Stock Compensation Plan, effective

First Supplemental Indenture, dated September 22, 2017, between the Company, as of March 3, 2005, which was filedissuer and U.S. Bank National Association, as Appendix B to the Company's definitive proxy statement, filed on April 18, 2005, and is incorporated herein by reference.


Table of Contents

Exhibit No.Description of Exhibit
*10.3Form of Stock Option Agreement, relating to options granted under the Company's 2003 Management Incentive Plan,trustee, which was filed as Exhibit 10.14.2 to the Company'sCompany’s current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.September 25, 2017.


4.7

*10.4



Form of First AmendmentGlobal Note for the 4.400% Senior Notes due 2024 (included as an exhibit to Stock Option Agreement, relating to options granted under the Company's 2003 Management Incentive Plan,Exhibit 4.2), which was filed as Exhibit 10.14.3 to the Company'sCompany’s current report on Form 8-K, which was filed on January 9, 2006, and is incorporated herein by reference.September 25, 2017.


4.8

*10.5



Form

Credit Agreement dated as of Notice of March 2005 Stock Option Grant, relatingSeptember 22, 2017, among the Company, as borrower, BTMU, JPMorgan Chase Bank, N.A., Compass Bank (d/b/a BBVA Compass), U.S. Bank National Association and Wells Fargo Securities, LLC as co-syndication agents, BTMU as administrative agent and the lenders party thereto from time to options granted under the Company's 2003 Management Incentive Plan,time, which was filed as Exhibit 10.24.4 to the Company'sCompany’s current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.September 25, 2017.


*10.1


*10.6



Form of Restricted Stock Agreement, relating to restricted shares granted under the Company's 2003 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.


*10.7


Form of Notice of March 2005 Restricted Stock Award, relating to restricted shares granted under the Company's 2003 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.


*10.8


First form of Notice of Amendment of Stock Option Grant, relating to options granted under the Company's 2003 Management Incentive Plan and dated as of January 3, 2006, between the Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief Financial Officer of the Company, which was filed as Exhibit 10.2 to the Company's current report on Form 8-K, which was filed on January 9, 2006, and is incorporated herein by reference.


*10.9


Second form of Notice of Stock Option Grant, relating to options granted under the Company's 2003 Management Incentive Plan and dated as of January 5, 2004, between the Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief Financial Officer of the Company, which was filed as Exhibit 10.6 to the Company's current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.


*10.10


Second form of Notice of Amendment of Stock Option Grant, relating to options granted under the Company's 2003 Management Incentive Plan and dated as of January 3, 2006, between the Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief Financial Officer of the Company, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on January 9, 2006, and is incorporated herein by reference.


*10.11


Third form of Notice of Stock Option Grant, relating to options granted under the Company's 2003 Management Incentive Plan and dated as of January 5, 2004, between the Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief Financial Officer of the Company, which was filed as Exhibit 10.7 to the Company's current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.

Table of Contents

Exhibit No.Description of Exhibit
*10.12Third form of Notice of Amendment of Stock Option Grant, relating to options granted under the Company's 2003 Management Incentive Plan and dated as of January 3, 2006, between the Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief Financial Officer of the Company, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on January 9, 2006, and is incorporated herein by reference.


*10.13


Form of Notice of Restricted Stock Award, relating to restricted shares granted under the Company's 2003 Management Incentive Plan and dated as of January 5, 2004, between the Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer, Chief Operating Officer of the Company and Mark S. Demilio, Chief Financial Officer of the Company, which was filed as Exhibit 10.8 to the Company's current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.


*10.14


Notice of Restricted Stock Award, relating to restricted shares granted under the Company's 2003 Management Incentive Plan and dated as of January 5, 2004, between the Company and Steven J. Shulman, Chief Executive Officer of the Company, which was filed as Exhibit 10.9 to the Company's current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.


*10.15


Supplemental Accumulation Plan, adopted in 2002, which was filed as Exhibit 10.10 to the Company's current report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.


*10.16


Form of Stock Option Agreement, relating to the 2006 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company's current report on Form 8-K, which was filed on May 22, 2006, and is incorporated herein by reference.


*10.17


Form of Notice of Stock Option Grant, pursuant to the 2006 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company's current report on Form 8-K, which was filed on May 22, 2006, and is incorporated herein by reference.


*10.18


Form of Restricted Stock Unit Agreement, pursuant to the 2006 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on May 22, 2006, and is incorporated herein by reference.


*10.19


Form of Notice of Restricted Stock Unit Award, pursuant to the 2006 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on May 22, 2006, and is incorporated herein by reference.


*10.20


Form of Restricted Stock and Stock Option Award Agreement, pursuant to the 2006 Director Equity Compensation Plan, which was filed as Exhibit 10.5 to the Company's current report on Form 8-K, which was filed on May 22, 2006, and is incorporated herein by reference.


*10.21


Magellan Health Services, Inc.—2006 Management Incentive Plan, effective as of May 16, 2006, which was filed as Exhibit 10.1 to the Company's Quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, which was filed on July 28, 2006, and is incorporated herein by reference.


*10.22


Magellan Health Services, Inc.—2006 Director Equity Compensation Plan, effective as of May 16, 2006, which was filed as Exhibit 10.2 to the Company's Quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, which was filed on July 28, 2006, and is incorporated herein by reference.

Table of Contents

Exhibit No.Description of Exhibit
*10.23Magellan Health Services, Inc.—2006 Employee Stock Purchase Plan, effective as of May 16, 2006 which was filed as Exhibit 10.3 to the Company's Quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, which was filed on July 28, 2006, and is incorporated herein by reference.


*10.24


Amended and Restated Supplemental Accumulation Plan, effective as of January 1, 2005, which was filed as Exhibit 10.1 to the Company'sCompany’s Quarterly report on Form 10-Q10‑Q for the quarter ended September 30, 2006, which was filed on October 26, 2006, and is incorporated herein by reference.


*10.2


*10.25



Amendment to Employment Agreement, dated July 28, 2006, between the Company and Jeffrey N. West, Senior Vice President and Controller

Magellan Health Services, Inc. 2008 Management Incentive Plan, effective as of the Company,May 20, 2008, which was filed as Exhibit 10.2Appendix A to the Company's Quarterly report on Form 10-Q for the quarter ended September 30, 2006,Company’s Definitive Proxy Statement, which was filed on October 26, 2006, and is incorporated herein by reference.



*10.26


Amendment to Agreements and Documents Governing Restricted Stock Units, dated December 1, 2008, between the Company and Rene Lerer, Chief Executive Officer which was filed as Exhibit 10.66 to the Company's Annual Report on Form 10-K, which was filed on February 29,April 11, 2008, and is incorporated herein by reference.


*10.3


*10.27



Employment Agreement dated February 19, 2008 between the Company and Rene Lerer, M.D., which was filed as Exhibit 10.1 to the Company's current report on Form 8-K, which was filed on February 25, 2008 and is incorporated herein by reference.


*10.28


Employment Agreement, dated February 25, 2008, between the Company and Tina Blasi, which was filed as Exhibit 10.46 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.29


Amendment to Employment Agreement, dated February 25, 2008, between the Company and Tina Blasi, which was filed as Exhibit 10.47 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.30


Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on May 27, 2008 and is incorporated herein by reference.


*10.4


*10.31



Form of Notice of March 2008 Stock Option Grant, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on May 27, 2008 and is incorporated herein by reference.


*10.5


*10.32



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on May 27, 2008 and is incorporated herein by reference.


*10.33


Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on May 27, 2008 and is incorporated herein by reference.

Table of Contents

Exhibit No.Description of Exhibit
*10.34Employment Agreement, dated August 11, 2008 between the Company and Jonathan Rubin, Chief Financial Officer, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on August 13, 2008, and is incorporated herein by reference.


*10.6


*10.35



Magellan Health Services, Inc.—2008 Management Incentive Plan, effective as of February 27, 2008, which was filed as Appendix A to the Company's Definitive Proxy Statement, which was filed on April 11, 2008, and is incorporated herein by reference.


*10.36


Amendment to Employment Agreement, dated December 1, 2008, between the Company and Jeffrey West, Senior Vice President and Controller which was filed as Exhibit 10.56 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.37


Amendment to Employment Agreement, dated December 1, 2008, between the Company and Tina Blasi, Chief Executive Officer of National Imaging Associates, Inc. which was filed as Exhibit 10.57 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.38


Amendment to Employment Agreement, dated December 1, 2008, between the Company and Daniel N. Gregoire, Executive Vice President, General Counsel and Secretary which was filed as Exhibit 10.58 to the Company'sCompany’s Annual Report on Form 10-K,10‑K, which was filed on February 29, 200827, 2009 and is incorporated herein by reference.


*10.7


*10.39



Amendment to Agreements and Documents Governing Restricted Stock Units, dated December 1, 2008, between the Company and Caskie Lewis-Clapper, Chief Human Resources Officer which was filed as Exhibit 10.61 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.40


Amendment to Agreements and Documents Governing Restricted Stock Units, dated December 1, 2008, between the Company and Tina Blasi, Chief Executive Officer of National Imaging Associates, Inc. which was filed as Exhibit 10.62 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.41


Amendment to Agreements and Documents Governing Restricted Stock Units, dated December 1, 2008, between the Company and Jeffrey West, Senior Vice President and Controller which was filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.42


Amendment to Agreements and Documents Governing Restricted Stock Units, dated December 1, 2008, between the Company and Daniel N. Gregoire, Executive Vice President, General Counsel and Secretary which was filed as Exhibit 10.64 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.43


Amendment to Employment Agreement, as amended and restated December 16, 2008, between the Company and Rene Lerer, M.D, Chief Executive Officer which was filed as Exhibit 10.65 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.


*10.44


Amendment to Agreements and Documents Governing Restricted Stock Units, dated December 1, 2008, between the Company and Rene Lerer, Chief Executive Officer which was filed as Exhibit 10.66 to the Company's Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.

Table of Contents

Exhibit No.Description of Exhibit
*10.45Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on May 4,March 10, 2009 and is incorporated herein by reference.


*10.8


*10.46



Form of Notice of March 2008 Stock Option Grant, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on May 4,March 10, 2009 and is incorporated herein by reference.


*10.9


*10.47



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on May 4, 2009 and is incorporated herein by reference.


*10.48


Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on May 4, 2009 and is incorporated herein by reference.


*10.49


Employment Agreement, dated July 28, 2009 between Karen S. Rohan and Magellan Health Services, Inc., which was filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, which was filed on July 31, 2009 and is incorporated herein by reference.


*10.50


Amendment to Employment Agreement, dated July 28, 2009 between Magellan Health Services, Inc. and Karen S. Rohan, which was filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, which was filed on July 31, 2009 and is incorporated herein by reference.


*10.51


Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 5, 2010 and is incorporated herein by reference.


*10.10


*10.52



Form of Notice of March 2008 Stock Option Grant, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 5, 2010 and is incorporated herein by reference.


*10.11


*10.53



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on March 5, 2010 and is incorporated herein by reference.


*10.54


Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on March 5, 2010 and is incorporated herein by reference.


*10.55


Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 8, 2011 and is incorporated herein by reference.


Table of Contents

Exhibit No.Description of Exhibit

*10.12

*10.56

Form of Notice of Stock Option Grant, relating to options granted under the Company'sCompany’s 2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 8, 2011 and is incorporated herein by reference.


*10.13


*10.57



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on March 8, 2011 and is incorporated herein by reference.


*10.58


Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company's 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on March 8, 2011 and is incorporated herein by reference.


*10.59


Magellan Health Services, Inc. 2011 Management Incentive Plan, effective as of May 18, 2011, which was filed as Appendix A to the Company'sCompany’s Definitive Proxy Statement, which was filed on April 8, 2011, and is incorporated herein by reference.


*10.14


*10.60



Magellan Health Services, Inc. 2011 Employee Stock Purchase Plan, effective as of May 18, 2011, which was filed as Appendix B to the Company's Definitive Proxy Statement, which was filed on April 8, 2011, and is incorporated herein by reference.


*10.61


Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 7, 2012 and is incorporated herein by reference.


*10.15


*10.62



Form of Notice of Stock Option Grant, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 7, 2012 and is incorporated herein by reference.


*10.16


*10.63



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company's 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company's current report on Form 8-K, which was filed on March 7, 2012 and is incorporated herein by reference.


*10.64


Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company's 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company's current report on Form 8-K, which was filed on March 7, 2012 and is incorporated herein by reference.


*10.65


Amendment to Employment Agreement, dated December 10, 2012 between Magellan Health Services, Inc. and Rene Lerer, M.D., which was filed as Exhibit 10.1 to the Company's current report on Form 8-K, which was filed on December 12, 2012, and is incorporated herein by reference.


*10.66


Employment Agreement dated December 10, 2012 between the Company and Barry M. Smith, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on December 12, 2012, and is incorporated herein by reference.


*10.17


*10.67



Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on February 7, 2013 and is incorporated herein by reference.


Table of Contents

Exhibit No.Description of Exhibit

*10.18

*10.68

Form of Notice of Stock Option Grant, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on February 7, 2013 and is incorporated herein by reference.


*10.19


*10.69



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on February 7, 2013 and is incorporated herein by reference.


*10.20


*10.70



Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on February 7, 2013 and is incorporated herein by reference.


*10.21


*10.71



Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 8, 2013 and is incorporated herein by reference.


*10.22


*10.72



Form of Notice of Stock Option Grant, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 8, 2013 and is incorporated herein by reference.reference.


*10.23


*10.73



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company'sCompany’s current report on Form 8-K,8 K, which was filed on March 8, 2013 and is incorporated herein by reference.


*10.24


*10.74



Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company'sCompany’s current report on Form 8-K,8 K, which was filed on March 8, 2013 and is incorporated herein by reference.


*10.25


*10.75



Form of Notice of Cash Denominated Award, relating to cash awards granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.5 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 8, 2013 and is incorporated herein by reference.


*10.26


*10.76



Amendment to Employment Agreement, dated April 3, 2013 between Magellan Health Services, Inc. and Tina Blasi, which was filed as Exhibit 10.1 to the Company's current report on Form 8-K, which was filed on April 8, 2013, and is incorporated herein by reference.


*10.77


Amendment to Employment Agreement, dated May 14, 2013 between Magellan Health Services, Inc. and Rene Lerer, M.D., which was filed as Exhibit 10.1 to the Company's current report on Form 8-K, which was filed on May 14, 2013, and is incorporated herein by reference.


10.78


Agreement and Plan of Merger, dated September 6, 2013, among Magellan Health Services, Inc., Cactus Acquisition LLC, Partners Rx Management LLC, and Holder Repco LLC, which was filed as Exhibit 10.1 to the Company's current report on Form 8-K, which was filed on October 1, 2013, and is incorporated herein by reference.

Table of Contents

Exhibit No.Description of Exhibit
*10.79Form of Stock Option Agreement, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 7, 2014 and is incorporated herein by reference.


*10.27


*10.80



Form of Notice of Stock Option Grant, relating to options granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 7, 2014 and is incorporated herein by reference.


*10.28


*10.81



Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 7, 2014 and is incorporated herein by reference.


*10.29


*10.82



Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted under the Company'sCompany’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on March 7, 2014 and is incorporated herein by reference.


*10.30


*10.83



Magellan Health Services, Inc. 2014 Employee Stock Purchase Plan, effective as of May 21, 2014, which was filed as Exhibit A to the Company's Definitive Proxy Statement, which was filed on April 10, 2014, and is incorporated herein by reference.


*10.84


Amendment to Employment Agreement, dated April 28, 2014, between the Company and Jonathan N. Rubin, which was filed as Exhibit 10.1 to the Company'sCompany’s current report on Form 8-K,8‑K, which was filed on April 29, 2014 and is incorporated herein by reference.


*10.31


#*10.85



Employment Agreement, dated September 18, 2013 between the Company and Sam K. Srivastava, Chief Executive Officer of Magellan HealthCare.HealthCare, which was filed as Exhibit 10.85 to the Company’s annual report on Form 10‑K, which was filed on February 26, 2015 and is incorporated herein by reference.


*10.32


#21


Form of Stock Option Agreement, relating to options granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current report on Form 8‑K, which was filed on March 9, 2015 and is incorporated herein by reference.


*10.33

Form of Notice of Stock Option Grant, relating to options granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company’s current report on Form 8‑K, which was filed on March 9, 2015 and is incorporated herein by reference.

*10.34

Form of Performance‑Based Restricted Stock Unit Agreement, relating to performance‑based restricted stock units granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company’s current report on Form 8‑K, which was filed on March 9, 2015 and is incorporated herein by reference.

*10.35

Form of Notice of Performance‑Based Restricted Stock Unit Award, relating to performance‑based restricted stock units granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company’s current report on Form 8‑K, which was filed on March 9, 2015 and is incorporated herein by reference.

*10.36

Amendment to Employment Agreement, dated April 28, 2015, between the Company and Jonathan N. Rubin, which was filed as Exhibit 10.1 to the Company’s current report on Form 8‑K, which was filed on April 29, 2015 and is incorporated herein by reference.

*10.37

Amendment to Employment Agreement, dated October 26, 2015 between the Company and Jonathan N. Rubin, which was filed as Exhibit 10.1 to the Company’s quarterly report on Form 10‑Q, which was filed on October 27, 2015 and is incorporated herein by reference.

*10.38

Form of Stock Option Agreement, relating to options granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current report on Form 8‑K, which was filed on March 7, 2016 and is incorporated herein by reference.

*10.39

Form of Notice of Stock Option Grant, relating to options granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company’s current report on Form 8‑K, which was filed on March 7, 2016 and is incorporated herein by reference.

*10.40

Form of Performance‑Based Restricted Stock Unit Agreement, relating to performance‑based restricted stock units granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company’s current report on Form 8‑K, which was filed on March 7, 2016 and is incorporated herein by reference.

*10.41

Form of Notice of Performance‑Based Restricted Stock Unit Award, relating to performance‑based restricted stock units granted under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company’s current report on Form 8‑K, which was filed on March 7, 2016 and is incorporated herein by reference.

*10.42

Magellan Health Services, Inc. 2016 Management Incentive Plan, effective as of May 18, 2016, which was filed as Appendix A to the Company’s Definitive Proxy Statement, which was filed on April 8, 2016, and is incorporated herein by reference.

10.43

Share Purchase Agreement dated as of May 15, 2016, among Magellan Health, Inc., Magellan Healthcare, Inc., Armed Forces Services Corporation and the holders of the issued and outstanding common stock of AFSC who are parties thereto, which was filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q, which was filed on July 29, 2016 and is incorporated herein by reference.

10.44

Purchase Agreement dated as of November 9, 2016, among Magellan Health, Inc., Magellan Pharmacy Solutions, Inc., Veridicus Holdings, LLC and Veridicus Health, LLC, which was filed as Exhibit 10.44 to the Company’s annual report on Form 10-K, which was filed on February 24, 2017 and is incorporated herein by reference.

*10.45

Form of Stock Option Agreement, relating to options granted under the Company’s 2016 Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current report on Form 8‑K, which was filed on March 8, 2017 and is incorporated herein by reference.

*10.46

Form of Notice of Stock Option Grant, relating to options granted under the Company’s 2016 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company’s current report on Form 8‑K, which was filed on March 7, 2017 and is incorporated herein by reference.

*10.47

Form of Performance-Based Restricted Stock Unit Agreement, relating to performance‑based restricted stock units granted under the Company’s 2016 Management Incentive Plan, which was filed as Exhibit 10.3 to the Company’s current report on Form 8‑K, which was filed on March 7, 2017 and is incorporated herein by reference.

*10.48

Form of Notice of Performance-Based Restricted Stock Unit Award, relating to performance‑based restricted stock units granted under the Company’s 2016 Management Incentive Plan, which was filed as Exhibit 10.4 to the Company’s current report on Form 8‑K, which was filed on March 7, 2017 and is incorporated herein by reference.

#12.1

Computation of Ratio of Earnings to Fixed Charges.

#21

List of subsidiaries of the Company.


#23


#23



Consent of Independent Registered Public Accounting Firm.


#31.1


#31.1



Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleySarbanes‑Oxley Act of 2002.


#31.2


#31.2



Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleySarbanes‑Oxley Act of 2002.


†32.1


†32.1



Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-OxleySarbanes‑Oxley Act of 2002.


†32.2


†32.2



Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleySarbanes‑Oxley Act of 2002.


#101


#101



The following materials from the Company'sCompany’s Annual Report on Form 10-K10‑K for the fiscal year ended December 31, 20142017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Changes in Shareholders'Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows and (v) related notes.


*

Constitutes a management contract, compensatory plan or arrangement.

#
Filed

#Filed herewith.

Furnished herewith.

Table of Contents

(b)Exhibits Required by Item 601 of Regulation S-K:
S‑K:

    Exhibits required to be filed by the Company pursuant to Item 601 of Regulation S-KS‑K are contained in a separate volume.

(c)Financial statements and schedules required by Regulation S-X Item 14(d):S‑X Rule 12-09:

            (1)   Not applicable.

            (2)   Not applicable.

            (3)   Information with respect to this item is contained on page S-1 of this Report on Form 10-K.

(1)

Not applicable.

(2)

Not applicable.

(3)

Information with respect to this item is contained on page S‑1 of this Report on Form 10‑K.

4.     Additional4.Additional Information

The Company will provide to any person without charge, upon request, a copy of its annual Report on Form 10-K10‑K (without exhibits) for the year ended December 31, 2014,2017, as filed with the Securities and Exchange Commission. The Company will also provide to any person without charge, upon request, copies of its Code of Ethics for Directors, Code of Ethics for Covered Officers, and Corporate Compliance Handbook for all employees (hereinafter referred to as the "Codes“Codes of Ethics"Ethics”). Any such requests should be made in writing to the Investor Relations Department, Magellan Health, Inc., 55 Nod Road, Avon, Connecticut 06001. The documents referred to above and other Securities and Exchange Commission filings of the Company are available on the Company'sCompany’s website atwww.magellanhealth.com. The Company intends to disclose any future amendments to the provisions of the Codes of Ethics and waivers from such Codes of Ethics, if any, made with respect to any of its directors and executive officers, on its internet site.


Item 16.    10-K Summary

Table of ContentsNone.


SIGNATURES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

MAGELLAN HEALTH, INC.

(Registrant)


Date: February 26, 2015March 1, 2018



/s/ JONATHAN N. RUBIN


Jonathan N. Rubin
Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)


Date: February 26, 2015March 1, 2018



/s/ JEFFREY N. WEST


Jeffrey N. West

Senior Vice President and Controller

(Principal Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant and in the capacities and on the dates indicated have signed this Report below.

Signature
Title
Date





Signature

Title

Date

/s/ BARRY SMITH


Barry Smith

Chief Executive Officer and Chairman
of the Board of Directors

(Principal Executive Officer)

February 26, 2015

March 1, 2018


/s/ ERAN BROSHY

Eran Broshy

Barry Smith



Director


February 26, 2015


/s/ MICHAEL DIAMENT

Michael Diament



Director



February 26, 2015


/s/ ROBERT M. LE BLANC


Robert M. Le Blanc


Director


February 26, 2015

/s/ WILLIAM J. MCBRIDE

William J. McBride


Director


February 26, 2015

/s/ MICHAEL P. RESSNER

Michael P. Ressner


Director


February 26, 2015

Table of Contents

Signature
Title
Date





/s/ MARY SAMMONS

Mary Sammons
DirectorFebruary 26, 2015

/s/ PERRY FINE

Perry Fine


Director


February 26, 2015

/s/ KAY COLES JAMES

Kay Coles James


Director


February 26, 2015

/s/ DR. JOHN O. AGWUNOBI

Dr. John O. Agwunobi



Director



February 26, 2015

March 1, 2018


Dr. John O. Agwunobi

/s/ Eran Broshy

Director

March 1, 2018

Eran Broshy

/s/ Michael Diament

Director

March 1, 2018

Michael Diament

/s/ Dr. Perry Fine

Director

March 1, 2018

Dr. Perry Fine

/s/ Kay Coles James

Director

March 1, 2018

Kay Coles James

/s/ G. Scott MacKenzie

Director

March 1, 2018

G. Scott MacKenzie

/s/ William J. McBride

Director

March 1, 2018

William J. McBride

/s/ Mary Sammons

Director

March 1, 2018

Mary Sammons

/s/ JONATHAN N. RUBIN


Jonathan N. Rubin



Executive Vice President and

Chief
Financial Officer

(Principal Financial Officer)



February 26, 2015

March 1, 2018


Jonathan N. Rubin

/s/ JEFFREY N. WEST


Jeffrey N. West



Senior Vice President and Controller

(Principal Accounting Officer)



February 26, 2015

March 1, 2018

Jeffrey N. West


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

The following consolidated financial statements of the registrant and its subsidiaries are submitted herewith in response to Item 8 and Item 15(a)1:

Page(s)


Page(s)

Magellan Health, Inc.Inc.

Audited Consolidated Financial Statements

Report of independent registered public accounting firm

F-2

F‑2

Consolidated balance sheets as of December 31, 20132016 and 20142017

F-3

F‑3

Consolidated statements of income for the years ended December 31, 2012, 20132015, 2016 and 20142017

F-4

F‑4

Consolidated statements of comprehensive income for the years ended December 31, 2012, 20132015, 2016 and 20142017

F-5

F‑5

Consolidated statements of changes in stockholders'stockholders’ equity for the years ended December 31, 2012, 20132015, 2016 and 20142017

F-6

F‑6

Consolidated statements of cash flows for the years ended December 31, 2012, 20132015, 2016 and 20142017

F-7

F‑7

Notes to consolidated financial statements

F-8

F‑8

The following financial statement schedule of the registrant and its subsidiaries is submitted herewith in response to Item 15(a)2:

Schedule I—Condensed Financial Information of Registrant

S‑1

Schedule II—Valuation and qualifying accounts


S-1

S‑5

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.


Table of Contents


Report of Independent Registered Public Accounting Firm

The

To the Shareholders and Board of Directors and Stockholders of Magellan Health, Inc.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Magellan Health, Inc. and subsidiaries as of December 31, 20132016 and 2014,2017, and the related consolidated statements of income, comprehensive income, changes in stockholders'stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included2017, and the related notes and financial statement scheduleschedules listed in the Index at Item 15(a)2. 15 (a) 1 and 2 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three  years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2018 expressed an adverse opinion thereon.

Basis for Opinion

These financial statements and schedule are the responsibility of the Company'sCompany’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. Our audit includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Magellan Health, Inc. and subsidiaries at December 31, 2013 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Magellan Health, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon.

/s/ERNST Ernst & YOUNGYoung LLP

We have served as the Company’s auditor since 2002.

Baltimore, Maryland

March 1, 2018

Baltimore, Maryland
February 26, 2015


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

    

2016

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents ($81,776 and $229,013 restricted at December 31, 2016 and December 31, 2017, respectively)

 

$

304,508

 

$

398,732

 

Accounts receivable, less allowance of $5,644 and $8,622 at December 31, 2016 and December 31, 2017, respectively

 

 

606,764

 

 

660,775

 

Short-term investments ($227,795 and $219,111 restricted at December 31, 2016 and December 31, 2017, respectively)

 

 

297,493

 

 

310,578

 

Pharmaceutical inventory

 

 

58,995

 

 

40,945

 

Other current assets ($38,785 and $41,121 restricted at December 31, 2016 and December 31, 2017, respectively)

 

 

51,507

 

 

72,323

 

Total Current Assets

 

 

1,319,267

 

 

1,483,353

 

Property and equipment, net

 

 

172,524

 

 

158,638

 

Long-term investments ($6,306 and $17,287 restricted at December 31, 2016 and December 31, 2017, respectively)

 

 

7,760

 

 

17,287

 

Deferred income taxes

 

 

3,125

 

 

813

 

Other long-term assets

 

 

12,725

 

 

22,567

 

Goodwill

 

 

742,054

 

 

1,006,288

 

Other intangible assets, net

 

 

186,232

 

 

268,288

 

Total Assets

 

$

2,443,687

 

$

2,957,234

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

95,635

 

$

74,300

 

Accrued liabilities

 

 

202,176

 

 

193,635

 

Short-term contingent consideration

 

 

9,354

 

 

6,892

 

Medical claims payable

 

 

184,136

 

 

327,625

 

Other medical liabilities

 

 

197,856

 

 

177,002

 

Current debt and capital lease obligations

 

 

403,693

 

 

112,849

 

Total Current Liabilities

 

 

1,092,850

 

 

892,303

 

Long-term debt and capital lease obligations

 

 

214,686

 

 

740,888

 

Deferred income taxes

 

 

 —

 

 

12,298

 

Tax contingencies

 

 

13,981

 

 

14,226

 

Long-term contingent consideration

 

 

1,799

 

 

1,925

 

Deferred credits and other long-term liabilities

 

 

15,882

 

 

19,100

 

Total Liabilities

 

 

1,339,198

 

 

1,680,740

 

Redeemable non-controlling interest

 

 

4,770

 

 

 —

 

Preferred stock, par value $.01 per share

 

 

 

 

 

 

 

Authorized—10,000 shares at December 31, 2016 and December 31, 2017-Issued and outstanding-none

 

 

 —

 

 

 —

 

Ordinary common stock, par value $.01 per share

 

 

 

 

 

 

 

Authorized—100,000 shares at December 31, 2016 and December 31, 2017-Issued and outstanding-51,993 and 23,517 shares at December 31, 2016, respectively, and 52,973 and 24,202 shares at December 31, 2017, respectively

 

 

520

 

 

530

 

Other Stockholders’ Equity:

 

 

 

 

 

 

 

Additional paid-in capital

 

 

1,186,283

 

 

1,274,811

 

Retained earnings

 

 

1,289,288

 

 

1,399,495

 

Accumulated other comprehensive loss

 

 

(175)

 

 

(380)

 

Treasury stock, at cost, 28,476 and 28,771 shares at December 31, 2016 and December 31, 2017, respectively

 

 

(1,376,197)

 

 

(1,397,962)

 

Total Stockholders’ Equity

 

 

1,099,719

 

 

1,276,494

 

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity

 

$

2,443,687

 

$

2,957,234

 

See accompanying notes to consolidated financial statements.

 
 2013 2014 

ASSETS

       

Current Assets:

       

Cash and cash equivalents

 $203,187 $255,303 

Restricted cash

  236,696  215,325 

Accounts receivable, less allowance for doubtful accounts of $5,447 and $4,047 at December 31, 2013 and 2014, respectively

  238,185  353,713 

Short-term investments (restricted investments of $117,674 and $132,808 at December 31, 2013 and 2014, respectively)

  175,883  224,361 

Deferred income taxes

  37,530  27,226 

Pharmaceutical inventory

  49,609  39,375 

Other current assets (restricted deposits of $25,009 and $30,620 at December 31, 2013 and 2014, respectively)

  48,268  52,246 

Total Current Assets

  989,358  1,167,549 

Property and equipment, net

  172,333  171,916 

Restricted long-term investments

  32,430  43,293 

Other long-term assets

  7,197  11,575 

Goodwill

  488,206  566,106 

Other intangible assets, net

  69,694  133,718 

Total Assets

 $1,759,218 $2,094,157 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND
STOCKHOLDERS' EQUITY

       

Current Liabilities:

       

Accounts payable

 $42,853 $63,929 

Accrued liabilities

  134,652  154,931 

Medical claims payable

  228,341  278,482 

Other medical liabilities

  67,416  72,719 

Current maturities of long-term debt and capital lease obligations

  3,005  15,779 

Total Current Liabilities

  476,267  585,840 

Long-term debt and capital lease obligations

  23,720  255,742 

Deferred income taxes

  42,046  30,950 

Tax contingencies

  32,343  12,320 

Contingent consideration

    49,839 

Deferred credits and other long-term liabilities

  17,803  19,951 

Total Liabilities

  592,179  954,642 

Redeemable Non-Controlling Interest

  10,554  5,957 

Preferred stock, par value $.01 per share

       

Authorized—10,000 shares at December 31, 2013 and 2014—Issued and outstanding—none

     

Ordinary common stock, par value $.01 per share

       

Authorized—100,000 shares at December 31, 2013 and 2014—Issued and outstanding—47,351 shares and 27,616 shares at December 31, 2013, respectively, and 50,085 and 26,935 shares at December 31, 2014, respectively

  474  501 

Multi-Vote common stock, par value $.01 per share

       

Authorized—40,000 shares at December 31, 2013 and 2014—Issued and outstanding—none

     

Other Stockholders' Equity:

       

Additional paid-in capital

  922,325  1,018,266 

Retained earnings

  1,100,493  1,179,897 

Accumulated other comprehensive loss

  (93) (143)

Ordinary common stock in treasury, at cost, 19,735 shares and 23,150 shares at December 31, 2013 and 2014, respectively

  (866,714) (1,064,963)

Total Stockholders' Equity

  1,156,485  1,133,558 

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity

 $1,759,218 $2,094,157 

 

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31,

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

Managed care and other

 

 

$

3,197,645

 

$

2,902,942

 

$

3,479,182

 

PBM and dispensing

 

 

 

1,399,755

 

 

1,933,942

 

 

2,359,401

 

Total net revenue

 

 

 

4,597,400

 

 

4,836,884

 

 

5,838,583

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of care

 

 

 

2,274,755

 

 

1,882,614

 

 

2,413,770

 

Cost of goods sold

 

 

 

1,321,877

 

 

1,818,720

 

 

2,211,910

 

Direct service costs and other operating expenses (1)(2)(3)

 

 

 

822,392

 

 

876,612

 

 

941,883

 

Depreciation and amortization

 

 

 

102,844

 

 

106,046

 

 

115,706

 

Interest expense

 

 

 

6,581

 

 

10,193

 

 

25,977

 

Interest and other income

 

 

 

(2,165)

 

 

(2,818)

 

 

(5,887)

 

Total costs and expenses

 

 

 

4,526,284

 

 

4,691,367

 

 

5,703,359

 

Income before income taxes

 

 

 

71,116

 

 

145,517

 

 

135,224

 

Provision for income taxes

 

 

 

42,409

 

 

69,728

 

 

25,083

 

Net income

 

 

 

28,707

 

 

75,789

 

 

110,141

 

Less: net loss attributable to non-controlling interest

 

 

 

(2,706)

 

 

(2,090)

 

 

(66)

 

Net income attributable to Magellan

 

 

$

31,413

 

$

77,879

 

$

110,207

 

Net income attributable to Magellan per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic (See Note 6—"Stockholders' Equity")

 

 

$

1.26

 

$

3.36

 

$

4.72

 

Diluted (See Note 6—"Stockholders' Equity")

 

 

$

1.21

 

$

3.22

 

$

4.51

 


(1)

Includes stock compensation expense of $50,384, $37,422 and $39,116 for the years ended December 31, 2015, 2016 and 2017, respectively.

(2)

Includes changes in fair value of contingent consideration of $44,257, $(104) and $696 for the years ended December 31, 2015, 2016 and 2017, respectively.

(3)

Includes impairment of intangible assets of $4,800 for the year ended December 31, 2016.

See accompanying notes to consolidated financial statements.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31,

(In thousands, except per share amounts)
thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Net income

 

$

28,707

 

$

75,789

 

$

110,141

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities (1)

 

 

(119)

 

 

87

 

 

(205)

 

Comprehensive income

 

 

28,588

 

 

75,876

 

 

109,936

 

Less: comprehensive loss attributable to non-controlling interest

 

 

(2,706)

 

 

(2,090)

 

 

(66)

 

Comprehensive income attributable to Magellan

 

$

31,294

 

$

77,966

 

$

110,002

 

 
 2012 2013 2014 

Net revenue:

          

Managed care and other

 $2,857,099 $3,063,049 $2,968,374 

PBM and dispensing

  350,298  483,268  791,744 

Total net revenue

  3,207,397  3,546,317  3,760,118 

Costs and expenses:

          

Cost of care

  2,071,890  2,232,976  2,088,595 

Cost of goods sold

  328,414  455,601  732,949 

Direct service costs and other operating expenses(1)

  557,512  619,546  723,498 

Depreciation and amortization

  60,488  71,994  91,070 

Interest expense

  2,247  3,000  7,387 

Interest and other income

  (2,019) (1,985) (1,301)

Total costs and expenses

  3,018,532  3,381,132  3,642,198 

Income before income taxes

  188,865  165,185  117,920 

Provision for income taxes

  37,838  39,924  43,689 

Net income

  151,027  125,261  74,231 

Less: net income (loss) attributable to non-controlling interest

      (5,173)

Net income attributable to Magellan Health, Inc. 

 $151,027 $125,261 $79,404 

Net income per common share attributable to Magellan Health, Inc.:

          

Basic

 $5.51 $4.63 $2.98 

Diluted

 $5.42 $4.53 $2.90 

(1)
Includes stock compensation expense of $17,783, $21,252 and $40,584 for the years ended December 31, 2012, 2013 and 2014, respectively.

(1)

Net of income tax (benefit) expense of $(68), $51 and $(8) for the years ended December 31, 2015, 2016 and 2017, respectively.

See accompanying notes to consolidated financial statements.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,

CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

 
 2012 2013 2014 

Net income

 $151,027 $125,261 $74,231 

Other comprehensive income (loss):

          

Unrealized gains (losses) on available-for-sale securities(1)

  115  (58) (50)

Comprehensive income

  151,142  125,203  74,181 

Less: comprehensive income (loss) attributable to non-controlling interest

      (5,173)

Comprehensive income attributable to Magellan Health, Inc. 

 $151,142 $125,203 $79,354 

(1)
Net of income tax provision (benefit) of $73, $(38) and $(33) for the years ended December 31, 2012, 2013 and 2014, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                  

 

 

 

 

Accumulated

 

                   

 

 

 

                               

 

Common Stock

 

Additional

 

 

 

Other

 

Total

 

 

 

 Common Stock

 

 

In Treasury

 

Paid in

 

Retained

 

  Comprehensive  

 

Stockholders’

 

 

    

Shares

    

 Amount 

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Equity

 

Balance at December 31, 2014

    

50,085

 

$

501

 

 

(23,150)

 

$

(1,064,963)

 

$

1,018,266

 

$

1,179,897

 

$

(143)

 

$

1,133,558

 

Stock compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

50,384

 

 

 —

 

 

 —

 

 

50,384

 

Exercise of stock options

 

1,140

 

 

11

 

 

 —

 

 

 —

 

 

54,079

 

 

 —

 

 

 —

 

 

54,090

 

Tax benefit from exercise of stock options and vesting of stock awards

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,530

 

 

 —

 

 

 —

 

 

3,530

 

Issuance of equity

 

115

 

 

 1

 

 

 —

 

 

 —

 

 

408

 

 

 —

 

 

 —

 

 

409

 

Repurchase of stock

 

 —

 

 

 —

 

 

(3,498)

 

 

(204,428)

 

 

 —

 

 

 —

 

 

 —

 

 

(204,428)

 

Adjustment to additional paid in capital due to reversal of tax contingency

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

32

 

 

 —

 

 

 —

 

 

32

 

Adjustment to non-controlling interest

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,686)

 

 

 —

 

 

 —

 

 

(2,686)

 

Net income attributable to Magellan

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

31,413

 

 

 —

 

 

31,413

 

Other comprehensive loss—other

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(119)

 

 

(119)

 

Balance at December 31, 2015

 

51,340

 

 

513

 

 

(26,648)

 

 

(1,269,391)

 

 

1,124,013

 

 

1,211,310

 

 

(262)

 

 

1,066,183

 

Stock compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

37,422

 

 

 —

 

 

 —

 

 

37,422

 

Exercise of stock options

 

494

 

 

 6

 

 

 —

 

 

 —

 

 

24,542

 

 

 —

 

 

 —

 

 

24,548

 

Adjustment due to adoption of ASU 2016-09

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

99

 

 

 —

 

 

99

 

Issuance of equity

 

159

 

 

 1

 

 

 —

 

 

 —

 

 

1,229

 

 

 —

 

 

 —

 

 

1,230

 

Repurchase of stock

 

 —

 

 

 —

 

 

(1,828)

 

 

(106,806)

 

 

 —

 

 

 —

 

 

 —

 

 

(106,806)

 

Adjustment to non-controlling interest

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(923)

 

 

 —

 

 

 —

 

 

(923)

 

Net income attributable to Magellan

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

77,879

 

 

 —

 

 

77,879

 

Other comprehensive income—other

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

87

 

 

87

 

Balance at December 31, 2016

 

51,993

 

 

520

 

 

(28,476)

 

 

(1,376,197)

 

 

1,186,283

 

 

1,289,288

 

 

(175)

 

 

1,099,719

 

Stock compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

39,116

 

 

 —

 

 

 —

 

 

39,116

 

Exercise of stock options

 

831

 

 

 8

 

 

 —

 

 

 —

 

 

44,347

 

 

 —

 

 

 —

 

 

44,355

 

Issuance of equity

 

149

 

 

 2

 

 

 —

 

 

 —

 

 

361

 

 

 —

 

 

 —

 

 

363

 

Repurchase of stock

 

 —

 

 

 —

 

 

(295)

 

 

(21,765)

 

 

 —

 

 

 —

 

 

 —

 

 

(21,765)

 

Adjustment to non-controlling interest

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,704

 

 

 —

 

 

 —

 

 

4,704

 

Net income attributable to Magellan

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

110,207

 

 

 —

 

 

110,207

 

Other comprehensive loss—other

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(205)

 

 

(205)

 

Balance at December 31, 2017

 

52,973

 

$

530

 

 

(28,771)

 

$

(1,397,962)

 

$

1,274,811

 

$

1,399,495

 

$

(380)

 

$

1,276,494

 

 

See accompanying notes to consolidated financial statements.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands)

 
  
  
 Common
Stock
In Treasury
  
  
  
  
 
 
 Common Stock  
  
 Accumulated
Other
Comprehensive
Income (Loss)
  
 
 
 Additional
Paid in
Capital
 Retained
Earnings
 Total
Stockholders'
Equity
 
 
 Shares Amount Shares Amount 

Balance at December 31, 2011

  45,285 $453  (18,112)$(783,269)$804,035 $824,205 $(150)$845,274 

Stock compensation expense

          17,945      17,945 

Exercise of stock options

  531  5      20,717      20,722 

Tax benefit from exercise of stock options and vesting of stock awards

          112      112 

Issuance of equity

  112  1      (733)     (732)

Repurchase of stock

      (463) (23,292)       (23,292)

Adjustment to additional paid in capital due to reversal of tax contingency

  
  
  
  
  
6,162
  
  
  
6,162
 

Net income attributable to Magellan Health, Inc. 

            151,027    151,027 

Other comprehensive income—other

              115  115 

Balance at December 31, 2012

  45,928  459  (18,575) (806,561) 848,238  975,232  (35) 1,017,333 

Stock compensation expense

          21,252      21,252 

Exercise of stock options

  1,139  12      47,281      47,293 

Tax benefit from exercise of stock options and vesting of stock awards

          2,297      2,297 

Issuance of equity

  284  3      (596)     (593)

Repurchase of stock

      (1,160) (60,153)       (60,153)

Adjustment to additional paid in capital due to reversal of tax contingency

  
  
  
  
  
3,853
  
  
  
3,853
 

Net income attributable to Magellan Health, Inc. 

            125,261    125,261 

Other comprehensive loss—other

              (58) (58)

Balance at December 31, 2013

  47,351  474  (19,735) (866,714) 922,325  1,100,493  (93) 1,156,485 

Stock compensation expense

          40,584      40,584 

Exercise of stock options

  1,191  12      52,982      52,994 

Tax benefit from exercise of stock options and vesting of stock awards

          2,980      2,980 

Issuance of equity

  1,543  15      (369)     (354)

Repurchase of stock

      (3,415) (198,249)       (198,249)

Adjustment to additional paid in capital due to reversal of tax contingency

  
  
  
  
  
2,591
  
  
  
2,591
 

Adjustment to non-controlling interest

          (2,827)     (2,827)

Net income attributable to Magellan Health, Inc. 

            79,404    79,404 

Other comprehensive loss—other

              (50) (50)

Balance at December 31, 2014

  50,085 $501  (23,150)$(1,064,963)$1,018,266 $1,179,897 $(143)$1,133,558 

See accompanying notes to consolidated financial statements.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,

(In thousands)

 

 

 

 

 

 

 

 

 

 


 2012 2013 2014 

 

2015

    

2016

    

2017

 

Cash flows from operating activities:

       

 

 

 

 

 

 

 

 

 

 

Net income

 $151,027 $125,261 $74,231 

 

$

28,707

 

$

75,789

 

$

110,141

 

Adjustments to reconcile net income to net cash provided by operating activities:

       

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 60,488 71,994 91,070 

 

 

102,844

 

 

106,046

 

 

115,706

 

Non-cash impairment of intangible assets

 

 

 —

 

 

4,800

 

 

 —

 

Non-cash interest expense

 728 736 3,987 

 

 

399

 

 

565

 

 

4,757

 

Non-cash stock compensation expense

 17,783 21,252 40,584 

 

 

50,384

 

 

37,422

 

 

39,116

 

Non-cash income tax expense (benefit)

 17,306 (1,212) (4,291)

Non-cash income tax (benefit) provision

 

 

(26,999)

 

 

4,710

 

 

(30,981)

 

Non-cash amortization on investments

 7,193 9,107 5,050 

 

 

7,118

 

 

5,238

 

 

3,924

 

Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:

       

Restricted cash

 (40,760) (2,242) 21,371 

Changes in assets and liabilities, net of effects from acquisitions of businesses:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 (16,411) (40,804) (74,604)

 

 

(52,394)

 

 

(134,089)

 

 

(40,910)

 

Pharmaceutical inventory

 (6,160) (3,882) 10,234 

 

 

(11,374)

 

 

(8,246)

 

 

17,605

 

Other assets

 414 (9,293) (7,557)

 

 

4,149

 

 

(13,900)

 

 

(4,565)

 

Accounts payable and accrued liabilities

 (8,321) 3,593 5,887 

 

 

(36,043)

 

 

52,470

 

 

(84,445)

 

Medical claims payable and other medical liabilities

 31,292 17,866 55,670 

 

 

36,187

 

 

(8,042)

 

 

26,235

 

Contingent consideration

 

 

55,035

 

 

(51,205)

 

 

696

 

Tax contingencies

 (35,376) (22,960) (14,955)

 

 

(1,021)

 

 

673

 

 

1,681

 

Deferred credits and other long-term liabilities

 1,901 10,988 4,045 

 

 

294

 

 

(5,584)

 

 

3,218

 

Other

 189 2,757 322 

 

 

171

 

 

52

 

 

95

 

Net cash provided by operating activities

 181,293 183,161 211,044 

 

 

157,457

 

 

66,699

 

 

162,273

 

Cash flows from investing activities:

       

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 (69,549) (64,542) (62,337)

 

 

(71,584)

 

 

(60,881)

 

 

(57,232)

 

Acquisitions and investments in businesses, net of cash acquired

  (107,541) (128,277)

 

 

(55,818)

 

 

(199,237)

 

 

(232,403)

 

Purchase of investments

 (321,541) (323,253) (340,961)

 

 

(470,093)

 

 

(478,477)

 

 

(449,873)

 

Maturity of investments

 281,748 339,428 276,446 

 

 

404,308

 

 

494,256

 

 

423,118

 

Other

 (1,225)   

Net cash used in investing activities

 (110,567) (155,908) (255,129)

 

 

(193,187)

 

 

(244,339)

 

 

(316,390)

 

Cash flows from financing activities:

       

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

   250,000 

 

 

 —

 

 

375,000

 

 

1,041,736

 

Payments to acquire treasury stock

 (21,868) (60,677) (197,533)

 

 

(206,044)

 

 

(106,806)

 

 

(21,765)

 

Proceeds from exercise of stock options and warrants

 20,486 47,529 52,994 

 

 

53,493

 

 

25,145

 

 

44,355

 

Payments on debt and capital lease obligations

 

 

(17,038)

 

 

(20,891)

 

 

(803,393)

 

Payments on contingent consideration

 

 

(20,762)

 

 

(40,559)

 

 

(3,032)

 

Tax benefit from exercise of stock options and vesting of stock awards

 990 3,212 3,218 

 

 

4,073

 

 

 —

 

 

 —

 

Payments on long-term debt and capital lease obligations

  (3,001) (8,045)

Other

 (732) (593) (4,433)

 

 

409

 

 

1,230

 

 

(9,560)

 

Net cash (used in) provided by financing activities

 (1,124) (13,530) 96,201 

 

 

(185,869)

 

 

233,119

 

 

248,341

 

Net increase in cash and cash equivalents

 69,602 13,723 52,116 

Net (decrease) increase in cash and cash equivalents

 

 

(221,599)

 

 

55,479

 

 

94,224

 

Cash and cash equivalents at beginning of period

 119,862 189,464 203,187 

 

 

470,628

 

 

249,029

 

 

304,508

 

Cash and cash equivalents at end of period

 $189,464 $203,187 $255,303 

 

$

249,029

 

$

304,508

 

$

398,732

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014
2017

1. General

Basis of Presentation

The consolidated financial statements of Magellan Health, Inc., a Delaware corporation ("Magellan"(“Magellan”), include Magellan and its subsidiaries (together with Magellan, the "Company"“Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Business Overview

The Company is engaged ina leader within the healthcare management business, and is focused on meeting needs indelivering innovative specialty solutions for the fastest growing, most complex areas of healthcarehealth, including special populations, complete pharmacy benefits, and other specialty carve-out areas of healthcare. The Company develops innovative solutions that are fast growing, highly complexcombine advanced analytics, agile technology and highclinical excellence to drive better decision making, positively impact members’ health outcomes and optimize the cost with an emphasis on special population management.of care for the customers we serve. The Company provides services to health plans and other managed care organizations ("MCOs"(“MCOs”), employers, labor unions, various military and governmental agencies and third party administrators consultants(“TPAs”). Magellan operates three segments: Healthcare, Pharmacy Management and brokers. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.Corporate.

Managed Healthcare

        TwoThe Healthcare segment is comprised of the Company's segmentstwo reporting units – Commercial and Government.

The Commercial reporting unit’s customers include health plans, accountable care organizations (“ACOs”), and employers for whom Magellan provides carve-out management services for behavioral health, employee assistance plans (“EAP”), and other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac, and physical medicine. These management services are in the managed healthcare business. This lineapplied to a health plan’s or ACO’s entire book of business reflects the Company's: (i)including commercial, Medicaid and Medicare members or targeted complex populations basis.

The Government reporting unit contracts with local, state and federal governmental agencies to provide services to recipients under Medicaid, Medicare and other government programs. Currently these management services include behavioral health and EAP. The management of behavioral healthcaretotal medical cost, as well as long term support services, and (ii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations is delivered through Magellan Complete Care ("MCC"(“MCC”). The Company'sThese special populations include individuals with serious mental illness (“SMI”), dual eligibles, aged, blind and disabled (“ABD”) and other populations with unique and often complex healthcare needs.

Magellan’s coordination and management of physicalthese healthcare and behavioral healthcare includeslong term support services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed and privileged providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time managingmaking the cost of these services more affordable for our customers. The treatment services provided through the Company's provider network include outpatient programs, intermediate care programs, inpatient treatment and crisis intervention services. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medicalnon‑medical counseling under certain government contracts.

        The Company's integrated management of physical and behavioral healthcare includes full service health plans which provide for the holistic management of special populations. These special populations include individuals with serious mental illness, dual eligibles, those eligible for long term care and other populations with unique and often complex healthcare needs.

The Company provides its Healthcare management services primarily through: (i) risk-basedrisk‑based products, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month fee, or  (ii) administrative services only ("ASO"(“ASO”) products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment services, in exchange for an administrative fee and, (iii) employee assistance programs ("EAPs") where the Company provides short-term outpatient behavioral counseling services.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

1. General (Continued)

        The managed healthcare business includes the following two segments, which are differentiated based on the services provided and/or the customers served:

        Commercial.    The Managed Healthcare Commercial segment ("Commercial") generally reflects managed behavioral healthcare services and EAP services provided under contracts with health plans, insurance companies and MCOs forin some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations, governmental agencies, military and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements.

        Public Sector.    The Managed Healthcare Public Sector segment ("Public Sector") generally reflects: (i) the management of behavioral health services provided to recipients under Medicaid and other state sponsored programs under contracts with state and local governmental agencies, and (ii) the integrated management of physical, behavioral and pharmaceutical care for special populations covered under Medicaid and other government sponsored programs. Public Sector contracts encompass either risk-based or ASO arrangements.

Specialty Solutions

        The Specialty Solutions segment ("Specialty Solutions") generally reflects the management of the delivery of diagnostic imaging (radiology benefits management or "RBM") andinstances, a variety of other specialty areas such as radiation oncology, obstetrical ultrasound, cardiology and musculoskeletal management to ensure that such services are clinically appropriate and cost effective. The Company's Specialty Solutions services are currently provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid recipients. The Company offers its Specialty Solutions services through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing services, and through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the services.gain share.

Pharmacy Management

The Pharmacy Management segment ("(“Pharmacy Management"Management”) comprisesis comprised of products and solutions that provide clinical and financial management of drugspharmaceuticals paid under both the medical and the pharmacy benefit programs.benefit. Pharmacy Management'sManagement’s services includeinclude: (i) traditional pharmacy benefit management ("PBM"(“PBM”) services; (ii) pharmacy benefit administration ("PBA"(“PBA”) for state Medicaid and other government sponsored programs; (iii) specialty pharmaceutical dispensing operations, contractingoperations; (iv) clinical and formulary optimizationmanagement programs; (iv)(v) medical pharmacy management programs; and (v)(vi) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement.

These services are available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to health plans, employers, third party administrators, managed care organizations, state governments, Medicare Part D, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy products to its existing customers and market its pharmacy solutions to the Healthcare customer base.

Pharmacy Management contracts with its customers for services using risk‑based, gain share or ASO arrangements. In addition, Pharmacy Management has subcontract arrangementsprovides services to provide PBM servicesthe Healthcare segment for certain Public Sector customers.

        The Company's Pharmacy Management programs are provided under contracts with health plans, employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass risk-based and fee-for-service ("FFS") arrangements.


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

1. General (Continued)its MCC business.

Corporate

This segment of the Company is comprised primarily of operational support functions such as salesamounts not allocated to the Healthcare and marketing and information technology, as well as corporate support functions such as executive, finance, human resources and legal.Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.

2. Summary of Significant Accounting Policies

Recent Accounting Pronouncements

In July 2011,May 2014, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) No. 2011-06, "Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2011-06"), which addresses how fees mandated by the Patient Protection and the Affordable Care Act ("ACA"), as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law"), should be recognized and classified in the income statements of health insurers. The Health Reform Law imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. ASU 2011-06 stipulates that the liability incurred for that fee be amortized to expense over the calendar year in which it is payable. This ASU is effective for calendar years beginning after December 31, 2013, when the fee initially became effective. The Company has obtained rate adjustments which the Company expects will cover the direct costs of these fees and the impact from non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has a state public sector customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. For 2014, the ACA fee was $21.4 million which has been paid, and which is included in direct service costs and other operating expenses in the consolidated statements of income. The Company has recorded revenues of $36.5 million for 2014, associated with the accrual for the reimbursement of the economic impact of the ACA fees from its customers.

        In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2013 and were adopted by the Company during the quarter ended March 31, 2014. The effect of the guidance is immaterial to the Company's consolidated results of operations, financial position, and cash flows.

        In May 2014, the FASB issued ASU No. 2014-09, "Revenue“Revenue from Contracts with Customers (Topic 606)" ("” (“ASU 2014-09"2014-09”), which is a new comprehensive revenue recognition standard that will


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2. Summary of Significant Accounting Policies (Continued)

supersede virtually all existing revenue guidance under GAAP. ThisIn March 2016, the FASB issued ASU is2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which clarifies the performance obligations and licensing implementation guidance of ASU 2014-09. In July 2015, the FASB deferred the effective date of ASU 2014-09. In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), which amends various aspects of ASU 2014-09. The amendments of ASU 2014-09, along with the subsequent updates and clarifications collectively known as Accounting Standard Codification 606 (“ASC 606”), are effective for calendar yearsannual and interim reporting periods of public entities beginning after December 15, 2016.2017. The Company intends to adopt ASC 606 on a modified retrospective basis. The Company has completed preliminary reviews of each revenue stream and is assessing the impact of adoption under ASC 606. Within the PBM and dispensing revenue streams, exclusive of Medicare Part D, the Company has substantially completed its review under the new standard and determined that ASC 606 will not have a material impact on the Company’s consolidated results of operations, financial position and cash flows. Within the managed care and other revenue streams, the Company continues to assess the potential impact.  At this time, the Company has not identified a material impact of adoption, however, the Company has also not completed its review of the impact on interim reporting. Based on further analysis, the Company determined there will be no impact to the recognition of the Patient Protection and Affordable Care Act health insurer fee (“HIF”) revenue under ASC 606 and it will not have a cumulative effect adjustment related to HIF upon the adoption of ASC 606. 

In July 2015, the FASB issued ASU No. 2015‑11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015‑11”). The amendment under this ASU requires that an entity measure inventory at the lower of cost or net realizable value. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016 and was adopted by the Company in the quarter ended March 31, 2017. The effect of this guidance was immaterial to the Company’s consolidated results of operations, financial position and cash flows.

In February 2016, the FASB issued ASU No. 2016‑02, “Leases” (“ASU 2016‑02”). This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of adoption, but believes the effect of this ASU will have a material effect on the Company’s consolidated balance sheets. The Company is currently assessing the potential impact this ASU will have on the Company'sCompany’s consolidated results of operations, financial position and cash flows.

In June 2014,2016, the FASB issued ASU No. 2014-12, "Compensation—Stock Compensation2016-13, “Financial Instruments-Credit Losses (Topic 718)326): Accounting for Share-Based Payments When the TermsMeasurement of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("Credit Losses on Financial Instruments” (“ASU 2014-12"2016-13”), which revises. This ASU amends the accounting treatmenton reporting credit losses for stock compensation tied to performance targets.assets held at amortized cost basis and available for sale debt securities. This ASUguidance is effective for calendarannual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2015.31, 2018. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operation, financial position and cash flows.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operation, financial positions and cash flows.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). The amendments in this ASU require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2017, with early adoption permitted. The Company does not expectedanticipate this ASU will have a material impact on the Company’s consolidated results of operation, financial positions and cash flows.

In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements” (“ASU 2016-19”). The amendments in this ASU cover a wide range of Topics in the Accounting Standard Codification, including internal use software covered under Subtopic 350-40. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2016 and was adopted by the Company in the quarter ended March 31, 2017. The effect of this guidance was immaterial to materially impact the Company'sCompany’s consolidated results of operations, financial position orand cash flows.

In August 2014,January 2017, the FASB issued ASU No. 2014-15, "Presentation2017-01, “Business Combinations (Topic 805): Clarifying the Definition of Financial Statements—Going Concern (Subtopic 205-40)" ("a Business” (“ASU 2014-15"2017-01”), which provides guidance. The amendments in GAAP about management's responsibility to evaluatethis ASU clarify whether there is substantial doubt about an entity's ability to continuetransactions should be accounted for as a going concern and to provide related footnote disclosures.acquisitions (or disposals) of assets or businesses. This amendment should reduce diversity in the timing and content of footnote disclosures. This ASUguidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter.of public entities beginning after December 15, 2017, with early adoption permitted. The Company does not anticipate this ASU will have a material impact on the Company’s consolidated results of operation, financial positions and cash flows.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in this ASU eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is not expected to materiallyeffective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company'sCompany’s consolidated results of operations, financial position orand cash flows.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The amendments in this ASU include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2017, with early adoption permitted. The Company does not anticipate this ASU will have a material impact on the Company’s consolidated results of operation, financial positions and cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, contingent consideration, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates.

Managed Care and Other Revenue

Managed Care Revenue.  Managed care revenue, inclusive of revenue from the Company'sCompany’s risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period thatin which terms to the amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $2.5 billion, $2.7 billion, $2.3 billion and $2.6$2.7 billion for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

        Fee-For-ServiceFee‑For‑Service, Fixed Fee and Cost-PlusCost‑Plus Contracts.  The Company has certain fee-for-service contracts, including cost-plus contracts with customers under which the Company recognizes revenue as services are performed and as costs are incurred. This includes revenues received in relation to ACA feesthe HIF fee billed


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

on a cost reimbursement basis. The Consolidated Appropriations Act of 2016 imposed a one-year moratorium on the HIF fee, suspending its application for 2017. Revenues from these contracts approximated $151.4$342.0 million, $215.1$503.2 million and $290.9$604.3 million for the years ended December 31, 2012, 20132015, 2016 and 2014, respectively.

        Block Grant Revenues.    The Maricopa Contract (as defined below) was partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $124.8 million, $131.5 million and $33.3 million for the years ended December 31, 2012, 2013 and 2014,2017, respectively.

        Performance-Based Revenue.    The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were $25.4 million, $14.0 million and $12.0 million for the years ended December 31, 2012, 2013 and 2014, respectively.

Rebate Revenue.  The Company administers a rebate program for certain clients through which the Company coordinates the achievement, calculation and collection of rebates and administrative fees from pharmaceutical manufacturers on behalf of clients. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company'sCompany’s clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues for the years ended December 31, 2012, 20132015, 2016 and 2014 were $40.22017 approximated $88.7 million, $34.8$85.4 million and $43.6$91.9 million, respectively.

In relation to the Company'sCompany’s PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers areis recorded as a reduction of cost of goods sold.

PBM and Dispensing Revenue

Pharmacy Benefit Management Revenue.  The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-paymentsco‑payments collected by the pharmacy and any associated administrative fees, when claims are adjudicated. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments)co‑payments) as it is acting as the principal in the arrangement and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client'sclient’s members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

net basis. Prior to the year ended December 31, 2013 the Company had no PBM business. PBM revenues were $106.7 millionapproximated $1.2 billion, $1.5 billion and $575.7 million$1.7 billion for the years ended December 31, 20132015, 2016 and 2014,2017, respectively.

Dispensing Revenue.The Company recognizes dispensing revenue, which includes the co-paymentsco‑payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the Company'sCompany’s customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund. Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were $350.3approximated $211.6 million, $376.6$221.8 million and $216.0$206.0 million for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

Significant CustomersMedicare Part D.

        Through March 31, 2014, is contracted with the Centers for Medicare and Medicaid (“CMS”) as a Prescription Drug Plan (“PDP”) to provide prescription drug benefits to Medicare beneficiaries. Net revenues include premiums earned by the PDP, which includes a direct premium paid by CMS and a beneficiary premium paid by the PDP member. In cases of low-income members, the beneficiary premium may be subsidized by CMS. The Company recognizes premium revenues on a monthly basis on a per member basis for covered members. In addition to these premiums, net revenue includes certain payments from the members based on the members’ actual prescription claims, including co-payments, coverage gap benefits, deductibles and co-insurance (collectively, “Member Responsibilities”). The Company receives a prospective subsidy payment from CMS each month to subsidize a portion of the Member Responsibilities for low-income members. If the prospective subsidy differs from actual prescription claims, the difference is recorded as either a receivable or payable on the consolidated balance sheets. The Company assumes no risk for the Member Responsibilities, including the portion subsidized by CMS. The Company recognizes revenues for Member Responsibilities, including the portion subsidized by CMS, on a gross basis as claims are adjudicated. CMS also provides an annual risk corridor adjustment which compares the Company’s actual drug costs incurred to the premiums received. Based on the risk corridor adjustment, the Company provided behavioral healthcare managementmay receive additional premiums from CMS or may be required to refund CMS a portion of previously received premiums. The Company calculates the risk corridor adjustment on a quarterly basis and other related services to approximately 680,000 membersthe amount is included in Maricopa County, Arizona as the Regional Behavioral Health Authority ("RBHA") for GSA6 ("Maricopa County") pursuant to a contract with the State of Arizona (the "Maricopa Contract"). The Maricopa Contract was for the management of the publicly funded behavioral health system that delivered mental health, substance abuse and crisis services for adults, youth, and children. The Maricopa Contract terminated on March 31, 2014. The Maricopa Contract generated net revenues of $758.3 million, $755.0with a corresponding receivable or payable on the consolidated balance sheets. Medicare Part D revenues approximated $272.8 million and $216.6$511.0 million for the years ended December 31, 2012, 20132016 and 2014,2017, respectively, including co-payments, which are included in PBM revenues above, of $31.0 million and $70.6 million for the years ended December 31, 2016 and 2017, respectively. As of December 31, 2016 and 2017, the Company had $117.5 million and $131.5 million, respectively, in net receivables associated with Medicare Part D from CMS and other parties related to this business.

Significant Customers

Customers exceeding ten percent of the consolidated Company’s net revenues

The Company provideshas a contract with the State of Florida to provide integrated healthcare services to Medicaid enrollees in the state of Florida (“the Florida Contract”). The Florida Contract began on February 4, 2014 and extends through December 31, 2018, unless sooner terminated by the parties. The State of Florida has the right to terminate the Florida Contract with cause, as defined, upon 24 hour notice and upon 30 days notice for any reason or no reason at all. The Florida Contracts generated net revenues of $439.5 million, $548.7 million and $605.9 million for the years ended December 31, 2015, 2016 and 2017, respectively.

Through December 31, 2015, the Company provided behavioral healthcare management and other related services to members in the state of Iowa pursuant to contracts with the State of Iowa (the "Iowa Contracts"“Iowa Contracts”). The Iowa Contracts generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the year endedterminated on December 31, 2014. The Company currently has two contracts; the Iowa Medicaid Contract and Iowa Medicaid Integrated Health Home Provider Agreement ("IHH Agreement"). Under the Iowa Medicaid Contract, the Company is responsible for providing managed mental health and substance abuse treatment to enrollees under a Medicaid 1915(b) waiver, as well as substance abuse treatment services plan funded by federal block grant and state appropriations under the authority of the Iowa Department of Public Health. The Iowa Health and Wellness Plan for members who qualify as an "exempt individual", as defined in 441 of the Iowa Administrative Code, were also added to the contract on January 1, 2014. The latest Iowa Medicaid Contract began on January 1, 2010 and extends through June 30, 2015 unless sooner terminated by the parties. The Iowa Department of Human Services and the Iowa Department of Public Health has the right to terminate the Iowa Medicaid Contract upon thirty days notice for any reason or no reason at all. We expect that the Iowa Medicaid Contract will be extended to coincide with the start date of new Iowa High Quality Healthcare Initiative, as discussed below, however there can be no assurance that the Iowa Medicaid Contract will be extended. Under the IHH Agreement, the Company establishes a health home for individuals identified with serious and persistent mental illness through enrolled provider organizations capable of providing enhanced care. The IHH Agreement began on July 1, 2013 and extends through June 30, 2016 unless sooner terminated by either party with 60 days notice for any reason or no reason at all. The IHH program is part of the new Iowa High Quality Healthcare Initiative and we expect that the end of the IHH agreement will coincide with the start date of the new initiative.2015. The Iowa Contracts generated net revenues of $240.2 million, $321.1$530.3 million and $465.0$13.5 million for the years ended December 31, 2012, 20132015 and 2014,2016, respectively.


TableCustomers exceeding ten percent of Contentssegment net revenues


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

        On February 16, 2015 the Iowa Department of Human Services (the "Agency") released the Iowa High Quality Healthcare Initiative Request for Proposal ("RFP"). The Agency intends to contract on a statewide basis with two to four successful bidders with a demonstrated capacity to coordinate care and provide quality outcomes for the Medicaid and Children's Health Insurance Program ("CHIP") populations. The program will enroll the majority of the Iowa Medicaid and CHIP populations and will also provide services for individuals qualifying for Iowa Department of Public Health ("IDPH") funded substance abuse services. The anticipated start of the contract is January 1, 2016 for an initial period of three years and the ability for the Agency to extend the contract for two additional two year terms. The RFP includes the services provided by the Company's current Iowa Contracts. The Company intends to submit a proposal on this RFP. There can be no assurance that the Company will be awarded a contract pursuant to the RFP, or that the terms of any contract awarded pursuant to the RFP will be similar to the current Iowa Contracts.

In addition to the MaricopaFlorida Contract and the Iowa Contracts previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the years ended December 31, 2012, 20132015, 2016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

    

Term Date

    

2015

    

2016

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmacy Management

 

 

 

 

 

 

 

 

 

 

 

 

Customer A

 

December 31, 2016 (1)

 

$

324,809

 

$

264,152

 

$

4,764

*

Customer B

 

March 31, 2019

 

 

 —

 

 

152,218

*

 

346,405

 

Segment
 Term Date 2012 2013 2014 

Commercial

            

Customer A

 

June 30, 2014(1)

 
$

192,415
 
$

207,080
 
$

110,153
 

Customer B

 December 31, 2019  134,885  141,444  184,981 

Customer C

 August 14, 2017  12,722* 70,390* 107,247 

Customer D

 December 14, 2013(1)  118,351  74,203*  

Customer E

 December 31, 2017  67,959* 71,085* 67,426 

Public Sector

 

 

  
 
  
 
  
 
 

Customer F

 

December 31, 2018(2)

  
133,864

*
 
128,607

*
 
253,661
 

Specialty Solutions

  
 
  
 
 

Customer G

 

December 31, 2017(3)

  
117,739
  
130,895
  
146,930
 

Customer H

 June 30, 2016(4)  60,094  55,078  33,492*

Customer I

 June 30, 2017  57,455  61,838  76,580 

Customer A

 November 30, 2016  1,339* 6,399* 54,413 

Customer J

 January 31, 2016  38,366  47,311  52,310 

Pharmacy Management

  
 
  
 
 

Customer K

 

April 4, 2015 to December 31, 2015(5)

  
129,209
  
133,724
  
123,812
 

Customer L

 December 31, 2013(6)  60,350  59,125* 14,312*

Customer E

 December 31, 2013(6)  73,785  92,647  2,612*

Customer M

 March 31, 2014(1)(7)  69,090  66,153* 18,055*

Customer N

 December 16, 2016      171,936 

*

Revenue amount did not exceed ten10 percent of net revenues for the respective segment for the year presented. Amount is shown for comparative purposes only.

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2. Summary of Significant Accounting Policies (Continued)

(1)
The contract has terminated.

(2)
The Company had behavioral healthcare contracts with various areas in the State of Florida (the "Florida Areas") which were part of the Florida Medicaid program. The State of Florida implemented a new system of mandated managed care through which Medicaid enrollees will receive integrated healthcare services, and has phased out the behavioral healthcare programs under which the Florida Areas' contracts operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program.

(3)
On December 31, 2014, this contract was amended and extended through December 31, 2017. Historically the Company provided services on a risk basis. Under the amended contract, the funding arrangement will be a combination of risk and ASO based services.

(4)
The contract transitioned from risk to ASO based services effective July 1, 2014.

(5)
The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(6)
The contract has terminated, however, the Company continues to provide services as the contract is transitioned to the new vendor.

(7)
This customer represented a subcontract with a Public Sector customer and was eliminated in consolidation.

The Company also has a significant concentration of business with various counties in the State of Pennsylvania (the "Pennsylvania Counties"“Pennsylvania Counties”) which are part of the Pennsylvania Medicaid program.program, with members under its contract with CMS and with various agencies and departments of the United States federal government. Net revenues from the Pennsylvania Counties in the aggregate totaled $354.1$395.7 million, $359.0$461.6 million and $369.9$490.0 million for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. Net revenues from members in relation to its contract with CMS in aggregate totaled $272.8 million and $511.0 million for the years ended December 31, 2016 and 2017, respectively. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled $164.3 million, $252.5 million, and $341.5 million for the years ended December 31, 2015, 2016 and 2017, respectively.

The Company'sCompany’s contracts with customers typically have terms of one to three years, and in certain cases contain renewal provisions (at the customer'scustomer’s option) for successive terms of between one and two years (unless terminated earlier). Substantially all of these contracts may be immediately terminated with cause and many of the Company'sCompany’s contracts are terminable without cause by the customer or the Company either upon the giving of requisite notice and the passage of a specified period of time (typically between 60 and 180 days) or upon the occurrence of other specified events. In addition, the Company'sCompany’s contracts with federal, state and local governmental agencies generally are conditioned on legislative appropriations. These contracts generally can be terminated or modified by the customer if such appropriations are not made.

Income Taxes

The Company files a consolidated federal income tax return for the Company andwith most of its eighty-percent or more owned subsidiaries, and acontrolled subsidiaries. The Company previously filed separate consolidated federal income tax returnreturns for AlphaCare of New York, Inc. ("AlphaCare"(“AlphaCare”) and its parent, AlphaCare Holdings, Inc. ("(“AlphaCare Holdings"Holdings”). During 2017, AlphaCare and AlphaCare Holdings became members of the Magellan federal consolidated group. The Company and its subsidiaries also file income tax returns in various state and local jurisdictions.

The Company estimates income taxes for each of the jurisdictions in which it operates. This process involves determining both permanent and temporary differences resulting from differing


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

treatment for tax and book purposes. Deferred tax assets and/or liabilities are determined by multiplying the temporary differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The Company establishes valuation allowances againstthen assesses the likelihood that the deferred tax assets if itwill be recovered from the reversal of temporary differences, the implementation of feasible and prudent tax planning strategies, and future taxable income. To the extent the Company cannot conclude that recovery is more likely than not, that the deferred tax asset will not be realized. The need forit establishes a valuation allowance is determined based on the evaluation of various factors, including expectations of future earnings and management's judgment.allowance. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.

Reversals of both valuation allowances and unrecognized tax benefits are recorded in the period they occur, typically as reductions to income tax expense. However, reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the related book expense are recorded as reductions to deferred tax assets, although prior to the adoption of ASU 2016-09 in 2016 were recorded as increases in additional paid-inpaid‑in capital. To the extent reversals of unrecognized tax benefits cannot be specifically traced to these excess deductions due to complexities in the tax law, the Company records the tax benefit for such reversals to additional paid-in-capital on a pro-rata basis.

The Company recognizes interim period income taxes by estimating an annual effective tax rate and applying it to year-to-dateyear‑to‑date results. The estimated annual effective tax rate is periodically updated throughout the year based on actual results to date and an updated projection of full year income. Although the effective tax rate approach is generally used for interim periods, taxes on significant, unusual and infrequent items are recognized at the statutory tax rate entirely in the period the amounts are realized.

Health Care Reform

The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from customers which the Company expects will cover the direct costs of these fees and the impact from non‑deductibility of such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. The Consolidated Appropriations Act of 2016 imposed a one-year moratorium on the HIF fee, suspending its application for 2017. The HIF fee went back into effect for 2018, however, on January 23, 2018 the United States Congress passed the Continuing Resolution which imposed another one-year moratorium on the HIF fee, suspending its application for 2019. For 2015 and 2016, the HIF fees were $26.5 million and $26.5 million, respectively, which have been paid and which are included in direct service costs and other operating expenses in the consolidated statements of income.

Cash and Cash Equivalents

Cash equivalents are short-term,short‑term, highly liquid interest-bearinginterest‑bearing investments with maturity dates of three months or less when purchased, consisting primarily of money market instruments. At December 31, 2014,2017, the Company'sCompany’s excess capital and undistributed earnings for the Company'sCompany’s regulated subsidiaries of $65.5$143.9 million are included in cash and cash equivalents.

Restricted Assets

The Company has certain assets which are considered restricted for: (i) the payment of claims under the terms of certain managed care contracts; (ii) regulatory purposes related to the payment of claims in certain jurisdictions; and (iii) the maintenance of minimum required tangible net equity levels for certain of the Company'sCompany’s subsidiaries. Significant restricted assets of the Company as of December 31, 20132016 and 20142017 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

2016

    

2017

 

Restricted cash and cash equivalents

 

$

81,776

 

$

229,013

 

Restricted short-term investments

 

 

227,795

 

 

219,111

 

Restricted deposits (included in other current assets)

 

 

38,785

 

 

41,121

 

Restricted long-term investments

 

 

6,306

 

 

17,287

 

Total

 

$

354,662

 

$

506,532

 

 
 2013 2014 

Restricted cash

 $236,696 $215,325 

Restricted short-term investments

  117,674  132,808 

Restricted deposits (included in other current assets)

  25,009  30,620 

Restricted long-term investments

  32,430  43,293 

Total

 $411,809 $422,046 

TableThe Company’s equity in restricted net assets of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

consolidated subsidiaries represented approximately 27% of the Company’s consolidated stockholder’s equity as of December 31, 20142017 and consisted of net assets of the Company which were restricted as to transfer to Magellan in the form of cash dividends, loans or advances under regulatory restrictions.

2. Summary of Significant Accounting Policies (Continued)

Fair Value Measurements

The Company currently does not have non-financialhas certain assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. FinancialThese assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect the Company'sCompany’s assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including the Company'sCompany’s data.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company'sCompany’s financial assets and liabilities that are required to be measured at fair value as of December 31, 20132016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

    

$

 —

    

$

177,495

    

$

 —

    

$

177,495

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

 

5,817

 

 

 —

 

 

 —

 

 

5,817

 

Obligations of government-sponsored enterprises (2)

 

 

 —

 

 

25,767

 

 

 —

 

 

25,767

 

Corporate debt securities

 

 

 —

 

 

272,219

 

 

 —

 

 

272,219

 

Certificates of deposit

 

 

 —

 

 

1,450

 

 

 —

 

 

1,450

 

Total assets held at fair value

 

$

5,817

 

$

476,931

 

$

 —

 

$

482,748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

11,153

 

$

11,153

 

Total liabilities held at fair value

 

$

 —

 

$

 —

 

$

11,153

 

$

11,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (3)

    

$

 —

    

$

284,064

    

$

 —

    

$

284,064

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

 

28,231

 

 

 —

 

 

 —

 

 

28,231

 

Obligations of government-sponsored enterprises (2)

 

 

 —

 

 

22,088

 

 

 —

 

 

22,088

 

Corporate debt securities

 

 

 —

 

 

269,788

 

 

 —

 

 

269,788

 

Taxable municipal bonds

 

 

 —

 

 

5,000

 

 

 —

 

 

5,000

 

Certificates of deposit

 

 

 —

 

 

2,758

 

 

 —

 

 

2,758

 

Total assets held at fair value

 

$

28,231

 

$

583,698

 

$

 —

 

$

611,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

8,817

 

$

8,817

 

Total liabilities held at fair value

 

$

 —

 

$

 —

 

$

8,817

 

$

8,817

 

 
 Fair Value Measurements
at December 31, 2013
 
 
 Level 1 Level 2 Level 3 Total 

Assets

             

Cash and Cash Equivalents(1)

 $ $101,028 $ $101,028 

Restricted Cash(2)

    128,318    128,318 

Investments:

  
 
  
 
  
 
  
 
 

U.S. Government and agency securities

  1,129      1,129 

Obligations of government-sponsored enterprises(3)

    8,440    8,440 

Corporate debt securities

    198,594    198,594 

Certificates of deposit

    150    150 

Total assets held at fair value

 $1,129 $436,530 $ $437,659 

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)


 
 Fair Value Measurements
at December 31, 2014
 
 
 Level 1 Level 2 Level 3 Total 

Assets

             

Cash and Cash Equivalents(4)

 $ $139,280 $ $139,280 

Restricted Cash(5)

    65,992    65,992 

Investments:

  
 
  
 
  
 
  
 
 

U.S. Government and agency securities

  4,303      4,303 

Obligations of government-sponsored enterprises(3)

    15,315    15,315 

Corporate debt securities

    246,886    246,886 

Certificates of deposit

    1,150    1,150 

Total assets held at fair value

 $4,303 $468,623 $ $472,926 

Liabilities

             

Contingent consideration

 $ $ $58,153 $58,153 

Total liabilities held at fair value

 $ $ $58,153 $58,153 

(1)
Excludes $102.2 million of cash held in bank accounts by the Company.

(2)
Excludes $108.4 million of restricted cash held in bank accounts by the Company.

(3)
Includes investments in notes issued by the Federal Home Loan Bank.

(4)
Excludes $116.0 million of cash held in bank accounts by the Company.

(5)
Excludes $149.3 million of restricted cash held in bank accounts by the Company.

(1)

Excludes $127.0 million of cash held in bank accounts by the Company.

(2)

Includes investments in notes issued by the Federal Home Loan Bank, Federal Farm Credit Banks and Federal National Mortgage Association.

(3)

Excludes $114.7 million of cash held in bank accounts by the Company.

For the years ended December 31, 20132016 and 2014,2017, the Company did not transfer any assets between fair value measurement levels.

The carrying values of financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short-term maturities. The fair value of the Notes (as defined below) of $409.2 million as of December 31, 2017 was determined based on quoted market prices and would be classified within Level 1 of the fair value hierarchy. The estimated fair value of the Company'sCompany’s term loan of $246.9$345.6 million as of December 31, 20142017 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

All of the Company'sCompany’s investments are classified as "available-for-sale"“available-for-sale” and are carried at fair value.

        The contingent consideration liability reflectsAs of the fair value of potential future payments related tobalance sheet date, the CDMI, LLC ("CDMI") and Cobalt Therapeutics, LLC ("Cobalt") acquisitions. The CDMI purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016. The Cobalt purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

        The fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, client base,operating income, member engagement and new contract execution. The projected revenues, gross profits, client base, member engagement, and new contract execution are derived from the Company's latest internal operational forecasts. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in a change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income. As the fair value measurement for the contingent consideration is based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurement guidance.

The following unobservable inputs were used in the fair value measurement of contingent consideration: (i)include the discount rate, of 14.5 percent; (ii) probabilities of payment of approximately zero to 85 percent for CDMI and 5 to 70 percent for Cobalt; and (iii) projected payment dates of 2015 to 2017. dates.

As of the acquisition date,December 31, 2016 and 2017, the Company estimated undiscounted future contingent payments of $61.7$12.7 million and $4.2$9.9 million, for CDMI and Cobalt, respectively. As of December 31, 2014, the Company estimated undiscounted future contingent payments of $65.7 million and $4.2 million for CDMI and Cobalt, respectively. The increase for CDMI isnet decrease was mainly a result ofdue to payments made in 2017 and changes in operational forecasts and probabilities of payment. As of December 31, 2014,2017, the aggregate amounts and projected dates of future potential contingent consideration payments were $7.2 million in 2018 and $2.7 million in 2020.

As of December 31, 2016, the fair value of the short termshort-term and long termlong-term contingent consideration was $8.3$9.4 million and $49.8$1.8 million, respectively, and is included in accrued liabilitiesshort-term contingent consideration and long-term contingent consideration, respectively, in the consolidated balance sheet. sheets. As of December 31, 2017, the fair value of the short-term and long-term contingent consideration was $6.9 million and $1.9 million, respectively, and is included in short-term contingent consideration and long-term contingent consideration, respectively, in the consolidated balance sheets.

The change in the fair value of the contingent consideration was $9.3$(0.1) million and $0.7 million for the yearyears ended December 31, 2014, $6.2 million2016 and $3.1 million of2017, respectively, which waswere recorded in the consolidated statements of income as direct service costs and other operating expenses and as interest expense, respectively.in the consolidated statements of income. The increase wasincreases during 2017 were mainly a result of the changes in the present value and the estimated undiscounted liability, as noted above.liability.

The following table summarizes the Company'sCompany’s liability for contingent consideration (in thousands):

 
 December 31,
2014
 

Balance as of beginning of period

 $ 

Acquisition of CDMI

  45,778 

Acquisition of Cobalt

  3,071 

Changes in fair value

  9,304 

Balance as of end of period

 $58,153 

 

 

 

 

 

 

 

 

 

    

December 31, 

    

December 31, 

 

 

    

2016

    

2017

 

Balance as of beginning of period

 

$

92,426

 

$

11,153

 

Acquisition of TMG

 

 

2,244

 

 

 —

 

Acquisition of AFSC

 

 

8,247

 

 

 —

 

Changes in fair value

 

 

(104)

 

 

696

 

Payments

 

 

(91,660)

 

 

(3,032)

 

Balance as of end of period

 

$

11,153

 

$

8,817

 

Investments

All of the Company'sCompany’s investments are classified as "available-for-sale"“available‑for‑sale” and are carried at fair value. Securities which have been classified as Level 1 are measured using quoted market prices in active markets for identical assets or liabilities while those which have been classified as Level 2 are measured using quoted prices for identical assets and liabilities in markets that are not active. The Company'sCompany’s policy is to classify all investments with


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

contractual maturities within one year as current. Investment income is recognized when earned and reported net of investment expenses. Net unrealized holding gains or losses are excluded from earnings and are reported, net of tax, as "accumulated“accumulated other comprehensive income (loss)" in the accompanying consolidated balance sheets and consolidated statements of comprehensive income until realized, unless the losses are deemed to be other-than-temporary.other‑than‑temporary. Realized gains or losses, including any provision for other-than-temporaryother‑than‑temporary declines in value, are included in the consolidated statements of income.

If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporaryother‑than‑temporary and is recorded to other-than-temporaryother‑than‑temporary impairment losses recognized in income in the consolidated statements of income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporaryother‑than‑temporary impairment is recognized in other-than-temporaryother‑than‑temporary impairment losses recognized in income in the consolidated statements of income and the non-creditnon‑credit component of the other-than-temporaryother‑than‑temporary impairment is recognized in other comprehensive income.

The credit component of an other-than-temporaryother‑than‑temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. Furthermore, unrealized losses entirely caused by non-creditnon‑credit related factors related to debt securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.

As of December 31, 20132016 and 2014,2017, there were no material unrealized losses that the Company believed to be other-than-temporary.other‑than‑temporary. No realized gains or losses were recorded for the years ended December 31, 2012, 2013,2015, 2016, or 2014.2017. The following is a summary of short-term and long-term investments at December 31, 20132016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

U.S. Government and agency securities

    

$

5,832

    

$

 —

    

$

(15)

    

$

5,817

 

Obligations of government-sponsored enterprises (1)

 

 

25,779

 

 

 2

 

 

(14)

 

 

25,767

 

Corporate debt securities

 

 

272,479

 

 

 1

 

 

(261)

 

 

272,219

 

Certificates of deposit

 

 

1,450

 

 

 —

 

 

 —

 

 

1,450

 

Total investments at December 31, 2016

 

$

305,540

 

$

 3

 

$

(290)

 

$

305,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

U.S. Government and agency securities

    

$

28,313

    

$

 —

    

$

(82)

    

$

28,231

 

Obligations of government-sponsored enterprises (1)

 

 

22,139

 

 

 —

 

 

(51)

 

 

22,088

 

Corporate debt securities

 

 

270,154

 

 

 1

 

 

(367)

 

 

269,788

 

Taxable municipal bonds

 

 

5,000

 

 

 —

 

 

 —

 

 

5,000

 

Certificates of deposit

 

 

2,758

 

 

 —

 

 

 —

 

 

2,758

 

Total investments at December 31, 2017

 

$

328,364

 

$

 1

 

$

(500)

 

$

327,865

 

 
 December 31, 2013 
 
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 

U.S. Government and agency securities

 $1,129 $ $ $1,129 

Obligations of government-sponsored enterprises(1)

  8,441  2  (3) 8,440 

Corporate debt securities

  198,748  18  (172) 198,594 

Certificates of deposit

  150      150 

Total investments at December 31, 2013

 $208,468 $20 $(175)$208,313 

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

 
 December 31, 2014 
 
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 

U.S. Government and agency securities

 $4,305 $ $(2)$4,303 

Obligations of government-sponsored enterprises(1)

  15,318  1  (4) 15,315 

Corporate debt securities

  247,118  8  (240) 246,886 

Certificates of deposit

  1,150      1,150 

Total investments at December 31, 2014

 $267,891 $9 $(246)$267,654 

(1)
Includes investments in notes issued by the Federal Home Loan Bank.

(1)

Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.

The maturity dates of the Company'sCompany’s investments as of December 31, 20142017 are summarized below (in thousands):

 
 Amortized
Cost
 Estimated
Fair Value
 

2015

 $224,509 $224,361 

2016

  43,382  43,293 

Total investments at December 31, 2014

 $267,891 $267,654 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Estimated

 

 

    

Cost

    

Fair Value

 

2018

 

$

310,989

 

$

310,578

 

2019

 

 

17,375

 

 

17,287

 

Total investments at December 31, 2017

 

$

328,364

 

$

327,865

 

Accounts Receivable

The Company'sCompany’s accounts receivable consists of amounts due from customers throughout the United States. Collateral is generally not required. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Management believes the allowance for doubtful accounts is adequate to provide for normal credit losses.

Concentration of Credit Risk

Accounts receivable subjects the Company to a concentration of credit risk with third party payors that include health insurance companies, managed healthcare organizations, healthcare providers and governmental entities.

The Company maintains cash and cash equivalents balances at financial institutions andwhich are insured by the Federal Deposit Insurance Corporation ("FDIC"(“FDIC”). At times, balances in certain bank accounts may exceed the FDIC insured limits.

Pharmaceutical Inventory

Pharmaceutical inventory consists solely of finished goods (primarily prescription drugs) and areis stated at the lower of first-in first-outfirst‑in first‑out, cost, or market.


Table of ContentsLong‑lived Assets


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

Long-lived Assets

        Long-livedLong‑lived assets, including property and equipment and intangible assets to be held and used, are currently reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount shouldof an asset may not be addressed.recoverable. We group and evaluate these long-lived assets for impairment at the lowest level at which individual cash flows can be identified. Impairment is determined by comparing the carrying value of these long-livedlong‑lived assets to management'smanagement’s best estimate of the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The cash flow projections used to make this assessment are consistent with the cash flow projections that management uses internally in making key decisions. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset, which is generally determined by using quoted market prices or the discounted present value of expected future cash flows.

Property and Equipment

Property and equipment is stated at cost, except for assets that have been impaired, for which the carrying amount has been reduced to estimated fair value. Expenditures for renewals and improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. The Company capitalizes costs incurred to develop internal-useinternal‑use software during the application development stage. Capitalization of software development costs occurs after the preliminary project stage is complete, management authorizes the project, and it is probable that the project will be completed and the software will be used for the function intended. Amortization of capital lease assets is included in depreciation expense and is included in accumulated depreciation as reflected in the table below. Depreciation is provided on a straight-linestraight‑line basis over the estimated useful lives of the assets, which is generally two to ten years for building improvements (or the lease term, if shorter), three to fifteen years for equipment and three to five years for capitalized internal-useinternal‑use software. The net capitalized internal use software as of December 31, 20132016 and 20142017 was $78.8$88.2 million and $85.6$79.6 million, respectively. Depreciation expense was $50.8$73.4 million, $61.4$75.3 million and $68.3$76.5 million for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. Included in depreciation expense for the years ended December 31, 2012, 20132015, 2016 and 20142017 was $28.8$45.6 million, $34.8$47.6 million and $40.9$49.5 million, respectively, related to capitalized internal useinternal-use software.

Property and equipment, net, consisted of the following at December 31, 20132016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

    

2016

    

2017

 

Building improvements

 

$

16,817

 

$

17,974

 

Equipment

 

 

204,743

 

 

204,632

 

Capital leases - property

 

 

26,945

 

 

26,945

 

Capital leases - equipment

 

 

14,729

 

 

18,183

 

Capitalized internal-use software

 

 

446,619

 

 

486,013

 

 

 

 

709,853

 

 

753,747

 

Accumulated depreciation

 

 

(537,329)

 

 

(595,109)

 

Property and equipment, net

 

$

172,524

 

$

158,638

 

 
 2013 2014 

Building improvements

 $12,074 $13,416 

Equipment

  180,540  185,391 

Capital leases—property

  26,945  26,945 

Capital leases—equipment

  2,794  7,883 

Capitalized internal-use software

  304,146  351,978 

  526,499  585,613 

Accumulated depreciation

  (354,166) (413,697)

Property and equipment, net

 $172,333 $171,916 

Table of ContentsGoodwill


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

Goodwill

The Company is required to test its goodwill for impairment on at least an annual basis. The Company has selected October 1 as the date of its annual impairment test. The goodwill impairment test is a two-steptwo‑step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit with goodwill based on various valuation techniques, with the primary technique being a discounted cash flow analysis, which requires the input of various assumptions with respect to revenues, operating margins, growth rates and discount rates. The estimated fair value for each reporting unit is compared to the carrying value of the reporting unit, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an "implied“implied fair value"value” of goodwill. The determination of a reporting unit's "impliedunit’s “implied fair value"value” of goodwill requires the Company to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the "implied“implied fair value"value” of goodwill, which is compared to its corresponding carrying value.

Goodwill is tested for impairment at a level referred to as a reporting unit, with the Company'sCompany’s reporting units with goodwill as of December 31, 20142017 comprised of Health Plan, Specialty Solutions,Commercial, Government and Pharmacy Management, and Magellan Complete Care.Management.

The fair valuevalues of the Health PlanCommercial (a component of the CommercialHealthcare segment), Specialty Solutions and Magellan Complete CareGovernment (a component of the Public SectorHealthcare segment) and Pharmacy Management reporting units were determined using a discounted cash flow method. This method involves estimating the present value of estimated future cash flows utilizing a risk adjusted discount rate. Key assumptions for this method include cash flow projections, terminal growth rates and discount rates.

        The fair value of the Pharmacy Management reporting unit was determined using discounted cash flow, guideline company and similar transaction methods. Key assumptions for the discounted cash flow method are consistent with those described above. For the guideline company method, revenue and earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiples for guideline companies were applied to the reporting unit's pro forma revenue and EDITDA for 2014, which represents actual results for the nine-month period ended September 30, 2014 and projected results for the three-month period ended December 31, 2014, and to the reporting unit's projected revenue and EBITDA for 2015. For the similar transaction method, revenue and EBITDA multiples based on merger and acquisition transactions for similar companies were applied to the reporting unit's pro forma revenue and EBITDA for 2014, which represents actual results for the nine-month period ended September 30, 2014 and projected results for the three-month period ended December 31, 2014. The weighting applied to the fair values determined using the discounted cash flow, guideline company and similar transaction methods to determine an overall fair value for the Pharmacy Management reporting unit was 75 percent, 22.5 percent and 2.5 percent, respectively. The weighting of each of the methods described above was based on the relevance of the approach. A change in the weighting would not change the outcome of the first step of the impairment test.

        As a result of the first step of the 2014 annual goodwill impairment analysis, the fair value of each reporting unit with goodwill exceeded its carrying value with a range of approximately 40 percent to 65 percent. Therefore, the second step was not necessary.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

Goodwill for each of the Company'sCompany’s reporting units with goodwill at December 31, 20132016 and 2014 were2017 was as follows (in thousands):

 
 2013 2014 

Health Plan

 $120,485 $129,042 

Specialty Solutions

  104,549  104,549 

Pharmacy Management

  242,290  311,636 

Magellan Complete Care

  20,882  20,879 

Total

 $488,206 $566,106 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

2016

 

2017

 

Commercial

 

$

242,255

 

$

242,255

 

Government

 

 

108,321

 

 

368,612

 

Pharmacy Management

 

 

391,478

 

 

395,421

 

Total

 

$

742,054

 

$

1,006,288

 

 

The changes in the carrying amount of goodwill for the years ended December 31, 20132016 and 20142017 are reflected in the table below (in thousands):

 
 2013 2014 

Balance as of beginning of period

 $426,939 $488,206 

Acquisition of Partners Rx(1)

  40,385  254 

Acquisition of AlphaCare Holdings(1)

  20,882  (3)

Acquisition of CDMI

    69,092 

Acquisition of Cobalt

    8,557 

Balance as of end of period

 $488,206 $566,106 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

2016

 

2017

 

Balance as of beginning of period

 

$

621,390

 

$

742,054

 

Acquisition of AFSC

 

 

76,736

 

 

 —

 

Acquisition of Veridicus

 

 

30,705

 

 

1,647

 

Acquisition of SWH

��

 

 —

 

 

260,139

 

Other acquisitions and measurement period adjustments

 

 

13,223

 

 

2,448

 

Balance as of end of period

 

$

742,054

 

$

1,006,288

 

Intangible Assets

The Company reviews other intangible assets for impairment when events or changes in circumstances occur which may potentially impact the estimated useful life of the intangible assets. During the second quarter of 2016, the Company recognized $4.8 million in impairment charges, which are reflected in direct service costs and other operating expenses in the consolidated statements of income and reported within the Healthcare segment. The fair value of the impairment was determined using the income method, which resulted in the full impairment of the customer agreement intangible asset recorded in conjunction with the AlphaCare acquisition.

The following is a summary of intangible assets at December 31, 20132016 and 2014,2017, and the estimated useful lives for such assets (in thousands)thousands, except useful lives):

 
 December 31, 2013 
Asset
 Estimated
Useful Life
 Gross
Carrying
Amount
 Accumulated
Amortization
 Net
Carrying
Amount
 

Customer agreements and lists

 2.5 to 18 years $163,990 $(100,482)$63,508 

Provider networks and other

 1 to 16 years  11,593  (5,407) 6,186 

   $175,583 $(105,889)$69,694 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

  

Weighted Avg

 

Gross

 

 

 

 

Net

 

 

 

Original

 

Remaining

 

Carrying

 

Accumulated

 

Carrying

 

Asset

    

Useful Life

 

Useful Life

 

Amount

    

Amortization

    

Amount

 

Customer agreements and lists

    

2.5

 

to

18

 

years  

 

6.4

years

 

$

357,708

    

$

(181,588)

    

$

176,120

 

Provider networks and other

 

1

 

to

16

 

years  

 

4.3

years

 

 

18,240

 

 

(12,008)

 

 

6,232

 

Trade names

 

indefinite

 

indefinite

 

 

3,880

 

 

 —

 

 

3,880

 

 

 

 

 

 

 

 

 

 

 

 

 

$

379,828

 

$

(193,596)

 

$

186,232

 

 

 
 December 31, 2014 
Asset
 Estimated
Useful Life
 Gross
Carrying
Amount
 Accumulated
Amortization
 Net
Carrying
Amount
 

Customer agreements and lists

 2.5 to 18 years $249,390 $(121,788)$127,602 

Provider networks and other

 1 to 16 years  13,013  (6,897) 6,116 

   $262,403 $(128,685)$133,718 

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

  

Weighted Avg

 

Gross

 

 

 

 

Net

 

 

 

Original

 

Remaining

 

Carrying

 

Accumulated

 

Carrying

 

Asset

    

Useful Life

 

Useful Life

 

Amount

    

Amortization

    

Amount

 

Customer agreements and lists

    

2.5

 

to

18

 

years  

 

5.3

years

 

$

441,346

    

$

(218,335)

    

$

223,011

 

Provider networks and other

 

1

 

to

16

 

years  

 

3.0

years

 

 

25,410

 

 

(14,433)

 

 

10,977

 

Trade names and licenses

 

indefinite

 

indefinite

 

 

34,300

 

 

 —

 

 

34,300

 

 

 

 

 

 

 

 

 

 

 

 

 

$

501,056

 

$

(232,768)

 

$

268,288

 

Amortization expense was $9.7$29.4 million, $10.6$30.7 million and $22.8$39.2 million for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. The Company estimates amortization expense will be $25.1$48.6 million, $20.8$48.3 million, $16.7$46.8 million, $15.3$43.7 million and $15.2$25.2 million for the years ending December 31, 2015, 2016, 2017, 2018, 2019, 2020, 2021 and 2019,2022, respectively.

Cost of Care, Medical Claims Payable and Other Medical Liabilities

Cost of care is recognized in the period in which members receive managed healthcare services. In addition to actual benefits paid, cost of care in a period also includes the impact of accruals for estimates of medical claims payable. Medical claims payable represents the liability for healthcare claims reported but not yet paid and claims incurred but not yet reported ("IBNR"(“IBNR”) related to the Company'sCompany’s managed healthcare businesses. Such liabilities are determined by employing actuarial methods that are commonly used by health insurance actuaries and that meet actuarial standards of practice. Cost of care for the Company’s EAP contracts, which are mainly with the United States federal government, pertain to the costs to employ licensed behavioral health counselors to deliver non-medical counseling for these contracts.

The IBNR portion of medical claims payable is estimated based on past claims payment experience for member groups, enrollment data, utilization statistics, authorized healthcare services and other factors. This data is incorporated into contract-specificcontract‑specific actuarial reserve models and is further analyzed to create "completion factors"“completion factors” that represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Factors that affect estimated completion factors include benefit changes, enrollment changes, shifts in product mix, seasonality influences, provider reimbursement changes, changes in claims inventory levels, the speed of claims processing and changes in paid claim levels. Completion factors are applied to claims paid through the financial statement date to estimate the ultimate claim expense incurred for the current period. Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims. For the most recent incurred months (generally the most recent two months), the percentage of claims paid for claims incurred in those months is generally low. This makes the completion factor methodology less reliable for such months. Therefore, incurred claims for any month with a completion factor that is less than 70 percent are generally not projected from historical completion and payment patterns; rather they are projected by estimating claims expense based on recent monthly estimated cost incurred per member per month times membership, taking into account seasonality influences, benefit changes and healthcare trend levels, collectively considered to be "trend“trend factors."” For new contracts, the Company estimates IBNR based on underwriting data until it has sufficient data to utilize these methodologies.

Medical claims payable balances are continually monitored and reviewed. If it is determined that the Company'sCompany’s assumptions in estimating such liabilities are significantly different than actual results, the Company'sCompany’s results of operations and financial position could be impacted in future periods. Adjustments of prior period estimates may result in additional cost of care or a reduction of cost of care in the period an adjustment is made. Further, due to the considerable variability of healthcare costs, adjustments to claim liabilities occur each period and are sometimes significant as compared to the net income recorded in that period. Prior period development is recognized immediately upon the actuary'sactuary’s judgment that a portion of the prior period liability is no longer needed or that additional


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

liability should have been accrued. The following table presents the components of the change in medical claims payable for the years ended December 31, 2012, 20132015, 2016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 


 2012 2013 2014 

    

2015

    

2016

    

2017

 

Claims payable and IBNR, beginning of period

 $157,099 $222,929 $242,229 

 

$

278,803

 

$

253,299

 

$

188,618

 

Cost of care:

       

 

 

 

 

 

 

 

 

 

 

Current year

 2,076,190 2,264,276 2,097,395 

 

 

2,297,255

 

 

1,892,914

 

 

2,421,270

 

Prior years(3)

 (4,300) (31,300) (8,800)

 

 

(22,500)

 

 

(10,300)

 

 

(7,500)

 

Total cost of care

 2,071,890 2,232,976 2,088,595 

 

 

2,274,755

 

 

1,882,614

 

 

2,413,770

 

Claim payments and transfers to other medical liabilities(1):

       

 

 

 

 

 

 

 

 

 

 

Current year

 1,877,459 2,053,274 1,845,325 

 

 

2,077,729

 

 

1,733,310

 

 

2,210,346

 

Prior years

 128,601 160,402 206,696 

 

 

222,530

 

 

213,985

 

 

161,798

 

Total claim payments and transfers to other medical liabilities

 2,006,060 2,213,676 2,052,021 

 

 

2,300,259

 

 

1,947,295

 

 

2,372,144

 

Acquisition of SWH

 

 

 —

 

 

 —

 

 

96,398

 

Claims payable and IBNR, end of period

 222,929 242,229 278,803 

 

 

253,299

 

 

188,618

 

 

326,642

 

Withhold receivables, end of period(2)

 (24,500) (13,888) (321)

Withhold (receivables) payable, end of period(2)

 

 

(2,850)

 

 

(4,482)

 

 

983

 

Medical claims payable, end of period

 $198,429 $228,341 $278,482 

 

$

250,449

 

$

184,136

 

$

327,625

 


(1)
For any given period, a portion of unpaid medical claims payable could be covered by reinvestment liability (discussed below) and may not impact the Company's results of operations for such periods.

(2)
Medical claims payable is offset by customer withholds from capitation payments in situations in which the customer has the contractual requirement to pay providers for care incurred.

(3)
Favorable development in 2012, 2013, and 2014 was $4.3 million, $31.3 million, and $8.8 million, respectively.

(1)

For any given period, a portion of unpaid medical claims payable could be covered by reinvestment liability (discussed below) and may not impact the Company’s results of operations for such periods.


(2)

Medical claims payable is offset by customer withholds from capitation payments in situations in which the customer has the contractual requirement to pay providers for care incurred.

(3)

Favorable development in 2015, 2016 and 2017 was $22.5 million, $10.3 million and $7.5 million, respectively, and was mainly related to lower medical trends and faster claims completion than originally assumed.

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

Actuarial standards of practice require that claim liabilities be adequate under moderately adverse circumstances. Adverse circumstances are situations in which the actual claims experience could be higher than the otherwise estimated value of such claims. In many situations, the claims paid amount experienced will be less than the estimate that satisfies the actuarial standards of practice. Any prior period favorable cost of care development related to a lack of moderately adverse conditions is excluded from "Cost“Cost of Care—Care – Prior Years"Years” adjustments, as a similar provision for moderately adverse conditions is established for current year cost of care liabilities and therefore does not generally impact net income.

Due to the existence of risk sharing and reinvestment provisions in certain customer contracts, principally in the Public Sector segment,Government contracts, a change in the estimate for medical claims payable does not necessarily result in an equivalent impact on cost of care.

The Company believes that the amount of medical claims payable is adequate to cover its ultimate liability for unpaid claims as of December 31, 2014;2017; however, actual claims payments may differ from established estimates.

Other medical liabilities consist primarily of "reinvestment" payables under certain managed healthcare contracts with Medicaid customersamounts payable to pharmacies for claims that have been adjudicated by the Company but not yet paid and "profit share"“profit share” payables under certain risk-based contracts. Under a contract with reinvestment features, if the cost of care is less than certain minimum amounts specified in the contract (usually as a percentage of revenue), the Company is required to "reinvest" such difference in behavioral healthcare programs when and as specified by the customer or to pay the difference to the customer for their use in funding such programs. Under a contract with profit share provisions, if the cost of care is below certain specified levels, the Company will "share"“share” the cost savings with the customer at the percentages set forth in the contract. In addition, certain contracts include provisions to provide the Company additional funding if the cost of care is above the specified levels.

Other medical liabilities also include amount payable“reinvestment” payables under certain managed healthcare contracts with Medicaid customers. Under a contract with reinvestment features, if the cost of care is less than certain minimum amounts specified in the contract (usually as a percentage of revenue), the Company is required to pharmacies for claims that have been adjudicated“reinvest” such difference in behavioral healthcare programs when and as specified by the Company but not yet paid.customer or to pay the difference to the customer for their use in funding such programs.

Advertising Costs

        Advertising costs consist primarily of printed media services, event sponsorships, and promotional items, which are expensed as incurred. Advertising expense was approximately $2.0 million, $2.3 million, and $2.7 million for the fiscal years ended December 31, 2012, 2013, and 2014, respectively.

Accrued Liabilities

As of December 31, 20132016 and 2017, the only individual current liability that exceeded five percent of total current liabilities related to accrued employee compensation liabilities of $40.2 million. As of December 31, 2014, the only individual current liabilities that exceeded five percent of total current liabilities related to accrued employee compensation liabilities of $47.0$76.1 million and deferred revenue of $29.8 million.


Table of Contents$45.6 million, respectively.


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

Net Income per Common Share attributable to Magellan Health, Inc.

Net income per common share attributable to Magellan Health, Inc. is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period (see Note 6—"Stockholders' Equity"“Stockholders’ Equity”).

Redeemable Non-ControllingNon‑Controlling Interest

As of December 31, 2014,2016 the Company held a 75%an equity interest of approximately 84% in AlphaCare Holdings. The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring the Company to purchase up to 50% of the remaining shares prior to January 1, 2017 provided certain membership levels are attained. After December 31, 2016 the other shareholders of AlphaCare Holdings havehad the right to exercise put options requiring the Company to purchase all or any portion of the remaining shares. In addition, after December 31, 2016 the Company hashad the right to purchase all remaining shares. Non-controllingNon‑controlling interests with redemption features, such as put options, that are not solely within the Company'sCompany’s control are considered redeemable non-controlling interest.non‑controlling interests. Redeemable non-controllingnon‑controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and stockholders'stockholders’ equity on the Company'sCompany’s consolidated balance sheet at the greater of the initial carrying amount adjusted for the non-controlling interest'snon‑controlling interest’s share of net income or loss, or at its redemption value. As of December 31, 2013, the Company recorded $10.6 million of redeemable non-controlling interest in relation to the acquisition. The carrying value of the non-controlling interestinterests as of December 31, 20142016 was $6.0$4.8 million.  During 2017, the Company exercised its right to acquire the remaining shares. The $4.6 million reduction in carryingredemption value for the year ended December 31, 2014 is a resultremaining shares at the time of operating losses, partially offset by the impact of additional capital provided by the Company.exercise was zero. The Company recognizes changes in the redemption value on a quarterly basis and adjusts the carrying amount of the non-controlling interest to equal the redemption value at the endtime of each reporting period. Under this method, this is viewed at the end of the reporting period as if it were also the redemption date for the non-controlling interest. The Company will reflect redemption value adjustments in the earnings per share calculation if redemption value is in excess of the carrying value of the non-controlling interest. As of December 31, 2014, the carrying value of the non-controlling interest exceeded the redemption value and therefore no adjustmentexercise was $4.7 million, which was reclassified to the carrying value was required.additional paid-in capital.  

Stock Compensation

At December 31, 20132016 and 2014,2017, the Company had equity-based employee incentive plans, which are described more fully in Note 6—"Stockholders' Equity"“Stockholders’ Equity”. In addition, the Company issued restricted stock awards associated with the Partners Rx and CDMI acquisitions,Armed Forces Services Corporation (“AFSC”) acquisition, which are also described more fully in Note 6—"Stockholders' Equity"“Stockholders’ Equity”. The Company uses the Black-Scholes-MertonBlack‑Scholes‑Merton formula to estimate the fair value of substantially all stock options granted to employees, and recorded stock compensation expense of $17.8$50.4 million, $21.3$37.4 million and $40.6$39.1 million for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. As stock compensation expense recognized in the consolidated statements of income for the years ended December 31, 2012, 20132015, 2016 and 20142017 is based on awards ultimately expected to vest, it has been reduced for annual estimated forfeitures of zero to four percent. If the actual number of forfeitures differs from those estimated, additional adjustments to compensation expense may be required in future periods. If vesting of an award is conditioned upon


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

2. Summary of Significant Accounting Policies (Continued)

the achievement of performance goals, compensation expense during the performance period is estimated using the most probable outcome of the performance goals, and adjusted as the expected outcome changes. The Company recognizes compensation costs for awards that do not contain performance conditions on a straight-linestraight‑line basis over the requisite service period, which is generally the vesting term of three years. For restricted stock units that include performance conditions, stock compensation is recognized using an accelerated method over the vesting period.

3. Acquisitions

Acquisition of Partners Rx Management, LLCSWH Holdings, Inc.

Pursuant to the September 6, 2013 agreementJuly 13, 2017 Agreement and planPlan of merger (the "Partners Agreement") with Partners Rx Management, LLC ("Partners Rx"Merger (“the SWH Agreement”), on October 1, 201331, 2017 the Company acquired all of the outstanding ownership interests of Partners Rx. Partners Rx is a full-service commercial PBM with a strong focus on health plans and self-funded employers primarily through sales through third party administrators, consultants and brokers. As consideration for the transaction, the Company paid $99.3 million in cash, including net receipts of $0.7 million for working capital adjustments. The Company funded the acquisition with cash on hand.

        During the year ended December 31, 2014, the Company made a measurement period adjustment of $0.3 million to decrease the deferred tax liability related to the Partners Rx acquisition.

Acquisition of AlphaCare Holdings, Inc.

        Pursuant to the August 13, 2013 stock purchase agreement (the "AlphaCare Agreement"“SWH Acquisition”), on December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, the holding company for AlphaCare, a Health Maintenance Organization ("HMO") in New York that operates a New York Managed Long-Term Care Plan in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in Bronx, New York, Queens and Kings Counties.

        Prior to December 31, 2013, the Company held a 7% equity interest in AlphaCare through an equity investment of $2.0 million in preferred membership units of AlphaCare's previous holding company, AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to AlphaCare Holdings, LLC. As part of the AlphaCare Agreement, AlphaCare Holdings, LLC was reorganized into a Delaware corporation, and on December 31, 2013 the preferred membership units and the loan were converted into Series A Participating Preferred Stock ("AlphaCare Series A Preferred") of AlphaCare Holdings and the Company purchased an additional $17.4 million of AlphaCare Series A Preferred. During 2014, the Company purchased $2.2 million in common shares from the minority owners of AlphaCare Holdings. During 2014, the Company also purchased an additional $8.9 million in shares of Series B Participating Preferred Stock and Series C Participating Preferred Stock issued by AlphaCare Holdings. As of December 31, 2014, the Company held a 75% voting interest and the remaining shareholders held a 25% voting interest in AlphaCare Holdings.

        Based on the Company's 75% equity and voting interest in AlphaCare Holdings, the Company has included the results of operations in its consolidated financial statements. The Company reports the results of operations of AlphaCare Holdings within the Public Sector segment.


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

3. Acquisitions (Continued)

        During the year ended December 31, 2014, the Company made net retrospective adjustments to provisional amounts related to the AlphaCare Holdings acquisition that were recognized at the acquisition date that, if known, would have affected the measurement amounts recognized as of that date.

        The estimated fair values of AlphaCare Holdings assets acquired and liabilities assumed at the date of acquisition are summarized as follows (in thousands):

 
 Initial Amounts
Recognized at
Acquisition Date(1)
 Measurement
Period
Adjustments(2)
 Current Amounts
Recognized at
Acquisition Date
 

Assets acquired:

          

Current assets (includes $6,249 of cash and $7,900 of restricted cash)

 $14,766 $(548)$14,218 

Property and equipment, net

  310  (39) 271 

Other assets

  475  66  541 

Other identified intangible assets

  4,590  2,600  7,190 

Goodwill

  20,882  (3) 20,879 

Total assets acquired

  41,023  2,076  43,099 

Liabilities assumed:

          

Current liabilities

  3,139  1,039  4,178 

Deferred tax liabilities

  1,830  1,037  2,867 

Total liabilities assumed

  4,969  2,076  7,045 

Net assets acquired

  36,054    36,054 

Less: net assets attributable to noncontrolling interest

  (10,554)   (10,554)

Net consideration

 $25,500 $ $25,500 

(1)
As previously reported in the Company's Form 10-K for the year ended December 31, 2013.

(2)
The measurement period adjustments were recorded to reflect a $2.6 million increase in the customer contracts identified intangible and a $1.0 million increase to the deferred tax liability as a result of finalization of the valuation and other net changes of ($1.6) million as a result of changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing at the acquisition date.

Acquisition of CDMI, LLC

        Pursuant to the March 31, 2014 purchase agreement (the "CDMI Agreement") with CDMI, on April 30, 2014 the Company acquired all of the outstanding equity interests of CDMI. CDMI providesSWH Holdings, Inc. (“SWH”). SWH is a range of clinical consulting programshealthcare company focused on serving complex, high-risk populations, providing Medicare and negotiatesMedicaid dual-eligible benefits to members in Massachusetts and administers drug rebates for managed care


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

3. Acquisitions (Continued)

organizations and other customers. As consideration for the transaction, the CompanyAcquisition, Magellan Healthcare paid a base price of $201.1 million, including net receipts of $3.9 million for working capital adjustments. Pursuant to the CDMI Agreement, the sellers and certain key management of CDMI purchased a total of $80.0$400.0 million in Magellan restricted common stock, which will generally vest overcash, inclusive of a 42-month period, conditioned upon continued employment. In addition$10.0 million payment based on SWH’s Medicare plan in Massachusetts receiving a Centers for Medicare & Medicaid Services 2018 Star Rating of at least 4, subject to adjustments as provided in the base purchase price, the CDMI Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016.SWH Agreement.

The Company reportswill report the results of operations of CDMI withinSWH in its Pharmacy ManagementHealthcare segment. The consolidated statements of income include total revenues and Segment Profit (as defined in Note 10—"Business Segment Information") from CDMIfor SWH of $31.5$186.6 million and $27.2$9.5 million, respectively, for the eighttwo months subsequent to the acquisition.

The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. A portion of the excess purchase price over tangible net assets acquired has been allocated to identified intangible assets totaling $84.2$124.1 million, consisting of customer contracts in the amount of $82.8$86.5 million, which is being amortized over 8four to six years, non-compete agreementstrade name in the amount of $1.0$30.0 million, which has an indefinite life, provider networks in the amount of $7.2 million, which is being amortized over 6.5three years, and tradename in the amountlicenses of $0.4 million, which have an indefinite life. The acquisition resulted in $260.1 million in goodwill related primarily to anticipated synergies and the expanded presence in the managed long-term care (“MLTC”) market. The goodwill is being amortized over 20 months. The entire excess purchase price over tangible netincluded in the Company’s Government reporting unit. None of the goodwill or identified intangible assets acquired is amortizableare deductible for tax purposes, although the Company's effective rate will not be impacted by the tax amortization.purposes.

The estimated fair valuesvalue of CDMISWH assets acquired and liabilities assumed at the date of the acquisition are summarized as follows (in thousands):

Assets acquired:

    

Current assets (includes $41,892 of accounts receivable)

 $41,996 

Property and equipment, net

  457 

Other assets

  9 

Other identified intangible assets

  84,220 

Goodwill

  69,092 

Total assets acquired

  195,774 

Liabilities assumed:

    

Current liabilities

  28,985 

Contingent consideration

  45,778 

Total liabilities assumed

  74,763 

Net assets acquired

 $121,011 

 

 

 

 

Assets acquired:

 

 

 

Current assets (includes $169,397 and $12,669 of cash and accounts receivable, respectively)

 

$

193,542

Property and equipment, net

 

 

3,395

Other assets

 

 

2,789

Identified intangible assets

 

 

124,140

Goodwill

 

 

260,139

Total assets acquired

 

 

584,005

Liabilities assumed:

 

 

 

Current liabilities (includes $96,398 of medical claims payable)

 

 

139,769

Deferred tax liabilities

 

 

45,913

Total liabilities assumed

 

 

185,682

Net assets acquired

 

$

398,323

 As of December 31, 2014, the Company established a working capital receivable of $0.1 million that was reflected as a reduction to goodwill.

The fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, and new contract


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

3. Acquisitions (Continued)

execution. The projected revenues, gross profits, and client base are derived from the Company's latest internal operational forecasts. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income. As of the acquisition date, the Company estimated undiscounted future contingent payments of $61.7 million. As of December 31, 2014, the Company estimated undiscounted future contingent payments of $65.7 million. The increase is mainly a result of changes in operational forecasts and probabilities of payment. As of December 31, 2014, the fair value of the contingent consideration was $54.9 million and is included in accrued liabilities and contingent consideration in the consolidated balance sheet.

        The Company'sCompany’s estimated fair values of CDMISWH’s assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed, as detailed above, are subject to adjustment once the analyses are completed. In addition, the amount recognized for deferred tax liabilities may be impacted by the determination of these items. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

As of December 31, 2017, the Company established a working capital receivable of $0.3 million that was reflected as a reduction to the transaction price.

In connection with the CDMISWH acquisition, the Company incurred $1.3$1.0 million of acquisition related costs that were expensed during the year ended December 31, 2014.2017. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of income.

Other AcquisitionsAcquisition of Veridicus Holdings, LLC and Granite Alliance Insurance Company

Pursuant to the July 1, 2014November 19, 2016 purchase agreementagreements (the "Cobalt Agreement"“Veridicus Agreements”) with Cobalt,Veridicus Holdings, LLC and Granite Alliance Insurance Company (collectively “Veridicus”) and Veridicus Health, LLC, on December 13, 2016 and February 7, 2017 the Company acquired all of the outstanding equity interests of Cobalt. Cobalt provides computerized cognitive behavioral therapy self-service programs. As considerationVeridicus (the “Veridicus Acquisition”). Veridicus is a PBM with a unique set of clinical services and capabilities.

The base purchase price for the transaction,Veridicus Acquisition per the Veridicus Agreements was $74.5 million, subject to working capital adjustments. The Company reports the results of operations of Veridicus within its Pharmacy Management segment.

During the year ended December 31, 2017, the Company paidmade net measurement period adjustments of $2.3 million to increase the goodwill related to the Veridicus acquisition. The measurement period adjustments included a decrease to the customer contracts identified intangible assets of $2.9 million, partially offset by other measurement period adjustments of $0.6 million.

Acquisition of AFSC

Pursuant to the May 15, 2016 share purchase agreement (the “AFSC Agreement”) with AFSC, on July 1, 2016 the Company acquired all of the outstanding equity interests of AFSC (the “AFSC Acquisition”). AFSC has extensive experience providing and managing behavioral health and specialty services to various agencies of the federal government, including all five branches of the U.S. Armed Forces.

The base purchase price for the AFSC Acquisition per the AFSC Agreement was $117.5 million, subject to working capital adjustments. The Company reports the results of operations of AFSC within its Healthcare segment. Pursuant to the AFSC Agreement, certain members of AFSC’s management, who were also shareholders of AFSC, purchased a total of $4.0 million in Magellan restricted common stock, which will vest over a two-year period, conditioned upon continued employment with the Company. Consideration for the AFSC Acquisition includes a net payment for the net base purchase price of $8.0$113.5 million in cash, subject to working capital adjustments. adjustments, including adjustments for cash acquired. Proceeds from the sale of restricted common stock are recorded as stock compensation expense over the requisite service period.

In addition to the base purchase price, the CobaltAFSC Agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0$10.0 million. The potential contingent payments are based on the retention of certain core business by AFSC.

As of December 31, 2017, the Company had a working capital receivable of $3.9 million.

Acquisition of 4D Pharmacy Management Systems, Inc.

Pursuant to the March 17, 2015 Purchase Agreement (the “4D Agreement”) with 4D, on April 1, 2015 the Company acquired (the “4D Acquisition”) all of the outstanding equity interests of 4D. 4D was a privately held, full-service PBM serving managed care organizations, employers and government-sponsored benefit programs, such as Medicare Part D plans.

As consideration for the 4D Acquisition, the Company paid a base price of $54.7 million, including net receipts of $0.3 million for working capital adjustments. In addition to the base purchase price, the Company made additional contingent payments of $20.0 million. The contingent payments were based on the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and for the retention of certain business. The Company reports the results of operations of 4D within its Pharmacy Management segment.

Other Acquisitions

Pursuant to the February 9, 2016 purchase agreement (the “TMG Agreement”) with The Management Group, LLC (“TMG”), on February 29, 2016 the Company acquired all of the outstanding equity interests of TMG. TMG is a company with 30 years of expertise in community-based long-term care services and supports. As consideration for the transaction, the Company paid a base price of $14.8 million in cash, including net receipts of $0.2 million for working capital adjustments. In addition to the base purchase price, the TMG agreement provides for potential contingent payments up to a maximum aggregate of $15.0 million. The potential future payments are contingent upon engagement of new membersthe Company being awarded additional managed long-term services and new contract execution through June 30, 2017. The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. The Company will make appropriate adjustments to the purchase price allocations prior to the completion of the measurement period as required.

supports contracts. The Company reports the results of operations of CobaltTMG within its CommercialHealthcare segment.

Pursuant to the January 15, 2015 purchase agreement (the “HSM Agreement”) with HSM Physical Health, Inc. (“HSM”) and HSM Companies Inc., on January 31, 2015 the Company acquired all of the outstanding equity interests of HSM. HSM provides cost containment and utilization management services focused on physical and musculoskeletal health specialties. As consideration for the transaction, the Company paid a base price of $13.6 million in cash, including net payments of $0.1 million for working capital adjustments. The Company reports the results of operations of HSM within its Healthcare segment.

Pro Forma Financial Information

The following unaudited supplemental pro forma financial information represents the Company'sCompany’s consolidated results of operations for the year ended December 31, 20132016 as if the acquisition of CDMISenior Whole Health had occurred on January 1, 2013,2016, and for the year ended December 31, 20142017, as if the acquisition of CDMISenior Whole Health had occurred on January 1, 2014,2017, in all cases after giving effect to certain adjustments including interest income, depreciation, and amortization, and stock compensation expense.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

3. Acquisitions (Continued)

Such pro forma information does not purport to be indicative of operating results that would have been reported had the acquisition of CDMISenior Whole Health occurred on January 1, 20132016 and 20142017 (in thousands, exceptexpect per share amounts)amount):

 

 

 

 

 

 

 

 

Year Ended

 

 

December 31, 


 Year Ended
December 31,
 

 

 

2016

 

 

2017


 2013 2014 

 

 

(unaudited)

 

 

(unaudited)


 (unaudited)
 (unaudited)
 

 

 

 

 

 

 

Net revenue

 $3,588,975 $3,771,711 

 

$

5,617

 

$

6,685

Net income

 114,549 75,530 

Income per common share attributable to Magellan Health, Inc.:

     

Net income attributable to Magellan

 

$

86

 

$

117

Income per common share attributable to Magellan

 

 

 

 

 

 

Basic

 $4.23 $2.83 

 

$

3.72

 

$

5.02

Diluted

 $4.12 $2.75 

 

$

3.57

 

$

4.79

4. Benefit Plans

The Company has a defined contribution retirement plan (the "401(k) Plan"“401(k) Plan”). Employee participants can elect to contribute up to 75 percent of their compensation, subject to Internal Revenue Service ("IRS"(“IRS”) deferral limitations. The Company makes contributions to the 401(k) Plan based on employee compensation and contributions. The Company matches 50 percent of each employee'semployee’s contribution up to 6 percent of their annual compensation. The Company recognized $6.3$9.6 million, $7.4$11.1 million and $8.7$12.7 million of expense for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively, for matching contributions to the 401(k) Plan.

5. Long-TermLong‑Term Debt and Capital Lease Obligations

Senior Notes

On December 9, 2011,September 22, 2017, the Company entered into acompleted the public offering of $400.0 million aggregate principal amount of its 4.400% Senior Secured Revolving Credit Facility Credit Agreement with Citibank, N.A.Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of September 22, 2017 (the “Base Indenture”), Wells Fargo Bank, N.A., Bank of America, N.A.,between the Company, as issuer and U.S. Bank N.A.National Association, as trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee.

The Notes bear interest payable semiannually in cash in arrears on March 22 and September 22 of each year, commencing on March 22, 2018, which rate is subject to an interest rate adjustment upon the occurrence of certain credit rating events. The Notes mature on September 22, 2024. The Indenture provides that provided for upthe Notes are redeemable at the Company’s option, in whole or in part, at any time on or after July 22, 2024, at a redemption price equal to $230.0 million100% of revolving loans withthe principal amount of the Notes being redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

The Indenture also contains certain covenants which restrict the Company’s ability to, among other things, create liens on its and its subsidiaries’ assets; engage in sale and lease-back transactions; and engage in a sublimitconsolidation, merger or sale of up to $70.0 million forassets.

The net proceeds from the issuance of letters of credit for the accountand sale of the Company (the "2011 Credit Facility"). Citibank, N.A., assigned a portion of its interest inNotes were approximately $394.7 million after deducting the 2011 Credit Facility to Bank of Tokyo.underwriting discounts and commissions and offering expenses. The 2011 Credit Facility was guaranteed by substantially allnet proceeds from this offering were and will be used for working capital and general corporate purposes, and the termination and repayment of the subsidiaries of the Company and was secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011obligations under its Previous Credit Facility wasAgreements (as defined below) which were scheduled to matureexpire on July 23, 2019 and December 9, 2014.29, 2017.

        Under the 2011Terminated Credit Facility, the annual interest rate on Revolving Loan borrowings was equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 0.75 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. The Company had the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bore interest at the rate of 1.875 percent. The commitment commission on the 2011 Credit Facility was 0.375 percent of the unused Revolving Loan Commitment.


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

5. Long-Term Debt and Capital Lease Obligations (Continued)

On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that providesprovided for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan Health, Inc.)Magellan) to borrow up to $250.0 million of revolving loans, with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company, and a term loan in an original aggregate principal amount of $250.0 million (the "2014“2014 Credit Facility"Facility”). At such point,On December 2, 2015, the 2011Company entered into an amendment to the 2014 Credit Facility under which Magellan Pharmacy Services, Inc. (a wholly owned subsidiary of Magellan) became a party to the $500.0 million Credit Agreement as the borrower and assumed all of the obligations of Magellan Rx Management, Inc. Under the 2014 Credit Facility, on September 30, 2014, the Company completed a draw-down of the $250.0 million term loan (the “2014 Term Loan”). The 2014 Credit Facility was scheduled to mature on July 23, 2019. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2014 Credit Facility was terminated. During the period the 2014 Term Loan was outstanding, from January 1, 2017 through September 22, 2017, the weighted average interest rate was approximately 2.634 percent.

On June 27, 2016, the Company entered into a $200.0 million Credit Agreement with various lenders that provided for a $200.0 million term loan (the “2016 Term Loan”) to Magellan Pharmacy Services, Inc. (the “2016 Credit Facility”). The 20142016 Credit Facility iswas guaranteed by substantially all of the non-regulated subsidiaries of the Company and willwas scheduled to mature on July 23, 2019, butDecember 29, 2017. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2016 Credit Facility was terminated. During the period the 2016 Term Loan was outstanding, from January 1, 2017 through September 22, 2017, the weighted average interest rate was approximately 2.390 percent.

On January 10, 2017, the Company holds an optionentered into a Credit Agreement with various lenders that provided for a $200.0 million delayed draw term loan (the “2017 Term Loan”) to extendMagellan Pharmacy Services, Inc. (the “2017 Credit Facility”). The 2017 Credit Facility was guaranteed by substantially all of the non-regulated subsidiaries of the Company and was scheduled to mature on December 29, 2017. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2017 Credit Facility was terminated. During the period the 2017 Term Loan was outstanding, from January 10, 2017 through September 22, 2017, the weighted average interest rate was approximately 2.691 percent.

Active Credit Agreements

On September 22, 2017, the Company entered into a credit agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the borrower (the “2017 Credit Agreement”). The 2017 Credit Agreement is scheduled to mature on September 22, 2022.

The proceeds from the 2017 Credit Agreement were and will be used for (a) working capital and general corporate purposes of the Company and its subsidiaries, including investments and the funding of acquisitions, (b) the repayment of all outstanding loans and other obligations (and the termination of all commitments) under the 2014 Credit Facility, for an additional one year period.2016 Credit Facility and 2017 Credit Facility (collectively, the “Previous Credit Agreements”) (the termination and repayment of the obligations under the Previous Credit Agreements, collectively, the “Refinancing”) and (c) payment of fees and expenses incurred in connection with (i) the entering into the 2017 Credit Agreement and related documents and the incurrence of loans and issuance of letters of credit thereunder and (ii) the consummation of the Refinancing. Upon consummation of the Refinancing, the Previous Credit Agreements were terminated.

Under the 20142017 Credit Facility,Agreement, the annual interest rate on revolving and termthe loan borrowingsborrowing is equal to (i) in the case of base rate loans, the sum of aan initial borrowing margin of 0.500.500 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds"“federal funds” rate, or the Eurodollar rate for one month plus 1.001.000 percent, or (ii) in the case of Eurodollar rate loans, the sum of aan initial borrowing margin of 1.501.500 percent plus the Eurodollar rate for the selected interest period, which rates shall be adjusted from timeperiod. The borrowing margin is subject to timeadjustment based on the Company's total leverage ratio.Company’s debt rating as provided by certain rating agencies. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. Letters of credit issued bear interest at the rate of 1.625 percent. The commitment commission on the 2014revolving credit facility under the 2017 Credit FacilityAgreement is 0.200.200 percent of the unused Revolving Loan Commitment,revolving credit commitment, which rate shall be adjusted from timesubject to timeadjustment based on the Company's total leverage ratio.

        On September 30, 2014, the Company completed a draw-down of the $250.0 million term loan. The borrowings will initially be maintainedCompany’s debt rating as a Eurodollar loan. The term loan is subject toprovided by certain quarterly amortization payments. As of December 31, 2014 the remaining balance on the term loan was $246.9 million. The term loan will mature on July 22, 2019. As of December 31, 2014, the term loan bore interest at a rate of 1.50 percent plus the London Interbank Offered Rate ("LIBOR"), which was equivalent to a total interest rate of 1.66925 percent.rating agencies. During the period the term loan was outstanding, from September 30, 201422, 2017 through December 31, 2014,2017, the weighted average interest rate was 1.65496approximately 2.827 percent.

As of December 31, 2014,2017, the contractual maturities of the term loan under the 2017 Credit Agreement were as follows: 2015—2018—$12.517.5 million; 2016—2019—$15.617.5 million; 2017—2020—$25.017.5 million; 2018—2021—$25.017.5 million; and 2019—2022—$168.8275.6 million.

The Company had $33.7 million letters of credit outstanding issued under credit facilities at December 31, 2016. Beginning in April 2016, due to the timing of working capital needs, the Company had periodically borrowed from the revolving loan under the 2014 Credit FacilityFacility. The revolving loan borrowings had been in the form of Eurodollar rate loans and totaled $175.0 million at December 31, 2016, which were settled during the period from January 1, 2017 through September 22, 2017. At December 31, 2017, the Company had no revolving loan borrowings, resulting in a borrowing capacity of $400.0 million under the 2017 Credit Agreement. Included in long-term debt and capital lease obligations as of December 31, 2016 and December 31, 2017 are deferred loan issuance costs of $1.4 million and $6.6 million, respectively.

The 2017 Credit Agreement contains covenants that limit management'smanagement’s discretion in operating the Company'sCompany’s business by restricting or limiting the Company'sCompany’s ability, among other things, to:


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

5. Long-Term Debt and Capital Lease Obligations (Continued)

        There were $33.7 million and $32.9credit to the Company. The Company had $26.5 million of letters of credit outstanding at December 31, 2013 and 2014, respectively, and no Revolving Loan borrowings at December 31, 2013 or 2014.2017 under the L/C Agreement.

Capital Lease Obligations

There were $26.7$26.0 million and $24.6$22.9 million of capital lease obligations at December 31, 20132016 and December 31, 2014,2017, respectively. The Company'sCompany’s capital lease obligations represent amounts due under leases for certain properties, and computer software (acquired prior to the prospective adoption of ASU 2015-05 on January 1, 2016) and equipment. The recorded gross cost of capital leased assets was $34.8$41.7 million and $45.1 million at December 31, 2014.2016 and 2017, respectively.

6. Stockholders'Stockholders’ Equity

Stock Compensation

At December 31, 20132016 and 2014,2017, the Company had equity-based employee incentive plans. Prior to May 18, 2011,2016, the Company utilized the 2011 Management Incentive Plan (the “2011 MIP”), 2008 Management Incentive Plan (the "2008 MIP"), 2006 Management Incentive Plan (the "2006 MIP"), 2003 Management Incentive Plan (the "2003 MIP"“2008 MIP”) and 2006 Directors'Directors’ Equity Compensation Plan (collectively the "Preexisting Plans"“Preexisting Plans”) for grants of stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and stock appreciation rights, to provide incentives to officers, employees and non-employee directors.

On February 18, 2011,25, 2016, the board of directors of the Company approved the 20112016 Management Incentive Plan ("2011 MIP"(“2016 MIP”), and the 20112016 MIP was approved by the Company'sCompany’s shareholders at the 20112016 Annual Meeting of Shareholders on May 18, 2011.2016. The 20112016 MIP provides for the delivery of up to a number of shares equal to (i) 5,000,0004,000,000 shares of common stock, plus (ii) the number of shares subject to outstanding awards under the 2011 MIP and Preexisting Plans which become available after shareholder approval of the 20112016 MIP as a result of forfeitures, expirations, and in other permitted ways under the share recapture provisions of the 20112016 MIP. Delivery of shares under "full-value"“full-value” awards (awards other than options or stock appreciation rights) will be counted for each share delivered as 2.291.60 shares against the total number of shares reserved under the 2011 MIP. Upon shareholder approval of the 2011 MIP, no further awards were made under the Preexisting Plans, and any shares that remained available for new awards (i.e., were not committed for outstanding awards) under the Preexisting Plans were not carried forward to the 20112016 MIP.

The 20112016 MIP provides for awards of stock options, restricted stock awards ("RSAs"),RSAs, RSUs, performance-based restricted stock units ("RSUs"(“PSUs”), stock appreciation rights, cash-denominatedcash‑denominated awards and any combination of the foregoing. A restricted stock unitRSU is a notional account representing the right to receive a share of the Company'sCompany’s Common Stock (or, at the Company'sCompany’s option, cash in lieu thereof) at some future date. In general, stock options vest ratably on each anniversary over the three years subsequent to grant, and have a ten year life. With the exception of the shares received by the principal owners of Partners Rx, CDMI and CDMI,AFSC, RSAs generally vest on the anniversary of the grant. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant, assuming that the associated performance hurdle(s) for that vesting yeargrant. The PSUs vest over three years and are met. Stock compensation expense is recognized using an accelerated method over the vesting period based upon the continued employment of the RSU holder and the probability of achievement of the performance hurdle(s). RSUs granted in 2012, 2013, and 2014 have performance thresholds based on EPS and return on equity ("ROE").subject to market-based conditions. At December 31, 2014, 2,097,552


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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

6. Stockholders' Equity (Continued)

2017, 3,724,939 shares of the Company'sCompany’s common stock remain available for future grant under the Company's 2011Company’s 2016 MIP.

On February 27, 2014 the board of directors of the Company approved the 2014 Employee Stock Purchase Plan ("(“2014 ESPP"ESPP”), and the 2014 ESPP was approved by the Company'sCompany’s shareholders at the 2014 Annual Meeting of Shareholders on May 21, 2014. The 2014 ESPP provides for up to 200,000 shares of the Company'sCompany’s ordinary common stock, plus the number of shares remaining under the 2011 Employee Stock Purchase Plan, to be issued. During the years ended December 31, 20132016 and 2014, 28,7152017, 48,815 and 30,83856,426 shares of the Company'sCompany’s common stock were issued under the employee stock purchase plans, respectively. At December 31, 2014, 217,1012017, 72,187 shares of the Company'sCompany’s common stock remain available for future grant under the Company'sCompany’s 2014 ESPP.

Stock Options

Summarized information related to the Company'sCompany’s stock options for the years ended December 31, 2012, 20132015, 2016 and 20142017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2016

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

Average

 

 

 

Average

 


 2012 2013 

 

 

 

Exercise

 

 

 

Exercise

 


 Options Weighted
Average
Exercise
Price
 Options Weighted
Average
Exercise
Price
 

    

Options

    

Price

    

Options

    

Price

 

Outstanding, beginning of period

 3,841,233 $42.65 4,268,240 $44.35 

    

3,321,063

    

$

50.58

    

2,939,840

    

$

55.13

 

Granted

 1,402,800 47.54 1,047,133 53.18 

 

1,004,321

 

 

62.65

 

501,960

 

 

64.10

 

Forfeited

 (444,939) 46.08 (165,734) 49.66 

 

(244,658)

 

 

60.25

 

(104,680)

 

 

57.23

 

Exercised

 (530,854) 39.03 (1,139,493) 41.53 

 

(1,140,886)

 

 

47.41

 

(493,943)

 

 

50.60

 

Outstanding, end of period

 4,268,240 $44.35 4,010,146 $47.23 

 

2,939,840

 

 

55.13

 

2,843,177

 

 

57.42

 

 

 
 2014 
 
 Options Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term (in years)
 Aggregate
Intrinsic
Value
(in thousands)
 

Outstanding, beginning of period

  4,010,146 $47.23       

Granted

  769,636  59.62       

Forfeited

  (267,028) 53.74       

Exercised

  (1,191,691) 44.45       

Outstanding, end of period

  3,321,063 $50.58  6.98 $31,648 

Vested and expected to vest at end of period

  3,292,871 $50.53  6.96 $31,551 

Exercisable, end of period

  1,693,694 $46.58  5.56 $22,813 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

 

 

Exercise

 

Term

 

Value

 

 

    

Options

    

Price

    

(in years)

    

(in thousands)

 

Outstanding, beginning of period

    

2,843,177

 

$

57.42

    

    

    

 

    

 

Granted

 

525,596

 

 

71.35

 

 

 

 

 

 

Forfeited

 

(79,350)

 

 

61.39

 

 

 

 

 

 

Exercised

 

(831,186)

 

 

53.79

 

 

 

 

 

 

Outstanding, end of period

 

2,458,237

 

$

61.50

 

7.04

 

$

86,158

 

Vested and expected to vest at end of period

 

2,441,446

 

$

61.45

 

7.04

 

$

85,706

 

Exercisable, end of period

 

1,403,228

 

$

57.22

 

5.92

 

$

55,195

 

 

The aggregate intrinsic value in the table above represents the total pre-taxpre‑tax intrinsic value (based upon the difference between the Company'sCompany’s closing stock price on the last trading day of 20142017 of $60.03$96.55 and the exercise price) for all in-the-moneyin‑the‑money options as of December 31, 2014.2017. This amount changes based on the fair market value of the Company'sCompany’s common stock.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

6. Stockholders' Equity (Continued)

The total pre-taxpre‑tax intrinsic value of options exercised (based on the difference between the Company's closing stock price on the day the option was exercised and the exercise price) during the years ended December 31, 2012, 20132015, 2016 and 20142017 was $6.4$21.8 million, $18.2$9.3 million, and $19.7$23.8 million, respectively.

The weighted average grant date fair value per share of substantially all stock options granted during the years ended December 31, 2012, 20132015, 2016 and 20142017 was $11.65, $12.24$13.69, $15.05 and $13.49,$17.64, respectively, as estimated using the Black-Scholes-MertonBlack‑Scholes‑Merton option pricing model based on the following weighted average assumptions:

 

 

 

 

 

 

 


 2012 2013 2014 

    

2015

    

2016

    

2017

    

Risk-free interest rate

 0.66% 0.67% 1.16%

 

1.28

%  

1.16

%  

1.79

%

Expected life

 4 years 4 years 4 years 

 

 4

years

 4

years

 4

years

Expected volatility

 30.30% 27.86% 26.20%

 

25.03

%  

27.75

%  

27.75

%

Expected dividend yield

 0.00% 0.00% 0.00%

 

0.00

%  

0.00

%  

0.00

%

For the years ended December 31, 2012, 20132015, 2016 and 2014,2017, expected volatility was based on the historical volatility of the Company'sCompany’s stock price.

As of December 31, 2014,2017, there was $12.5$10.0 million of total unrecognized compensation expense related to nonvested stock options that is expected to be recognized over a weighted average remaining recognition period of 1.921.68 years. The total fair value of options vested during the year ended December 31, 20142017 was $11.3$8.8 million.

        TheIn the year ended December 31, 2015, $4.1 million of benefits of tax deductions in excess of recognized stock compensation expense are reported as a financing cash flow, rather than as an operating cash flow. In the years ended December 31, 2012, 2013 and 2014, approximately $1.0 million, $3.2 million and $3.2 million, respectively, of benefits of such tax deductions related to stock compensation expense were realized and as such were reported as financing cash flows. For the year ended December 31, 2014, theThe net change to additional paid-inpaid‑in capital related to tax benefits (deficiencies) was $3.0$3.5 million which primarily consists of the $3.2$4.1 million of excess tax benefits offset by $0.3$0.6 million of tax deficiencies. For

In the year ended December 31, 2013,2016, the net change to additional paid-in capital related to tax benefits (deficiencies)benefit from excess tax deductions was $2.3$0.8 million, which primarily consists of the $3.2 million of excess tax benefits offset by $0.8 million of tax deficiencies. For the year ended December 31, 2012, the change to additional paid-in capital related to tax benefits (deficiencies) was $0.1 million which includes the $1.0 million of excess tax benefits offset by $0.9$0.2 million of tax deficiencies and adjustments to prior years'deficiencies. In the year ended December 31, 2017, the net tax benefit from exerciseexcess tax deductions was $5.6 million, which consists of stock options and vesting$5.7 million of stock awards.


Tableexcess tax benefits offset by $0.1 million of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

tax deficiencies. Due to the adoption of ASU 2016-09 in 2016, the net tax benefits reduced income tax expense rather than being recorded as a change in additional paid-in-capital. Consistent with the adoption of this provision, the net tax benefit for the years ended December 31, 20142016 and 2017 is reported as an operating cash flow, rather than a financing cash flow.

6. Stockholders' Equity (Continued)

Restricted Stock Awards

Summarized information related to the Company'sCompany’s nonvested RSAs for the years ended December 31, 2012, 20132015, 2016 and 20142017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2016

 

2017

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

Grant Date

 

 

    

Shares

    

Fair Value

    

Shares

    

Fair Value

    

Shares

    

Fair Value

 

Outstanding, beginning of period

    

1,626,827

    

$

57.66

    

1,109,622

    

$

57.88

    

615,472

 

$

58.71

 

Awarded (1)

 

20,115

 

 

67.12

 

77,744

 

 

65.52

 

14,959

 

 

70.20

 

Vested

 

(537,320)

 

 

57.56

 

(571,894)

 

 

58.03

 

(585,438)

 

 

58.33

 

Forfeited

 

 —

 

 

 —

 

 —

 

 

 —

 

(13,891)

 

 

65.97

 

Outstanding, ending of period

 

1,109,622

 

 

57.88

 

615,472

 

 

58.71

 

31,102

 

 

68.00

 

 
 2012 2013 2014 
 
 Shares Weighted
Average
Grant Date
Fair Value
 Shares Weighted
Average
Grant Date
Fair Value
 Shares Weighted
Average
Grant Date
Fair Value
 

Outstanding, beginning of period

  18,748 $52.11  23,672 $42.25  192,165 $56.59 

Awarded(1)

  23,672  42.25  192,165  56.59  1,451,231  57.75 

Vested

  (18,748) 52.11  (23,672) 42.25  (16,569) 52.82 

Forfeited

             

Outstanding, ending of period

  23,672 $42.25  192,165 $56.59  1,626,827 $57.66 
���

(1)
December 31, 2013 includes 175,596 shares associated with the Partners Rx acquisition. December 31, 2014 includes 1,433,946 shares associated with the CDMI acquisition.

(1)

December 31, 2016 includes 60,069 shares associated with the AFSC acquisition.

As of December 31, 2014,2017, there was $68.1$1.0 million of unrecognized stock compensation expense related to nonvested restricted stock awards. This cost is expected to be recognized over a weighted-averageweighted‑average period of 2.380.45 years.

Restricted Stock Units

Summarized information related to the Company'sCompany’s nonvested RSUs for the years ended December 31, 2012, 20132015, 2016 and 20142017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2016

 

2017

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 


 2012 2013 2014 

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

Grant Date

 


 Shares Weighted
Grant Date
Fair Value
 Shares Weighted
Grant Date
Fair Value
 Shares Weighted
Grant Date
Fair Value
 

    

Shares

    

Fair Value

    

Shares

    

Fair Value

    

Shares

    

Fair Value

 

Outstanding, beginning of period

 206,338 $44.63 202,690 $47.38 194,913 $50.21 

    

156,695

    

$

54.88

    

231,088

    

$

61.53

    

200,178

 

$

61.65

 

Awarded

 131,913 47.48 98,580 52.62 76,306 60.39 

 

187,272

 

 

63.42

 

51,521

 

 

64.87

 

107,417

 

 

68.53

 

Vested

 (99,976) 41.81 (95,138) 46.72 (91,510) 49.53 

 

(79,036)

 

 

52.82

 

(53,839)

 

 

63.32

 

(119,489)

 

 

60.38

 

Forfeited

 (35,585) 47.43 (11,219) 49.79 (23,014) 54.86 

 

(33,843)

 

 

61.54

 

(28,592)

 

 

63.34

 

(24,817)

 

 

65.87

 

Outstanding, ending of period

 202,690 $47.38 194,913 $50.21 156,695 $54.88 

 

231,088

 

 

61.53

 

200,178

 

 

61.65

 

163,289

 

 

66.46

 

As of December 31, 2014,2017, there was $4.1$6.0 million of unrecognized stock compensation expense related to nonvested restricted stock units. This cost is expected to be recognized over a weighted-average period of 2.01 years.


1.80 yearsTable of Contents.


MAGELLAN HEALTH, INC. AND SUBSIDIARIES
Performance-Based Restricted Stock Units

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summarized information related to the Company’s nonvested PSUs for the years ended December 31, 20142015, 2016 and 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

 

    

2016

 

    

2017

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

Average

 

 

 

 

Average

 

 

 

 

 

 

Grant Date

 

 

 

 

Grant Date

 

 

 

 

Grant Date

 

 

 

 

Shares

 

Fair Value

 

 

Shares

 

Fair Value

 

 

Shares

 

Fair Value

 

Outstanding, beginning of period

 

 

 —

 

$

 —

 

 

36,938

 

$

85.00

 

 

102,977

 

$

93.03

 

Awarded

 

 

43,900

 

 

85.00

 

 

69,691

 

 

97.22

 

 

101,989

 

 

76.24

 

Vested

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Forfeited

 

 

(6,962)

 

 

85.00

 

 

(3,652)

 

 

91.89

 

 

(2,651)

 

 

87.75

 

Outstanding, end of period

 

 

36,938

 

 

85.00

 

 

102,977

 

 

93.03

 

 

202,315

 

 

84.63

 

The PSUs will entitle the grantee to receive a number of shares of the Company’s Common Stock determined over a three-year performance period ending on December 31 of the year prior to the settlement date of the awards, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of PSU awards ratably over the requisite service period. The number of shares for which the PSUs will be settled will be a percentage of shares for which the award is targeted and will depend on the Company’s total shareholder return (as defined below), expressed as a percentile ranking of the Company’s total shareholder return as compared to the Company’s peer group (as defined below). The number of shares for which the PSUs will be settled vary from zero to 200 percent of the shares specified in the grant. Total shareholder return is determined by dividing the average share value of the Company’s Common Stock over the 30 trading days preceding January 1 of the year the awards are scheduled to vest by the average share value of the Company’s Common Stock over the 30 trading days beginning on January 1 of the year the awards were granted, with a deemed reinvestment of any dividends declared during the performance period. The Company’s peer group includes companies which comprise the S&P Health Care Services Industry Index, which was selected by the Compensation Committee of the Company’s Board of Directors and includes a range of healthcare companies operating in several business segments.

The weighted average estimated fair value of the PSUs granted in year ended December 31, 2015 was $85.00, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1%, and expected volatility of 15% to 52% (average of 28%). Based on the total shareholder return, the PSUs granted in 2015 will be settled at 180 percent of the shares specified in the grant.

The weighted average estimated fair value of the PSUs granted in the year ended December 31, 2016 was $97.22, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1%, and expected volatility of 16% to 81% (average of 32%).

The weighted average estimated fair value of the PSUs granted in the year ended December 31, 2017 was $76.24, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1.54%, and expected volatility of 18% to 61% (average of 33%).

As of December 31, 2017, there was$7.7million of unrecognized stock compensation expense related to nonvested PSUs. This cost is expected to be recognized over a weighted‑average period of 1.42 years.

6. Stockholders' Equity (Continued)

Net Income per Common Share Attributable to Magellan Health, Inc.

The following table reconciles income (numerator) and shares (denominator) used in the Company'sCompany’s computations of net income per share for the years ended December 31, 2012, 20132015, 2016 and 20142017 (in thousands, except per share data):

 
 2012 2013 2014 

Numerator:

          

Net income attributable to Magellan Health, Inc. 

 $151,027 $125,261 $79,404 

Denominator:

          

Weighted average number of common shares outstanding—basic

  27,386  27,054  26,689 

Common stock equivalents—stock options

  406  564  495 

Common stock equivalents—restricted stock awards

  11  13  155 

Common stock equivalents—restricted stock units

  77  42  14 

Common stock equivalents—employee stock purchase plan

  2  2  2 

Weighted average number of common shares outstanding—diluted

  27,882  27,675  27,355 

Net income attributable to Magellan Health, Inc. per common share—basic

 $5.51 $4.63 $2.98 

Net income attributable to Magellan Health, Inc. per common share—diluted

 $5.42 $4.53 $2.90 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

Net income attributable to Magellan

 

$

31,413

 

$

77,879

 

$

110,207

 

Denominator:

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding—basic

 

 

24,865

 

 

23,181

 

 

23,333

 

Common stock equivalents—stock options

 

 

316

 

 

289

 

 

530

 

Common stock equivalents—RSAs

 

 

626

 

 

593

 

 

376

 

Common stock equivalents—RSUs

 

 

33

 

 

45

 

 

64

 

Common stock equivalents—PSUs

 

 

35

 

 

45

 

 

134

 

Common stock equivalents—employee stock purchase plan

 

 

 2

 

 

 3

 

 

 3

 

Weighted average number of common shares outstanding—diluted

 

 

25,877

 

 

24,156

 

 

24,440

 

Net income attributable to Magellan per common share—basic

 

$

1.26

 

$

3.36

 

$

4.72

 

Net income attributable to Magellan per common share—diluted

 

$

1.21

 

$

3.22

 

$

4.51

 

 

The weighted average number of common shares outstanding for the years ended December 31, 2012, 20132015, 2016 and 20142017 was calculated using outstanding shares of the Company'sCompany’s common stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the years ended December 31, 2012, 20132015, 2016 and 20142017 represent stock options to purchase shares of the Company'sCompany’s common stock, restricted stock awards, restricted stock units and stock purchased under the ESPP.

For the years ended December 31, 2012, 20132015, 2016 and 2014,2017, the Company had additional potential dilutive securities outstanding representing 2.21.3 million, 0.81.5 million and 0.70.4 million options, respectively, that were not included in the computation of dilutive securities because they were anti-dilutiveanti‑dilutive for such periods. Had these shares not been anti-dilutive,anti‑dilutive, all of these shares would not have been included in the net income per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

Stock Repurchases

The Company'sCompany’s board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

6. Stockholders' Equity (Continued)

On October 25, 201122, 2014, the Company'sCompany’s board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013.22, 2016. On July 24, 2013 the Company's board of directors approved an increase and extension of the stock repurchase plan which authorizedOctober 21, 2015, the Company to purchase up to $300reached aggregate purchases of $200 million of its outstanding stock through October 25, 2015.

and the program was completed. Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period
 Total Number
of Shares
Purchased
 Average
Price Paid
per Share
 Aggregate
Cost
 

November 11, 2011 - December 31, 2011

  671,776 $48.72 $32.7 

January 1, 2012 - December 31, 2012

  459,252  50.27  23.1 

January 1, 2013 - December 31, 2013

  1,159,871  51.83  60.1 

January 1, 2014 - November 21, 2014

  3,183,306  57.82  184.1 

  5,474,205    $300.0 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number

 

Average

 

 

 

 

 

 

of Shares

 

Price Paid

 

Aggregate

 

Period

    

Purchased

    

per Share

    

Cost

 

November 24, 2014 - December 31, 2014

 

232,170

 

$

60.65

 

$

14.1

 

January 1, 2015 - October 21, 2015

 

3,153,156

 

 

58.96

 

 

185.9

 

 

 

3,385,326

 

 

 

 

$

200.0

 

 

On October 22, 201426, 2015, the Company'sCompany’s board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016.26, 2017. On July 26, 2017, the Company’s board of directors approved an extension of the 2015 Repurchase Program through October 26, 2018. Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period
 Total Number
of Shares
Purchased
 Average
Price Paid
per Share
 Aggregate
Cost
 

November 24, 2014 - December 31, 2014

  232,170 $60.65 $14.1 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number

 

Average

 

 

 

 

 

 

of Shares

 

Price Paid

 

Aggregate

 

Period

    

Purchased

    

per Share

    

Cost

 

October 26, 2015 - December 31, 2015

 

345,044

 

$

53.46

 

$

18.4

 

January 1, 2016 - December 31, 2016

 

1,828,183

 

 

58.40

 

 

106.8

 

January 1, 2017 - December 31, 2017

 

280,140

 

 

77.67

 

 

21.8

 

 

 

2,453,367

 

 

 

 

$

147.0

 

        During the periodThe Company made no share repurchases from January 1, 20152018 through February 23, 2015, the Company made additional open market purchases of 352,592 shares of the Company's common stock at an aggregate cost of $21.3 million (excluding broker commissions).2018.

Recent Sales of Unregistered Securities

On September 6, 2013,May 15, 2016, the Company and Partners RxAFSC entered into a mergerpurchase agreement pursuant to which on OctoberJuly 1, 2013 certain principal owners2016 the sellers and key management of Partners RxAFSC purchased 175,59660,069 shares of the Company'sCompany’s restricted stock for a total purchase price of $10$4.0 million. The purchase priceaggregate number of the shares issued was equal todetermined by dividing $4.0 million by the average trading prices per share of Magellan’s ordinary common stock on the closing prices of the Company's stock forNASDAQ over the five trading day perioddays ended on the trading day prior to the execution of the Merger Agreement.purchase agreement. The shares received by such principal ownerssellers and key management of Partners RxAFSC are subject to vesting over threetwo years with 50% vesting on the secondfirst anniversary of the acquisition and 50% vesting on the thirdsecond anniversary of the acquisition, conditioned on continued employment with the Company on the applicable vesting dates. The shares were issued to the principal ownerssellers and key management of Partners RxAFSC in a private placement pursuant to Section 4(a)(2) of the Securities Act.

 On March 31, 2014, the Company and CDMI, LLC entered into a purchase agreement pursuant to which on April 30, 2014 the sellers and key management of CDMI purchased 1,433,946 shares of the Company's restricted stock for a total purchase price of $80 million. The aggregate number of shares


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

6. Stockholders' Equity (Continued)

issued was determined by dividing $80.0 million by the volume weighted average trading prices per share of Magellan's ordinary common stock on the NASDAQ as reported by Bloomberg US L.P. using its "Volume at Price" function over the five trading days ended on the trading day prior to the closing of the purchase agreement. The shares received by such sellers and key management of CDMI are subject to vesting over 42 months with 25% vesting after 18 months and 75% vesting after 42 months, conditioned on continued employment. The shares were issued to the sellers and key management of CDMI in a private placement pursuant to Section 4(a)(2) of the Securities Act.

7. Income Taxes

Income Tax Expense

The components of income tax expense (benefit) for the following years ended December 31 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 


 2012 2013 2014 

    

2015

    

2016

    

2017

 

Income taxes currently payable:

       

 

 

 

 

 

 

 

 

 

 

Federal

 $18,345 $37,691 $42,674 

 

$

64,227

 

$

59,343

 

$

49,944

 

State

 2,187 3,445 5,306 

 

 

5,181

 

 

5,675

 

 

6,120

 

 20,532 41,136 47,980 

 

 

69,408

 

 

65,018

 

 

56,064

 

Deferred income taxes (benefits):

       

 

 

 

 

 

 

 

 

 

 

Federal

 14,922 (1,726) (3,236)

 

 

(26,573)

 

 

3,830

 

 

(31,941)

 

State

 2,384 514 (1,055)

 

 

(426)

 

 

880

 

 

960

 

 17,306 (1,212) (4,291)

 

 

(26,999)

 

 

4,710

 

 

(30,981)

 

Total income tax expense

 $37,838 $39,924 $43,689 

 

$

42,409

 

$

69,728

 

$

25,083

 

 

Total income tax expense for the years ended December 31 was different from the amount computed using the statutory federal income tax rate of 35 percent for the following reasons (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Income tax expense at federal statutory rate

 

$

24,891

 

$

50,931

 

$

47,328

 

State income taxes, net of federal income tax benefit

 

 

2,158

 

 

5,799

 

 

4,993

 

Tax contingencies reversed due to statute closings

 

 

(2,223)

 

 

(1,632)

 

 

(2,044)

 

Change in valuation allowances

 

 

5,174

 

 

2,130

 

 

(14,973)

 

Adjustments for Tax Act

 

 

 —

 

 

 —

 

 

(8,677)

 

Share-based compensation

 

 

165

 

 

(232)

 

 

(4,724)

 

Non-deductible HIF fees

 

 

9,953

 

 

10,204

 

 

 —

 

Other-net

 

 

2,291

 

 

2,528

 

 

3,180

 

Total income tax expense

 

$

42,409

 

$

69,728

 

$

25,083

 

 
 2012 2013 2014 

Income tax expense at federal statutory rate

 $67,107 $57,815 $41,272 

State income taxes, net of federal income tax benefit

  6,812  4,412  2,738 

Tax contingencies reversed due to statute closings

  (37,093) (25,299) (17,318)

Change in valuation allowances

  (288) 18  4,999 

Non-deductible ACA fees

      8,205 

Other-net

  1,300  2,978  3,793 

Total income tax expense

 $37,838 $39,924 $43,689 

TableOn December 22, 2017, the President of Contentsthe United States signed into law the “Tax Cuts and Jobs Act” (the “Tax Act”). The legislation includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. The legislation also provides for the acceleration of depreciation on certain assets placed in service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on the deduction of executive compensation.


MAGELLAN HEALTH, INC. AND SUBSIDIARIES
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to determine a reasonable estimate to be included as provisional amounts and provides a measurement period by which the accounting must be completed. The measurement period ends when a registrant has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740 but under no circumstances is the measurement period extend beyond one year from the enactment date (i.e. December 22, 2018).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

7. Income Taxes (Continued)

Deferred Income Taxes

The significant components of deferred tax assets and liabilities at December 31 were as follows (in thousands):

 

 

 

 

 

 

 


 2013 2014 

    

2016

    

2017

 

Deferred tax assets:

     

 

 

 

 

 

 

 

Net operating loss carryforwards

 $8,604 $15,867 

 

$

19,727

 

$

13,384

 

Share-based compensation

 15,926 14,519 

 

 

14,704

 

 

9,639

 

Other accrued compensation

 7,619 8,332 

 

 

9,313

 

 

6,195

 

Claims reserves

 8,005 9,429 

 

 

6,251

 

 

4,527

 

Deferred revenue

 6,708 4,090 

 

 

4,986

 

 

2,606

 

Other non-deductible accrued liabilities

 13,568 5,919 

 

 

3,460

 

 

5,362

 

Amortization of goodwill and intangible assets

 

 

444

 

 

 —

 

Indirect tax benefits

 4,804 3,825 

 

 

4,396

 

 

2,847

 

Other deferred tax assets

 987 2,356 

 

 

3,858

 

 

2,051

 

Total deferred tax assets

 66,221 64,337 

 

 

67,139

 

 

46,611

 

Valuation allowances

 (3,102) (12,363)

 

 

(17,117)

 

 

(2,368)

 

Deferred tax assets after valuation allowances

 63,119 51,974 

 

 

50,022

 

 

44,243

 

Deferred tax liabilities:

     

 

 

 

 

 

 

 

Depreciation

 (43,417) (42,644)

 

 

(41,311)

 

 

(22,906)

 

Amortization of goodwill and intangible assets

 (20,615) (9,407)

 

 

 —

 

 

(29,501)

 

Prepaid expenses

 (3,603) (3,631)

Other deferred tax liabilities

  (16)

 

 

(5,586)

 

 

(3,321)

 

Total deferred tax liabilities

 (67,635) (55,698)

 

 

(46,897)

 

 

(55,728)

 

Net deferred tax liabilities

 $(4,516)$(3,724)

Net deferred tax assets (liabilities)

 

$

3,125

 

$

(11,485)

 

 

The Company did not identify any items for which a reasonable estimate of the income tax effects of the Tax Act could not be determined as of December 31, 2017. However, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company re-measured its ending net deferred tax liabilities at December 31, 2017 and recorded a provisional tax benefit of $8.2 million. The Company will continue to analyze the Tax Act and additional technical and interpretive guidance on the Tax Act from the government and will complete its accounting no later than December 22, 2018. Any changes to the tax basis for temporary differences between the estimates in these statements and the 2017 federal return filed by the Company will also result in a corresponding adjustment to the remeasurement of deferred taxes as of the enactment date of the Tax Act.

The Company has $3.0$38.8 million of federal net operating loss carryforwards ("NOLs"(“NOLs”) available to reduce its consolidated taxable income in 20152018 and subsequent years. These NOLs (including $37.6 million incurred by AlphaCare prior to its membership in the Magellan consolidated group) will expire in 20172018 through 20192036 if not used and are subject to examination and adjustment by the IRS. AlphaCare has $24.5In addition, the Company’s utilization of these NOLs is subject to limitations under the Internal Revenue Code as to the timing and use. At this time, the Company does not believe these limitations will restrict the Company’s ability to use any federal NOLs before they expire.  The Company and its subsidiaries also have $93.7 million of federal NOLs available to reduce its consolidatedstate and local taxable income at certain subsidiaries in 20152018 and subsequent years. These NOLs will expire in 20332018 through 2034 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $160.5 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2015 and subsequent years. Most of these NOLs will expire in 2017 through 20342037 if not used and are subject to examination and adjustment by the respective state tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to limitations as to the timing and use. At this time, the Company does not believe these limitations will restrict the Company’s ability to use any of these state and local NOLs before they expire.

The Company'sCompany’s valuation allowances against deferred tax assets were $3.1$17.1 million and $12.4$2.4 million as of December 31, 20132016 and 2014, respectively,2017, respectively. The allowances at December 31, 2016 mostly relatingrelated to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and certain state NOLs. The significant decrease in 2017 was due to the reversal of AlphaCare federal NOL allowances as a result of planned restructuring of the Company’s New York operations as a result of the acquisition of SWH.  The combined results are projected to provide sufficient taxable income to utilize AlphaCare’s NOL unrestricted carryforwards. At December 31, 2017, the Company’s remaining valuation allowances primarily related to uncertainties regarding the eventual realization of certain state NOLs.

Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

7. Income Taxes (Continued)

were identified which were both prudent and reasonable. The Company believes taxable income expected to be generated in the future will be sufficient to support realization of the Company'sCompany’s deferred tax assets, as reduced by valuation allowances. This determination is based upon earnings history and future earnings expectations. Because AlphaCare has no earnings history due to the NOLs incurred to date, a full valuation allowance is recorded on such NOLs.

Other than deferred tax benefits attributable to operating loss carryforwards, there are no time constraints within which the Company'sCompany’s deferred tax assets must be realized. Future changes in the estimated realizability of deferred tax assets could materially affect the Company'sCompany’s financial condition and results of operations.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 


 2012 2013 2014 

    

2015

    

2016

    

2017

 

Balance as of beginning of period

 $99,230 $56,601 $30,176 

 

$

13,528

 

$

12,597

 

$

13,604

 

Additions for current year tax positions

 1,904 2,367 2,734 

 

 

3,371

 

 

3,274

 

 

3,243

 

Additions for tax positions of prior years

 403 214 118 

 

 

949

 

 

141

 

 

342

 

Reductions for tax positions of prior years

 (1,618) (396) (35)

 

 

(1,807)

 

 

(173)

 

 

(114)

 

Reductions due to lapses of applicable statutes of limitation

 (43,297) (28,606) (19,465)

Reductions due to lapses of applicable statutes of limitations

 

 

(3,071)

 

 

(2,235)

 

 

(2,693)

 

Reductions due to Tax Act

 

 

 —

 

 

 —

 

 

(509)

 

Reductions due to settlements with taxing authorities

 (21) (4)  

 

 

(373)

 

 

 —

 

 

(293)

 

Balance as of end of period

 $56,601 $30,176 $13,528 

 

$

12,597

 

$

13,604

 

$

13,580

 

 

If these unrecognized tax benefits had been realized as of December 31, 20132016 and 2014, $23.32017, $9.1 million and $9.2$10.7 million, respectively, would have reduced income tax expense.

The Company continually performs a comprehensive review of its tax positions and accrues amounts for tax contingencies related to uncertain tax positions. Based upon these reviews, the status of ongoing tax audits and the expiration of applicable statutes of limitations, accruals are adjusted as necessary. The tax benefit from an uncertain tax position is recognized when it is more likely than not that, based on the technical merits, the position will be sustained upon examination, including resolution of any related appeals or litigation processes.

The Company also adjusts these liabilities for unrecognized tax benefits when its judgment changes as a result of the evaluation of new information not previously available. However, the ultimate resolution of a disputed tax position following an examination by a taxing authority could result in a payment that is materially different from that accrued by the Company. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. However, reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the related book expense are recorded as reductions to deferred tax assets, although prior to the adoption of ASU 2016-09 in 2016 these were recorded as increases in additional paid-inpaid‑in capital. To the extent reversals of unrecognized tax benefits cannot be specifically traced to these excess deductions due to complexities in the tax law, the Company records the tax benefit for such reversals to additional paid-in capital on a pro-rata basis.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

7. Income Taxes (Continued)

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 20102013 expired during 2014.2017. As a result, $19.5$3.0 million of unrecognized tax benefitscontingency reserves recorded as of December 31, 20132016 were reversed in the current year, of which $16.0$2.0 million was reflected as a reduction to income tax expense $2.6and $1.0 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4$0.2 million of accrued interest was reversed in 20142017 and reflected as a reduction to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 20092012 expired during 2013.2016. As a result, $28.6$2.2 million of unrecognized tax benefitscontingency reserves recorded as of December 31, 20122015 were reversed in 2013,2016, of which $23.2$1.5 million was reflected as a reduction to income tax expense $3.9and $0.7 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1$0.1 million of accrued interest was reversed in 20132016 and reflected as a reductionreductions to income tax expense due to the closing of statutes of limitations on tax assessments.

The statutes of limitations regarding the assessment of federal and most state and local income taxes for 20082011 expired during 2012.2015. As a result, $43.3$3.1 million of unrecognized tax benefitscontingency reserves recorded as of December 31, 20112014 were reversed in 2012,2015, of which $35.7$2.0 million was reflected as a reduction to income tax expense, $6.2$1.0 million as a decrease to deferred tax assets, and the remainder as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets.capital. Additionally, $1.4$0.4 million of accrued interest and $0.8$0.7 million of unrecognized state tax benefits were reversed in 20122015 and reflected as reductions to income tax expense due to the closing of statutes of limitations on tax assessments and changes inthe favorable settlement of state income tax return elections, respectively.examinations.

With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years ended prior to 2011.2014. Further, it is reasonably possible the statutes of limitations regarding the assessment of federal and most state and local income taxes for 20112014 could expire during 2015. Also, unrecognized tax benefits could be reversed during 2015 as the result of resolution of certain state tax examinations.2018. Up to $4.2$2.9 million of unrecognized tax benefits recorded as of December 31, 20142017 could be reversed during 20152018 as a result of statute expirations, and settlement of these state examinations, of which $2.7$2.3 million would be reflected as a reduction to income tax expense $1.4and $0.6 million as a decrease to deferred tax assets, and the remainder as an increase to additional paid-in capital.assets. All reversals from statute expirations and examination resolutions would be reflected as discrete adjustments during the quarter in which the respective event occurs. As of December 31, 20132016 and 2014,2017, the Company had accrued approximately $1.5$0.3 million and $0.6$0.5 million, respectively, for the potential payment of interest and penalties (net of indirect benefits).penalties. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During the years ended December 31, 2012, 20132015, 2016 and 2014,2017, the Company recorded approximately $(0.1)$(0.4) million, $(1.2)$0.1 million and $(0.8)$0.2 million, respectively, in interest and penalties.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

8. Supplemental Cash Flow Information

Supplemental cash flow information for the years ended December 31, 2012, 20132015, 2016 and 20142017 is as follows (in thousands):

 
 2012 2013 2014 

Income taxes paid, net of refunds

 $57,663 $65,511 $57,728 

Interest paid

 $1,594 $2,264 $3,389 

Assets acquired through capital leases

 $ $29,739 $2,810 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Income taxes paid, net of refunds

 

$

63,899

 

$

54,442

 

$

59,474

 

Interest paid

 

$

6,181

 

$

9,378

 

$

15,415

 

Assets acquired through capital leases

 

$

4,212

 

$

4,491

 

$

2,418

 

9. Commitments and Contingencies

Insurance

The Company maintains a program of insurance coverage for a broad range of risks in its business. The Company has renewed its general, professional and managed care liability insurance policies with unaffiliated insurers for a one-year period from June 17, 20142017 to June 17, 2015.2018. The general liability policy is written on an "occurrence"“occurrence” basis, subject to a $0.05 million per claim un-aggregated self-insuredun‑aggregated self‑insured retention. The professional liability and managed care errors and omissions liability policies are written on a "claims-made"“claims‑made” basis, subject to a $1.0 million per claim ($10.0 million per class action claim) un-aggregated self-insuredun‑aggregated self‑insured retention for managed care errors and omissions liability, and a $0.05 million per claim un-aggregated self-insuredun‑aggregated self‑insured retention for professional liability.

The Company maintains a separate general and professional liability insurance policy with an unaffiliated insurer for its specialty pharmaceutical dispensing operations. The specialty pharmaceutical dispensing operations insurance policy has a one-year term for the period June 17, 20142017 to June 17, 2015.2018. The general liability policy is written on an "occurrence"“occurrence” basis and the professional liability policy is written on a "claims-made"“claims‑made” basis, subject to a $0.05 million per claim and $0.25 million aggregated self-insuredself‑insured retention.

        The Company maintains separate professional liability insurance policies with unaffiliated insurers for its Maricopa Contract business for the behavioral health direct care facilities, all of which were divested at various times prior to September 1, 2009. The Maricopa Contract professional liability insurance policies effective dates were from September 1, 2008 to September 1, 2009. The Company purchased a five-year extended reporting period for the professional liability policies effective September 1, 2009 for the period September 1, 2009 to September 1, 2014, subject to a $0.5 million per claim un-aggregated self-insured retention. The Company extended the reporting period for the professional liability policies for an additional two-year period to September 1, 2016, subject to a $0.5 million per claim un-aggregated self-insured retention. The professional liability policies are written on a "claims-made" basis.

The Company is responsible for claims within its self-insured retentions, and for portions of claims reported after the expiration date of the policies if they are not renewed, or if policy limits are exceeded. The Company also purchases excess liability coverage in an amount that management believes to be reasonable for the size and profile of the organization.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

9. Commitments and Contingencies (Continued)

Regulatory Issues

The managed healthcare industry is subject to numerous laws and regulations. The subjects of such laws and regulations cover, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, information privacy and security, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Over the past several years, government activity has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse and false claims statutes and/or regulations by healthcare organizations and insurers. Entities that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

In addition, regulators of certain of the Company'sCompany’s subsidiaries may exercise certain discretionary rights under regulations including increasing their supervision of such entities, requiring additional restricted cash or other security or seizing or otherwise taking control of the assets and operations of such subsidiaries.

LegalThe Company is subject to certain federal laws and regulations in connection with its contracts with the federal government. These laws and regulations affect how the Company conducts business with its federal agency customers and may impose added costs on its business. The Company’s failure to comply with federal procurement laws and regulations could cause it to lose business, incur additional costs and subject it to a variety of civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to reputation, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. The Company’s wholly owned subsidiary, AFSC, conducts business with federal agency customers and federal contractors to such agencies. The Company is currently in the process of conducting an investigation into matters relating to compliance by AFSC with Small Business Administration (“SBA”) regulations and other federal laws applicable to government contractors, and the Company intends to make its findings available to the SBA during and upon concluding the investigation. The results of this investigation may give rise to contingencies, if any, that could require us to record balance sheet liabilities or accrue expenses, the amounts of which we are not able to currently estimate. For 2017 AFSC’s total revenue comprised approximately 3% of the total revenues of the Company.

 

Legal

The Company'sCompany’s operating activities entail significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require the Company to incur significant fees and costs related to their defense.

The Company is also subject to or party to certain class actions and other litigation and claims relating to its operations or business practices. In the opinion of management, theThe Company has recorded reserves that, in the opinion of management, are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company'sCompany’s financial condition or results of operations; however, there can be no assurance in this regard.

Operating Leases

The Company leases certain of its operating facilities and equipment. The leases, which expire at various dates through JanuaryNovember 2025, generally require the Company to pay all maintenance, property tax and insurance costs.

At December 31, 2014,2017, aggregate amounts of future minimum payments under operating leases were as follows: 2015—$16.5 million; 2016—$16.6 million; 2017—$14.4 million; 2018—$12.420.8 million; 2019—$11.218.8 million; 20202020—$14.3 million; 2021—$10.9 million; 2022—$9.1 million; 2023 and beyond—$25.79.9 million. Operating lease obligations include estimated future lease payments for both open and closed offices.


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

9. Commitments and Contingencies (Continued)

At December 31, 2014,2017, aggregate amounts of future minimum rentals to be received under operating subleases were as follows: 2015—$0.1 million; 2016—$0.1 million; 2017—$0.1 million; 2018—$0.20.3 million; and 2019—$0.1 million. Operating sublease rentals to be received mainly relate to a portion of the Company'sCompany’s former headquarters.

Rent expense is recognized on a straight-linestraight‑line basis over the terms of the leases. Rent expense was $19.5 million, $15.2 million, $16.2 million and $17.4$19.0 million for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

Capital Leases

At December 31, 2014,2017, aggregate future amounts of minimum payments under capital leases, net of leasehold improvement allowances, were as follows: 2015—$0.6 million; 2016—$2.3 million; 2017—$3.5 million; 2018—$3.44.9 million; 2019—$2.93.1 million; 20202020—$3.6 million; 2021—$3.6 million; 2022—$3.7 million; 2023 and beyond—$18.47.6 million. Included in the future amounts payable under capital lease commitments is imputed interest of $6.5$3.6 million.

Restructuring Activities

        As a result of restructuring activities initiated in 2013, the Company recorded liabilities for employee termination costs. The restructuring activities initiated in 2013 were related to contract terminations and organizational changes made in an effort to improve the Company's ability to execute its strategy. For the year ended December 31, 2014, the Company incurred $(1.7) million of employee termination costs, due to net reversals of prior year liabilities, and $1.3 million of lease termination and exit costs. The restructuring costs incurred by segment were Commercial $0.4 million, Public Sector $0.2 million and Corporate $(1.0) million. As of December 31, 2014, the Company incurred cumulative restructuring costs of $14.9 million related to 2013 initiatives. As of December 31, 2014, the cumulative restructuring costs incurred by segment were Public Sector $7.0 million, Commercial $5.1 million, and Corporate $2.8 million. Restructuring costs are included in direct service costs and other operating expenses in the consolidated statements of income.

        The following table summarizes the activity related to the employee termination cost aspect of the 2013 restructuring liabilities for the year ended December 31, 2014, by reportable segment (in thousands):

 
 Commercial Public
Sector
 Corporate Consolidated 

Liability for employee termination costs at December 31, 2013

 $4,744 $4,296 $3,429 $12,469 

Additions

  850  797  341  1,988 

Payments

  (3,756) (3,596) (2,458) (9,810)

Liability released

  (1,188) (1,196) (1,312) (3,696)

Liability for employee termination costs at December 31, 2014

 $650 $301 $ $951 

10. Business Segment Information

The accounting policies of the Company'sCompany’s segments are the same as those described in Note 1—"General."2—“Summary of Significant Accounting Policies.” The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest


Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

10. Business Segment Information (Continued)

and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes ("(“Segment Profit"Profit”). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Public SectorHealthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Public Sector'sHealthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company'sCompany’s employees covered under its medical plan. As such, revenue, cost of care, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company'sCompany’s segments are defined previously.in Note 1—“General.”.

The following tables summarize, for the periods indicated, operating results by business segment (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Corporate

    

 

 

 

 

 

 

 

 

Pharmacy

 

and

 

 

 

 

 

    

Healthcare

    

Management

    

Elimination

    

Consolidated

 

Year Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other revenue

 

$

2,959,252

 

$

238,456

 

$

(63)

 

$

3,197,645

 

PBM and dispensing revenue

 

 

 —

 

 

1,510,180

 

 

(110,425)

 

 

1,399,755

 

Cost of care

 

 

(2,274,755)

 

 

 —

 

 

 —

 

 

(2,274,755)

 

Cost of goods sold

 

 

 —

 

 

(1,427,680)

 

 

105,803

 

 

(1,321,877)

 

Direct service costs and other

 

 

(510,811)

 

 

(284,968)

 

 

(26,613)

 

 

(822,392)

 

Stock compensation expense (1)

 

 

8,502

 

 

36,351

 

 

5,531

 

 

50,384

 

Changes in fair value of contingent consideration (1)

 

 

(1,404)

 

 

45,661

 

 

 —

 

 

44,257

 

Less: non-controlling interest segment profit (loss) (2)

 

 

(2,439)

 

 

 —

 

 

(195)

 

 

(2,634)

 

Segment profit (loss)

 

$

183,223

 

$

118,000

 

$

(25,572)

 

$

275,651

 

Identifiable assets by business segment (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

$

133,597

 

$

 —

 

$

 —

 

$

133,597

 

Net accounts receivable

 

 

153,036

 

 

270,975

 

 

4,633

 

 

428,644

 

Investments

 

 

313,045

 

 

 —

 

 

13,120

 

 

326,165

 

Pharmaceutical inventory

 

 

 —

 

 

50,749

 

 

 —

 

 

50,749

 

Goodwill

 

 

260,618

 

 

360,772

 

 

 —

 

 

621,390

 

Other intangible assets, net

 

 

12,227

 

 

121,147

 

 

 —

 

 

133,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Corporate

    

 

 

 

 

 

 

 

 

Pharmacy

 

and

 

 

 

 

 

    

Healthcare

    

Management

    

Elimination

    

Consolidated

 

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other revenue

 

$

2,659,685

 

$

243,561

 

$

(304)

 

$

2,902,942

 

PBM and dispensing revenue

 

 

 —

 

 

2,053,188

 

 

(119,246)

 

 

1,933,942

 

Cost of care

 

 

(1,882,614)

 

 

 —

 

 

 —

 

 

(1,882,614)

 

Cost of goods sold

 

 

 —

 

 

(1,933,086)

 

 

114,366

 

 

(1,818,720)

 

Direct service costs and other

 

 

(573,706)

 

 

(261,570)

 

 

(41,336)

 

 

(876,612)

 

Stock compensation expense (1)

 

 

4,440

 

 

20,509

 

 

12,473

 

 

37,422

 

Changes in fair value of contingent consideration (1)

 

 

(231)

 

 

127

 

 

 —

 

 

(104)

 

Impairment of intangible assets (1)

 

 

4,800

 

 

 —

 

 

 —

 

 

4,800

 

Less: non-controlling interest segment profit (loss) (2)

 

 

(567)

 

 

 —

 

 

(170)

 

 

(737)

 

Segment profit (loss)

 

$

212,941

 

$

122,729

 

$

(33,877)

 

$

301,793

 

Identifiable assets by business segment (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

$

81,608

 

$

 1

 

$

167

 

$

81,776

 

Net accounts receivable

 

 

191,058

 

 

405,611

 

 

10,095

 

 

606,764

 

Investments

 

 

293,034

 

 

10,703

 

 

1,516

 

 

305,253

 

Pharmaceutical inventory

 

 

 —

 

 

58,995

 

 

 —

 

 

58,995

 

Goodwill

 

 

350,576

 

 

391,478

 

 

 —

 

 

742,054

 

Other intangible assets, net

 

 

55,756

 

 

130,476

 

 

 —

 

 

186,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Corporate

    

 

 

 

 

 

 

 

 

Pharmacy

 

and

 

 

 

 

 

    

Healthcare

    

Management

    

Elimination

    

Consolidated

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other revenue

 

$

3,206,277

 

$

273,489

 

$

(584)

 

$

3,479,182

 

PBM and dispensing revenue

 

 

 —

 

 

2,491,044

 

 

(131,643)

 

 

2,359,401

 

Cost of care

 

 

(2,413,770)

 

 

 —

 

 

 —

 

 

(2,413,770)

 

Cost of goods sold

 

 

 —

 

 

(2,341,979)

 

 

130,069

 

 

(2,211,910)

 

Direct service costs and other

 

 

(601,201)

 

 

(302,525)

 

 

(38,157)

 

 

(941,883)

 

Stock compensation expense (1)

 

 

10,689

 

 

19,881

 

 

8,546

 

 

39,116

 

Changes in fair value of contingent consideration (1)

 

 

696

 

 

 —

 

 

 —

 

 

696

 

Less: non-controlling interest segment profit (loss) (2)

 

 

(56)

 

 

 —

 

 

(3)

 

 

(59)

 

Segment profit (loss)

 

$

202,747

 

$

139,910

 

$

(31,766)

 

$

310,891

 

Identifiable assets by business segment (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

$

220,786

 

$

8,059

 

$

168

 

$

229,013

 

Net accounts receivable

 

 

244,486

 

 

403,880

 

 

12,409

 

 

660,775

 

Investments

 

 

327,865

 

 

 —

 

 

 —

 

 

327,865

 

Pharmaceutical inventory

 

 

 —

 

 

40,945

 

 

 —

 

 

40,945

 

Goodwill

 

 

610,867

 

 

395,421

 

 

 —

 

 

1,006,288

 

Other intangible assets, net

 

 

165,159

 

 

103,129

 

 

 —

 

 

268,288

 

 
 Commercial Public
Sector
 Specialty
Solutions
 Pharmacy
Management
 Corporate
and
Elimination
 Consolidated 

Year Ended December 31, 2012

                   

Managed care and other revenue

 $728,512 $1,620,875 $349,133 $227,669 $(69,090)$2,857,099 

Dispensing revenue

        350,298    350,298 

Cost of care

  (437,518) (1,413,320) (228,383) (61,759) 69,090  (2,071,890)

Cost of goods sold

        (328,414)   (328,414)

Direct service costs and other

  (172,035) (89,129) (55,418) (111,593) (129,337) (557,512)

Stock compensation expense(1)

  532  1,111  1,567  1,007  13,566  17,783 

Segment profit (loss)

 $119,491 $119,537 $66,899 $77,208 $(115,771)$267,364 

Identifiable assets by business segment(3)

                   

Restricted cash

 $18,254 $147,766 $ $ $60,534 $226,554 

Net accounts receivable

  39,678  27,415  7,580  65,755  (2,175) 138,253 

Investments

  21,273  101,093      111,324  233,690 

Pharmaceutical inventory

      45,727      45,727 

Goodwill

  120,485    104,549  201,905    426,939 

Other intangible assets, net

  2,152    7,877  24,906    34,935 

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

10. Business Segment Information (Continued)

 
 Commercial Public
Sector
 Specialty
Solutions
 Pharmacy
Management
 Corporate
and
Elimination
 Consolidated 

Year Ended December 31, 2013

                   

Managed care and other revenue

 $766,841 $1,757,933 $375,818 $228,705 $(66,248)$3,063,049 

PBM and dispensing revenue

        483,268    483,268 

Cost of care

  (469,478) (1,523,023) (247,496) (59,227) 66,248  (2,232,976)

Cost of goods sold

        (455,601)   (455,601)

Direct service costs and other

  (172,491) (122,819) (57,334) (128,427) (138,475) (619,546)

Stock compensation expense(1)

  503  1,038  1,630  1,172  16,909  21,252 

Segment profit (loss)

 $125,375 $113,129 $72,618 $69,890 $(121,566)$259,446 

Identifiable assets by business segment(3)

                   

Restricted cash

 $25,107 $196,651 $ $ $14,938 $236,696 

Net accounts receivable

  50,407  62,977  7,368  115,527  1,906  238,185 

Investments

  16,491  92,966      98,856  208,313 

Pharmaceutical inventory

      49,609      49,609 

Goodwill

  120,485  20,882  104,549  242,290    488,206 

Other intangible assets, net

  1,076  4,590  6,123  57,905    69,694 

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

10. Business Segment Information (Continued)

 
 Commercial Public
Sector
 Specialty
Solutions
 Pharmacy
Management
 Corporate
and
Elimination
 Consolidated 

Year Ended December 31, 2014

                   

Managed care and other revenue

 $673,996 $1,635,609 $471,300 $205,524 $(18,055)$2,968,374 

PBM and dispensing revenue

        844,512  (52,768) 791,744 

Cost of care

  (364,780) (1,385,858) (339,714) (16,298) 18,055  (2,088,595)

Cost of goods sold

        (784,758) 51,809  (732,949)

Direct service costs and other

  (160,341) (187,966) (71,785) (182,833) (120,573) (723,498)

Stock compensation expense(1)

  618  894  1,387  28,829  8,856  40,584 

Changes in fair value of contingent consideration(1)

  38      6,134    6,172 

Less: non-controlling interest segment profit (loss)(2)

    (5,087)       (5,087)

Segment profit (loss)

 $149,531 $67,766 $61,188 $101,110 $(112,676)$266,919 

Identifiable assets by business segment(3)

                   

Restricted cash

 $9,515 $204,166 $ $ $1,644 $215,325 

Net accounts receivable

  56,056  98,480  15,952  180,535  2,690  353,713 

Investments

  18,133  124,824      124,697  267,654 

Pharmaceutical inventory

        39,375    39,375 

Goodwill

  129,042  20,879  104,549  311,636    566,106 

Other intangible assets, net

  2,031  6,471  2,338  122,878    133,718 

(1)
Stock compensation expense and changes in present value of contingent consideration are included in direct service costs and other operating expenses, however these amounts are excluded from the computation of Segment Profit.

(2)
The non-controlling interest portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.

(3)
Identifiable assets by business segment are those assets that are used in the operations of each segment. The remainder of the Company's assets cannot be specifically identified by segment.

(1)

Stock compensation expense, changes in the fair value of contingent consideration recorded in relation to the acquisitions and impairment of intangible assets are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.


(2)

The non-controlling interest portion of AlphaCare’s segment profit (loss) is excluded from the computation of Segment Profit.

(3)

Identifiable assets by business segment are those assets that are used in the operations of each segment. The remainder of the Company’s assets cannot be specifically identified by segment.

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

10. Business Segment Information (Continued)

The following table reconciles Segment Profit to consolidated income before income taxes to Segment Profit for the years ended December 31, 2012, 20132015, 2016 and 20142017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

 

Income before income taxes

 

$

71,116

 

$

145,517

 

$

135,224

 

Stock compensation expense

 

 

50,384

 

 

37,422

 

 

39,116

 

Changes in fair value of contingent consideration

 

 

44,257

 

 

(104)

 

 

696

 

Impairment of intangible assets

 

 

 —

 

 

4,800

 

 

 —

 

Non-controlling interest segment (profit) loss

 

 

2,634

 

 

737

 

 

59

 

Depreciation and amortization

 

 

102,844

 

 

106,046

 

 

115,706

 

Interest expense

 

 

6,581

 

 

10,193

 

 

25,977

 

Interest and other income

 

 

(2,165)

 

 

(2,818)

 

 

(5,887)

 

Segment Profit

 

$

275,651

 

$

301,793

 

$

310,891

 

 
 2012 2013 2014 

Segment Profit

 $267,364 $259,446 $266,919 

Stock compensation expense

  (17,783) (21,252) (40,584)

Changes in fair value of contingent consideration

      (6,172)

Non-controlling interest segment profit (loss)

      (5,087)

Depreciation and amortization

  (60,488) (71,994) (91,070)

Interest expense

  (2,247) (3,000) (7,387)

Interest and other income

  2,019  1,985  1,301 

Income before income taxes

 $188,865 $165,185 $117,920 

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014

11. Selected Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 20132016 and 20142017 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

 

March 31, 

 

June 30, 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2016

    

2016

    

2016

 

Year Ended December 31, 2016

    

 

    

    

 

    

    

 

    

    

 

    

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other

 

$

676,461

 

$

699,861

 

$

751,589

 

$

775,031

 

PBM and dispensing

 

 

440,561

 

 

464,484

 

 

540,543

 

 

488,354

 

Total net revenue

 

 

1,117,022

 

 

1,164,345

 

 

1,292,132

 

 

1,263,385

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of care

 

 

457,631

 

 

472,529

 

 

480,243

 

 

472,211

 

Cost of goods sold

 

 

415,459

 

 

436,930

 

 

509,673

 

 

456,658

 

Direct service costs and other operating expenses (1) (2) (3)

 

 

192,456

 

 

214,077

 

 

229,094

 

 

240,985

 

Depreciation and amortization

 

 

25,007

 

 

25,580

 

 

26,885

 

 

28,574

 

Interest expense

 

 

1,748

 

 

1,994

 

 

3,038

 

 

3,413

 

Interest and other income

 

 

(683)

 

 

(692)

 

 

(741)

 

 

(702)

 

Total costs and expenses

 

 

1,091,618

 

 

1,150,418

 

 

1,248,192

 

 

1,201,139

 

Income before income taxes

 

 

25,404

 

 

13,927

 

 

43,940

 

 

62,246

 

Provision for income taxes

 

 

12,013

 

 

12,615

 

 

18,631

 

 

26,469

 

Net income

 

 

13,391

 

 

1,312

 

 

25,309

 

 

35,777

 

Less: net income (loss) attributable to non-controlling interest

 

 

154

 

 

(2,646)

 

 

(200)

 

 

602

 

Net income attributable to Magellan

 

$

13,237

 

$

3,958

 

$

25,509

 

$

35,175

 

Weighted average number of common shares outstanding—basic

 

 

23,631

 

 

23,516

 

 

23,052

 

 

22,556

 

Weighted average number of common shares outstanding—diluted

 

 

24,511

 

 

24,643

 

 

24,009

 

 

23,493

 

Net income per common share attributable to Magellan:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—basic:

 

$

0.56

 

$

0.17

 

$

1.11

 

$

1.56

 

Net income per common share—diluted:

 

$

0.54

 

$

0.16

 

$

1.06

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

 

March 31, 

 

June 30, 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2017

    

2017

    

2017

 

Year Ended December 31, 2017

    

 

    

    

 

    

    

 

    

    

 

    

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care and other

 

$

729,340

 

$

821,699

 

$

834,358

 

$

1,093,785

 

PBM and dispensing

 

 

576,283

 

 

597,440

 

 

585,048

 

 

600,630

 

Total net revenue

 

 

1,305,623

 

 

1,419,139

 

 

1,419,406

 

 

1,694,415

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of care

 

 

482,054

 

 

583,264

 

 

569,306

 

 

779,146

 

Cost of goods sold

 

 

542,633

 

 

562,355

 

 

543,682

 

 

563,240

 

Direct service costs and other operating expenses (4) (5)

 

 

221,486

 

 

231,372

 

 

227,372

 

 

261,653

 

Depreciation and amortization

 

 

26,976

 

 

27,731

 

 

28,189

 

 

32,810

 

Interest expense

 

 

4,148

 

 

4,900

 

 

7,663

 

 

9,266

 

Interest and other income

 

 

(949)

 

 

(1,071)

 

 

(1,781)

 

 

(2,086)

 

Total costs and expenses

 

 

1,276,348

 

 

1,408,551

 

 

1,374,431

 

 

1,644,029

 

Income before income taxes

 

 

29,275

 

 

10,588

 

 

44,975

 

 

50,386

 

Provision (benefit) for income taxes

 

 

11,806

 

 

5,661

 

 

11,739

 

 

(4,123)

 

Net income

 

 

17,469

 

 

4,927

 

 

33,236

 

 

54,509

 

Less: net income (loss) attributable to non-controlling interest

 

 

(278)

 

 

(573)

 

 

785

 

 

 —

 

Net income attributable to Magellan

 

$

17,747

 

$

5,500

 

$

32,451

 

$

54,509

 

Weighted average number of common shares outstanding—basic

 

 

23,012

 

 

23,108

 

 

23,282

 

 

23,921

 

Weighted average number of common shares outstanding—diluted

 

 

24,038

 

 

24,038

 

 

24,563

 

 

25,113

 

Net income per common share attributable to Magellan:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share—basic:

 

$

0.77

 

$

0.24

 

$

1.39

 

$

2.28

 

Net income per common share—diluted:

 

$

0.74

 

$

0.23

 

$

1.32

 

$

2.17

 


 
 For the Quarter Ended 
 
 March 31,
2013
 June 30,
2013
 September 30,
2013
 December 31,
2013
 

Fiscal Year Ended December 31, 2013

             

Net revenue:

             

Managed care and other

 $722,589 $746,720 $770,113 $823,627 

PBM and dispensing

  99,172  96,028  103,485  184,583 

Total net revenue

  821,761  842,748  873,598  1,008,210 

Costs and expenses:

             

Cost of care

  525,027  537,630  564,537  605,782 

Cost of goods sold

  93,512  90,175  97,503  174,411 

Direct service costs and other operating expenses(1)

  139,627  144,497  156,834  178,588 

Depreciation and amortization

  16,170  16,946  17,654  21,224 

Interest expense

  610  792  789  809 

Interest and other income

  (353) (358) (291) (983)

Total costs and expenses

  774,593  789,682  837,026  979,831 

Income before income taxes

  47,168  53,066  36,572  28,379 

Provision for income taxes

  19,110  21,586  (10,660) 9,888 

Net income

 $28,058 $31,480 $47,232 $18,491 

Weighted average number of common shares outstanding—basic

  27,110  26,829  26,990  27,285 

Weighted average number of common shares outstanding—diluted

  27,648  27,338  27,704  28,008 

Net income per common share—basic:

 $1.03 $1.17 $1.75 $0.68 

Net income per common share—diluted:

 $1.01 $1.15 $1.70 $0.67 

(1)

Includes stock compensation expense of $8,887, $9,510, $9,176 and $9,849 for the quarters ended March 31, June 30, September 30 and December 31, 2016, respectively.


(2)

Includes changes in fair value of contingent consideration of $(266), $463, $313 and $(614) for the quarters ended March 31, June 30, September 30 and December 31, 2016, respectively.

(3)

Includes impairment of intangible assets of $4,800 for the quarter ended June 30, 2016.

(4)

Includes stock compensation expense of $10,140, $11,371, $10,323 and $7,282 for the quarters ended March 31, June 30, September 30 and December 31, 2017, respectively.

(5)

Includes changes in fair value of contingent consideration of $(49), $252, $(834) and $1,327 for the quarters ended March 31, June 30, September 30 and December 31, 2017, respectively.

 SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Table of Contents


MAGELLAN HEALTH, INC. AND SUBSIDIARIES
(Parent Company Only)

NOTES TO CONSOLIDATEDCONDENSED BALANCE SHEETS AS OF DECEMBER 31,

(In thousands)

 

 

 

 

 

 

 

2016

    

2017

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

 2

 

$

 2

Accounts receivable

 

 —

 

 

157

Due from affiliates, net

 

 —

 

 

283,802

Other current assets

 

 —

 

 

32

Total Current Assets

 

 2

 

 

283,993

Investment in subsidiaries

 

1,206,555

 

 

1,830,555

Total Assets

$

1,206,557

 

$

2,114,548

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Accrued liabilities

$

496

 

$

7,227

Due to affiliates, net

 

106,342

 

 

 —

Current debt

 

 —

 

 

108,881

Total Current Liabilities

 

106,838

 

 

116,108

Long-term debt

 

 —

 

 

721,946

Total Liabilities

 

106,838

 

 

838,054

Preferred stock, par value $.01 per share

 

 

 

 

 

Authorized—10,000 shares at December 31, 2016 and December 31, 2017-Issued and outstanding-none

 

 —

 

 

 —

Ordinary common stock, par value $.01 per share

 

 

 

 

 

Authorized—100,000 shares at December 31, 2016 and December 31, 2017-Issued and outstanding-51,993 and 23,517 shares at December 31, 2016, respectively, and 52,973 and 24,202 shares at December 31, 2017, respectively

 

520

 

 

530

Other Stockholders’ Equity:

 

 

 

 

 

Additional paid-in capital

 

1,186,283

 

 

1,274,811

Retained earnings

 

1,289,288

 

 

1,399,495

Accumulated other comprehensive loss

 

(175)

 

 

(380)

Treasury stock, at cost, 28,476 and 28,771 shares at December 31, 2016 and December 31, 2017, respectively

 

(1,376,197)

 

 

(1,397,962)

Total Stockholders’ Equity

 

1,099,719

 

 

1,276,494

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity

$

1,206,557

 

$

2,114,548

See accompanying notes to condensed financial statements.

SCHEDULE I—CONDENSED FINANCIAL STATEMENTS (Continued)INFORMATION OF REGISTRANT

December 31, 2014

11. Selected Quarterly Financial Data (Unaudited) (Continued)

 
 For the Quarter Ended 
 
 March 31,
2014
 June 30,
2014
 September 30,
2014
 December 31,
2014
 

Fiscal Year Ended December 31, 2014

             

Net revenue:

             

Managed care and other

 $829,591 $682,274 $703,020 $753,489 

PBM and dispensing

  136,884  205,740  220,150  228,970 

Total net revenue

  966,475  888,014  923,170  982,459 

Costs and expenses:

             

Cost of care

  605,708  481,617  495,180  506,090 

Cost of goods sold

  125,298  192,566  202,180  212,905 

Direct service costs and other operating expenses(2)

  164,722  179,034  176,928  202,814 

Depreciation and amortization

  20,229  22,480  23,956  24,405 

Interest expense

  836  2,004  2,879  1,668 

Interest and other income

  (311) (275) (241) (474)

Total costs and expenses

  916,482  877,426  900,882  947,408 

Income before income taxes

  49,993  10,588  22,288  35,051 

Provision for income taxes

  25,613  6,261  (3,490) 15,305 

Net income

  24,380  4,327  25,778  19,746 

Less: net income (loss) attributable to non-controlling interest

  (1,340) (659) (1,355) (1,819)

Net income attributable to Magellan Health, Inc. 

 $25,720 $4,986 $27,133 $21,565 

Weighted average number of common shares outstanding—basic

  27,370  27,144  26,703  25,558 

Weighted average number of common shares outstanding—diluted

  28,051  27,765  27,242  26,382 

Net income per common share attributable to Magellan Health, Inc.:

             

Net income per common share—basic:

 $0.94 $0.18 $1.02 $0.84 

Net income per common share—diluted:

 $0.92 $0.18 $1.00 $0.82 

(1)
Includes stock compensation expense of $5,638, $4,602, $4,524 and $6,488 for the quarters ended March 31, June 30, September 30, and December 31, 2013, respectively.

(2)
Includes stock compensation expense of $4,472, $9,550, $11,961 and $14,601 for the quarters ended March 31, June 30, September 30, and December 31, 2014, respectively.

Table of Contents


MAGELLAN HEALTH, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31,

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

2015

    

2016

    

2017

Costs and expenses:

 

 

 

 

 

 

 

 

Direct service costs and other operating expenses

$

26,613

 

$

41,336

 

$

38,157

Interest expense

 

 —

 

 

 —

 

 

8,343

Interest and other income

 

 —

 

 

 —

 

 

(157)

Total costs and expenses

 

26,613

 

 

41,336

 

 

46,343

Loss before income taxes

 

(26,613)

 

 

(41,336)

 

 

(46,343)

Benefit for income taxes

 

10,045

 

 

16,072

 

 

17,918

Net loss before equity in subsidiaries

 

(16,568)

 

 

(25,264)

 

 

(28,425)

Equity in earnings from subsidiaries

 

47,981

 

 

103,143

 

 

138,632

Net income

 

31,413

 

 

77,879

 

 

110,207

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities

 

(119)

 

 

87

 

 

(205)

Comprehensive income

$

31,294

 

$

77,966

 

$

110,002

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed financial statements.

SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

MAGELLAN HEALTH, INC. (Parent Company Only)

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

(In thousands)

 

 

 

 

 

 

 

 

 

 

2015

    

2016

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net cash used in operating activities

$

(17,390)

 

$

(24,283)

 

$

(21,778)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Dividends received from/(capital contributions to) subsidiaries, net

 

166,442

 

 

106,235

 

 

(836,396)

Net cash provided by (used in) investing activities

 

166,442

 

 

106,235

 

 

(836,396)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 —

 

 

 —

 

 

841,736

Proceeds from exercise of stock options

 

54,091

 

 

24,547

 

 

44,355

Payments to acquire treasury stock

 

(204,427)

 

 

(106,806)

 

 

(21,765)

Payments on debt

 

 —

 

 

 —

 

 

(4,375)

Other

 

1,284

 

 

307

 

 

(1,777)

Net cash (used in) provided by financing activities

 

(149,052)

 

 

(81,952)

 

 

858,174

Net increase (decrease) in cash and cash equivalents

 

 —

 

 

 —

 

 

 —

Cash and cash equivalents at beginning of period

 

 2

 

 

 2

 

 

 2

Cash and cash equivalents at end of period

$

 2

 

$

 2

 

$

 2

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed financial statements.

SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

MAGELLAN HEALTH, INC. (Parent Company Only)

NOTES TO CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2017

1. Basis of Presentation

Magellan’s parent company condensed financial statements should be read in conjunction with its consolidated financial statements, and the accompanying notes thereto, included in this Form 10-K.

2. Subsidiary Transactions

Magellan’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries. When Magellan receives dividends from its subsidiaries, such amounts are recorded as a reduction to the investments in the respective subsidiaries.  Magellan made capital contributions to certain subsidiaries primarily to comply with minimum net worth requirements and to fund acquisitions. During 2015, 2016 and 2017, Magellan received cash dividends from its subsidiaries of $32.3 million, $29.3 million and $34.7 million, respectively.

3. Long Term Debt

See Note 5—“Long Term Debt and Capital Lease Obligations” to the consolidated financial statements for discussion of Magellan’s long-term debt obligations set forth elsewhere herein. 

As of December 31, 2017, the contractual maturities of the term loan under the 2017 Credit Agreement were as follows: 2018—$17.5 million; 2019—$17.5 million; 2020—$17.5 million; 2021—$17.5 million; and 2022—$275.6 million.  In 2024, Magellan’s $400.0 million aggregate principal amount of its 4.400% Senior Notes will mature.

MAGELLAN HEALTH, INC.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

Charged to

 

Charged to

 

 

 

 

 

 

 

Balance

 

 

 

Beginning

 

Costs and

 

Other

 

 

 

 

 

 

 

at End

 

Classification

    

of Period

    

Expenses

    

Accounts

    

Addition

    

Deduction

    

of Period

 

Year Ended December 31, 2015

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Allowance for doubtful accounts

 

$

4,047

 

$

(150)

(1)  

$

(11)

(2)  

$

 —

 

$

(640)

(4) 

$

3,246

 

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

3,246

 

 

2,498

(1)  

 

(67)

(2)  

 

 —

 

 

(33)

(4) 

 

5,644

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

5,644

 

 

4,557

(1)  

 

(1,248)

(2)  

 

424

(3) 

 

(755)

(4) 

 

8,622

 


(1)

Bad debt expense.

(2)

Recoveries of accounts receivable previously written off.

(3)

Acquisition of SWH.

(4)

Accounts written off.

Classification
 Balance at
Beginning
of Period
 Charged to
Costs and
Expenses
 Charged to
Other
Accounts
 Addition Deduction Balance
at End
of Period
 

Year Ended December 31, 2012

                   

Allowance for doubtful accounts

 $3,336 $1,947(1)$(346)(2)$ $(325)(4) 4,612 

Year Ended December 31, 2013

                   

Allowance for doubtful accounts

  4,612  1,205(1) (126)(2) 130(3) (374)(4) 5,447 

Year Ended December 31, 2014

                   

Allowance for doubtful accounts

  5,447  764(1) (1,934)(2) 107(3) (337)(4) 4,047 

2


(1)
Bad debt expense.

(2)
Recoveries of accounts receivable previously written off.

(3)
To establish a reserve on pre-acquisition balances.

(4)
Accounts written off.