UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q~~10‑Q

(Mark One)
~~(Mark One)~~ ☒
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, ~~2016~~2017
Or
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. ~~1-6639~~1‑6639

MAGELLAN HEALTH, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		~~58-1076937~~58‑1076937 (IRS Employer Identification No.)
4800 N. Scottsdale Rd, Suite 4400 Scottsdale, Arizona (Address of principal executive offices)		85251 (Zip code)

(602) ~~572-6050~~
572‑6050

(~~Registrant's~~Registrant’s telephone number, including area code)

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-T~~S‑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 whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, smaller reporting company, or ~~a non-accelerated filer.~~an emerging growth company. See definition of ~~"accelerated filer~~“large accelerated filer”, “accelerated filer”, “smaller reporting company” and ~~large accelerated filer"~~“emerging growth company” in Rule ~~12b-2~~12b‑2 of the Exchange Act. (Check one):


Large accelerated filerý ☒		Accelerated filero ☐		~~Non-accelerated~~Non‑accelerated filero ☐ (Do not check if a smaller reporting company)
	Smaller reporting companyo ☐		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-2~~12b‑2 of the Exchange Act). Yes o☐ No ý☒

The number of shares of the ~~registrant's~~registrant’s Ordinary Common Stock outstanding as of June 30, ~~2016~~2017 was ~~24,581,451.~~23,682,556

Table of Contents

FORM 10‑Q

~~FORM 10-Q~~

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

INDEX

			~~Page No.~~

		~~PART I—Financial Information:~~
~~Item 1:~~		~~Financial Statements~~		2
		Page No.
	PART I — Financial Information:
Item 1:	Financial Statements	2
	Consolidated Balance Sheets—December 31, ~~2015~~2016 and June 30, ~~2016~~2017		2
		Consolidated Statements of Income—For the Three and Six Months Ended June 30, ~~2015~~2016 and ~~2016~~2017		3
		Consolidated Statements of Comprehensive Income—For the Three and Six Months Ended June 30, ~~2015~~2016 and ~~2016~~2017		4
		Consolidated Statements of Cash Flows—For the Six Months Ended June 30, ~~2015~~2016 and ~~2016~~2017		5
		Notes to Consolidated Financial Statements		6
Item 2:2:		~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations		33	26
Item 3:3:		Quantitative and Qualitative Disclosures about Market Risk		47	37
Item 4:4:		Controls and Procedures		47	37
		PART ~~II—~~II — Other ~~Information:~~Information:
Item 1:1:		Legal Proceedings		48	38
Item ~~1A:~~1A:		Risk Factors		48	38
Item 2:2:		Unregistered Sales of Equity Securities and Use of Proceeds		48	38
Item 3:3:		Defaults Upon Senior Securities		49	38
Item 4:4:		Mine Safety Disclosures		49	39
Item 5:5:		Other Information		49	39
Item 6:6:		Exhibits ~~Exhibits~~		49	39
Signatures ~~Signatures~~		40
Exhibit Index		41
		50

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

December 31,
2015 June 30, 2016
(unaudited)
ASSETS

Current Assets:

Cash and cash equivalents
$ 115,432 $ 198,656
Restricted cash
133,597 80,642
Accounts receivable, less allowance for doubtful accounts of $3,246 and $3,384 at December 31, 2015 and June 30, 2016, respectively
428,644 506,980
Short-term investments (restricted investments of $277,556 and $246,968 at December 31, 2015 and June 30, 2016, respectively)
322,339 284,604
Pharmaceutical inventory
50,749 62,995
Other current assets (restricted deposits of $27,752 and $32,125 at December 31, 2015 and June 30, 2016, respectively)
46,921 75,808

Total Current Assets
1,097,682 1,209,685
Property and equipment, net
174,745 173,933
Restricted long-term investments
3,826 3,054
Deferred income taxes
26,836 25,364
Other long-term assets
11,207 38,736
Goodwill
621,390 634,613
Other intangible assets, net
133,374 116,012

Total Assets
$ 2,069,060 $ 2,201,397

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable
$ 86,484 $ 71,440
Accrued liabilities
139,726 171,102
Short-term contingent consideration
91,623 594
Medical claims payable
250,449 216,793
Other medical liabilities
136,939 136,637
Current maturities of long-term debt and capital lease obligations
19,014 50,516

Total Current Liabilities
724,235 647,082
Long-term debt and capital lease obligations
238,295 426,175
Tax contingencies
12,677 13,681
Long-term contingent consideration
803 3,214
Deferred credits and other long-term liabilities
20,930 21,975

Total Liabilities
996,940 1,112,127

Redeemable non-controlling interest
5,937 4,368
Preferred stock, par value $.01 per share

Authorized—10,000 shares at December 31, 2015 and June 30, 2016—Issued and outstanding—none
— —
Ordinary common stock, par value $.01 per share

Authorized—100,000 shares at December 31, 2015 and June 30, 2016—Issued and outstanding—51,340 shares and 24,692 shares at December 31, 2015, respectively, and 51,605 and 24,581 shares at June 30, 2016, respectively
513 516
Multi-Vote common stock, par value $.01 per share

Authorized—40,000 shares at December 31, 2015 and June 30, 2016—Issued and outstanding—none
— —
Other Stockholders' Equity:

Additional paid-in capital
1,124,013 1,150,756
Retained earnings
1,211,310 1,228,505
Accumulated other comprehensive loss
(262 ) (26 )
Ordinary common stock in treasury, at cost, 26,648 shares and 27,024 shares at December 31, 2015 and June 30, 2016, respectively
(1,269,391 ) (1,294,849 )

Total Stockholders' Equity
1,066,183 1,084,902

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity
$ 2,069,060 $ 2,201,397


			June 30,
	December 31,		2017
	2016			(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ($81,776 and $83,061 restricted at December 31, 2016 and June 30, 2017, respectively)	$	304,508	$	281,333
Accounts receivable, less allowance of $5,644 and $7,402 at December 31, 2016 and June 30, 2017, respectively		606,764		628,539
Short-term investments ($227,795 and $225,443 restricted at December 31, 2016 and June 30, 2017, respectively)		297,493		300,436
Pharmaceutical inventory		58,995		59,738
Other current assets ($38,785 and $32,997 restricted at December 31, 2016 and June 30, 2017, respectively)		51,507		73,259
Total Current Assets		1,319,267		1,343,305
Property and equipment, net		172,524		165,088
Long-term investments ($6,306 and $8,395 restricted at December 31, 2016 and June 30, 2017, respectively)		7,760		8,395
Deferred income taxes		3,125		4,911
Other long-term assets		12,725		26,845
Goodwill		742,054		745,997
Other intangible assets, net		186,232		165,102
Total Assets	$	2,443,687	$	2,459,643
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	95,635	$	70,735
Accrued liabilities		202,176		179,053
Short-term contingent consideration		9,354		9,769
Medical claims payable		184,136		198,343
Other medical liabilities		197,856		189,628
Current debt and capital lease obligations		403,693		428,791
Total Current Liabilities		1,092,850		1,076,319
Long-term debt and capital lease obligations		214,686		201,148
Tax contingencies		13,981		15,168
Long-term contingent consideration		1,799		1,587
Deferred credits and other long-term liabilities		15,882		17,764
Total Liabilities		1,339,198		1,311,986
Redeemable non-controlling interest		4,770		3,919
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2016 and June 30, 2017-Issued and outstanding-none		—		—
Ordinary common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2016 and June 30, 2017-Issued and outstanding-51,993 and 23,517 shares at December 31, 2016, respectively, and 52,235 and 23,683 shares at June 30, 2017, respectively		520		522
Other Stockholders’ Equity:
Additional paid-in capital		1,186,283		1,212,427
Retained earnings		1,289,288		1,312,535
Accumulated other comprehensive loss		(175)		(174)
Treasury stock, at cost, 28,476 and 28,552 shares at December 31, 2016 and June 30, 2017, respectively		(1,376,197)		(1,381,572)
Total Stockholders’ Equity		1,099,719		1,143,738
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity	$	2,443,687	$	2,459,643

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2017		2016		2017
Net revenue:
Managed care and other	$	699,861	$	821,699	$	1,376,322	$	1,551,039
PBM and dispensing		464,484		597,440		905,045		1,173,723
Total net revenue		1,164,345		1,419,139		2,281,367		2,724,762
Costs and expenses:
Cost of care		472,529		583,264		930,160		1,065,318
Cost of goods sold		436,930		562,355		852,389		1,104,988
Direct service costs and other operating expenses (1)(2)(3)		214,077		231,372		406,533		452,858
Depreciation and amortization		25,580		27,731		50,587		54,707
Interest expense		1,994		4,900		3,742		9,048
Interest and other income		(692)		(1,071)		(1,375)		(2,020)
Total costs and expenses		1,150,418		1,408,551		2,242,036		2,684,899
Income before income taxes		13,927		10,588		39,331		39,863
Provision for income taxes		12,615		5,661		24,628		17,467
Net income		1,312		4,927		14,703		22,396
Less: net income (loss) attributable to non-controlling interest		(2,646)		(573)		(2,492)		(851)
Net income attributable to Magellan	$	3,958	$	5,500	$	17,195	$	23,247
Net income per common share attributable to Magellan:
Basic (See Note B)	$	0.17	$	0.24	$	0.73	$	1.01
Diluted (See Note B)	$	0.16	$	0.23	$	0.70	$	0.97

Three Months Ended
June 30, Six Months Ended
June 30,

2015 2016 2015 2016
Net revenue:

Managed care and other
$ 776,240 $ 699,861 $ 1,524,890 $ 1,376,322
PBM and dispensing
381,367 464,484 613,685 905,045

Total net revenue
1,157,607 1,164,345 2,138,575 2,281,367

Cost and expenses:

Cost of care
568,288 472,529 1,090,616 930,160
Cost of goods sold
361,409 436,930 579,616 852,389
Direct service costs and other operating expenses(1)(2)(3)
191,455 214,077 395,905 406,533
Depreciation and amortization
25,022 25,580 48,518 50,587
Interest expense
1,653 1,994 3,279 3,742
Interest income
(500 ) (692 ) (966 ) (1,375 )

Total costs and expenses
1,147,327 1,150,418 2,116,968 2,242,036

Income before income taxes
10,280 13,927 21,607 39,331
Provision for income taxes
5,987 12,615 10,120 24,628

Net income
4,293 1,312 11,487 14,703
Less: net (loss) income attributable to non-controlling interest
(350 ) (2,646 ) (444 ) (2,492 )

Net income attributable to Magellan Health, Inc.
$ 4,643 $ 3,958 $ 11,931 $ 17,195

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

Basic (See Note B)
$ 0.18 $ 0.17 $ 0.47 $ 0.73
Diluted (See Note B)
$ 0.17 $ 0.16 $ 0.45 $ 0.70

~~(1)~~: Includes stock compensation expense of $13,795 and $9,510 for the three months ended June 30, 2015 and 2016, respectively, and $27,696 and $18,397 for the six months ended June 30, 2015 and 2016, respectively.
~~(2)~~: Includes changes in fair value of contingent consideration of $2,567 and $463 for the three months ended June 30, 2015 and 2016, respectively, and $17,536 and $197 for the six months ended June 30, 2015 and 2016, respectively.
~~(3)~~: ~~Includes impairment of intangible assets of $4,800 for the three and six months ended June 30, 2016.~~

(1)

Includes stock compensation expense of $9,510 and $11,371 for the three months ended June 30, 2016 and 2017, respectively, and $18,397 and $21,511 for the six months ended June 30, 2016 and 2017, respectively.

(2)

Includes changes in fair value of contingent consideration of $463 and $252 for the three months ended June 30, 2016 and 2017, respectively, and $197 and $203 for the six months ended June 30, 2016 and 2017, respectively.

(3)

Includes impairment of intangible assets of $4,800 for the three and six months ended June 30, 2016.

See accompanying notes to consolidated financial statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

Three Months
Ended
June 30, Six Months Ended
June 30,

2015 2016 2015 2016
Net income
$ 4,293 $ 1,312 $ 11,487 $ 14,703
Other comprehensive income:

Unrealized (losses) gains on available-for-sale securities(1)
(93 ) (2 ) (24 ) 236

Comprehensive income
4,200 1,310 11,463 14,939
Less: comprehensive (loss) income attributable to non-controlling interest
(350 ) (2,646 ) (444 ) (2,492 )

Comprehensive income attributable to Magellan Health, Inc.
$ 4,550 $ 3,956 $ 11,907 $ 17,431

~~(1)~~: Net of income tax (benefit) provision of $(48) and $1 for the three months ended June 30, 2015 and 2016, respectively, and $(2) and $147 for the six months ended June 30, 2015 and 2016, respectively.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2017		2016		2017
Net income	$	1,312	$	4,927	$	14,703	$	22,396
Other comprehensive income:
Unrealized (losses) gains on available-for-sale securities (1)		(2)		22		236		1
Comprehensive income		1,310		4,949		14,939		22,397
Less: comprehensive income (loss) attributable to non-controlling interest		(2,646)		(573)		(2,492)		(851)
Comprehensive income attributable to Magellan	$	3,956	$	5,522	$	17,431	$	23,248

(1)

Net of income tax provision of $1 and $14 for the three months ended June 30, 2016 and 2017, respectively, and $147 and $2 for the six months ended June 30, 2016 and 2017, respectively.

See accompanying notes to consolidated financial statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30,

(Unaudited)

(In thousands)


	2015			2016			2016		2017
Cash flows from operating activities:
Net income	$	11,487		$	14,703		$	14,703	$	22,396
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		48,518			50,587			50,587		54,707
Non-cash impairment of intangible asset		—			4,800
Non-cash impairment of intangible assets								4,800		—
Non-cash interest expense		197			204			204		578
Non-cash stock compensation expense		27,696			18,397			18,397		21,511
Non-cash income tax (benefit) provision		(3,323	)		1,570
Non-cash income tax expense (benefit)								1,570		(1,520)
Non-cash amortization on investments		2,966			3,147			3,147		2,094
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash		84,004			53,528
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net		(32,064	)		(74,430	)		(74,430)		(21,859)
Pharmaceutical inventory		(2,919	)		(12,246	)		(12,246)		(1,188)
Other assets		(31,551	)		(56,460	)		(56,460)		(21,974)
Accounts payable and accrued liabilities		(72,439	)		14,050			14,522		(59,372)
Medical claims payable and other medical liabilities		45,544			(34,460	)		(34,460)		5,978
Contingent consideration		36,245			(50,904	)		(50,904)		203
Tax contingencies		(578	)		647			647		764
Deferred credits and other long-term liabilities		(1,059	)		663			663		1,882
Other		(48	)		23			23		(364)

Net cash provided by (used in) operating activities		112,676			(66,181	)

Net cash (used in) provided by operating activities								(119,237)		3,836
Cash flows from investing activities:
Capital expenditures		(37,653	)		(30,522	)		(30,522)		(26,797)
Acquisitions and investments in businesses, net of cash acquired		(55,943	)		(16,050	)		(15,477)		(3,200)
Purchase of investments		(293,348	)		(211,061	)		(211,061)		(238,814)
Maturity of investments		215,984			246,786			246,786		233,143

Net cash used in investing activities		(170,960	)		(10,847	)		(10,274)		(35,668)

Cash flows from financing activities:
Proceeds from issuance of debt		—			225,000			225,000		200,000
Payments to acquire treasury stock		(68,783	)		(25,458	)		(25,458)		(5,000)
Proceeds from exercise of stock options and warrants		49,170			9,691			9,691		5,946
Payments on long-term debt and capital lease obligations		(8,299	)		(9,401	)
Payments on debt and capital lease obligations								(9,401)		(190,978)
Payments on contingent consideration		(4,439	)		(39,958	)		(39,958)		—
Tax benefit from exercise of stock options and vesting of stock awards		3,774			472
Other		(616	)		(94	)		(94)		(1,311)

Net cash (used in) provided by financing activities		(29,193	)		160,252

Net (decrease) increase in cash and cash equivalents		(87,477	)		83,224
Net cash provided by financing activities								159,780		8,657
Net increase (decrease) in cash and cash equivalents								30,269		(23,175)
Cash and cash equivalents at beginning of period		255,303			115,432			249,029		304,508

Cash and cash equivalents at end of period	$	167,826		$	198,656		$	279,298	$	281,333




Supplemental cash flow data:
Non-cash investing activites:
Non-cash investing activities:
Property and equipment acquired under capital leases	$	1,987		$	4,010		$	4,010	$	2,418

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~JUNE~~

June 30, ~~2016~~

2017

(Unaudited)

NOTE A—General

Basis of Presentation

The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation ~~("Magellan"~~(“Magellan”), include Magellan and its subsidiaries (together with Magellan, the ~~"Company"~~“Company”). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange ~~Commission's~~Commission’s (the ~~"SEC"~~“SEC”) instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three and six months ended June 30, ~~2016~~2017 are not necessarily indicative of the results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation.

These unaudited consolidated financial statements should be read in conjunction with the ~~Company's~~Company’s audited consolidated financial statements for the year ended December 31, ~~2015~~2016 and the notes thereto, which are included in the ~~Company's~~Company’s Annual Report on Form 10-K filed with the SEC on February ~~29, 2016.~~24, 2017.

Business Overview

The Company is engaged in the healthcare management business, and is focused on managing the fastest growing, most complex areas of health, including special populations, complete pharmacy benefits and other specialty areas of healthcare. The Company develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact health outcomes and optimize the cost of care for the members 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 ~~("TPAs"~~(“TPAs”).

Healthcare

Healthcare includes the ~~Company's:~~Company’s: (i) management of behavioral healthcare services and employee assistance program ~~("EAP"~~(“EAP”) services, (ii) management of other specialty areas including diagnostic imaging and musculoskeletal management, and (iii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations, delivered through Magellan Complete Care ~~("MCC"~~(“MCC”). These special populations include individuals with serious mental illness ~~("SMI"~~(“SMI”), dual eligibles, ~~long-term~~long‑term services and supports and other populations with unique and often complex healthcare needs.

The ~~Company's~~Company’s coordination and management of these healthcare services are 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 improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

more affordable for our customers. 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~~non‑medical counseling under certain government contracts.

The Healthcare ~~segment's~~segment’s commercial division serves a variety of customers, with services, inclusive of special population management, provided under contracts with health plans and accountable care organizations for some or all of their commercial, Medicaid and Medicare members, as well as with employers. The government division contracts with local, state and federal governmental agencies to provide services to recipients under Medicaid, Medicare and other government programs.

The Company provides its management services primarily through: (i) ~~risk-based~~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 and (ii) administrative services only ~~("ASO"~~(“ASO”) products, where the Company provides

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

services such as utilization review, claims administration and/or provider network management, but does not assume responsibility for the cost of the treatment services.

Pharmacy Management

The Pharmacy Management segment ("(“Pharmacy ~~Management"~~Management”) comprises products and solutions that provide clinical and financial management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy ~~Management's~~Management’s services include: (i) pharmacy benefit management ~~("PBM"~~(“PBM”) services; (ii) pharmacy benefit administration ~~("PBA"~~(“PBA”) for state Medicaid and other government sponsored programs; (iii) pharmaceutical dispensing operations; (iv) clinical and formulary management programs; (v) medical pharmacy management programs; and (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.

Pharmacy ~~Management's~~Management’s services are provided under contracts with health plans, employers, MCOs, state Medicaid programs, Medicare Part D and other government agencies, and encompass ~~risk-based~~risk‑based and ~~fee-for-service ("FFS"~~fee‑for‑service (“FFS”) arrangements. In addition, Pharmacy Management has subcontract arrangements to provide PBM services for certain Healthcare customers.

Corporate

This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments ~~including~~that are largely associated with costs related to being a publicly traded company. In order to better represent the operations of the Company's segments, effective January 1, 2016, the Company began allocating operational and corporate support costs to the Healthcare and Pharmacy segments. These costs, which were historically reported in the Corporate segment, include operational support functions such as sales and marketing and information technology, as well as corporate support functions such as executive, finance and human resources. Prior period balances have been reclassified to reflect this change.

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~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued Accounting Standards Update ~~("ASU"~~(“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 supersede virtually all existing revenue guidance under GAAP. In March 2016, the FASB issued ASU 2016-08, ~~"Revenue~~“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~" ("~~” (“ASU ~~2016-08"~~2016-08”), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU NoNo. 2016-10, ~~"Revenue~~“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and ~~Licensing" ("~~Licensing” (“ASU ~~2016-10"~~2016-10”), which clarifies the performance obligations and licensing implementation guidance of ASU 2014-09. In July 2015, the FASB ~~approved to defer~~deferred the effective date of ASU 2014-09. ~~These ASUs are effective for calendar years beginning after~~In December ~~15, 2017. 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,~~2016, 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" ("2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU ~~2014-12"~~2016-20”), which ~~revises the accounting treatment for stock compensation tied to performance targets.~~amends various aspects of ASU 2014-09. The amendments in this ASU are effective for calendar years beginning after December 15, 2015 and were adopted by the Company during the quarter ended March 31, 2016. The effect of this guidance was immaterial to 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 beginning after December 15, 2016 and for annual and interim reporting periods thereafter. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position or cash flows.

In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amendments in this ASUthese ASUs are effective for annual and interim reporting periods of public entities beginning after December ~~31, 2015~~15, 2017. The Company has identified its major revenue streams and ~~were adopted by~~is in the process of completing formal contract reviews. While the Company ~~during~~continues to assess all of the ~~quarter ended March 31, 2016. The effect~~potential impacts of ~~this guidance was immaterial to~~these ASUs, the ~~Company's~~Company does not expect implementation of these ASUs will have a significant impact on the Company’s consolidated results of operations, financial position orand cash flows.

~~In April 2015,~~ The Company continues to assess the ~~FASB issued ASU No. 2015-05, "Intangibles—Goodwill~~disclosure requirements prescribed by these ASUs and ~~Other—Internal—Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which provides guidance~~it may be required to ~~clarify~~expand its disclosures. The Company intends to adopt the ~~customer's accounting for fees~~

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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

paid in a cloud computing arrangement. The amendments in this ASU are effective for annual and interim reporting periods of public entities beginning after December 31, 2015 and were adopted by the Companynew standard on a ~~prospective basis during the quarter ended March 31, 2016. The effect of this guidance was immaterial to the Company's consolidated results of operations, financial position or cash flows.~~modified retrospective basis.

In July 2015, the FASB issued ASU No. ~~2015-11, "Inventory~~2015‑11, “Inventory (Topic 330): Simplifying the Measurement of ~~Inventory" ("~~Inventory” (“ASU ~~2015-11"~~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.~~2016 and was adopted by the Company in the quarter ended March 31, 2017. The effect of this guidance ~~is not expected~~was immaterial to ~~materially impact~~ the ~~Company's~~Company’s consolidated results of operations, financial position orand cash flows.

In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments" ("ASU 2015-16"). The amendment under this ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU are effective for calendar years beginning after December 15, 2015 and were adopted by the Company during the quarter ended March 31, 2016. The effect of this guidance is immaterial to the Company's consolidated results of operations, financial position or cash flows.

In February 2016, the FASB issued ASU No. ~~2016-02, "Leases" ("~~2016‑02, “Leases” (“ASU ~~2016-02"~~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

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(Unaudited)

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's~~Company’s consolidated results of operations, financial position and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)" ("ASU 2016-09"). This ASU amends the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for annual and interim reporting period 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 operations, financial position and cash flows.

In June 2016, the FASB issued ASU No. 2016-13, ~~"Financial Instruments—Credit~~“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments" ("~~Instruments” (“ASU ~~2016-13"~~2016-13”). This ASU amends the accounting on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 31, 2018. The Company is currently assessing the potential impact this ASU will have on the ~~Company's~~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 is currently assessing the potential impact this ASU will have 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 the Company’s consolidated results of operations, financial position and cash flows.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments in this ASU clarify whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. 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 operations, financial position 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 effective 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’s consolidated results of operations, financial position and 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 is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~JUNE~~June 30, ~~2016~~2017

(Unaudited)

~~NOTE A—General (Continued)~~

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's~~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~~in which terms to the amendment are ~~finalized, and that the amendment is executed.~~finalized. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated ~~$668.6 million and $1,314.9 million for the three and six months ended June 30, 2015, respectively and~~ $570.8 million and $1,115.8 million for the three and six months ended June 30, 2016, respectively, and $647.2 million and $1,206.3 million for the three and six months ended June 30, 2017, respectively.

~~Fee-For-Service,~~Fee‑For‑Service, Fixed Fee and ~~Cost-Plus~~Cost‑Plus Contracts. The Company has certain 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 the Patient Protection and Affordable Care Act health insurer fee ("(“HIF ~~fee"~~fee”) billed 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 ~~$86.7 million and $163.6 million for the three and six months ended June 30, 2015, respectively, and~~ $102.6 million and $205.6 million for the three and six months ended June 30, 2016, respectively, and $144.2 million and $287.9 million for the three and six months ended June 30, 2017, 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~~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 approximated ~~$16.9 million and $32.8 million for the three and six months ended June 30, 2015, respectively, and~~ $21.3 million and $41.1 million for the three and six months ended June 30, 2016, respectively, and $21.2 million and $43.5 million for the three and six months ended June 30, 2017, respectively.

In relation to the ~~Company's~~Company’s PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The

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~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

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 is 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~~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)~~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~~client’s members. If the Company enters into a contract where it is only an administrator, and does

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(Unaudited)

not assume any of the risks previously noted, revenue will be recognized on a net basis. PBM revenues approximated ~~$330.0 million and $515.8 million for the three and six months ended June 30, 2015, respectively, and~~ $362.0 million and $697.0 million for the three and six months ended June 30, 2016, respectively, and $436.0 million and $868.9 million for the three and six months ended June 30, 2017, respectively.

Dispensing Revenue. The Company recognizes dispensing revenue, which includes the ~~co-payments~~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~~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 ~~$51.4 million and $97.9 million for the three and six months ended June 30, 2015, respectively, and~~ $54.4 million and $109.7 million for the three and six months ended June 30, 2016, respectively, and $53.2 million and $108.4 million for the three and six months ended June 30, 2017, respectively.

Medicare Part D.The Company is contracted with the Centers for Medicare and Medicaid ~~Services ("CMS"~~(“CMS”) as a Prescription Drug Plan ~~("PDP"~~(“PDP”) to provide prescription drug benefits to Medicare beneficiaries. Net revenues include ~~insurance~~ 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 ~~insurance~~ premium revenues on a monthly basis on a per member basis for covered members. In addition to these premiums, net ~~revenues~~revenue includes certain payments from the members based on the ~~members'~~members’ actual prescription claims, including co-payments, coverage gap benefits, deductibles and co-insurance (collectively, ~~"Member Responsibilities"~~“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. ~~The~~ CMS also provides an annual risk corridor adjustment which compares the

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~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

~~Company's~~ Company’s actual drug costs incurred to the premiums received. Based on the risk corridor adjustment, the Company may 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 the amount is included in net revenues with a corresponding receivable or payable on the consolidated balance sheets. Medicare Part D revenues approximated ~~$48.1~~$65.2 million and ~~$98.4~~$115.5 million for the three and six months ended June 30, ~~2016.~~2016, respectively, including co-payments, which are included in PBM revenues above, of $7.6 million and $17.1 million for the three and six months ended June 30, 2016, respectively. Medicare Part D revenues approximated $124.5 million and $236.1 million for the three and six months ended June 30, 2017, respectively, including co-payments, which are included in PBM revenues above, of $16.3 million and $39.7 million for the three and six months ended June 30, 2017, respectively. As of December 31, 2016 and June 30, 2017, the Company had $117.5 million and $146.3 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~~Company’s net revenues

The Company provides behavioral healthcare management and other related services to members in the state of Florida pursuant to contracts with the State of Florida (the "Florida Contracts"). 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 receive integrated healthcare services, and in 2014 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~~to Medicaid enrollees in the ~~new program ("~~state of Florida (“the Florida ~~Medicaid Contract"~~Contract”). The Florida ~~Medicaid~~ 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 ~~Medicaid~~ 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~~Contract generated net revenues of ~~$218.0~~$267.8 million and ~~$267.8~~$300.1 million for the six months ended June 30, ~~2015~~2016 and ~~2016,~~2017, respectively.

~~Through December 31, 2015, the Company provided behavioral healthcare management and other related services to members in the state~~

Customers exceeding ten percent of segment net revenues

In addition to the Florida ~~Contracts and the Iowa Contracts~~Contract, previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the six months ended June 30, ~~2015~~2016 and ~~2016~~2017 (in thousands):


Segment	Term Date	2016		2017

Healthcare
None

Pharmacy Management
Customer A	December 31, 2016 (1)	$	193,956	$	2,690	*
Customer B	March 31, 2019		—		184,364

* Revenue amount did not exceed 10 percent of net revenues for the respective segment for the year presented. Amount is shown for comparative purposes only.

(1)

A vast majority of this customer’s revenues were generated from drug acquisition costs related to PBM services which terminated on September 1, 2016. The Company continues to provide specialty distribution services to the customer and is in negotiations with the customer to extend this contract.

Segment
Term Date 2015 2016
Healthcare

None

Pharmacy Management

Customer A
December 31, 2016 $ 158,132 $ 193,956

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

Level 3—Unobservable inputs that reflect the ~~Company's~~Company’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's~~Company’s data.


	June 30, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (3)	$	—	$	116,659	$	—	$	116,659
Investments:
U.S. Government and agency securities		5,971		—		—		5,971
Obligations of government-sponsored enterprises (4)		—		26,229		—		26,229
Corporate debt securities		—		270,255		—		270,255
Taxable municipal bonds		—		5,026		—		5,026
Certificates of deposit		—		1,350		—		1,350
Total assets held at fair value	$	5,971	$	419,519	$	—	$	425,490

Liabilities
Contingent consideration	$	—	$	—	$	11,356	$	11,356
Total liabilities held at fair value	$	—	$	—	$	11,356	$	11,356

June 30, 2016

Level 1 Level 2 Level 3 Total
Assets

Cash and cash equivalents(4)
$ — $ 65,785 $ — $ 65,785
Restricted cash(5)
— 59,706 — 59,706
Investments:

U.S. government and agency securities
5,132 — — 5,132
Obligations of government-sponsored enterprises(6)
— 54,708 — 54,708
Corporate debt securities
— 226,668 — 226,668
Certificates of deposit
— 1,150 — 1,150

Total assets held at fair value
$ 5,132 $ 408,017 $ — $ 413,149

Liabilities

Contingent consideration
$ — $ — $ 3,808 $ 3,808

Total liabilities held at fair value
$ — $ — $ 3,808 $ 3,808

~~(1)~~: ~~Excludes $109.4 million of cash held in bank accounts by the Company.~~
~~(2)~~: ~~Excludes $50.8 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 $164.7 million of cash held in bank accounts by the Company.

(4)

Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

~~(3)~~: ~~Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.~~
~~(4)~~: ~~Excludes $132.9 million of cash held in bank accounts by the Company.~~
~~(5)~~: ~~Excludes $20.9 million of restricted cash held in bank accounts by the Company.~~
~~(6)~~: ~~Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.~~

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

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's~~Company’s investments are classified as ~~"available-for-sale"~~“available-for-sale” and are carried at fair value.

The contingent consideration liability reflects the fair value of potential future payments related to the ~~CDMI, LLC ("CDMI"),~~ Cobalt Therapeutics, LLC ~~("Cobalt"~~(“Cobalt”), ~~4D Pharmacy Management Systems, Inc. ("4D") and~~ The Management Group, LLC ~~("TMG"~~(“TMG”) and Armed Forces Services Corporation (“AFSC”) acquisitions. The ~~CDMI~~Cobalt, TMG and AFSC 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 4D purchase agreement provided for potential contingent payments up to a maximum aggregate amount of $30.0 million. The potential future payments were contingent upon the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and the retention of certain business. The Cobalt and TMG purchase agreements ~~also~~ provide for potential contingent payments of up to a maximum of $6.0 million, ~~and~~ $15.0 million and $10.0 million, respectively. As of June 30, 2017, there are remaining potential future payments of $5.0 million, $15.0 million and $10.0 million for Cobalt, TMG and AFSC, respectively.

As of the balance sheet date, the fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, 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.

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~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

For CDMI, the Company estimated undiscounted future contingent payments of $90.1 million as of December 31, 2015, which the Company settled in June 2016. For 4D, the Company estimated net undiscounted future contingent payments of $1.0 million as of December 31, 2015, which the Company settled in February 2016. For Cobalt and TMG the The unobservable inputs used in the fair value measurement include the discount rate, probabilities of payment and projected payment dates.

As of December 31, 2016 and June 30, 2017, the Company estimated undiscounted future contingent payments of $12.7 million and $12.3 million, respectively. The net decrease was mainly due to changes in operational forecasts and probabilities of payment. As of June 30, 2017, the aggregate amounts and projected dates of future potential contingent consideration payments were $10.0 million in 2017 and $2.3 million in 2020.

As of December 31, 2016, the fair value of the short-term and long-term contingent consideration was ~~$0.6~~$9.4 million and ~~$3.2~~$1.8 million, respectively, and is included in short-term contingent consideration and long-term contingent consideration, respectively, in the consolidated balance sheets. As of June 30, 2017, the fair value of the short-term and long-term contingent consideration was $9.8 million and $1.6 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 $0.5 million and $0.2 million for the three and six months ended June 30, 2016, respectively, and $0.3 million and $0.2 million for the three and six months ended June 30, 2017, respectively, which ~~was~~were recorded as direct service costs and other operating expenses in the consolidated statements of income. The ~~increase was~~decreases were mainly a result of changes in present value and the estimated undiscounted liability.

The following table summarizes the ~~Company's~~Company’s liability for contingent consideration for the six months ended June 30, 2017 (in thousands):

June 30,
2016
Balance as of beginning of period
$ 92,426
Acquistion of TMG
2,244
Change in fair value
197
Net payments
(91,059 )

Balance as of end of period
$ 3,808


	June 30,
	2017
Balance as of beginning of period	$	11,153
Changes in fair value		203
Payments		—
Balance as of end of period	$	11,356

Cash and Cash Equivalents

Cash equivalents are short-term, highly liquid interest-bearing investments with maturity dates of three months or less when purchased, consisting primarily of money market instruments. At June 30, ~~2016,~~2017, the ~~Company's~~Company’s excess capital and undistributed earnings for the ~~Company's~~Company’s regulated subsidiaries of ~~$78.5~~$116.6 million are included in cash and cash equivalents.

~~Investments~~

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

Investments

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-temporary~~other‑than‑temporary and is recorded to ~~other-than-temporary~~other‑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-temporary~~other‑than‑temporary impairment is recognized in ~~other-than-temporary~~other‑than‑temporary impairment losses recognized in income in the consolidated statements of income and the ~~non-credit~~non‑credit component of the ~~other-than-temporary~~other‑than‑temporary impairment is recognized in other comprehensive income.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

As of December 31, ~~2015~~2016 and June 30, ~~2016,~~2017, there were no unrealized losses that the Company determined to be ~~other-than-temporary.~~other‑than‑temporary. No realized gains or losses were recorded for the six months ended June 30, ~~2015~~2016 or ~~2016.~~2017. The following is a summary of ~~short-term~~short‑term and ~~long-term~~long‑term investments at December 31, ~~2015~~2016 and June 30, ~~2016~~2017 (in thousands):

December 31, 2015

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
U.S. government and agency securities
$ 5,524 $ — $ (10 ) $ 5,514
Obligations of government-sponsored enterprises(1)
50,575 4 (54 ) 50,525
Corporate debt securities
269,340 — (364 ) 268,976
Certificates of deposit
1,150 — — 1,150

Total investments at December 31, 2015
$ 326,589 $ 4 $ (428 ) $ 326,165


	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


	June 30, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	5,994	$	—	$	(23)	$	5,971
Obligations of government-sponsored enterprises (2)		26,245		1		(17)		26,229
Corporate debt securities		270,493		43		(281)		270,255
Taxable municipal bonds		5,034		—		(8)		5,026
Certificates of deposit		1,350		—		—		1,350
Total investments at June 30, 2017	$	309,116	$	44	$	(329)	$	308,831

(1)

Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.

(2)

Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

June 30, 2016

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
U.S. government and agency securities
$ 5,126 $ 6 $ — $ 5,132
Obligations of government-sponsored enterprises(2)
54,688 20 — 54,708
Corporate debt securities
226,735 26 (93 ) 226,668
Certificates of deposit
1,150 — — 1,150

Total investments at June 30, 2016
$ 287,699 $ 52 $ (93 ) $ 287,658

~~(1)~~: ~~Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.~~
~~(2)~~: ~~Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.~~

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

The maturity dates of the ~~Company's~~Company’s investments as of June 30, ~~2016~~2017 are summarized below (in thousands):


	Amortized		Estimated
	Cost		Fair Value
2017	$	180,496	$	180,389
2018		123,956		123,780
2019		4,664		4,662
Total investments at June 30, 2017	$	309,116	$	308,831

Amortized
Cost Estimated
Fair Value
2016
$ 215,467 $ 215,426
2017
69,737 69,730
2018
2,495 2,502

Total investments at June 30, 2016
$ 287,699 $ 287,658

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

moratorium on the HIF fee, suspending its application for 2017. The HIF fee is scheduled to go back into effect for 2018. For ~~2015,~~2016 the HIF fees were $26.5 million which has been paid. ~~For 2016, the HIF fees are estimated to be $26.3 million, and are included in accrued liabilities in the consolidated balance sheets.~~ Of ~~these amounts, $6.3 million and $13.2 million was expensed in the three and six months ended June 30, 2015 and~~this amount, $6.1 million and $13.2 million was expensed in the three and six months ended June 30, 2016, ~~respectively,~~ which was included in direct service costs and other operating expenses in the consolidated statements of income. The Company recorded revenues of ~~$10.7 million and $22.4 million in the three and six months ended June 30, 2015, respectively, and~~ $10.1 million and $21.4 million in the three and six months ended June 30, 2016, ~~respectively,~~ associated with the accrual for the reimbursement of the economic impact of the HIF fees from its customers. As of June 30, 2017, the Company has a $13.3 million receivable related to a terminated contract that the customer has expressed their unwillingness to pay, however the Company believes the amount is collectible based on the IRS regulations and contractual arrangements that were executed and has not established a reserve. The Company continues to evaluate correspondence with the customer related to this receivable.

Stock Compensation

At December 31, ~~2015~~2016 and June 30, ~~2016,~~2017, the Company had ~~equity-based~~equity‑based employee incentive plans, which are described more fully in Note 6 in the ~~Company's~~Company’s Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2015.~~2016, which was filed with the SEC on February 24, 2017. The Company recorded stock compensation expense of ~~$13.8 million and $27.7 million for the three and six months ended June 30, 2015 and~~ $9.5 million and $18.4 million for the three and six months ended June 30, 2016, respectively, and $11.4 million and $21.5 million for the three and six months ended June 30, 2017, respectively. Stock compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, ~~2015~~2016 and ~~2016~~2017 has been reduced for forfeitures, estimated at between zero and four percent for ~~both~~all periods.

The weighted average grant date fair value of all stock options granted during the six months ended June 30, ~~2016~~2017 was ~~$15.04~~$17.10 as estimated using the ~~Black-Scholes-Merton~~Black‑Scholes‑Merton option pricing model, which also assumed an expected volatility of ~~27.75~~27.8 percent based on the historical volatility of the ~~Company's~~Company’s stock price.

~~The benefits~~For the six months ended June 30, 2016, the benefit of tax deductions in excess of recognized stock compensation expense ~~are~~(net of deficiencies) was $0.3 million, which was reported as a ~~financing cash flow, rather than as an operating cash flow. In the six months ended June 30, 2015 and 2016, $3.8 million and $0.5 million, respectively, of benefits of such tax deductions related~~change to ~~stock compensation expense were realized and as such were reported as financing cash flows.~~additional paid‑in capital. For the six months ended June 30, ~~2015,~~2017, the benefit of tax deductions in excess of recognized stock compensation expense (net of deficiencies) was $1.0 million. Due to the adoption of ASU 2016-09 in the 4th quarter of 2016, this net benefit is reported as a reduction to income tax expense rather than as a change in additional paid-in-capital. As a result of the adoption of this standard, the net ~~change to additional paid in capital related to~~ tax benefits (deficiencies) was $3.7 million, which includes $3.8 million of excess tax benefits offset by $(0.1) million of excess tax deficiencies. For the six months ended June 30, 2016, the net change to additional paid in capital related to tax benefits (deficiencies) was $0.3 million, which includes $0.5 million of excess tax benefits offset by $(0.2) million of excess tax deficiencies.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~benefit is reflected as an operating cash flow rather than a financing cash flow.

Summarized information related to the ~~Company's~~Company’s stock options for the six months ended June 30, ~~2016~~2017 is as follows:

Options Weighted
Average
Exercise
Price
Outstanding, beginning of period
2,939,840 $ 55.13
Granted
445,560 64.08
Forfeited
(45,263 ) 51.07
Exercised
(195,202 ) 49.00

Outstanding, end of period
3,144,935 $ 56.84

Vested and expected to vest at end of period
3,111,786 $ 56.78

Exercisable, end of period
1,785,957 $ 53.13


		Weighted
		Average
		Exercise
	Options	Price
Outstanding, beginning of period	2,843,177	$	57.42
Granted	425,596		69.21
Forfeited	(42,789)		58.31
Exercised	(123,563)		50.86
Outstanding, end of period	3,102,421	$	59.29
Vested and expected to vest at end of period	3,078,102	$	59.24
Exercisable, end of period	2,001,180	$	56.13

All of the ~~Company's~~Company’s options granted during the six months ended June 30, ~~2016~~2017 vest ratably on each anniversary date over the three years subsequent to grant and have a ten year life.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

Summarized information related to the ~~Company's~~Company’s nonvested restricted stock awards ~~("RSAs"~~(“RSAs”) for the six months ended June 30, ~~2016~~2017 is as follows:



							Weighted
							Average
							Grant Date
	Shares			Weighted Average Grant Date Fair Value		Shares	Fair Value
Outstanding, beginning of period		1,109,622		$	57.88	615,472	$	58.71
Awarded		16,065			65.36	14,959		70.20
Vested		(20,115	)		67.12	(17,675)		64.01
Forfeited		—			—	—		—

Outstanding, end of period		1,105,572			57.82

Outstanding, ending of period						612,756		58.83



		Weighted
		Average
		Grant Date
	Shares	Fair Value
Outstanding, beginning of period	200,178	$	61.65
Awarded	107,417		68.53
Vested	(117,069)		60.52
Forfeited	(10,068)		65.19
Outstanding, ending of period	180,458		66.28

Shares Weighted
Average
Grant Date
Fair Value
Outstanding, beginning of period
231,088 $ 61.53
Awarded
51,521 64.87
Vested
(51,419 ) 63.77
Forfeited
(13,713 ) 63.59

Outstanding, end of period
217,477 61.66

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

shareholder return is determined by dividing the average share value of the ~~Company's~~Company’s common stock over the 30 trading days preceding January 1, ~~2019~~2020 by the average share value of the ~~Company's~~Company’s common stock over the 30 trading days beginning on January 1, ~~2016,~~2017, with a deemed reinvestment of any dividends declared during the performance period. The ~~Company's~~Company’s peer group includes 5651 companies which comprise the S&P Health Care Services Industry Index, which was selected by the compensation committee of the ~~Company's~~Company’s board of directors and includes a range of healthcare companies operating in several business segments.

Long Term Debt and Capital Lease Obligations

On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that provides 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

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

aggregate principal amount of $250.0 million (the ~~"2014~~“2014 Credit ~~Facility"~~Facility”). On December 2, 2015, the Company entered into an amendment to the 2014 Credit Facility under which Magellan Pharmacy Services, Inc. (a wholly owned subsidiary of ~~Magellan Health, Inc.)~~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. The 2014 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on July 23, 2019; however, the Company holds an option to extend the 2014 Credit Facility for an additional one year period.

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 ofranging from 0.50 percent to 1.00 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 1.00 percent, or (ii) in the case of Eurodollar rate loans, the sum of a borrowing margin ofranging from 1.50 percent to 2.00 percent plus the Eurodollar rate for the selected interest ~~period based on the Company's current total leverage ratio.~~period. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion, with the borrowing margin for these loans adjusted from time to time based on the ~~Company's~~Company’s total leverage ratio. Letters of credit issued bear interest atequal to the ~~rate of 1.625~~borrowing margin for Eurodollar loans that ranges from 1.50 percent ~~and~~to 2.00 percent, with the commitment commission on the ~~2014 Credit Facility is~~unused revolving loan commitment ranging from 0.20 percent to 0.35 percent. These letter of ~~the unused Revolving Loan Commitment, both of which~~credit and commitment commission rates are ~~based on the Company's current total leverage ratio. These rates shall be~~ adjusted from time to time based on the ~~Company's~~Company’s total leverage ratio.

Under the 2014 Credit Facility, on September 30, 2014, the Company completed a draw-down of the $250.0 million term loan (the ~~"2014~~“2014 Term ~~Loan"~~Loan”). The borrowings ~~will initially be~~have been maintained as a Eurodollar loan. The 2014 Term Loan is subject to certain quarterly amortization payments. As of June 30, ~~2016~~2017 the remaining balance on the 2014 Term Loan was ~~$228.1~~$206.2 million. The 2014 Term Loan will mature on July 23, 2019. As of June 30, ~~2016,~~2017, the 2014 Term Loan bore interest at a rate of ~~1.50~~1.625 percent plus the London Interbank Offered Rate ~~("LIBOR"~~(“LIBOR”), which was equivalent to a total interest rate of ~~1.9603~~approximately 2.851 percent. For the six months ended June 30, ~~2016,~~2017, the weighted average interest rate was ~~1.9358~~approximately 2.523 percent.

On June 27, 2016, the Company entered into a $200.0 million Credit Agreement with various lenders that provides for a $200.0 million term loan (the ~~"2016~~“2016 Term ~~Loan"~~Loan”) to Magellan Pharmacy Services, Inc. (the ~~"2016~~“2016 Credit ~~Facility"~~Facility”). The 2016 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on December 29, 2017.

Under the 2016 Credit Facility, the annual interest rate on the term loan is equal to (i) in the case of base rate loans, the sum of a borrowing margin ~~of 0.375~~ranging from 0.25 percent to 0.75 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 1.00 percent, or (ii) in the case of Eurodollar rate loans, the sum of a borrowing margin ~~of 1.375~~ranging from 1.25 percent to 1.75 percent plus the Eurodollar rate for the selected interest ~~period, based on the Company's current total leverage ratio.~~period. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion, with the borrowing margin for these loans adjusted from time to time based on the ~~Company's~~Company’s total leverage ratio.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

The borrowings under the 2016 Term Loan ~~will initially be~~have been maintained as a Eurodollar loan. As of June 30, ~~2016~~2017 the remaining balance on the 2016 Term Loan was $200.0 million and bore interest at a rate of approximately 1.375 percent

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

plus the ~~London Interbank Offered Rate ("LIBOR"),~~LIBOR, which was equivalent to a total interest rate of ~~1.8283~~approximately 2.601 percent. For the six months ended June 30, 2017, the weighted average interest rate was approximately 2.276 percent.

On January 10, 2017, the Company entered into a Credit Agreement with various lenders that provides 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 is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on December 29, 2017.

Under the 2017 Credit Facility, the annual interest rate on the term loan borrowing is equal to (i) in the case of base rate loans, the sum of an initial borrowing margin of 0.625 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 an initial borrowing margin of 1.625 percent plus the Eurodollar rate for the selected interest period. The borrowing margin is subject to adjustment based on the leverage ratio of the Company. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. The commitment commission on the 2017 Credit Facility is 0.25 percent of the unused commitment, which rate shall be adjusted from time to time based on the Company's total leverage ratio.

On January 10, 2017, the Company completed a $100.0 million draw of its available $200.0 million delayed draw term loan under the 2017 Credit Facility. An additional $100.0 million draw under the 2017 Credit Facility was completed on March 14, 2017. As of June 30, ~~2016,~~2017 the remaining balance on the 2017 Term Loan was $200.0 million and bore interest at a rate of approximately 1.625 percent plus the LIBOR, which was equivalent to a total interest rate of approximately 2.834 percent. During the period the term loan was outstanding, from January 10, 2017 through June 30, 2017, the weighted average interest rate was approximately 2.570 percent.

As of June 30, 2017, the contractual maturities of the term loans under the 2014 Credit Facility, ~~and the~~ 2016 Credit Facility and the 2017 Credit Facility (collectively, the “Credit Facilities”) were as follows: ~~2016—$9.4 million;~~ 2017—$~~225.0~~412.5 million; 2018—$25.0 million; and 2019—$168.7 million. The Company had ~~$33.4~~$33.7 million and ~~$33.7~~$27.0 million of letters of credit outstanding at December 31, ~~2015~~2016 and June 30, ~~2016,~~2017, respectively. ~~The Company had no revolving loan borrowings at December 31, 2015. In~~Beginning in April 2016, due to the timing of working capital needs, the Company has periodically borrowed ~~$25.0 million of~~from the ~~available~~ revolving loans under the 2014 Credit Facility, which remains outstanding on June 30, 2016. In July 2016, due to the timing of working capital needs, the Company borrowed an additional net $25.0 million of the available revolving loansloan under the 2014 Credit Facility. AsThe revolving loan borrowings have been in the form of ~~July 22, 2016, there are $166.3~~Eurodollar rate loans and totaled $175.0 million at December 31, 2016. At June 30, 2017, the Company had no revolving loan borrowings, resulting in a borrowing capacity of ~~revolving loans available~~$223.0 million under the 2014 Credit Facility.

There were ~~$24.4~~$26.0 million and ~~$25.2~~$24.9 million of capital lease obligations at December 31, ~~2015~~2016 and June 30, ~~2016,~~2017, respectively. The Company’s capital lease obligations represent amounts due under leases for certain properties, computer software (acquired prior to the prospective adoption of ASU 2015-05 on January 1, 2016) and equipment. Included in long-term debt and capital lease obligations as of December 31, ~~2015~~2016 and June 30, ~~2016~~2017 are deferred loan issuance costs of $1.4 million and ~~$1.6~~$1.2 million, respectively.

Redeemable ~~Non-Controlling~~Non‑Controlling Interest

As of June 30, ~~2016,~~2017, the Company held 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 have 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 has the right to purchase all remaining shares. ~~Non-controlling~~Non‑controlling interests with redemption features, such as put options, that are not solely within the ~~Company's~~Company’s control are considered redeemable ~~non-controlling~~non‑controlling interests. Redeemable ~~non-controlling~~non‑controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and ~~stockholders'~~stockholders’ equity on the ~~Company's~~Company’s consolidated balance sheet at the greater of the initial carrying amount adjusted for the ~~non-controlling interest's~~non‑controlling interest’s share of net income or loss or its redemption value. The carrying value of the ~~non-controlling~~non‑controlling interest as of December 31, ~~2015~~2016 and June 30, ~~2016~~2017 was ~~$5.9~~$4.8 million and ~~$4.4~~$3.9 million, respectively. The ~~$1.5~~$0.9 million decrease in carrying value is a result of operating ~~losses, partially offset by the impact of additional capital provided by the Company.~~losses. The Company evaluates the redemption value on a quarterly basis. If the redemption value is greater than the carrying value, the Company adjusts the carrying amount of the ~~non-controlling~~non‑controlling interest to equal the redemption value at the end 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~~non‑controlling interest. The Company will reflect redemption value adjustments in the

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

earnings per share ~~("EPS"~~(“EPS”) calculation if redemption value is in excess of the carrying value of the ~~non-controlling~~non‑controlling interest. As of June 30, ~~2016,~~2017, the carrying value of the ~~non-controlling~~non‑controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~Reclassifications

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE A—General (Continued)~~

~~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.

~~Reclassifications~~

Certain prior year amounts have been reclassified to conform with the current year presentation.

~~In order~~The Company elected to ~~better represent~~early adopt ASUs 2016-09 and 2016-18 effective for the ~~operations~~fiscal year ended December 31, 2016 and applied them retrospectively. Adoption of ~~the Company's segments, effective January 1, 2016, the Company began allocating operational and corporate support costs~~these standards resulted in a net reduction to the Healthcare and Pharmacy Management segments. For comparative presentation, the Company applied the allocation methodology retrospectively and reclassified direct service costs and other between segmentsCompany’s cash flows of $53.0 million for the ~~three and~~ six months ended June 30, ~~2015. The~~2016. In addition, as a result of the adoption of ASU 2016-09, the diluted weighted average shares outstanding as of June 30, 2016 have been adjusted. There was no impact ~~of these reclassifications are disclosed in Note C—"Business Segment Information".~~

~~Table of Contents~~to the net income per common share – diluted.

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

NOTE B—Net Income per Common Share Attributable to Magellan Health, Inc.

The following table reconciles income attributable to common shareholders (numerator) and shares (denominator) used in the computations of net income per share attributable to common shareholders (in thousands, except per share data):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2017		2016		2017
Numerator:
Net income attributable to Magellan	$	3,958	$	5,500	$	17,195	$	23,247
Denominator:
Weighted average number of common shares outstanding—basic		23,516		23,108		23,570		23,060
Common stock equivalents—stock options (1)		383		399		318		436
Common stock equivalents—RSAs (1)		681		439		622		421
Common stock equivalents—RSUs (1)		27		30		27		56
Common stock equivalents—PSUs (1)		34		61		35		62
Common stock equivalents—employee stock purchase plan		2		1		2		2
Weighted average number of common shares outstanding—diluted (1)		24,643		24,038		24,574		24,037
Net income attributable to Magellan per common share—basic	$	0.17	$	0.24	$	0.73	$	1.01
Net income attributable to Magellan per common share—diluted	$	0.16	$	0.23	$	0.70	$	0.97

Three Months Ended
June 30, Six Months Ended
June 30,

2015 2016 2015 2016
Numerator:

Net income attributable to Magellan Health, Inc.
$ 4,643 $ 3,958 $ 11,931 $ 17,195

��

Denominator:

Weighted average number of common shares outstanding—basic
25,684 23,516 25,502 23,570
Common stock equivalents—stock options
362 355 406 306
Common stock equivalents—RSAs
654 619 584 583
Common stock equivalents—RSUs
26 23 36 27
Common stock equivalents—PSUs
49 31 58 29
Common stock equivalents—employee stock purchase plan
1 2 2 2

Weighted average number of common shares outstanding—diluted
26,776 24,546 26,588 24,517

Net income attributable to Magellan Health, Inc. per common share—basic
$ 0.18 $ 0.17 $ 0.47 $ 0.73

Net income attributable to Magellan Health, Inc. per common share—diluted
$ 0.17 $ 0.16 $ 0.45 $ 0.70

During 2016, the Company early adopted ASU 2016-09. As a result, the common stock equivalents and diluted weighted average common shares outstanding as of June 30, 2016 have been adjusted. There was no impact to net income per common share – diluted.

The weighted average number of common shares outstanding for the six months ended June 30, ~~2015~~2016 and ~~2016~~2017 were calculated using outstanding shares of the ~~Company's~~Company’s common stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the six months ended June 30, ~~2015~~2016 and ~~2016~~2017 represent stock options to purchase shares of the ~~Company's~~Company’s common stock, RSAs, RSUs, PSUs and stock purchased under the Employee Stock Purchase Plan.

The Company had additional potential dilutive securities outstanding representing ~~0.8 million and 0.9 million options for the three and six months ended June 30, 2015, respectively, and~~ 1.2 million and 1.1 million options for the three and six months ended June 30, 2016, respectively, and 0.8 million and 0.7 million for the three and six months ended June 30, 2017, respectively, that were not included in the computation of dilutive securities because they were anti-dilutive for the period. Had these shares not been anti-dilutive, all of these shares would not have been included in the net income attributable to common shareholder per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~JUNE~~June 30, ~~2016~~2017

(Unaudited)

NOTE C—Business Segment Information

The accounting policies of the ~~Company's~~Company’s segments are the same as those described in Note A—"“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. Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of ~~Healthcare's~~Healthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the ~~Company's~~Company’s employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The ~~Company's~~Company’s segments are defined in Note A—~~"General"~~“General”.

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


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2016
Managed care and other revenue	$	637,970	$	61,975	$	(84)	$	699,861
PBM and dispensing revenue		—		495,399		(30,915)		464,484
Cost of care		(472,529)		—		—		(472,529)
Cost of goods sold		—		(466,637)		29,707		(436,930)
Direct service costs and other		(139,965)		(64,086)		(10,026)		(214,077)
Stock compensation expense (1)		2,451		5,548		1,511		9,510
Changes in fair value of contingent consideration (1)		390		73		—		463
Impairment of intangible assets (1)		4,800		—		—		4,800
Less: non-controlling interest segment profit (loss) (2)		(1,305)		—		(7)		(1,312)
Segment profit (loss)	$	34,422	$	32,272	$	(9,800)	$	56,894


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2017
Managed care and other revenue	$	755,270	$	66,659	$	(230)	$	821,699
PBM and dispensing revenue		—		631,932		(34,492)		597,440
Cost of care		(583,264)		—		—		(583,264)
Cost of goods sold		—		(595,446)		33,091		(562,355)
Direct service costs and other		(145,914)		(74,953)		(10,505)		(231,372)
Stock compensation expense (1)		3,106		5,684		2,581		11,371
Changes in fair value of contingent consideration (1)		252		—		—		252
Less: non-controlling interest segment profit (loss) (2)		(568)		—		(1)		(569)
Segment profit (loss)	$	30,018	$	33,876	$	(9,554)	$	54,340

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Three Months Ended June 30, 2015

Managed care and other revenue
$ 722,471 $ 53,782 $ (13 ) $ 776,240
PBM and dispensing revenue
— 408,924 (27,557 ) 381,367
Cost of care
(568,288 ) — — (568,288 )
Cost of goods sold
— (387,828 ) 26,419 (361,409 )
Direct service costs and other(3)
(124,779 ) (61,038 ) (5,638 ) (191,455 )
Stock compensation expense(1)(3)
1,784 10,339 1,672 13,795
Changes in fair value of contingent consideration(1)
71 2,496 — 2,567
Less: non-controlling interest segment profit (loss)(2)
(273 ) — (77 ) (350 )

Segment profit (loss)
$ 31,532 $ 26,675 $ (5,040 ) $ 53,167

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~JUNE~~June 30, ~~2016~~2017

(Unaudited)

~~NOTE C—Business~~


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2016
Managed care and other revenue	$	1,256,898	$	119,552	$	(128)	$	1,376,322
PBM and dispensing revenue		—		965,633		(60,588)		905,045
Cost of care		(930,160)		—		—		(930,160)
Cost of goods sold		—		(910,586)		58,197		(852,389)
Direct service costs and other		(265,582)		(124,927)		(16,024)		(406,533)
Stock compensation expense (1)		4,470		10,970		2,957		18,397
Changes in fair value of contingent consideration (1)		70		127		—		197
Impairment of intangible assets (1)		4,800		—				4,800
Less: non-controlling interest segment profit (loss) (2)		(1,136)		—		(11)		(1,147)
Segment profit (loss)	$	71,632	$	60,769	$	(15,575)	$	116,826


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2017
Managed care and other revenue	$	1,420,646	$	130,839	$	(446)	$	1,551,039
PBM and dispensing revenue		—		1,238,678		(64,955)		1,173,723
Cost of care		(1,065,318)		—		—		(1,065,318)
Cost of goods sold		—		(1,167,283)		62,295		(1,104,988)
Direct service costs and other		(284,882)		(150,806)		(17,170)		(452,858)
Stock compensation expense (1)		5,765		11,414		4,332		21,511
Changes in fair value of contingent consideration (1)		203		—		—		203
Less: non-controlling interest segment profit (loss) (2)		(845)		—		(2)		(847)
Segment profit (loss)	$	77,259	$	62,842	$	(15,942)	$	124,159

(1)

Stock compensation expense, changes in the fair value of contingent consideration recorded in relation to 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 portion of AlphaCare’s segment profit (loss) is excluded from the computation of Segment Profit.

The following table reconciles income before income taxes to Segment ~~Information (Continued)~~Profit (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2017		2016		2017
Income before income taxes	$	13,927	$	10,588	$	39,331	$	39,863
Stock compensation expense		9,510		11,371		18,397		21,511
Changes in fair value of contingent consideration		463		252		197		203
Impairment of intangible assets		4,800		—		4,800		—
Non-controlling interest segment (profit) loss		1,312		569		1,147		847
Depreciation and amortization		25,580		27,731		50,587		54,707
Interest expense		1,994		4,900		3,742		9,048
Interest and other income		(692)		(1,071)		(1,375)		(2,020)
Segment Profit	$	56,894	$	54,340	$	116,826	$	124,159

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Three Months Ended June 30, 2016

Managed care and other revenue
$ 637,970 $ 61,975 $ (84 ) $ 699,861
PBM and dispensing revenue
— 495,399 (30,915 ) 464,484
Cost of care
(472,529 ) — — (472,529 )
Cost of goods sold
— (466,637 ) 29,707 (436,930 )
Direct service costs and other(3)
(139,965 ) (64,086 ) (10,026 ) (214,077 )
Stock compensation expense(1)(3)
2,451 5,548 1,511 9,510
Changes in fair value of contingent consideration(1)
390 73 — 463
Impairment of intangible assets(1)
4,800 — — 4,800
Less: non-controlling interest segment profit (loss)(2)
(1,305 ) — (7 ) (1,312 )

Segment profit (loss)
$ 34,422 $ 32,272 $ (9,800 ) $ 56,894

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Six Months Ended June 30, 2015

Managed care and other revenue
$ 1,422,064 $ 102,850 $ (24 ) $ 1,524,890
PBM and dispensing revenue
— 667,717 (54,032 ) 613,685
Cost of care
(1,090,621 ) 5 — (1,090,616 )
Cost of goods sold
— (631,366 ) 51,750 (579,616 )
Direct service costs and other(3)
(253,247 ) (129,271 ) (13,387 ) (395,905 )
Stock compensation expense(1)(3)
4,972 19,744 2,980 27,696
Changes in fair value of contingent consideration(1)
171 17,365 — 17,536
Less: non-controlling interest segment profit (loss)(2)
(393 ) — (51 ) (444 )

Segment profit (loss)
$ 83,732 $ 47,044 $ (12,662 ) $ 118,114

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~JUNE~~June 30, ~~2016~~2017

(Unaudited)

~~NOTE C—Business Segment Information (Continued)~~

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Six Months Ended June 30, 2016

Managed care and other revenue
$ 1,256,898 $ 119,552 $ (128 ) $ 1,376,322
PBM and dispensing revenue
— 965,633 (60,588 ) 905,045
Cost of care
(930,160 ) — — (930,160 )
Cost of goods sold
— (910,586 ) 58,197 (852,389 )
Direct service costs and other(3)
(265,582 ) (124,927 ) (16,024 ) (406,533 )
Stock compensation expense(1)(3)
4,470 10,970 2,957 18,397
Changes in fair value of contingent consideration(1)
70 127 — 197
Impairment of intangible assets(1)
4,800 — — 4,800
Less: non-controlling interest segment profit (loss)(2)
(1,136 ) — (11 ) (1,147 )

Segment profit (loss)
$ 71,632 $ 60,769 $ (15,575 ) $ 116,826

~~(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 portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.~~
~~(3)~~: Effective January 1, 2016, the Company implemented changes related to the allocation of Corporate operational and support functions. These changes were applied retrospectively. The following tables summarize, for the periods indicated, the changes by business segment (in thousands):

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Three Months Ended June 30, 2015

Segment profit (loss) before Corporate allocations
$ 47,522 $ 30,960 $ (25,315 ) $ 53,167
Allocated Corporate costs
(17,280 ) (4,608 ) 21,888 —
Allocated Corporate stock compensation expense
1,290 323 (1,613 ) —

Segment profit (loss)
$ 31,532 $ 26,675 $ (5,040 ) $ 53,167

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE C—Business Segment Information (Continued)~~

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Three Months Ended June 30, 2016

Segment profit (loss) before Corporate allocations
$ 50,719 $ 36,256 $ (30,081 ) $ 56,894
Allocated Corporate costs
(17,661 ) (4,325 ) 21,986 —
Allocated Corporate stock compensation expense
1,364 341 (1,705 ) —

Segment profit (loss)
$ 34,422 $ 32,272 $ (9,800 ) $ 56,894

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Six Months Ended June 30, 2015

Segment profit (loss) before Corporate allocations
$ 115,470 $ 55,465 $ (52,821 ) $ 118,114
Allocated Corporate costs
(35,227 ) (9,293 ) 44,520 —
Allocated Corporate stock compensation expense
3,489 872 (4,361 ) —

Segment profit (loss)
$ 83,732 $ 47,044 $ (12,662 ) $ 118,114

Healthcare Pharmacy
Management Corporate
and
Elimination Consolidated
Six Months Ended June 30, 2016

Segment profit (loss) before Corporate allocations
$ 104,246 $ 68,963 $ (56,383 ) $ 116,826
Allocated Corporate costs
(35,302 ) (8,866 ) 44,168 —
Allocated Corporate stock compensation expense
2,688 672 (3,360 ) —

Segment profit (loss)
$ 71,632 $ 60,769 $ (15,575 ) $ 116,826

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE C—Business Segment Information (Continued)~~

~~The following table reconciles Segment Profit to income before income taxes (in thousands):~~

Three Months Ended
June 30, Six Months Ended
June 30,

2015 2016 2015 2016
Segment profit
$ 53,167 $ 56,894 $ 118,114 $ 116,826
Stock compensation expense
(13,795 ) (9,510 ) (27,696 ) (18,397 )
Changes in fair value of contingent consideration
(2,567 ) (463 ) (17,536 ) (197 )
Impairment of intangible assets
— (4,800 ) — (4,800 )
Non-controlling interest segment profit (loss)
(350 ) (1,312 ) (444 ) (1,147 )
Depreciation and amortization
(25,022 ) (25,580 ) (48,518 ) (50,587 )
Interest expense
(1,653 ) (1,994 ) (3,279 ) (3,742 )
Interest income
500 692 966 1,375

Income before income taxes
$ 10,280 $ 13,927 $ 21,607 $ 39,331

NOTE D—Commitments and Contingencies

Legal

The ~~Company's~~Company’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, the Company has recorded reserves that 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's~~Company’s financial condition or results of operations; however, there can be no assurance in this regard.

Stock Repurchases

On October ~~22, 2014~~26, 2015, the ~~Company's~~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.~~26, 2017 (the “2015 Repurchase Program”). On July 26, 2017, the Company’s board of directors approved an extension of the 2015 Repurchase Program through October 26, 2018. Stock repurchases under the ~~program~~programs may be ~~purchased~~carried out from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases and the actual amount purchased will depend on a variety of factors including the market price of the ~~Company's~~Company’s shares, general market and economic conditions, and other corporate

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~JUNE 30, 2016~~

~~(Unaudited)~~

~~NOTE D—Commitments and Contingencies (Continued)~~

considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the ~~Company's~~Company’s board of directors at any time.

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
January 1, 2015 - October 21, 2015
3,153,156 58.96 185.9

3,385,326 $ 200.0

~~On October 26,~~ 2015 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 26, 2017. Pursuant to this program,Stock Repurchase Program, the Company made 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
October 26, 2015 - December 31, 2015
345,044 $ 53.46 $ 18.4
January 1, 2016 - June 30, 2016
375,507 67.78 25.5

720,551 $ 43.9


	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 - June 30, 2017	76,181		70.54		5.4
	2,249,408			$	130.6

The Company made ~~no repurchases~~additional open market purchases of 13,922 shares of the Company’s common stock at an aggregate cost of $1.0 million (excluding broker commissions) during the period from July 1, ~~2016~~2017 through July ~~22, 2016.~~21, 2017.

~~NOTE E—Acquisitions~~

Pursuant to the February 9, 2016 purchase agreement (the "TMG Agreement") with 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 $15.0 million in cash, subject to 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 the Company being awarded additional managed long-term services and supports contracts. The Company reports the results of operations of TMG within its Healthcare segment. The Company's estimated fair values of TMG's assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~JUNE~~June 30, ~~2016~~2017

(Unaudited)

NOTE E—Acquisitions ~~(Continued)~~

finalized, and accordingly, the assets acquired and liabilities assumed are subject to adjustment once the analyses are completed. The Company will make appropriate adjustments to the purchase price allocations prior to the completionAcquisition of ~~the measurement period as required.~~AFSC

~~NOTE F—Subsequent Events~~

Pursuant to the May 15, 2016 share purchase agreement (the ~~"AFSC Agreement"~~“AFSC Agreement”) with Armed Forces Services Corporation ~~("AFSC"~~(“AFSC”), on July 1, 2016 the Company acquired all of the outstanding equity interests of ~~AFSC.~~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.

~~Under the terms of~~The base purchase price for the AFSC Acquisition per the AFSC Agreement was $117.5 million, subject to working capital adjustments. 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 $113.5 million in cash, subject to working capital 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, ~~is $117.5 million plus~~the AFSC Agreement provides for potential contingent payments up to a maximum aggregate amount of $10.0 million. The potential contingent payments are based on the retention of certain core business by AFSC.

As of ~~AFSC. Certain key~~June 30, 2017, the Company established a working capital receivable of $3.2 million that was reflected as a reduction to the transaction price.

Acquisition of Veridicus Holdings, LLC and Granite Alliance Insurance Company

Pursuant to the November 19, 2016 purchase agreements (the “Veridicus Agreements”) with 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 Veridicus (the “Veridicus Acquisition”). Veridicus is a PBM with a unique set of clinical services and capabilities.

The base purchase price for the 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.

The Company’s estimated fair values of Veridicus 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 are subject to adjustment once the analyses are completed. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required. During the six months ended June 30, 2017, the Company made net measurement period adjustments of $2.1 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 $0.8 million.

As of June 30, 2017, the Company established a working capital receivable of $0.5 million that was reflected as a reduction to the transaction price.

NOTE F—Subsequent Events

On July 13, 2017, the Company entered into an agreement and plan of merger (“the SWH Agreement”) to acquire SWH Holdings, Inc. (“Senior Whole Health”). Senior Whole Health is a healthcare company focused on serving complex, high-risk populations, providing Medicare and Medicaid dual-eligible benefits to members in Massachusetts and New York. Under the terms of ~~AFSC's management, who~~the SWH Agreement, the base purchase price is $390.0 million, subject to working capital adjustments, plus a potential contingent payment of $10.0 million. The contingent payments are ~~also shareholders, will reinvest~~based on a ~~portion~~

Table of ~~their proceeds~~Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2017

(Unaudited)

subsidiary of SWH Holdings earning a Star Rating from Medicare of 4.0 or greater in ~~Magellan restricted common stock. The stock~~2018. Consummation of the merger is subject to ~~vesting over a two-year period.~~

various conditions, including state regulatory approvals and the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Act. The Company anticipates funding the acquisition from the proceeds of new debt offerings.

On July 13, 2017, in connection with the Company’s acquisition of Senior Whole Health, the Company secured committed financing for up to $400.0 million at closing under a bridge facility (the “SWH Bridge Facility”). Proceeds from the SWH Bridge Facility may only be used by the Company to fund the acquisition and pay associated transaction costs. If utilized, the SWH Bridge Facility will ~~report~~be guaranteed by substantially all of the ~~results~~non-regulated subsidiaries of ~~operation~~the Company and mature 364 days after the closing date of ~~AFSC within~~ the ~~Healthcare segment.~~acquisition.

Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of operations of Magellan and its subsidiaries should be read together with the Consolidated Financial Statements and the notes to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form ~~10-Q~~10‑Q and the ~~Company's~~Company’s Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2015,~~2016, which was filed with the SEC on February ~~29, 2016.~~

~~Forward-Looking Statements~~24, 2017.

Forward‑Looking Statements

This Form ~~10-Q~~10‑Q includes ~~"forward-looking statements"~~“forward‑looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the Company believes that its plans, intentions and expectations as reflected in such ~~forward-looking~~forward‑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-looking~~forward‑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-looking~~forward‑looking statements. Important factors currently known to management that could cause actual results to differ materially from those in ~~forward-looking~~forward‑looking statements include:

•: ~~the Company's inability to renegotiate or extend expiring customer contracts, or the termination of customer contracts;~~
•: ~~the Company's inability to integrate acquisitions in a timely and effective manner;~~
•: changes in business practices of the industry, including the possibility that certain of the Company's managed care customers could seek to provide managed healthcare services directly to their subscribers, instead of contracting with the Company for such services, particularly as a result of further consolidation in the managed care industry and especially regarding managed healthcare customers that have already done so with a portion of their membership;
•: the impact of changes in the contracting model for Medicaid contracts, including certain changes in the contracting model used by states for managed healthcare services contracts relating to Medicaid lives;
•: ~~the Company's ability to accurately predict and control healthcare costs, and to properly price the Company's services;~~
•: the Company's ability to accurately underwrite and control healthcare costs associated with its expansion into clinically integrated management of special populations eligible for Medicaid and Medicare, including individuals with serious mental illness and other unique high-cost populations;
•: ~~the Company's ability to maintain or secure cost-effective healthcare provider contracts;~~
•: ~~the Company's ability to maintain relationships with key pharmacy providers, vendors and manufacturers;~~
•: ~~fluctuation in quarterly operating results due to seasonal and other factors;~~
•: ~~the Company's dependence on government spending for managed healthcare, including changes in federal, state and local healthcare policies;~~
•: ~~restrictive covenants in the Company's debt instruments;~~
•: ~~present or future state regulations and contractual requirements that the Company provide financial assurance of its ability to meet its obligations;~~

the Company’s inability to renegotiate or extend expiring customer contracts, or the termination of customer contracts;

the Company’s inability to integrate acquisitions in a timely and effective manner;

changes in business practices of the industry, including the possibility that certain of the Company’s managed care customers could seek to provide managed healthcare services directly to their subscribers, instead of contracting with the Company for such services, particularly as a result of further consolidation in the managed care industry and especially regarding managed healthcare customers that have already done so with a portion of their membership;

the impact of changes in the contracting model for Medicaid contracts, including certain changes in the contracting model used by states for managed healthcare services contracts relating to Medicaid lives;

the Company’s ability to accurately predict and control healthcare costs, and to properly price the Company’s services;

the Company’s ability to accurately underwrite and control healthcare costs associated with its expansion into clinically integrated management of special populations eligible for Medicaid and Medicare, including individuals with serious mental illness and other unique high‑cost populations;

the Company’s ability to maintain or secure cost‑effective healthcare provider contracts;

the Company’s ability to maintain relationships with key pharmacy providers, vendors and manufacturers;

fluctuation in quarterly operating results due to seasonal and other factors;

the Company’s dependence on government spending for managed healthcare, including changes in federal, state and local healthcare policies;

restrictive covenants in the Company’s debt instruments;

present or future state regulations and contractual requirements that the Company provide financial assurance of its ability to meet its obligations;

the impact of the competitive environment in the managed healthcare services industry which may limit the Company’s ability to maintain or obtain contracts, as well as its ability to maintain or increase its rates;

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•: the impact of the competitive environment in the managed healthcare services industry which may limit the Company's ability to maintain or obtain contracts, as well as its ability to maintain or increase its rates;
•: ~~the impact of healthcare reform legislation;~~
•: ~~the Mental Health and Substance Abuse Benefit Parity Law and Regulations;~~
•: ~~government regulation;~~
•: ~~the Company's participation in Medicare Part D is subject to government regulation;~~
•: ~~the unauthorized disclosure of sensitive or confidential member or other information;~~
•: ~~a breach or failure in the Company's operational security systems or infrastructure, or those of third parties with which we do business;~~
•: ~~the possible impact of additional regulatory scrutiny and liability associated with the Company's Pharmacy Management segment;~~
•: ~~the inability to realize the value of goodwill and intangible assets;~~
•: ~~pending or future actions or claims for professional liability;~~
•: ~~claims brought against the Company that either exceed the scope of the Company's liability coverage or result in denial of coverage;~~
•: ~~class action suits and other legal proceedings;~~
•: ~~negative publicity;~~
•: ~~the impact of governmental investigations;~~
•: ~~the impact of varying economic and market conditions on the Company's investment portfolio;~~
•: ~~the state of the national economy and adverse changes in economic conditions; and~~
•: ~~the impact to contingent consideration as a result of changes in operational forecasts and probabilities of payment.~~

the impact of healthcare reform legislation;

the Mental Health and Substance Abuse Benefit Parity Law and Regulations;

government regulation;

the Company’s participation in Medicare Part D is subject to government regulation;

the unauthorized disclosure of sensitive or confidential member or other information;

a breach or failure in the Company’s operational security systems or infrastructure, or those of third parties with which we do business;

the possible impact of additional regulatory scrutiny and liability associated with the Company’s Pharmacy Management segment;

the inability to realize the value of goodwill and intangible assets;

pending or future actions or claims for professional liability;

claims brought against the Company that either exceed the scope of the Company’s liability coverage or result in denial of coverage;

class action suits and other legal proceedings;

negative publicity;

the impact of governmental investigations;

the impact of varying economic and market conditions on the Company’s investment portfolio;

the state of the national economy and adverse changes in economic conditions; and

the impact to contingent consideration as a result of changes in operational forecasts and probabilities of payment.

Further discussion of factors currently known to management that could cause actual results to differ materially from those in ~~forward-looking~~forward‑looking statements is set forth under the heading ~~"Risk Factors"~~“Risk Factors” in Item 1A of ~~Magellan's~~Magellan’s Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2015.~~2016. When used in this Quarterly Report on Form ~~10-Q,~~10‑Q, the words ~~"estimate," "anticipate," "expect," "believe," "should,"~~“estimate,” “anticipate,” “expect,” “believe,” “should,” and similar expressions are intended to be ~~forward-looking~~forward‑looking statements. Magellan undertakes no obligation to update or revise ~~forward-looking~~forward‑looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by law.

Business Overview

The Company is engaged in the healthcare management business, and is focused on managing the fastest growing, most complex areas of health, including special populations, complete pharmacy benefits and other specialty areas of healthcare. The Company develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact health outcomes and optimize the cost of care for the members we serve. The Company provides services to health plans and other MCOs, employers, labor unions, various military and governmental agencies and TPAs. The ~~Company's~~Company’s business is divided into three segments, based on the services it provides and/or the customers it serves. See Note A—~~"General"~~“General” for more information on the ~~Company's~~Company’s business segments.

The following tables summarize, for the periods indicated, revenues and covered lives for Healthcare by product classification and customer type (in thousands):


					Covered lives as of
	Covered lives as of June 30, 2016				June 30, 2017
	Risk-based		ASO		Risk-based	ASO
Commercial
Behavioral(1)		13,528		10,110	13,875	11,411
Specialty		8,189		16,582	9,087	16,022
Government(2)		4,229		1,030	4,026	1,062


	Revenue for the six months ended
	June 30, 2017
	Risk-based		ASO		Total
Commercial
Behavioral(1)	$	193,539	$	60,367	$	253,906
Specialty		296,159		35,258		331,417
Government(2)		787,974		47,349		835,323
Total	$	1,277,672	$	142,974	$	1,420,646

Revenue for six months
ended June 30, 2016

Risk-based ASO Total
Commercial

Behavioral(1)
$ 164,907 $ 59,735 $ 224,642
Specialty
254,611 32,771 287,382
Government(2)
702,359 42,515 744,874

Total
$ 1,121,877 $ 135,021 $ 1,256,898

~~(1)~~: ~~Includes revenues of $25.6 million from EAP services provided on a risk basis to health plans and employers with 11.0 million covered lives.~~
~~(2)~~: ~~Includes revenues of $77.5 million from EAP services provided on a risk basis to federal governmental entities with 3.5 million covered lives.~~

(1)

Includes revenues of $24.4 million from EAP services provided on a risk basis to health plans and employers with 10.6 million covered lives.

(2)

Includes revenues of $173.5 million from EAP services provided on a risk basis to federal governmental entities with 3.5 million covered lives.

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


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2016
Managed care and other revenue	$	637,970	$	61,975	$	(84)	$	699,861
PBM and dispensing revenue		—		495,399		(30,915)		464,484
Cost of care		(472,529)		—		—		(472,529)
Cost of goods sold		—		(466,637)		29,707		(436,930)
Direct service costs and other		(139,965)		(64,086)		(10,026)		(214,077)
Stock compensation expense (1)		2,451		5,548		1,511		9,510
Changes in fair value of contingent consideration (1)		390		73		—		463
Impairment of intangible assets (1)		4,800		—		—		4,800
Less: non-controlling interest segment profit (loss) (2)		(1,305)		—		(7)		(1,312)
Segment profit (loss)	$	34,422	$	32,272	$	(9,800)	$	56,894


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2017
Managed care and other revenue	$	755,270	$	66,659	$	(230)	$	821,699
PBM and dispensing revenue		—		631,932		(34,492)		597,440
Cost of care		(583,264)		—		—		(583,264)
Cost of goods sold		—		(595,446)		33,091		(562,355)
Direct service costs and other		(145,914)		(74,953)		(10,505)		(231,372)
Stock compensation expense (1)		3,106		5,684		2,581		11,371
Changes in fair value of contingent consideration (1)		252		—		—		252
Less: non-controlling interest segment profit (loss) (2)		(568)		—		(1)		(569)
Segment profit (loss)	$	30,018	$	33,876	$	(9,554)	$	54,340


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2016
Managed care and other revenue	$	1,256,898	$	119,552	$	(128)	$	1,376,322
PBM and dispensing revenue		—		965,633		(60,588)		905,045
Cost of care		(930,160)		—		—		(930,160)
Cost of goods sold		—		(910,586)		58,197		(852,389)
Direct service costs and other		(265,582)		(124,927)		(16,024)		(406,533)
Stock compensation expense (1)		4,470		10,970		2,957		18,397
Changes in fair value of contingent consideration (1)		70		127		—		197
Impairment of intangible assets (1)		4,800		—				4,800
Less: non-controlling interest segment profit (loss) (2)		(1,136)		—		(11)		(1,147)
Segment profit (loss)	$	71,632	$	60,769	$	(15,575)	$	116,826

Healthcare Pharmacy
Management Corporate and
Elimination Consolidated
Three Months Ended June 30, 2016

Managed care and other revenue
$ 637,970 $ 61,975 $ (84 ) $ 699,861
PBM and dispensing revenue
— 495,399 (30,915 ) 464,484
Cost of care
(472,529 ) — — (472,529 )
Cost of goods sold
— (466,637 ) 29,707 (436,930 )
Direct service costs and other(3)
(139,965 ) (64,086 ) (10,026 ) (214,077 )
Stock compensation expense(1)(3)
2,451 5,548 1,511 9,510
Changes in fair value of contingent consideration(1)
390 73 — 463
Impairment of intangible assets(1)
4,800 — — 4,800
Less: non-controlling interest segment profit (loss)(2)
(1,305 ) — (7 ) (1,312 )

Segment profit (loss)
$ 34,422 $ 32,272 $ (9,800 ) $ 56,894

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Healthcare Pharmacy
Management Corporate and
Elimination Consolidated
Six Months Ended June 30, 2015

Managed care and other revenue
$ 1,422,064 $ 102,850 $ (24 ) $ 1,524,890
PBM and dispensing revenue
— 667,717 (54,032 ) 613,685
Cost of care
(1,090,621 ) 5 — (1,090,616 )
Cost of goods sold
— (631,366 ) 51,750 (579,616 )
Direct service costs and other(3)
(253,247 ) (129,271 ) (13,387 ) (395,905 )
Stock compensation expense(1)(3)
4,972 19,744 2,980 27,696
Changes in fair value of contingent consideration(1)
171 17,365 — 17,536
Less: non-controlling interest segment profit (loss)(2)
(393 ) — (51 ) (444 )

Segment profit (loss)
$ 83,732 $ 47,044 $ (12,662 ) $ 118,114


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2017
Managed care and other revenue	$	1,420,646	$	130,839	$	(446)	$	1,551,039
PBM and dispensing revenue		—		1,238,678		(64,955)		1,173,723
Cost of care		(1,065,318)		—		—		(1,065,318)
Cost of goods sold		—		(1,167,283)		62,295		(1,104,988)
Direct service costs and other		(284,882)		(150,806)		(17,170)		(452,858)
Stock compensation expense (1)		5,765		11,414		4,332		21,511
Changes in fair value of contingent consideration (1)		203		—		—		203
Less: non-controlling interest segment profit (loss) (2)		(845)		—		(2)		(847)
Segment profit (loss)	$	77,259	$	62,842	$	(15,942)	$	124,159

Healthcare Pharmacy
Management Corporate and
Elimination Consolidated
Six Months Ended June 30, 2016

Managed care and other revenue
$ 1,256,898 $ 119,552 $ (128 ) $ 1,376,322
PBM and dispensing revenue
— 965,633 (60,588 ) 905,045
Cost of care
(930,160 ) — — (930,160 )
Cost of goods sold
— (910,586 ) 58,197 (852,389 )
Direct service costs and other(3)
(265,582 ) (124,927 ) (16,024 ) (406,533 )
Stock compensation expense(1)(3)
4,470 10,970 2,957 18,397
Changes in fair value of contingent consideration(1)
70 127 — 197
Impairment of intangible assets(1)
4,800 — — 4,800
Less: non-controlling interest segment profit (loss)(2)
(1,136 ) — (11 ) (1,147 )

Segment profit (loss)
$ 71,632 $ 60,769 $ (15,575 ) $ 116,826

~~(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 portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.~~
~~(3)~~: ~~Effective January 1, 2016, the Company implemented changes related to the allocation of Corporate operational and support functions. These changes were applied retrospectively. The~~

(1)

(2)

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

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~~following tables summarize, for the periods indicated, the changes by business segment (in thousands):~~

Healthcare Pharmacy
Management Corporate and
Elimination Consolidated
Three Months Ended June 30, 2015

Segment profit (loss) before Corporate allocations
$ 47,522 $ 30,960 $ (25,315 ) $ 53,167
Allocated Corporate costs
(17,280 ) (4,608 ) 21,888 —
Allocated Corporate stock compensation expense
1,290 323 (1,613 ) —

Segment profit (loss)
$ 31,532 $ 26,675 $ (5,040 ) $ 53,167

Healthcare Pharmacy
Management Corporate and
Elimination Consolidated
Three Months Ended June 30, 2016

Segment profit (loss) before Corporate allocations
$ 50,719 $ 36,256 $ (30,081 ) $ 56,894
Allocated Corporate costs
(17,661 ) (4,325 ) 21,986 —
Allocated Corporate stock compensation expense
1,364 341 (1,705 ) —

Segment profit (loss)
$ 34,422 $ 32,272 $ (9,800 ) $ 56,894

Healthcare Pharmacy
Management Corporate and
Elimination Consolidated
Six Months Ended June 30, 2015

Segment profit (loss) before Corporate allocations
$ 115,470 $ 55,465 $ (52,821 ) $ 118,114
Allocated Corporate costs
(35,227 ) (9,293 ) 44,520 —
Allocated Corporate stock compensation expense
3,489 872 (4,361 ) —

Segment profit (loss)
$ 83,732 $ 47,044 $ (12,662 ) $ 118,114

Healthcare Pharmacy
Management Corporate and
Elimination Consolidated
Six Months Ended June 30, 2016

Segment profit (loss) before Corporate allocations
$ 104,246 $ 68,963 $ (56,383 ) $ 116,826
Allocated Corporate costs
(35,302 ) (8,866 ) 44,168 —
Allocated Corporate stock compensation expense
2,688 672 (3,360 ) —

Segment profit (loss)
$ 71,632 $ 60,769 $ (15,575 ) $ 116,826

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The following table reconciles ~~Segment Profit to~~ income before income taxes to Segment Profit (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2017		2016		2017
Income before income taxes	$	13,927	$	10,588	$	39,331	$	39,863
Stock compensation expense		9,510		11,371		18,397		21,511
Changes in fair value of contingent consideration		463		252		197		203
Impairment of intangible assets		4,800		—		4,800		—
Non-controlling interest segment (profit) loss		1,312		569		1,147		847
Depreciation and amortization		25,580		27,731		50,587		54,707
Interest expense		1,994		4,900		3,742		9,048
Interest and other income		(692)		(1,071)		(1,375)		(2,020)
Segment Profit	$	56,894	$	54,340	$	116,826	$	124,159

Quarter ended June 30, 2017 (“Current Year Quarter”), compared to the quarter ended June 30, 2016 (“Prior Year Quarter”)

Healthcare

Net Revenue

Net revenue related to Healthcare increased by 18.4 percent or $117.3 million. The increase in revenue is mainly due to higher membership and net favorable rate changes of $64.5 million, revenue for AFSC acquired July 1, 2016 of $48.4 million, contracts implemented after (or during) the Prior Year Quarter of $29.3 million, net retroactive program changes in the Current Year Quarter of $40.3 million and the revenue impact of unfavorable prior period medical claims development recorded in the Current Year Quarter of $6.7 million. These increases were partially offset by terminated contracts of $33.7 million, net program changes of $12.3 million, net revenue recorded for HIF fees in the Prior Year Quarter of $10.1 million, unfavorable retroactive rate adjustments in the Current Year Quarter of $4.1 million, the revenue impact of unfavorable prior period medical claims development recorded in the Prior Year Quarter of $3.0 million and other net unfavorable variances of $8.7 million (mainly profit share impact of favorable care trends).

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Cost of Care

Cost of care increased by 23.4 percent or $110.7 million. The increase is mainly due to increased membership and higher care associated with net favorable rate changes of $55.9 million, care costs for AFSC of $36.6 million, net retroactive program changes in the Current Year Quarter of $37.2 million, new contracts implemented after (or during) the Prior Year Quarter of $27.8 million, net unfavorable prior period medical claims development recorded in the Current Year Quarter of $8.2 million and net favorable prior period medical claims development recorded in the Prior Year Quarter of $2.5 million. These increases were partially offset by terminated contracts of $27.2 million, net program changes of $10.9 million, customer settlements of $2.5 million and care trends and other net favorable variances of $16.9 million. For our commercial contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 83.6 percent in the Prior Year Quarter to 89.9 percent in the Current Year Quarter, mainly due to unfavorable care trends. For our government contracts, cost of care as a percentage of risk revenue (excluding EAP business) was 87.1 percent which was consistent with the Prior Year Quarter.

Direct Service Costs

Direct service costs increased by 4.3 percent or $5.9 million, primarily due to costs related to AFSC and new business, partially offset by the impact of terminated contracts and HIF fees in the Prior Year Quarter. Direct service costs decreased as a percentage of revenue from 21.9 percent in the Prior Year Quarter to 19.3 percent in the Current Year Quarter, mainly due to increase in revenue from business growth and acquisitions, partially offset by terminated contracts and costs related to the acquisition of AFSC.

Pharmacy Management

Managed Care and Other Revenue

Managed care and other revenue related to Pharmacy Management increased by 7.6 percent or $4.7 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $2.2 million, Medical pharmacy of $2.1 million, revenue for Veridicus acquired on December 13, 2016 of $1.3 million and other net favorable variances of $1.8 million. These increases were partially offset by decreased rebate revenue of $1.5 million and terminated contracts of $1.2 million.

PBM and Dispensing Revenue

PBM and dispensing revenue related to Pharmacy Management increased by 27.6 percent or $136.5 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $80.2 million, Medicare revenue of $59.3 million, revenue for Veridicus of $44.6 million, Pharmacy employer revenue of $42.4 million and pharmacy MCO revenue of $7.3 million. These favorable variances were partially offset by terminated contracts of $94.6 million and other net unfavorable variances of $2.7 million

Cost of Goods Sold

Cost of goods sold increased by 27.6 percent or $128.8 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $78.9 million, an increase in Medicare of $57.5 million, cost for Veridicus of $40.7 million, Pharmacy employer of $37.7 million, an increase in pharmacy MCO of $5.7 million and other net unfavorable variances of $1.3 million. These increases were partially offset by terminated contracts of $93.0 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold was 94.2 percent which was consistent with the Prior Year Quarter.

Direct Service Costs

Direct service costs increased by 17.0 percent or $10.9 million, mainly due to the acquisition of Veridicus, contract implementation costs and ongoing costs to support new business. Direct service costs decreased as a percentage of revenue from 11.5 percent in the Prior Year Quarter to 10.7 percent in the Current Year Quarter, mainly due to an increase in revenue from business growth and acquisition activity.

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Corporate and Elimination

Net expenses related to Corporate, which includes eliminations, increased by 7.2 percent or $0.8 million, primarily due to an increase in stock and other compensation expense in the Current Year Quarter. As a percentage of revenue, corporate and elimination was 0.9 percent in the Current Year Quarter, which is down slightly from the Prior Year Quarter.

Depreciation and Amortization

Depreciation and amortization expense increased by 8.4 percent or $2.2 million, primarily due to asset additions after the Prior Year Quarter and acquisition activity.

Interest Expense

Interest expense increased by $2.9 million, primarily due to an increase in interest rates and the amount of outstanding debt.

Interest Income

Interest income increased by $0.4 million, primarily due to higher yields.

Income Taxes

~~Non-GAAP Measures~~The Company’s effective income tax rates were 90.6 percent and 53.5 percent for the Prior Year Quarter and Current Year Quarter, respectively. The effective income tax rate for the Current Year Quarter is lower than the Prior Year Quarter mainly due the suspension for 2017 of the non-deductible HIF fees and valuation allowance increases in 2016 with respect to losses at AlphaCare.

Six months ended June 30, 2017 (“Current Year Period”), compared to the six months ended June 30, 2016 (“Prior Year Period”)

Healthcare

Net Revenue

Net revenue related to Healthcare increased by 13.0 percent or $163.7 million. The increase in revenue is mainly due to higher membership and net favorable rate changes of $135.9 million, revenue for AFSC acquired July 1, 2016 of $92.3 million, contracts implemented after (or during) the Prior Year Period of $54.3 million, net retroactive program changes recorded in the Current Year Period of $20.9 million, revenue for TMG acquired February 29, 2016 of $8.5 million, retroactive profit share in the Current Year Period of $3.3 million, favorable retroactive rate adjustments in the Current Year Period of $2.2 million, and customer settlements in the Current Year Period of $2.0 million. These increases were partially offset by terminated contracts of $68.6 million, net program changes of $23.8 million, net revenue recorded for HIF fees in the Prior Year Period of $21.7 million, the revenue impact of favorable prior period medical claims development recorded in the Current Year Period of $5.3 million, favorable retroactive rate adjustments in the Prior Year Period of $3.3 million, a performance penalty in the Current Year Period of $2.2 million, the revenue impact of unfavorable prior period medical claims development recorded in the Prior Year Period of $2.2 million and other net unfavorable variances of $28.6 million (mainly profit share impact of favorable care trends).

Cost of Care

Cost of care increased by 14.5 percent or $135.2 million. The increase is mainly due to increased membership and higher care associated with net favorable rate changes of $119.3 million, care costs for AFSC of $77.5 million, new contracts implemented after (or during) the Prior Year Period of $55.9 million, net retroactive program changes recorded in the Current Year Period of $19.2 million and net favorable prior period medical claims development recorded in the Prior Year Period of $1.9 million. These increases were partially offset by terminated contracts of $55.0 million, favorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $20.7 million, net program changes of $19.5 million, net favorable prior period medical claims development recorded in the

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Current Year Period of $9.1 million, customer settlements of $4.5 million and care trends and other net favorable variances of $29.8 million. For our commercial contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 84.0 percent in the Prior Year Period to 87.5 percent in the Current Year Period, mainly due to unfavorable care trends. For our government contracts, cost of care decreased as a percentage of risk revenue (excluding EAP business) from 86.0 percent in the Prior Year Period to 84.3 percent in the Current Year Period, mainly due to favorable care development, favorable care trends and business mix.

Direct Service Costs

Direct service costs increased by 7.3 percent or $19.3 million, primarily due to costs related to TMG and AFSC and contract implementation cost, partially offset by the impact of terminated contracts and HIF fees in the Prior Year Period. Direct service costs decreased as a percentage of revenue from 21.1 percent in the Prior Year Period to 20.1 percent in the Current Year Period, mainly due to an increase in revenue from business growth and acquisition activity, partially offset by terminated contracts and the acquisition of TMG and AFSC.

Pharmacy Management

Managed Care and Other Revenue

Managed care and other revenue related to Pharmacy Management increased by 9.4 percent or $11.3 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $4.1 million, Medical pharmacy of $2.9 million, revenue for Veridicus acquired on December 13, 2016 of $2.6 million, increased rebate revenue of $1.0 million, government pharmacy revenue of $0.7 million and other net favorable variances of $1.6 million. These increases were partially offset by terminated contracts of $1.6 million.

PBM and Dispensing Revenue

PBM and dispensing revenue related to Pharmacy Management increased by 28.3 percent or $273.0 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $204.6 million, Medicare revenue of $120.4 million, revenue for Veridicus of $85.7 million, Pharmacy employer revenue of $39.7 million, pharmacy MCO revenue of $11.7 million and other net favorable variances of $0.3 million. These favorable variances were partially offset by terminated contracts of $186.9 million and net decreased dispensing activity from existing customers of $2.5 million.

Cost of Goods Sold

Cost of goods sold increased by 28.2 percent or $256.7 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $201.6 million, an increase in Medicare of $117.5 million, cost for Veridicus of $77.8 million, Pharmacy employer of $32.4 million, an increase in pharmacy MCO of $10.4 million and other net unfavorable variances of $4.7 million. These increases were partially offset by terminated contracts of $183.7 million and net decreased dispensing activity from existing customers of $4.0 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold was 94.2 percent which was consistent with the Prior Year Period.

Direct Service Costs

Direct service costs increased by 20.7 percent or $25.9 million, mainly due to the acquisition of Veridicus, contract implementation costs and ongoing costs to support new business. Direct service costs decreased as a percentage of revenue from 11.5 percent in the Prior Year Period to 11.0 percent in the Current Year Period, mainly due to an increase in revenue from business growth and acquisition activity.

Corporate and Elimination

Net expenses related to Corporate, which includes eliminations, increased by 9.3 percent or $1.7 million, primarily due to an increase in stock and other compensation expense in the Current Year Period. As a percentage of revenue, corporate and elimination was 0.7 percent, which was consistent with the Prior Year Period.

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Depreciation and Amortization

Depreciation and amortization expense increased by 8.1 percent or $4.1 million, primarily due to asset additions after the Prior Year Period and acquisition activity.

Interest Expense

Interest expense increased by $5.3 million, primarily due to an increase in interest rates and the amount of outstanding debt.

Interest Income

Interest income increased by $0.6 million, primarily due to higher yields.

Income Taxes

The Company’s effective income tax rates were 62.6 percent and 43.8 percent for the Prior Year Period and Current Year Period, respectively. The effective income tax rate for the Current Year Period is lower than the Prior Year Period mainly due the suspension for 2017 of the non-deductible HIF fees and valuation allowance increases in 2016 with respect to AlphaCare.

Non‑GAAP Measures

The Company reports its financial results in accordance with GAAP, however the ~~Company's~~Company’s management also assesses business performance and makes business decisions regarding the ~~Company's~~Company’s operations using certain ~~non-GAAP~~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"~~Income”) and adjusted net income per common share attributable to Magellan ~~Health, Inc.~~ on a diluted basis ("(“Adjusted ~~EPS"~~EPS”). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude ~~non-cash~~non‑cash stock compensation expense resulting from restricted stock purchases by sellers, changes in 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~~non‑GAAP measures provide a more useful comparison of the ~~Company's~~Company’s underlying business performance from period to period and are more representative of the earnings capacity of the Company. ~~Non-GAAP~~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.~~ (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2017		2016		2017
Net income attributable to Magellan	$	3,958	$	5,500	$	17,195	$	23,247
Adjusted for acquisitions starting in 2013
Stock compensation expense relating to acquisitions		4,556		4,906		9,112		9,758
Changes in fair value of contingent consideration		463		252		197		203
Amortization of acquired intangibles		5,509		8,315		11,289		16,766
Impairment of intangible assets, net of non-controlling interest		3,936		—		3,936		—
Tax impact		(4,071)		(4,888)		(7,949)		(9,767)
Adjusted Net Income	$	14,351	$	14,085	$	33,780	$	40,207

Three Months Ended
June 30, Six Months Ended
June 30,

2015 2016 2015 2016
Adjusted Net Income
$ 14,722 $ 14,351 $ 39,106 $ 33,780
Adjusted for acquisitions starting in 2013

Stock compensation relating to acquisitions
(8,498 ) (4,556 ) (16,836 ) (9,112 )
Changes in fair value of contingent consideration
(2,567 ) (463 ) (17,536 ) (197 )
Amortization of acquired intangibles
(5,260 ) (5,509 ) (9,643 ) (11,289 )
Impairment of intangible assets, net of non-controlling interest
— (3,936 ) — (3,936 )
Tax impact
6,246 4,071 16,840 7,949

Net income attributable to Magellan Health, Inc.
$ 4,643 $ 3,958 $ 11,931 $ 17,195

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The following table reconciles Adjusted EPS to net income per common share attributable to ~~Magellan Health, Inc.—~~Magellan—diluted:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended				Six Months Ended
	2015			2016			2015			2016			June 30,				June 30,
Adjusted EPS	$	0.56		$	0.58		$	1.47		$	1.38
													2016		2017		2016		2017
Net income per common share attributable to Magellan—diluted													$	0.16	$	0.23	$	0.70	$	0.97
Adjusted for acquisitions starting in 2013
Stock compensation relating to acquisitions		(0.32	)		(0.19	)		(0.63	)		(0.37	)
Stock compensation expense relating to acquisitions														0.19		0.20		0.37		0.40
Changes in fair value of contingent consideration		(0.10	)		(0.02	)		(0.66	)		(0.01	)		0.02		0.01		0.01		0.01
Amortization of acquired intangibles		(0.20	)		(0.22	)		(0.36	)		(0.46	)		0.22		0.35		0.46		0.70
Impairment of intangible assets, net of non-controlling interest		—			(0.16	)		—			(0.16	)		0.16		—		0.16		—
Tax impact		0.23			0.17			0.63			0.32			(0.17)		(0.20)		(0.32)		(0.41)

Net income per common share attributable to Magellan Health, Inc.—diluted	$	0.17		$	0.16		$	0.45		$	0.70



Adjusted EPS													$	0.58	$	0.59	$	1.38	$	1.67

~~Quarter ended June 30, 2016 ("Current Year Quarter"), compared to the quarter ended June 30, 2015 ("Prior Year Quarter")~~

~~Healthcare~~

~~Net Revenue~~

Net revenue related to Healthcare decreased by 11.7 percent or $84.5 million from the Prior Year Quarter to the Current Year Quarter. The decrease in revenue is mainly due to terminated contracts of $168.0 million, unfavorable rate changes of $16.4 million, program changes of $5.9 million and other net unfavorable variances of $3.4 million (mainly related to favorable care trends and other net care variances). These decreases were partially offset by increased membership from existing customers of $73.9 million, contracts implemented after (or during) the Prior Year Quarter of $17.3 million, revenue for TMG acquired February 29, 2016 of $12.6 million, the revenue impact of unfavorable prior period medical claims development recorded in the Current Year Quarter of $3.0 million and the revenue impact of favorable prior period medical claims development recorded in the Prior Year Quarter of $2.4 million.

~~Cost of Care~~

Cost of care decreased by 16.9 percent or $95.8 million from the Prior Year Quarter to the Current Year Quarter. The decrease in cost of care is primarily due to terminated contracts of $150.4 million, lower care associated with unfavorable rate changes of $15.0 million, program changes of $4.8 million, net favorable prior period medical claims development recorded in the Current Year Quarter of $2.5 million and care trends and other net favorable variances of $4.9 million. These decreases were partially offset by increased membership from existing customers of $64.9 million, new contracts implemented after (or during) the Prior Year Quarter of $10.6 million and favorable prior period medical claims development recorded in the Prior Year Quarter of $6.3 million. For our commercial contracts, cost of care decreased as a percentage of risk revenue (excluding EAP business) from 84.2 percent in the Prior Year Quarter to 83.6 percent in the Current Year Quarter, mainly due to business mix. For our government contracts, cost of care decreased as a percentage of risk revenue (excluding EAP business) from 89.6 percent in the Prior Year Quarter to 87.1 percent in the Current Year Quarter, mainly due to business mix.

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~~Direct Service Costs~~

Direct service costs increased by 12.2 percent or $15.2 million from the Prior Year Quarter to the Current Year Quarter primarily due to cost related to TMG and the $4.8 million impairment of an intangible asset, partially offset by terminated contracts. Direct service costs increased as a percentage of revenue from 17.3 percent in the Prior Year Quarter to 21.9 percent in the Current Year Quarter, mainly due to business mix changes related to terminated contracts, the impairment of an intangible asset and the acquisition of TMG.

~~Pharmacy Management~~

~~Managed Care and Other Revenue~~

Managed care and other revenue related to Pharmacy Management increased by 15.2 percent or $8.2 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to increased rebate revenue of $4.4 million, government pharmacy revenue of $2.1 million, new contracts implemented after (or during) the Prior Year Quarter of $1.3 million and other net favorable variances of $0.4 million.

~~PBM and Dispensing Revenue~~

PBM and dispensing revenue related to Pharmacy Management increased by 21.1 percent or $86.5 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $71.8 million, pharmacy employer revenue of $12.3 million, pharmacy MCO revenue of $3.3 million and other net favorable variances of $1.3 million. These favorable variances were partially offset by net decreased dispensing activity from existing customers of $2.2 million.

~~Cost of Goods Sold~~

Cost of goods sold increased by 20.3 percent or $78.8 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $71.8 million, an increase in pharmacy employer of $7.7 million and pharmacy MCO of $3.8 million. These increases were partially offset by net decreased dispensing activity from existing customers of $2.7 million and other net favorable variances of $1.8 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.7 percent in the Prior Year Quarter to 94.2 percent the Current Year Quarter, mainly due to business mix.

~~Direct Service Costs~~

Direct service costs increased by 5.0 percent or $3.0 million from the Prior Year Quarter to the Current Year Quarter mainly due contract implementation costs and ongoing costs to support new business, partially offset by a decrease in expense for fair value of contingent consideration and stock compensation. As a percentage of revenue, direct service costs decreased from 13.2 percent in the Prior Year Quarter to 11.6 percent in the Current Year Quarter, mainly due to the increase in revenue from business growth and the decrease in expense for fair value of contingent consideration and stock compensation.

~~Corporate and Elimination~~

Net expenses related to Corporate, which includes eliminations, increased by 66.7 percent or $4.5 million, primarily due to higher project cost, severance and higher benefit costs in the Current Year Quarter. As a percentage of revenue, corporate and elimination increased from 0.6 percent in the

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~~Prior Year Quarter to 1.0 percent in the Current Year Quarter, mainly due to higher project cost in the Current Year Quarter.~~

~~Depreciation and Amortization~~

Depreciation and amortization expense increased by 2.2 percent or $0.6 million from the Prior Year Quarter to the Current Year Quarter, primarily due to asset additions after the Prior Year Quarter and acquisition activity.

~~Interest Expense~~

~~Interest expense increased by $0.3 million from the Prior Year Quarter to the Current Year Quarter primarily due to an increase in interest rates and amount of outstanding debt.~~

~~Interest Income~~

~~Interest income increased by $0.2 million from the Prior Year Quarter to the Current Year Quarter primarily due to higher yields.~~

~~Income Taxes~~

The Company's effective income tax rates were 58.2 percent and 90.6 percent for the Prior Year Quarter and Current Year Quarter, respectively. The effective income tax rate for the Current Year Quarter differs from the Prior Year Quarter mainly due to valuation allowance increases in 2016 with respect to losses at AlphaCare.

~~Six months ended June 30, 2016 ("Current Year Period"), compared to the six months ended June 30, 2015 ("Prior Year Period")~~

~~Healthcare~~

~~Net Revenue~~

Net revenue related to Healthcare decreased by 11.6 percent or $165.2 million from the Prior Year Period to the Current Year Period. The decrease in revenue is mainly due to terminated contracts of $332.3 million, unfavorable rate changes of $31.1 million, program changes of $11.8 million and other net unfavorable variances of $11.8 million (mainly related to favorable care trends and other net care variances). These decreases were partially offset by increased membership from existing customers of $158.7 million, contracts implemented after (or during) the Prior Year Period of $34.9 million, revenue for TMG acquired February 29, 2016 of $16.7 million, unfavorable retroactive rate adjustments in the Prior Year Period of $3.3 million, favorable retroactive rate adjustments in the Current Year Period of $3.3 million, the revenue impact of favorable prior period medical claims development recorded in the Prior Year Period of $2.7 million and the revenue impact of unfavorable prior period medical claims development recorded in the Current Year Period of $2.2 million.

~~Cost of Care~~

Cost of care decreased by 14.7 percent or $160.5 million from the Prior Year Period to the Current Year Period. The decrease in cost of care is primarily due to terminated contracts of $287.3 million, lower care associated with unfavorable rate changes of $31.3 million, program changes of $8.7 million, net favorable prior period medical claims development recorded in the Current Year Period of $1.9 million and care trends and other net favorable variances of $11.5 million. These decreases were partially offset by increased membership from existing customers of $135.2 million, favorable prior period medical claims development recorded in the Prior Year Period of $24.1 million and new contracts implemented after (or during) the Prior Year Period of $20.9 million. For our commercial

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contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 82.7 percent in the Prior Year Period to 84.0 percent in the Current Year Period, mainly due to favorable care development in the Prior Year Period and business mix. For our government contracts, cost of care decreased as a percentage of risk revenue (excluding EAP business) from 87.4 percent in the Prior Year Period to 86.0 percent in the Current Year Period, mainly due to retroactive rate adjustments in the Prior Year Period and Current Year Period.

~~Direct Service Costs~~

Direct service costs increased by 4.9 percent or $12.3 million from the Prior Year Period to the Current Year Period primarily due to the $4.8 million impairment of an intangible asset and costs related to TMG, partially offset by terminated contracts. Direct service costs increased as a percentage of revenue from 17.8 percent in the Prior Year Period to 21.1 percent in the Current Year Period, mainly due to the impairment of an intangible asset and costs related to TMG, partially offset by terminated contracts.

~~Pharmacy Management~~

~~Managed Care and Other Revenue~~

Managed care and other revenue related to Pharmacy Management increased by 16.2 percent or $16.7 million from the Prior Year Period to the Current Year Period. This increase is primarily due to increased rebate revenue of $8.5 million, new contracts implemented after (or during) the Prior Year Period of $5.0 million and government pharmacy revenue of $5.0 million. These increases were partially offset by other net unfavorable variances of $1.8 million.

~~PBM and Dispensing Revenue~~

PBM and dispensing revenue related to Pharmacy Management increased by 44.6 percent or $297.9 million from the Prior Year Period to the Current Year Period. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $126.7 million, revenue for 4D acquired on April 1, 2015 of $107.5 million, pharmacy employer revenue of $37.6 million, pharmacy MCO revenue of $22.5 million and net increased dispensing activity from existing customers of $3.9 million. These increases were partially offset by other net unfavorable variances of $0.3 million.

~~Cost of Goods Sold~~

Cost of goods sold increased by 44.2 percent or $279.2 million from the Prior Year Period to the Current Year Period. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $127.2 million, 4D acquired April 1, 2015 of $103.9 million, an increase in pharmacy employer of $25.9 million, pharmacy MCO of $22.8 million, and net increased dispensing activity from existing customers of $1.7 million. These increases were partially offset by other net favorable variances of $2.3 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.6 percent in the Prior Year Period to 94.3 percent the Current Year Period, mainly due to business mix.

~~Direct Service Costs~~

Direct service costs decreased by 3.4 percent or $4.3 million from the Prior Year Period to the Current Year Period. This decrease mainly relates to changes in the fair value of contingent consideration related to the CDMI and 4D acquisitions of $17.2 million in the Prior Year Period and lower stock compensation expense of $8.8 million, which decreases were partially offset by additional costs from the acquisition of 4D, contract implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs decreased from 16.8 percent in the Prior Year

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Period to 11.5 percent in the Current Year Period, mainly due to the decrease in expense for fair value of contingent consideration and stock compensation expense, partially offset by the increase in revenue from business growth and acquisition activity.

~~Corporate and Elimination~~

Net expenses related to Corporate, which includes eliminations, increased by 18.2 percent or $2.9 million, primarily due to higher project costs in the Current Year Period. As a percentage of revenue, corporate and elimination was 0.7 percent which was consistent with the Prior Year Period.

~~Depreciation and Amortization~~

Depreciation and amortization expense increased by 4.3 percent or $2.1 million from the Prior Year Period to the Current Year Period, primarily due to asset additions after the Prior Year Period and acquisition activity.

~~Interest Expense~~

~~Interest expense increased by $0.5 million from the Prior Year Period to the Currently Year Period mainly due to an increase in interest rates and amount of outstanding debt.~~

~~Interest Income~~

~~Interest income increased by $0.4 million from the Prior Year Period to the Current Year Period primarily due to higher yields.~~

~~Income Taxes~~

The Company's effective income tax rates were 46.8 percent and 62.6 percent for the Prior Year Period and Current Year Period, respectively. The effective income tax rate for the Current Year Period differs from the Prior Year Period mainly due to valuation allowance increases in 2016 with respect to losses at AlphaCare.

Outlook—Results of Operations

The ~~Company's~~Company’s Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may result from a variety of factors such as those set forth under Item 2—~~"Forward-Looking Statements"~~“Forward‑Looking Statements” as well as a variety of other factors including: (i) changes in utilization levels by enrolled members of the ~~Company's risk-based~~Company’s risk‑based and other pharmacy contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general); (vi) the timing of acquisitions; (vii) changes in estimates regarding medical costs and ~~IBNR;~~claims incurred but not reported (“IBNR”) ; and (viii) changes in the estimates of contingent consideration.

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

Care Trends. The Company expects that ~~same-store~~same‑store normalized cost of care trend for the 12 month forward outlook to be 3 to 7 percent for commercial products and 0 to 2 percent for government business.

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Interest Rate Risk. Changes in interest rates affect interest income earned on the ~~Company's~~Company’s cash equivalents and investments, as well as interest expense on variable interest rate borrowings under the ~~Company's 2014~~Company’s Credit ~~Facility and 2016 Credit Facility (collectively, the "Credit Facilities").~~Facilities. Based on the amount of cash equivalents and investments and the borrowing levels under the Credit Facilities as of June 30, ~~2016,~~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's~~Company’s future earnings and cash outflows.

Historical—Liquidity and Capital Resources

Operating Activities. The Company reported net cash ~~provided~~used by operating activities of ~~$112.7~~$119.2 million for the Prior Year Period and net cash ~~used~~provided by operating activities of ~~$66.2~~$3.8 million for the Current Year Period. The ~~$178.9~~$123.0 million ~~decrease~~increase in operating cash flows from the Prior Year Period is attributable to ~~a net shift of restricted funds between cash and investments that results in an operating cash flow change that is directly offset by an investing cash flow change, unfavorable~~favorable working capital changes and an increase in Segment Profit partially offset by increased tax payments ~~and a decrease in Segment Profit~~ between years.

Restricted cash of $63.2 million in the Prior Year Period was shifted to restricted investments that increased operating cash flows. Restricted cash of $31.4 million in the Current Year Period was shifted from restricted investments that decreased operating cash flows. The net ~~impact of the shift in restricted funds between periods is a decrease in operating cash flows of $94.6 million.~~

~~The net unfavorable~~favorable impact of working capital changes between periods totaled ~~$81.3~~$127.4 million. For the Prior Year Period, operating cash flows were impacted by net unfavorable working capital changes of ~~$37.3~~$203.0 million, which were largely attributable to ~~timing of discretionary bonus activity and~~ an increase in accounts receivable, ~~partially offset by the collection~~specifically related to our healthcare business and our Medicare Part D business, and contingent consideration payments of ~~HIF fee receivables.~~$91.1 million, of which $51.1 million is reflected as operating activities. For the Current Year Period, operating cash flows were impacted by net unfavorable working capital changes of ~~$118.6~~$75.6 million, a large portion of which ~~were largely~~was attributable to ~~contingent consideration payments~~timing of ~~$91.1 million, of which $51.1 million is reflected as operating activities, and receivables of $55.0~~discretionary bonus activity.

Segment Profit for the Current Year Period increased $7.3 million from ~~our Medicare Part D business.~~the Prior Year Period. Tax payments for the Current Year Period totaled ~~$33.0~~$44.7 million, which represents an increase of ~~$1.7~~$11.7 million ~~from~~compared to the Prior Year Period. ~~Segment Profit for Current Year Period decreased $1.3 million from the Prior Year Period.~~

~~During the Current Year Period, the Company had a restricted cash flow source~~

Investing Activities. The Company utilized ~~$37.7~~$30.5 million and ~~$30.5~~$26.8 million during the Prior Year Period and Current Year Period, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, and leaseholds) and capitalized software for the Prior Year Period were ~~$13.2~~$7.8 million and ~~$24.5~~$22.7 million, respectively, as compared to additions for the Current Year Period related to hard assets and capitalized software of $7.8 million and ~~$22.7~~$19.0 million, respectively.

During the Prior Year Period the Company received net cash of $35.7 million from the net maturity of "available-for-sale" securities, with the Company using $5.7 million during the Current Year Period for the net purchase of "available-for-sale" securities. During the Prior Year Period, the Company used net cash of $77.4 million for the net purchase of "available-for-sale" securities, with the Company receiving net cash of $35.7 million during the Current Year Period from the net maturity of "available-for-sale" securities. In addition, during the Prior Year Period, the Company used net cash of $13.6 million and $42.4 million for the acquisition of HSM Physical Health and 4D, respectively. During the Current Year Period, the Company used net cash of

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~~$16.5~~$16.0 million for the acquisition of TMG, partially offset by a working capital adjustment of $0.5 million related to the acquisition of ~~4D.~~4D Pharmacy Management Systems, Inc. During the Current Year Period, the Company used net cash of $3.2 million related to investments in businesses and the acquisition of Veridicus.

Financing Activities. During the Prior Year Period, the Company paid $68.8 million for the repurchase of treasury stock under the Company's share repurchase program, $6.3 million on debt obligations and $2.0 million on capital lease obligations. The Company made a contingent consideration payment totaling $5.0 million of which $4.4 million was related to financing activities. In addition, the Company received $49.2 million from the exercise of stock options and had other net favorable items of $3.1 million.

~~During the Current~~ Year Period, the Company paid $25.5 million for the repurchase of treasury stock under the ~~Company's~~Company’s share repurchase program, $6.3 million on debt obligations and $3.1 million on capital lease obligations. The Company made a contingent consideration ~~payments~~payment totaling $91.1 million, of which $40.0 million was related to financing activities. In addition, the Company received $225.0 million from the issuance of debt and $9.7 million from exercise of stock options.

During the Current Year Period, the Company paid $187.5 million on debt obligations, $5.0 million for the repurchase of treasury stock under the Company's share repurchase program, $3.5 million on capital lease obligations and had other net unfavorable items of $1.3 million. In addition, the Company received $200.0 million from the issuance of debt and $6.0 million from the exercise of stock ~~options, and other net favorable items of $0.5 million.~~options.

Outlook—Liquidity and Capital Resources

Liquidity. During the remainder of ~~2016,~~2017, the Company will have estimated capital expenditures of between ~~$32.5~~$38.2 million and ~~$42.5~~$48.2 million. In addition, the Company anticipates working capital increases for 2016 of approximately $100 million, mainly for receivables from CMS and other parties related to our Part D business. As of July 22, 2016, due to the timing of working capital needs, the Company borrowed a net total of $50.0 million of the $250.0 million of revolving loans available under the 2014 Credit Facility. The Company may ~~have to~~ draw on the 2014 Credit Facility or 2017 Credit Facility as required to meet working capital needs associated with the ~~extent that the anticipated~~ timing of receivables and payables, orfund share repurchases ~~changes during the year.~~or support acquisition activities. The Company currently expects to have adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. During the remainder of 2017, scheduled principal payments of $12.5 million will be made under the 2014 Credit Facility, and the 2016 Credit Facility and the 2017 Credit Facility will mature on December 29, 2017. The Company currently expects to have the ability to settle its 2017 debt obligations through current unrestricted cash and investment balances and cash flows from operations in 2017, as well as borrowing capacity available under the 2014 Credit Facility in the form of revolving loans. However, the Company will likely refinance its debt during 2017. The Company plans to maintain its current investment strategy of investing in a diversified, high quality, liquid portfolio of investments and continues to closely monitor the ~~situation in the~~ financial markets. The Company estimates that it has no risk of any material permanent loss on its investment portfolio; however, there can be no assurance ~~that~~ the Company will not experience any such losses in the future.

Stock Repurchases. On October 26, 2015, the ~~Company's~~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 26, 2017. See Note D—"“Commitments and ~~Contingencies"~~Contingencies” for more information on the ~~Company's~~Company’s share repurchase program.

~~Off-Balance~~Off‑Balance Sheet Arrangements. As of June 30, ~~2016,~~2017, the Company has no material ~~off-balance~~off‑balance sheet arrangements.

Credit Facilities. On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that provides 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. On December 2, 2015, the Company entered into an amendment to the 2014 Credit Facility under which Magellan Pharmacy Services, Inc. ~~(a wholly owned subsidiary of Magellan Health, Inc.)~~ became a party to the $500.0 million Credit Agreement as the borrower and assumed all of the obligations of Magellan Rx Management, Inc. The 2014 Credit Facility is guaranteed by substantially all of the ~~non-regulated~~non‑regulated subsidiaries of the Company and will mature on July 23, 2019, however, the Company holds an option to extend the 2014 Credit Facility for an additional one year period.

On June 27, 2016, the Company entered into a ~~$200.0 million~~ Credit Agreement with various lenders that provides for a $200.0 million term loan to Magellan Pharmacy Services, Inc. The 2016 Credit Facility is guaranteed by substantially all of the non‑regulated subsidiaries of the Company and will mature on December 29, 2017.

On January 10, 2017, the Company entered into a Credit Agreement with various lenders that provides for a $200.0 million delayed draw term loan to Magellan Pharmacy Services, Inc. The 2017 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on December 29, 2017.

See Note A—~~"General"~~“General” for more information on the Credit Facilities.

Restrictive Covenants in Debt Agreements. The Credit Facilities contain covenants that potentially limit ~~management's~~management’s discretion in operating the ~~Company's~~Company’s business by, in certain circumstances, restricting or limiting the ~~Company's~~Company’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 or merge or consolidate with another company; and~~
•: ~~enter into some types of transactions with affiliates.~~

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 or merge or consolidate with another company; and

enter into some types of transactions with affiliates.

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

The Credit Facilities also require the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the Credit Facilities pursuant to its terms, would result in an event of default under the Credit Facilities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Changes in interest rates affect interest income earned on the ~~Company's~~Company’s cash equivalents and investments, as well as interest expense on variable interest rate borrowings under the ~~Company's~~Company’s Credit Facilities. Based on the amount of cash equivalents and investments and the borrowing levels under the Credit Facilities as of June 30, ~~2016,~~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's~~Company’s future earnings and cash outflows.

Item 4. Controls and Procedures.

a) The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act), as of June 30, 2016. Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of June 30, 2016.

b) Under the supervision and with the participation of management, including the Company's principal executive and principal financial officers, the Company has determined that there has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

a)The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a‑15(e) under the Exchange Act), as of June 30, 2017. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2017.

b)Under the supervision and with the participation of management, including the Company’s principal executive and principal financial officers, the Company has determined that there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a‑15(f) under the Exchange Act) that occurred during the Company’s quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

There has been no material change in our risk factors as disclosed in Part I—Item 1A—"“Risk ~~Factors"~~Factors” of the ~~Company's~~Company’s Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2015,~~2016, which was filed with the SEC on February ~~29, 2016.~~24, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The ~~Company's~~Company’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 26, 2015, the ~~Company's~~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 26, 2017. Pursuant to this program, the Company made open market purchases during the ~~six~~three months ended June 30, ~~2016~~2017 as follows ~~(aggregate cost excludes broker commissions and~~(approximate dollar value of shares that may yet be purchased under the plan 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)
April 1 - 30, 2017	—	$	—	—	$	74.8
May 1-31, 2017	30,754		69.09	30,754		72.7
June 1-30, 2017	45,427		71.52	45,427		69.4
	76,181			76,181

Period
Total Number
of Shares
Purchased Average
Price Paid
per Share 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 Plan(1)(2)
April 1 - 30, 2016
141,121 $ 69.93 141,121 $ 162.3
May 1 - 31, 2016
91,926 67.25 91,926 156.1
June 1 - 30, 2016
— — — 156.1

233,047 233,047

~~(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.~~

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

~~Exhibit No.~~			~~Description~~

	~~4.1~~		$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.
Exhibit No.	*10.1	Description
2.1	~~Share Purchase~~	Agreement and Plan of Merger, dated ~~as of May 15, 2016,~~July 13, 2017, among ~~Magellan Health,~~ Magellan Healthcare, Inc., ~~Armed Forces Services Corporation ("AFSC")and the holders~~SWH Holdings, Inc., certain of the ~~issued~~stockholders of SWH Holdings, Inc., certain of the vested optionhoders of SWH Holdings, Inc., TA Associates Management, L.P. and ~~outstanding common stock of AFSC who are parties thereto.~~Silver Merger Sub, Inc.
3.1	~~31.1~~	Second Amended and Restated Certificate of Incorporation of the Company, as amended and restated on May 25, 2017, which was filed as Exhibit 3.1 to the Company’s current report on Form 8-K, which was filed on May 25, 2017 and is incorporated herein by reference.
3.2		Bylaws of the Company as amended and restated on May 24, 2017, which was filed as Exhibit 3.2 to the Company’s current report on Form 8-K, which was filed on May 25, 2017 and is incorporated herein by reference.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the ~~Sarbanes-Oxley~~Sabanes-Oxley Act of 2002.
31.2	~~31.2~~		Certification of Chief Financial Officer pursuant to Section 302 of the ~~Sarbanes-Oxley~~Sarbanes‑Oxley Act of 2002.
32.1	~~32.1~~		Certification of Chief Executive Officer pursuant to Section 906 of the ~~Sarbanes-Oxley~~Sarbanes‑Oxley Act of 2002 (furnished).
32.2	~~32.2~~		Certification of Chief Financial Officer pursuant to Section 906 of the ~~Sarbanes-Oxley~~Sarbanes‑Oxley Act of 2002 (furnished).
101	~~101~~		The following materials from the ~~Company's~~Company’s Quarterly Report on Form ~~10-Q~~10‑Q for the quarter ended June 30, ~~2016~~2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) related notes.

*: ~~Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the SEC.~~

Table of Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements 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.


Date: July ~~29, 2016~~28, 2017			~~MAGELLAN HEALTH, INC.~~ Magellan Health, Inc. (Registrant)
		~~By:~~
	By:	/s/ ~~JONATHAN N. RUBIN~~ Jonathan N. Rubin ~~Executive Vice President and~~
		Jonathan N. Rubin
		Chief Financial Officer ~~(Principal~~ (Principal Financial Officer and Duly Authorized Officer)

Table of Contents

Exhibit Index


Exhibit Number		Description of Exhibit
	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 optionhoders of SWH Holdings, Inc., TA Associates Management, L.P. and Silver Merger Sub, Inc.
	3.1	Second Amended and Restated Certificate of Incorporation of the Company, as amended and restated on May 25, 2017, which was filed as Exhibit 3.1 to the Company’s current report on Form 8-K, which was filed on May 25, 2017 and is incorporated herein by reference.
	3.2	Bylaws of the Company as amended and restated on May 24, 2017, which was filed as Exhibit 3.2 to the Company’s current report on Form 8-K, which was filed on May 25, 2017 and is incorporated herein by reference.
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sabanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002 (furnished).
	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002 (furnished).
	101	The following materials from the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) related notes.

	December 31, 2015			June 30, 2016 (unaudited)

ASSETS
Current Assets:
Cash and cash equivalents	$	115,432		$	198,656
Restricted cash		133,597			80,642
Accounts receivable, less allowance for doubtful accounts of $3,246 and $3,384 at December 31, 2015 and June 30, 2016, respectively		428,644			506,980
Short-term investments (restricted investments of $277,556 and $246,968 at December 31, 2015 and June 30, 2016, respectively)		322,339			284,604
Pharmaceutical inventory		50,749			62,995
Other current assets (restricted deposits of $27,752 and $32,125 at December 31, 2015 and June 30, 2016, respectively)		46,921			75,808

Total Current Assets		1,097,682			1,209,685
Property and equipment, net		174,745			173,933
Restricted long-term investments		3,826			3,054
Deferred income taxes		26,836			25,364
Other long-term assets		11,207			38,736
Goodwill		621,390			634,613
Other intangible assets, net		133,374			116,012

Total Assets	$	2,069,060		$	2,201,397



LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	86,484		$	71,440
Accrued liabilities		139,726			171,102
Short-term contingent consideration		91,623			594
Medical claims payable		250,449			216,793
Other medical liabilities		136,939			136,637
Current maturities of long-term debt and capital lease obligations		19,014			50,516

Total Current Liabilities		724,235			647,082
Long-term debt and capital lease obligations		238,295			426,175
Tax contingencies		12,677			13,681
Long-term contingent consideration		803			3,214
Deferred credits and other long-term liabilities		20,930			21,975

Total Liabilities		996,940			1,112,127

Redeemable non-controlling interest		5,937			4,368
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2015 and June 30, 2016—Issued and outstanding—none		—			—
Ordinary common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2015 and June 30, 2016—Issued and outstanding—51,340 shares and 24,692 shares at December 31, 2015, respectively, and 51,605 and 24,581 shares at June 30, 2016, respectively		513			516
Multi-Vote common stock, par value $.01 per share
Authorized—40,000 shares at December 31, 2015 and June 30, 2016—Issued and outstanding—none		—			—
Other Stockholders' Equity:
Additional paid-in capital		1,124,013			1,150,756
Retained earnings		1,211,310			1,228,505
Accumulated other comprehensive loss		(262	)		(26	)
Ordinary common stock in treasury, at cost, 26,648 shares and 27,024 shares at December 31, 2015 and June 30, 2016, respectively		(1,269,391	)		(1,294,849	)

Total Stockholders' Equity		1,066,183			1,084,902

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity	$	2,069,060		$	2,201,397

	June 30, 2016

Balance as of beginning of period	$	92,426
Acquistion of TMG		2,244
Change in fair value		197
Net payments		(91,059	)

Balance as of end of period	$	3,808

	December 31, 2015

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	5,524	$	—	$	(10	)	$	5,514
Obligations of government-sponsored enterprises(1)		50,575		4		(54	)		50,525
Corporate debt securities		269,340		—		(364	)		268,976
Certificates of deposit		1,150		—		—			1,150

Total investments at December 31, 2015	$	326,589	$	4	$	(428	)	$	326,165

	Amortized Cost		Estimated Fair Value

2016	$	215,467	$	215,426
2017		69,737		69,730
2018		2,495		2,502

Total investments at June 30, 2016	$	287,699	$	287,658

			Weighted Average Exercise Price

Outstanding, beginning of period	2,939,840		$	55.13
Granted	445,560			64.08
Forfeited	(45,263	)		51.07
Exercised	(195,202	)		49.00

Outstanding, end of period	3,144,935		$	56.84



Vested and expected to vest at end of period	3,111,786		$	56.78



Exercisable, end of period	1,785,957		$	53.13

			Weighted Average Grant Date Fair Value

Outstanding, beginning of period	231,088		$	61.53
Awarded	51,521			64.87
Vested	(51,419	)		63.77
Forfeited	(13,713	)		63.59

Outstanding, end of period	217,477			61.66

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated

Three Months Ended June 30, 2015
Managed care and other revenue	$	722,471		$	53,782		$	(13	)	$	776,240
PBM and dispensing revenue		—			408,924			(27,557	)		381,367
Cost of care		(568,288	)		—			—			(568,288	)
Cost of goods sold		—			(387,828	)		26,419			(361,409	)
Direct service costs and other(3)		(124,779	)		(61,038	)		(5,638	)		(191,455	)
Stock compensation expense(1)(3)		1,784			10,339			1,672			13,795
Changes in fair value of contingent consideration(1)		71			2,496			—			2,567
Less: non-controlling interest segment profit (loss)(2)		(273	)		—			(77	)		(350	)

Segment profit (loss)	$	31,532		$	26,675		$	(5,040	)	$	53,167

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated

Six Months Ended June 30, 2015
Managed care and other revenue	$	1,422,064		$	102,850		$	(24	)	$	1,524,890
PBM and dispensing revenue		—			667,717			(54,032	)		613,685
Cost of care		(1,090,621	)		5			—			(1,090,616	)
Cost of goods sold		—			(631,366	)		51,750			(579,616	)
Direct service costs and other(3)		(253,247	)		(129,271	)		(13,387	)		(395,905	)
Stock compensation expense(1)(3)		4,972			19,744			2,980			27,696
Changes in fair value of contingent consideration(1)		171			17,365			—			17,536
Less: non-controlling interest segment profit (loss)(2)		(393	)		—			(51	)		(444	)

Segment profit (loss)	$	83,732		$	47,044		$	(12,662	)	$	118,114

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated

Three Months Ended June 30, 2015
Segment profit (loss) before Corporate allocations	$	47,522		$	30,960		$	(25,315	)	$	53,167
Allocated Corporate costs		(17,280	)		(4,608	)		21,888			—
Allocated Corporate stock compensation expense		1,290			323			(1,613	)		—

Segment profit (loss)	$	31,532		$	26,675		$	(5,040	)	$	53,167

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated

Three Months Ended June 30, 2016
Segment profit (loss) before Corporate allocations	$	50,719		$	36,256		$	(30,081	)	$	56,894
Allocated Corporate costs		(17,661	)		(4,325	)		21,986			—
Allocated Corporate stock compensation expense		1,364			341			(1,705	)		—

Segment profit (loss)	$	34,422		$	32,272		$	(9,800	)	$	56,894

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated

Six Months Ended June 30, 2015
Segment profit (loss) before Corporate allocations	$	115,470		$	55,465		$	(52,821	)	$	118,114
Allocated Corporate costs		(35,227	)		(9,293	)		44,520			—
Allocated Corporate stock compensation expense		3,489			872			(4,361	)		—

Segment profit (loss)	$	83,732		$	47,044		$	(12,662	)	$	118,114

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated

Six Months Ended June 30, 2016
Segment profit (loss) before Corporate allocations	$	104,246		$	68,963		$	(56,383	)	$	116,826
Allocated Corporate costs		(35,302	)		(8,866	)		44,168			—
Allocated Corporate stock compensation expense		2,688			672			(3,360	)		—

Segment profit (loss)	$	71,632		$	60,769		$	(15,575	)	$	116,826

Period		Average Price Paid per Share		Aggregate 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

Period		Average Price Paid per Share			Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan(1)(2)

April 1 - 30, 2016	141,121	$	69.93	141,121	$	162.3
May 1 - 31, 2016	91,926		67.25	91,926		156.1
June 1 - 30, 2016	—		—	—		156.1

	233,047			233,047