UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10‑Q~~10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended ~~September~~June 30, ~~2017~~2020
Or
☐	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~~4801 E. Washington Street ~~Scottsdale,~~ Phoenix, Arizona (Address of principal executive offices)	~~85251~~85034 (Zip code)

~~(602) 572‑6050~~(800) 642-1716

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	MGLN	The NASDAQ Global Market

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 ☒ No ☐

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 ☒ No ☐

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


Large accelerated filer ☒	Accelerated filer ☐	~~Non‑accelerated~~Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐			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 ☐ No ☒

The number of shares of ~~the registrant’s Ordinary Common Stock~~Magellan Health, Inc.’s common stock outstanding as of ~~September~~June 30, ~~2017~~2020 was ~~24,042,290.~~25,310,420.

Table of Contents

FORM 10-Q

~~FORM 10‑Q~~

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

INDEX


		Page No.
		~~Page No.~~
	PART I — Financial Information:
Item 1:	Financial Statements	2
	Consolidated Balance Sheets—December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017~~2020	2
	Consolidated Statements of ~~Income—~~Comprehensive Income —For the Three and Six Months Ended June 30, 2019 and 2020	3
	Consolidated Statements Changes in Stockholders’ Equity—For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020	3 4
	~~Consolidated Statements of Comprehensive Income—For the Three and Nine Months Ended September 30, 2016 and 2017~~	4
	Consolidated Statements of Cash Flows—For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020	5
	Notes to Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27 32
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	39 44
Item 4:	Controls and Procedures	44
	PART II — Other Information:
Item 1:	~~Controls and Procedures~~Legal Proceedings	39
	~~PART II~~ — ~~Other Information~~:	44
Item 11A:	~~Legal Proceedings~~Risk Factors	40 45
Item 1A2:	~~Risk Factors~~	40
~~Item 2~~:	Unregistered Sales of Equity Securities and Use of Proceeds	40 48
Item 3:	Defaults Upon Senior Securities	40 48
Item 4:	Mine Safety Disclosures	40 48
Item 5:	Other Information	41 48
Item 6:	Exhibits	41 48
Exhibit Index		42 49
Signatures		43
		50

Table of Contents

PART ~~I��~~I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

September 30,

December 31,

2017

2016

(Unaudited)

ASSETS

Current Assets:

Cash and cash equivalents ($81,776 and $98,277 restricted at December 31, 2016 and September 30, 2017, respectively)

$
304,508

$
504,764

Accounts receivable, less allowance of $5,644 and $8,657 at December 31, 2016 and September 30, 2017, respectively

606,764

622,431

Short-term investments ($227,795 and $238,869 restricted at December 31, 2016 and September 30, 2017, respectively)

297,493

312,902

Pharmaceutical inventory

58,995

48,941

Other current assets ($38,785 and $23,140 restricted at December 31, 2016 and September 30, 2017, respectively)

51,507

52,896

Total Current Assets

1,319,267

1,541,934

Property and equipment, net

172,524

161,437

Long-term investments ($6,306 and $10,575 restricted at December 31, 2016 and September 30, 2017, respectively)

7,760

10,575

Deferred income taxes

3,125

5,249

Other long-term assets

12,725

40,621

Goodwill

742,054

745,947

Other intangible assets, net

186,232

156,351

Total Assets

$
2,443,687

$
2,662,114

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$
95,635

$
66,530

Accrued liabilities

202,176

173,701

Short-term contingent consideration

9,354

8,875

Medical claims payable

184,136

213,692

Other medical liabilities

197,856

193,881

Current debt and capital lease obligations

403,693

19,231

Total Current Liabilities

1,092,850

675,910

Long-term debt and capital lease obligations

214,686

745,543

Tax contingencies

13,981

14,348

Long-term contingent consideration

1,799

615

Deferred credits and other long-term liabilities

15,882

18,290

Total Liabilities

1,339,198

1,454,706

Redeemable non-controlling interest

4,770

4,704

Preferred stock, par value $.01 per share

Authorized—10,000 shares at December 31, 2016 and September 30, 2017-Issued and outstanding-none

—

—

Ordinary common stock, par value $.01 per share

Authorized—100,000 shares at December 31, 2016 and September 30, 2017-Issued and outstanding-51,993 and 23,517 shares at December 31, 2016, respectively, and 52,723 and 24,042 shares at September 30, 2017, respectively

520

527

Other Stockholders’ Equity:

Additional paid-in capital

1,186,283

1,248,993

Retained earnings

1,289,288

1,344,986

Accumulated other comprehensive loss

(175)

(148)

Treasury stock, at cost, 28,476 and 28,681 shares at December 31, 2016 and September 30, 2017, respectively

(1,376,197)

(1,391,654)

Total Stockholders’ Equity

1,099,719

1,202,704

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity

$
2,443,687

$
2,662,114



	December 31,		June 30,
	2019		2020
ASSETS
Current Assets:
Cash and cash equivalents ($51,253 and $28,237 restricted at December 31, 2019 and June 30, 2020, respectively)	$	115,752	$	160,419
Accounts receivable, net		680,569		753,065
Short-term investments ($82,772 and $46,315 restricted at December 31, 2019 and June 30, 2020, respectively)		98,797		75,671
Pharmaceutical inventory		44,962		36,694
Other current assets ($36,215 and $73,905 restricted at December 31, 2019 and June 30, 2020, respectively)		69,687		80,375
Current portion of assets held for sale		663,276		1,145,904
Total Current Assets		1,673,043		2,252,128
Property and equipment, net		131,712		141,035
Long-term investments ($2,307 restricted at December 31, 2019)		2,864		—
Deferred income taxes		1,840		28,519
Other long-term assets		58,905		60,770
Goodwill		806,421		806,421
Other intangible assets, net		81,675		62,330
Assets held for sale, less current portion		335,713		—
Total Assets	$	3,092,173	$	3,351,203
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	83,790	$	99,199
Accrued liabilities		191,854		187,286
Medical claims payable		128,114		112,077
Other medical liabilities		92,915		110,268
Current debt, finance lease and deferred financing obligations		3,491		84,942
Current portion of liabilities held for sale		409,983		504,459
Total Current Liabilities		910,147		1,098,231
Long-term debt, finance lease and deferred financing obligations		679,125		641,950
Deferred income taxes		1,971		—
Tax contingencies		9,453		11,097
Deferred credits and other long-term liabilities		56,393		56,956
Liabilities held for sale, less current portion		37,301		—
Total Liabilities		1,694,390		1,808,234
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2019 and June 30, 2020-Issued and outstanding-NaN		—		—
Common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2019 and June 30, 2020-Issued and outstanding-54,285 and 24,623 shares at December 31, 2019, respectively, and 54,972 and 25,310 shares at June 30, 2020, respectively		543		550
Other Stockholders’ Equity:
Additional paid-in capital		1,386,616		1,429,995
Retained earnings		1,475,207		1,576,549
Accumulated other comprehensive income		144		602
Treasury stock, at cost, 29,662 and 29,662 shares at December 31, 2019 and June 30, 2020, respectively		(1,464,727)		(1,464,727)
Total Stockholders’ Equity		1,397,783		1,542,969
Total Liabilities and Stockholders’ Equity	$	3,092,173	$	3,351,203

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Net revenue:
Managed care and other	$	608,614	$	548,711	$	1,175,162	$	1,101,879
PBM		545,675		551,364		1,098,133		1,120,575
Total net revenue		1,154,289		1,100,075		2,273,295		2,222,454
Costs and expenses:
Cost of care		408,911		321,831		778,008		670,939
Cost of goods sold		501,081		528,067		1,027,395		1,061,308
Direct service costs and other operating expenses (1)		195,907		199,756		398,207		403,997
Depreciation and amortization		28,191		23,888		53,608		47,246
Interest expense		9,070		7,995		18,107		16,953
Interest and other income		(1,821)		(551)		(3,580)		(1,770)
Special charges		-		8,309		-		8,309
Total costs and expenses		1,141,339		1,089,295		2,271,745		2,206,982
Income from continuing operations before income taxes		12,950		10,780		1,550		15,472
Provision (benefit) for income taxes		5,735		(36,328)		2,526		(30,566)
Net income (loss) from continuing operations		7,215		47,108		(976)		46,038
Income from discontinued operations, net of tax		6,398		36,397	��	15,020		55,717
Net income	$	13,613	$	83,505	$	14,044	$	101,755

Net income (loss) per common share:
Basic (See Note A)
Continuing operations	$	0.30	$	1.88	$	(0.04)	$	1.85
Discontinued operations		0.26		1.45		0.62		2.24
Consolidated operations	$	0.56	$	3.33	$	0.58	$	4.09
Diluted (See Note A)
Continuing operations	$	0.30	$	1.86	$	(0.04)	$	1.84
Discontinued operations		0.26		1.44		0.62		2.22
Consolidated operations	$	0.56	$	3.30	$	0.58	$	4.06
Other comprehensive income
Unrealized gains on available-for-sale securities (2)		419		659		739		458
Comprehensive income	$	14,032	$	84,164	$	14,783	$	102,213

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2017

2016

2017
Net revenue:

Managed care and other

$
751,589

$
834,358

$
2,127,911

$
2,385,397
PBM and dispensing

540,543

585,048

1,445,588

1,758,771
Total net revenue

1,292,132

1,419,406

3,573,499

4,144,168
Costs and expenses:

Cost of care

480,243

569,306

1,410,403

1,634,624
Cost of goods sold

509,673

543,682

1,362,062

1,648,670
Direct service costs and other operating expenses (1)(2)(3)

229,094

227,372

635,627

680,230
Depreciation and amortization

26,885

28,189

77,472

82,896
Interest expense

3,038

7,663

6,780

16,711
Interest and other income

(741)

(1,781)

(2,116)

(3,801)
Total costs and expenses

1,248,192

1,374,431

3,490,228

4,059,330
Income before income taxes

43,940

44,975

83,271

84,838
Provision for income taxes

18,631

11,739

43,259

29,206
Net income

25,309

33,236

40,012

55,632
Less: net (loss) income attributable to non-controlling interest

(200)

785

(2,692)

(66)
Net income attributable to Magellan

$
25,509

$
32,451

$
42,704

$
55,698
Net income attributable to Magellan per common share:

Basic (See Note B)

$
1.11

$
1.39

$
1.83

$
2.41
Diluted (See Note B)

$
1.06

$
1.32

$
1.75

$
2.30

(1)

~~(1)~~

Includes stock compensation expense of ~~$9,176~~$5,207 and ~~$10,323~~$6,592, for the three months ended ~~September~~June 30, ~~2016~~2019 and ~~2017,~~2020, respectively and ~~$27,573~~$14,607 and ~~$31,834~~$12,389 for the ~~nine~~six months ended ~~September~~June 30, ~~2016 and 2017,~~2019 and 2020, respectively.

(2)

~~(2)~~

~~Includes changes in fair value~~Net of ~~contingent consideration~~income tax provision of ~~$313~~$131 and ~~$(834)~~$219 for the three months ended ~~September~~June 30, ~~2016~~2019 and ~~2017,~~2020, respectively, and ~~$510~~$231 and ~~$(631)~~$152 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017, respectively~~.

2020, respectively.

~~(3)~~

~~Includes impairment of intangible assets of $0 and $4,800 for the three and nine months ended September 30, 2016, respectively.~~

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2016

2017

2016

2017
Net income

$
25,309

$
33,236

$
40,012

$
55,632
Other comprehensive income:

Unrealized (loss) gains on available-for-sale securities (1)

(127)

26

109

27
Comprehensive income

25,182

33,262

40,121

55,659
Less: comprehensive (loss) income attributable to non-controlling interest

(200)

785

(2,692)

(66)
Comprehensive income attributable to Magellan

$
25,382

$
32,477

$
42,813

$
55,725


													Accumulated
				Common Stock				Additional					Other		Total
	Common Stock				In Treasury			Paid in			Retained		Comprehensive		Stockholders’
	Shares	Amount		Shares		Amount		Capital			Earnings		(Loss) Income		Equity
Balance at March 31, 2019	53,695	$	537		(29,662)	$	(1,464,727)	$	1,337,849		$	1,419,735	$	(4)	$	1,293,390
Stock compensation expense	—		—		—		—		5,414			—		—		5,414
Exercise of stock options	348		4		—		—		21,430			—		—		21,434
Issuance of equity	20		—		—		—		—			—		—		—
Net income	—		—		—		—		—			13,613		—		13,613
Other comprehensive income—other	—		—		—		—		—			—		419		419
Balance at June 30, 2019	54,063	$	541		(29,662)	$	(1,464,727)	$	1,364,693		$	1,433,348	$	415	$	1,334,270

Balance at March 31, 2020	54,631	$	546		(29,662)	$	(1,464,727)	$	1,402,797		$	1,493,044	$	(57)	$	1,431,603
Stock compensation expense	—		—		—		—		6,958			—		—		6,958
Exercise of stock options	324		4		—		—		20,240			—		—		20,244
Issuance of equity	17		—		—		—		—	��		—		—		—
Net income	—		—		—		—		—			83,505		—		83,505
Other comprehensive (loss)—other	—		—		—		—		—					659		659
Balance at June 30, 2020	54,972	$	550		(29,662)	$	(1,464,727)	$	1,429,995		$	1,576,549	$	602	$	1,542,969

Balance at December 31, 2018	53,536	$	535		(29,601)	$	(1,461,002)	$	1,326,645		$	1,419,449	$	(324)	$	1,285,303
Stock compensation expense	—		—		—		—		15,021			—		—		15,021
Exercise of stock options	389		5		—		—		23,474			—		—		23,479
Issuance of equity	138		1		—		—		(447)			—		—		(446)
Repurchase of stock	—		—		(61)		(3,725)		—			—		—		(3,725)
Net income	—		—		—		—		—			14,044		—		14,044
Other comprehensive income—other	—		—		—		—		—			—		739		739
Adoption of ASC 842	—		—		—		—		—			(145)		—		(145)
Balance at June 30, 2019	54,063	$	541		(29,662)	$	(1,464,727)	$	1,364,693		$	1,433,348	$	415	$	1,334,270

Balance at December 31, 2019	54,285	$	543		(29,662)	$	(1,464,727)	$	1,386,616		$	1,475,207	$	144	$	1,397,783
Stock compensation expense	—		—		—		—		13,015			—		—		13,015
Exercise of stock options	540		6		—		—		31,501			—		—		31,507
Issuance of equity	147		1		—		—		(1,137)			—		—		(1,136)
Net income	—		—		—		—		—			101,755		—		101,755
Other comprehensive income—other	—		—		—		—		—			—		458		458
Adoption of ASC 326	—		—		—		—		—			(413)		—		(413)
Balance at June 30, 2020	54,972	$	550		(29,662)	$	(1,464,727)	$	1,429,995		$	1,576,549	$	602	$	1,542,969

~~(1)~~

Net of income tax (benefit) provision of $(78) and $16 for the three months ended September 30, 2016 and 2017, respectively, and $68 and $18 for the nine months ended September 30, 2016 and 2017, respectively.

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30,

(Unaudited)

(In thousands)

2016

2017

Cash flows from operating activities:

Net income

$
40,012

$
55,632

Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization

77,472

82,896

Non-cash impairment of intangible assets

4,800

—

Non-cash interest expense

385

3,120

Non-cash stock compensation expense

27,573

31,834

Non-cash income tax provision (benefit)

2,998

(2,160)

Non-cash amortization on investments

4,224

3,052

Changes in assets and liabilities, net of effects from acquisitions of businesses:

Accounts receivable, net

(31,926)

(13,539)

Pharmaceutical inventory

(10,425)

9,609

Other assets

(72,374)

(15,481)

Accounts payable and accrued liabilities

23,870

(70,006)

Medical claims payable and other medical liabilities

(18,017)

25,578

Contingent consideration

(50,591)

(631)

Tax contingencies

(111)

158

Deferred credits and other long-term liabilities

(5,393)

2,408

Other

(57)

210

Net cash (used in) provided by operating activities

(7,560)

112,680

Cash flows from investing activities:

Capital expenditures

(44,345)

(42,703)

Acquisitions and investments in businesses, net of cash acquired

(126,931)

(3,200)

Purchase of investments

(365,521)

(341,280)

Maturity of investments

373,694

320,045

Net cash used in investing activities

(163,103)

(67,138)

Cash flows from financing activities:

Proceeds from issuance of debt

290,000

949,239

Payments to acquire treasury stock

(106,806)

(15,457)

Proceeds from exercise of stock options and warrants

10,933

28,328

Payments on debt and capital lease obligations

(13,569)

(798,359)

Payments on contingent consideration

(40,559)

(1,032)

Other

1,274

(8,005)

Net cash provided by financing activities

141,273

154,714

Net (decrease) increase in cash and cash equivalents

(29,390)

200,256

Cash and cash equivalents at beginning of period

249,029

304,508

Cash and cash equivalents at end of period

$
219,639

$
504,764

Supplemental cash flow data:

Non-cash investing activities:

Property and equipment acquired under capital leases

$
4,193

$
2,418


	2019		2020
Cash flows from operating activities:
Net income	$	14,044	$	101,755
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		64,198		57,951
Special Charges		—		8,309
Non-cash interest expense		679		941
Non-cash stock compensation expense		15,021		13,015
Non-cash income tax provision (benefit)		1,026		(29,443)
Non-cash (amortization) accretion on investments		(327)		907
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net		(51,544)		(24,535)
Pharmaceutical inventory		(4,793)		8,268
Other assets		(23,890)		(38,322)
Accounts payable and accrued liabilities		20,821		62,970
Medical claims payable and other medical liabilities		4,329		10,510
Contingent consideration		(3,758)		—
Tax contingencies		610		1,343
Deferred credits and other long-term liabilities		(7,429)		(2,537)
Other		372		(289)
Net cash provided by operating activities		29,359		170,843
Net cash (used in) provided by operating activities from discontinued operations		(16,574)		178,326
Net cash provided by (used in) operating activities from continuing operations		45,933		(7,483)
Cash flows from investing activities:
Capital expenditures		(27,804)		(38,305)
Acquisitions and investments in businesses, net of cash acquired		(320)		(369)
Purchases of investments		(295,768)		(417,688)
Proceeds from maturities and sales of investments		288,290		288,137
Net cash used in investing activities		(35,602)		(168,225)
Net cash used in investing activities from discontinued operations		(3,210)		(156,800)
Net cash used in investing activities from continuing operations		(32,392)		(11,425)
Cash flows from financing activities:
Proceeds from borrowings on revolving line of credit		—		80,000
Payments to acquire treasury stock		(4,124)		—
Proceeds from exercise of stock options		20,647		29,825
Payments on debt, finance lease and deferred financing obligations		(15,543)		(40,264)
Payments on contingent consideration		(6,247)		—
Other		(446)		(1,136)
Net cash (used in) provided by financing activities		(5,713)		68,425
Net cash provided by financing activities from discontinued operations		—		4,850
Net cash (used in) provided by financing activities from continuing operations		(5,713)		63,575
Net increase in cash and cash equivalents from continuing operations		7,828		44,667
Cash and cash equivalents at beginning of period		86,923		115,752
Cash and cash equivalents at end of period	$	94,751	$	160,419

Supplemental cash flow data:
Non-cash investing activities:
Assets acquired under finance leases and deferred financing obligations	$	3,302	$	3,599

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2020

(Unaudited)

NOTE A—General

Basis of Presentation

The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation (“Magellan”), include Magellan and its subsidiaries (together with Magellan, the “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 (the “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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 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. On April 30, 2020, the Company and Molina Healthcare, Inc. (“Molina”) entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company has agreed to sell its Magellan Complete Care (“MCC”) business to Molina (the “MCC Sale”) for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business. Accordingly, the accompanying consolidated financial statements for all periods presented reflect the MCC business as discontinued operations. See Note E—“Discontinued Operations” for additional information.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, ~~2016~~2019 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February ~~24, 2017.~~28, 2020.

Business Overview

The Company ~~is engaged in~~provides managed care services for some of 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~~offers innovative solutions that combine ~~advanced~~ analytics, ~~agile~~ technology and clinical ~~excellence~~rigor to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the ~~members it~~customers Magellan serves. The Company provides services to health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and governmental agencies and ~~third party~~third-party administrators (“TPAs”). Magellan operates 3 segments: Healthcare, Pharmacy Management and Corporate.

Healthcare

The Healthcare segment ~~(“Healthcare”)~~“Healthcare” previously consisted of 2 reporting units – Behavioral & Specialty Health and MCC. As a result of the MCC Sale, the Healthcare segment now only includes the ~~Company’s:~~Behavioral and Specialty Health reporting unit.

The Behavioral & Specialty Health reporting unit’s customers include health plans, accountable care organizations (“ACOs”), employers, the United States military and various federal government agencies for whom Magellan provides carve-out management services for (i) ~~management of~~ behavioral ~~healthcare services and~~health, (ii) employee assistance ~~program~~plans (“EAP”) ~~services, (ii) management~~and (iii) other areas of ~~other~~ specialty ~~areas~~healthcare including diagnostic imaging, ~~and~~ musculoskeletal management, cardiac and ~~(iii)~~physical medicine. These management services can be applied broadly across commercial, Medicaid and Medicare populations, or on a more targeted basis for our health plans and ACO customers. The Behavioral & Specialty Health unit also includes Magellan’s carve-out behavioral health contracts with various state Medicaid agencies.

MCC, which is now reflected as discontinued operations, contracts with state Medicaid agencies and the ~~integrated management~~Centers for Medicare and Medicaid Services (“CMS”) to manage care for beneficiaries under various Medicaid and Medicare programs. MCC manages a wide range of ~~physical, behavioral and pharmaceutical healthcare~~services from total medical cost to carve out long-term support services. MCC largely focuses on managing care for more acute special populations ~~delivered through Magellan Complete Care (“MCC”). These special populations include~~including individuals with serious mental illness (“SMI”), dual eligibles, ~~long‑term services~~aged, blind and ~~supports~~disabled (“ABD”) and other populations with unique and often complex healthcare needs.

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(Unaudited)

Magellan’s coordination and management of these healthcare and long-term support services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed ~~and privileged~~ providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services 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 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 Healthcare management services primarily through: (i) ~~risk‑based products,~~risk-based contractual arrangements, 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~~PMPM fee, ~~and~~or (ii) administrative services only (“ASO”) ~~products,~~contractual arrangements, where the Company provides

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

~~September 30, 2017~~

~~(Unaudited)~~

services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment ~~services.~~services, in exchange for an administrative fee and, in some instances, a gain share.

Pharmacy Management

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

~~Pharmacy Management’s~~These services are ~~provided under contracts with health plans,~~available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to managed care organizations, employers, ~~MCOs,~~third party administrators, state ~~Medicaid programs,~~governments, Medicare Part D, and other government agencies, exchanges, brokers and ~~encompass risk‑based~~consultants. In addition, the Company will continue to upsell its pharmacy services to its existing customers and ~~fee‑for‑service (“FFS”)~~market its pharmacy solutions to the Healthcare customer base.

Pharmacy Management contracts with its customers for services using risk-based, gain share or ASO arrangements. In addition, Pharmacy Management ~~has subcontract arrangements~~provides services to ~~provide~~the Healthcare segment for most of the MCC business.

On May 11, 2020, the Company announced its decision to exit the Medicare Part D business at the end of 2020. The Company will retain its Medicare Employer Group Waiver Plan as well as full capabilities to serve the PBM ~~services for certain Healthcare~~needs of its existing and prospective Medicare customers.

Corporate

This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.

Summary of Significant Accounting Policies

~~Recent Accounting Pronouncements~~

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which is a new comprehensive revenue recognition standard that will supersede virtually all existing revenue guidance under GAAP. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which clarifies the performance obligations and licensing implementation guidance of ASU 2014-09. In July 2015, the FASB deferred the effective date of ASU 2014-09. In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), which amends various aspects of ASU 2014-09. The amendments in these ASUs are effective for annual and interim reporting periods of public entities beginning after December 15, 2017. The Company intends to adopt the new standard on a modified retrospective basis. The Company has completed preliminary reviews of each revenue stream and is assessing the impact of adoption under ASU 606. Within the PBM and dispensing revenue streams, exclusive of Medicare Part D, the Company has substantially completed its review under the new standard and determined that ASU 606 will not have a material impact on the Company’s consolidated results of operations, financial position and cash flows. Within the managed care and other revenue streams, the Company continues to assess the potential impact, but has identified an impact related to the recognition of Health Insurer Fee (HIF) revenue under ASC 606. Although the income tax effect has not been quantified, the Company has determined, based on its preliminary assessment, that up to $40.0million of HIF revenue will be recognized as a revenue cumulative effect adjustment upon adoption of the new standard. Under ASC 605, HIF revenue is recognized as the health insurer fee is being expensed. Under ASC 606, HIF revenue will represent a form of variable consideration that is included in the transaction price for the managed care service to the extent it is not constrained. As such, HIF revenue included within the transaction price will be recognized as the managed care service is provided, which is the year prior to the fee being accrued and expensed. At this time, the Company has not identified a material impact of adoption for other revenue streams. However, the Company has also not completed its review of the impact on interim reporting.

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~~September 30, 2017~~

~~(Unaudited)~~

In July 2015, the FASB issued ASU No. 2015‑11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015‑11”). The amendment under this ASU requires that an entity measure inventory at the lower of cost or net realizable value. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016 and was adopted by the Company in the quarter ended March 31, 2017. The effect of this guidance was immaterial to the Company’s consolidated results of operations, financial position and cash flows.

In February 2016, the FASB issued ASU No. 2016‑02, “Leases” (“ASU 2016‑02”). This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of adoption, but believes the effect of this ASU will have a material effect on the Company’s consolidated balance sheets. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 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 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

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

~~September 30, 2017~~

~~(Unaudited)~~

~~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.

Use of Estimates

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(Unaudited)

compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under Accounting Standard Codification 606 (“ASC 606”) which are explained in more detail in “Revenue Recognition” below. Actual results could differ from those estimates.

Revenue Recognition

~~Managed Care~~Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the three and ~~Other Revenue~~six months ended June 30, 2019 and 2020 by major service line, type of customer and timing of revenue recognition (in thousands):

~~Managed Care~~


	Three Months Ended June 30, 2019
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	400,591	$	—	$	(65)	$	400,526
EAP risk-based		87,296		—		—		87,296
ASO		58,226		10,327		(82)		68,471
PBM, including dispensing		—		480,167		(4,335)		475,832
Medicare Part D		—		69,843		—		69,843
PBA		—		33,476		—		33,476
Formulary management		—		18,426		—		18,426
Other		—		419		—		419
Total net revenue	$	546,113	$	612,658	$	(4,482)	$	1,154,289

Type of Customer
Government	$	236,014	$	173,804	$	—	$	409,818
Non-government		310,099		438,854		(4,482)		744,471
Total net revenue	$	546,113	$	612,658	$	(4,482)	$	1,154,289

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	550,010	$	(4,335)	$	545,675
Transferred over time		546,113		62,648		(147)		608,614
Total net revenue	$	546,113	$	612,658	$	(4,482)	$	1,154,289

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(Unaudited)


	Three Months Ended June 30, 2020
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	344,199	$	—	$	(92)	$	344,107
EAP risk-based		77,419		—		—		77,419
ASO		59,403		12,271		(85)		71,589
PBM, including dispensing		—		499,484		(4,831)		494,653
Medicare Part D		—		56,711		—		56,711
PBA		—		30,811		—		30,811
Formulary management		—		25,061		—		25,061
Other		—		(276)		—		(276)
Total net revenue	$	481,021	$	624,062	$	(5,008)	$	1,100,075

Type of Customer
Government	$	222,393	$	208,989	$	—	$	431,382
Non-government		258,628		415,073		(5,008)		668,693
Total net revenue	$	481,021	$	624,062	$	(5,008)	$	1,100,075

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	556,195	$	(4,831)	$	551,364
Transferred over time		481,021		67,867		(177)		548,711
Total net revenue	$	481,021	$	624,062	$	(5,008)	$	1,100,075


	Six Months Ended June 30, 2019
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	762,399	$	—	$	(143)	$	762,256
EAP risk-based		176,913		—		—		176,913
ASO		113,623		18,470		(173)		131,920
PBM, including dispensing		—		973,391		(8,442)		964,949
Medicare Part D		—		133,184		—		133,184
PBA		—		67,453		—		67,453
Formulary management		—		35,609		—		35,609
Other		—		1,011		—		1,011
Total net revenue	$	1,052,935	$	1,229,118	$	(8,758)	$	2,273,295

Type of Customer
Government	$	467,076	$	401,852	$	—	$	868,928
Non-government		585,859		827,266		(8,758)		1,404,367
Total net revenue	$	1,052,935	$	1,229,118	$	(8,758)	$	2,273,295

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	1,106,575	$	(8,442)	$	1,098,133
Transferred over time		1,052,935		122,543		(316)		1,175,162
Total net revenue	$	1,052,935	$	1,229,118	$	(8,758)	$	2,273,295

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(Unaudited)


	Six Months Ended June 30, 2020
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	694,044	$	—	$	(182)	$	693,862
EAP risk-based		157,357		—		—		157,357
ASO		118,526		23,805		(168)		142,163
PBM, including dispensing		—		1,017,596		(9,398)		1,008,198
Medicare Part D		—		112,377		—		112,377
PBA		—		60,940		—		60,940
Formulary management		—		47,222		—		47,222
Other		—		335		—		335
Total net revenue	$	969,927	$	1,262,275	$	(9,748)	$	2,222,454

Type of Customer
Government	$	449,495	$	412,946	$	—	$	862,441
Non-government		520,432		849,329		(9,748)		1,360,013
Total net revenue	$	969,927	$	1,262,275	$	(9,748)	$	2,222,454

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	1,129,973	$	(9,398)	$	1,120,575
Transferred over time		969,927		132,302		(350)		1,101,879
Total net revenue	$	969,927	$	1,262,275	$	(9,748)	$	2,222,454

Per Member Per Month (“PMPM”) Revenue. ~~Managed care~~ Almost all of the Healthcare revenue and a small portion of the Pharmacy Management revenue is paid on a PMPM basis. PMPM revenue is inclusive of revenue from the Company’s risk, EAP and ASO contracts and primarily relates to managed care contracts for services such as the provision of behavioral healthcare, specialty healthcare, pharmacy management, or fully integrated healthcare services. PMPM contracts generally have a term of one year or longer, with the exception of government contracts where the customer can terminate with as little as 30 days’ notice for no significant penalty. All managed care contracts have a single performance obligation that constitutes a series for the provision of managed healthcare services for a population of enrolled members for the duration of the contract. The transaction price for PMPM contracts is ~~recognized over~~entirely variable as it primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the ~~applicable coverage period on a per member basis~~contract. In certain contracts, PMPM fees also include adjustments for ~~covered members.~~things such as performance incentives, performance guarantees and risk shares. The Company generally estimates the transaction price using an expected value methodology and amounts are only included in the net transaction price to the extent that it is ~~paid~~probable that a ~~per member fee~~significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The majority of the Company’s net PMPM transaction price relates specifically to its efforts to transfer the service for ~~all enrolled members,~~a distinct increment of the series (e.g. day or month) and ~~this fee~~ is ~~recorded~~recognized as revenue in the month in which members are entitled to service. The ~~Company adjusts its revenue for retroactive~~remaining transaction price is recognized over the contract period (or portion of the series to which it specifically relates) based upon estimated membership ~~terminations, additions and other changes, when such adjustments~~as a measure of progress.

Under certain government contracts, our risk scores are ~~identified,~~compared with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period in which terms to the amendment are finalized. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $576.8 million and $1,692.6 millionoverall average risk scores for the ~~three~~relevant state and ~~nine months ended September 30, 2016, respectively,~~market pool. Generally, if our risk score is below the average risk score, we are required to make a risk adjustment payment into the risk pool, and ~~$644.9 million and $1,851.2 million~~if our risk score is above the average risk score, we will receive a risk adjustment payment from the risk pool. Risk adjustments can have a positive or negative retroactive impact to rates.

Pharmacy Benefit Management Revenue. The Company’s customers for ~~the three and nine months ended September 30, 2017, respectively.~~

~~Fee‑For‑Service, Fixed Fee and 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”) 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 $143.7 million and $349.3 million for the three and nine months ended September 30, 2016, respectively, and $156.1 million and $444.0 million for the three and nine months ended September 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 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 $22.0 million and $63.1 million for the three and nine months ended September 30, 2016, respectively, and $21.4 million and $64.9 million for the three and nine months ended September 30, 2017, respectively.

~~In relation to the Company’s~~ PBM business, ~~the Company administers rebate programs through which it receives rebates from~~including pharmaceutical ~~manufacturers that~~dispensing operations, are ~~shared with its customers. The Company recognizes rebates when the Company~~generally comprised of MCOs, employer groups and health plans. PBM relationships generally have an expected term of one year or longer. A master services arrangement (“MSA”) 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.

executed

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(Unaudited)

by the Company and the customer, which outlines the terms and conditions of the PBM services to be provided. When a member in the customer’s organization submits a prescription, a claim is created which is presented for approval. The acceptance of each individual claim creates enforceable rights and ~~Dispensing Revenue~~

~~Pharmacy Benefit Management Revenue.~~obligations for each party and represents a separate contract. For each individual claim, the performance obligations are limited to the processing and adjudication of the claim, or dispensing of the products purchased. Generally, the transaction price for PBM services is explicitly listed in each contract and does not represent variable consideration. The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), ~~co‑payments collected by the pharmacy~~co-payments and any associated administrative fees, when claims are ~~adjudicated.~~adjudicated or the drugs are shipped. 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, controls the underlying service, 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~~collecting payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client’s members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. PBM revenues approximated $413.7 million and $1,110.7 million for the three and nine months ended September 30, 2016, respectively, and $419.3 million and $1,288.2 million for the three and nine months ended September 30, 2017, respectively.

~~Dispensing Revenue.~~ ~~The Company recognizes~~For dispensing, ~~revenue, which includes the co‑payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. At~~at the time of shipment, the earnings process is complete; the obligation of the Company’s customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund. Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were $57.5 million and $167.2 million for the three and nine months ended September 30, 2016, respectively, and $49.8 million and $158.2 million for the three and nine months ended September 30, 2017, respectively.

Medicare Part D.The Company is contracted with ~~the Centers for Medicare and Medicaid (“CMS”)~~CMS as a Prescription Drug Plan (“PDP”) to provide prescription drug benefits to Medicare beneficiaries. ~~Net revenues~~The accounting for Medicare Part D revenue is primarily the same as that for PBM, as previously discussed. However, there is certain variable consideration present only in Medicare Part D arrangements. The Company estimates the annual amount of variable consideration using a most likely amount methodology, which is allocated to each reporting period based upon actual utilization as a percentage of estimated utilization for the year. Amounts estimated throughout the year for interim reporting are substantially resolved and fixed as of December 31^st, the end of the plan year.

Pharmacy Benefit Administration Revenue. The Company provides Medicaid pharmacy services to states and other government sponsored programs. PBA contracts are generally multi-year arrangements but include ~~premiums~~language regarding early termination for convenience without material penalty provisions that results in enforceable rights and obligations on a month-to-month basis. In PBA arrangements, the Company is generally paid a fixed fee per month to provide PBA services. In addition, some PBA contracts contain upfront fees that constitute a material right. For contracts without an upfront fee, there is a single performance obligation to stand ready to provide the PBA services required for the contracted period. The Company believes that the customer receives the PBA benefits each day from access to the claims processing activities, and has concluded that a time-based measure is appropriate for recognizing PBA revenue. For contracts with an upfront fee, the material right represents an additional performance obligation. Amounts allocated to the material right are initially recorded as a contract liability and recognized as revenue over the anticipated period of benefit of the material right, which generally ranges from 2 to 10 years.

Formulary Management Revenue. The Company administers formulary management programs 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. Formulary management contracts generally have a term of one year or longer. All formulary management contracts have a single performance obligation that constitutes a series for the provision of rebate services for a drug, with utilization measured and settled on a quarterly basis, for the duration of the arrangement. The Company retains its administrative fee and/or a percentage of rebates that is included in its contract with the client from collecting the rebate from the manufacturer. While the administrative fee and/or the percentage of rebates retained is fixed, there is an unknown quantity of pharmaceutical purchases (utilization) during each quarter; therefore the transaction price itself is variable. The Company uses the expected value methodology to estimate the total rebates earned each quarter based on estimated volumes of pharmaceutical purchases by the Company’s clients during the quarter, as well as historical and/or anticipated retained rebate percentages. The Company does not record as rebate revenue any rebates that are passed through to its clients.

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

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(Unaudited)

when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the ~~PDP,~~Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.

Government EAP Risk-Based Revenue. The Company has certain contracts with federal customers for the provision of various managed care services, which ~~includes~~are classified as EAP risk-based business. These contracts are generally multi-year arrangements. The Company’s federal contracts are reimbursed on either a ~~direct premium paid by CMS and~~fixed fee basis or a ~~beneficiary premium paid~~cost reimbursement basis. The performance obligation on a fixed fee contract is to stand ready to provide the staffing required for the contracted period. For fixed fee contracts, the Company believes the invoiced amount corresponds directly with the value to the customer of the Company’s performance completed to date; therefore, the Company is utilizing the “right to invoice” practical expedient, with revenue recognition in the amount for which the Company has the right to invoice.

The performance obligation on a cost reimbursement contract is to stand ready to provide the activity or services purchased by the ~~PDP member. In cases~~customer, such as the operation of ~~low-income members,~~a counseling services group or call center. The performance obligation represents a series for the ~~beneficiary premium may be subsidized by CMS.~~duration of the arrangement. The ~~Company recognizes premium revenues on~~reimbursement rate is fixed per the contract; however, the level of activity (e.g., number of hours, number of counselors or number of units) is variable. A majority of the Company’s cost reimbursement transaction price relates specifically to its efforts to transfer the service for a ~~monthly basis on a per member basis for covered members. In addition to these premiums, net~~distinct increment of the series (e.g. day or month) and is recognized as revenue ~~includes certain payments from~~when the members based on the members’ actual prescription claims, including co-payments, coverage gap benefits, deductibles and co-insurance (collectively, “Member Responsibilities”). The Company receives a prospective subsidy payment from CMS each month to subsidize a portion of the ~~Member Responsibilities~~series for ~~low-income members. If~~which it relates has been provided (i.e. as the ~~prospective subsidy differs~~Company provides hours, counselors or units of service).

In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the contracts in the Company’s PBM and Part D business, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less; (ii) the right to invoice practical expedient; and (iii) variable consideration related to unsatisfied performance obligations that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or to a specific outcome from ~~actual prescription claims,~~transferring the ~~difference is recorded as either a~~distinct service. For the Company’s contracts that pertain to these exemptions: (i) the remaining performance obligations primarily relate to the provision of managed healthcare services to the customers’ membership; (ii) the estimated remaining duration of these performance obligations ranges from the remainder of the current calendar year to three years; and (iii) variable consideration for these contracts primarily includes net PMPM fees associated with unspecified membership that fluctuates throughout the contract.

Accounts Receivable, Contract Assets and Contract Liabilities

Accounts receivable, ~~or payable~~contract assets and contract liabilities consisted of the following (in thousands, except percentages):


	December 31,		June 30,
	2019		2020		$ Change		% Change
Accounts receivable	$	717,455	$	837,710	$	120,255		16.8%
Contract assets		2,162		7,151		4,989		230.8%
Contract liabilities - current		6,728		25,769		19,041		283.0%
Contract liabilities - long-term		11,099		11,022		(77)		(0.7%)

Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets on the consolidated balance ~~sheets. The Company assumes no risk for the Member Responsibilities, including the portion subsidized~~sheets, increased by ~~CMS. The Company recognizes revenues for Member Responsibilities, including the portion subsidized by CMS, on a gross basis as claims~~$120.3 million, mainly due to timing of receipts and HIF accrual. Contract assets, which are adjudicated. CMS also provides an annual risk corridor adjustment which compares the Company’s actual drug costs incurred to the premiums received. Based on the risk corridor adjustment, the Company 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~~other current assets on the consolidated balance ~~sheets.~~ ~~Medicare Part D revenues approximated $76.5~~sheets, increased by $5.0 million, mainly due to the timing of accrual of certain performance incentives and ~~$192.0 million for the three and nine months ended September 30, 2016, respectively, including co-payments,~~annual settlements. Contract liabilities – current, which are included in ~~PBM revenues above, of $7.2~~accrued liabilities on the consolidated balance sheets, increased by $19.0 million, ~~and $24.3 million for~~mainly due to the ~~three and nine months ended September 30, 2016, respectively. Medicare Part D revenues approximated $131.8 million and $367.9 million for~~HIF recognition in the ~~three and nine months ended September 30, 2017, respectively, including co-payments,~~current year period. Contract liabilities – long-term, which are included in ~~PBM revenues above,~~deferred credits and other long-term liabilities on the consolidated balance sheets, are consistent with prior year.

Table of ~~$15.8~~Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

During the three months ended June 30 2020, the Company recognized revenue of $2.0 million that was included in current contract liabilities at March 31, 2020. During the six months ended June 30, 2020, the Company recognized revenue of $4.0 million that was included in current contract liabilities as December 31, 2019. The estimated timing of recognition of amounts included in contract liabilities at June 30, 2020 are as follows: 2020—$24.0 million; 2021—$3.6 million; 2022—$3.1 million; 2023 and ~~$55.5 million for~~beyond—$6.1 million. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively. As of December 31, 2016 and September 30, 2017,~~2020, the revenue the Company ~~had $117.5 million~~recognized related to performance obligations that were satisfied, or partially satisfied, in previous periods was not material.

The Company’s accounts receivable consists of amounts due from customers throughout the United States. Collateral is generally not required. A majority of the Company’s contracts have payment terms in the month of service, or within a few months thereafter. The timing of payments from customers from time to time generates contract assets or contract liabilities; however, these amounts are immaterial.

The Company’s accounts receivable is net of an allowance for credit losses. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and ~~$170.5 million, respectively,~~reasonable and supportable forecasts. Management elected to disaggregate trade receivables into business segments due to risk characteristics unique to each platform given the individual lines of business and market. Pooling was further disaggregated based on either geography or product type.

The Company leveraged historical write offs over a defined lookback period in ~~net receivables~~deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts through the use of an adjustment for current and projected macroeconomic factors. Management identified appropriate macroeconomic indicators based on tangible correlation to historical losses, giving consideration to the location and risks associated with ~~Medicare Part D from CMS and other parties related to this business.~~the Company’s customers.

Significant Customers

Customers exceeding ten percent of the consolidated Company’s net revenues

The Company had no customers that exceeded ten percent of the Company’s net revenues from continuing operations. The following MCC customers, which are included in discontinued operations, previously exceeded ten percent of the Company’s consolidated net revenues.

The Company has contracts with the Commonwealth of Virginia (the “Virginia Contracts”). The Company began providing Medicaid managed long-term services and supports to enrollees in the Commonwealth Coordinated Care Plus (“CCC Plus”) program on August 1, 2017. The CCC Plus contract expires annually on December 31 and automatically renews annually on January 1 for a period of five calendar years, with potential of up to 5 12-month extensions. The Commonwealth of Virginia has the right to terminate the CCC Plus contract with cause at any time and for convenience upon 90 days’ notice. On August 1, 2018, the ~~State of Florida to provide~~Company began providing integrated healthcare services to Medicaid enrollees in the ~~state~~Commonwealth of ~~Florida~~Virginia under the Medallion 4.0/FAMIS Managed Care Program (“~~the Florida Contract”~~Medallion”). The ~~Florida Contract began on February 4, 2014 and extends~~

~~Table~~initial term of ~~Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September~~the Medallion contract is from August 1, 2018 through June 30, ~~2017~~

~~(Unaudited)~~

2019, with 6 12-month renewal options. The Medallion contract has been renewed through ~~December 31, 2018, unless sooner terminated by the parties.~~June 30, 2021. The ~~State~~Commonwealth of ~~Florida~~Virginia has the right to terminate the ~~Florida Contract~~Medallion contract with cause ~~as defined,~~at any time and for convenience upon ~~24 hour notice and upon 30 days notice for any reason or no reason at all.~~180 days’ notice. The ~~Florida Contract~~Virginia Contracts generated net revenues of ~~$403.4~~$391.2 million and ~~$457.7~~$475.2 million for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2020, respectively, which are reported as discontinued operations.

The Company had a contract with the State of New York (the “New York Contract”) to provide integrated managed care services to Medicaid and Medicare enrollees in the State of New York. The Company’s New York Contract terminated on December 31, 2016; however, the Company, along with other participating managed care plans in the state, continues to provide services while a new contract is being finalized. The New York Contracts generated net revenues of $400.6 million and $411.7 million for the six months ended June 30, 2019 and 2020, respectively, which are reported as discontinued operations.

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(Unaudited)

The Company has contracts with the Commonwealth of Massachusetts and CMS (the “Massachusetts Contracts”) to provide integrated managed care services to Medicaid and Medicare enrollees in the Commonwealth of Massachusetts. Medicaid services are provided under a Senior Care Options contract (“SCO Contract”) which began on January 1, 2016 and extends through December 31, 2021, with the potential for up to 5 additional one-year extensions. The Commonwealth of Massachusetts may terminate the contract with cause without prior notice and upon 180 days’ notice without cause. Medicare services are provided under a one-year contract with CMS. The CMS contract currently extends through December 31, 2020. The Company began recognizing revenue in relation to the Massachusetts Contracts on November 1, 2017 ~~respectively.~~as a result of the acquisition of SWH Holdings, Inc. The Massachusetts Contracts generated net revenues of $360.9 million and $359.7 million for the six months ended June 30, 2019 and 2020, respectively, which are reported within discontinued operations.

Customers exceeding ten percent of segment net revenues

~~In addition to the Florida Contract, previously discussed, the~~The following customers generated in excess of ten percent of net revenues for the respective segment for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 (in thousands):

Segment

Term Date

2016

2017

Healthcare

None

Pharmacy Management

Customer A

December 31, 2016 (1)

$
261,094

$
3,709
*
Customer B

March 31, 2019

78,471

266,795


Segment	Term Date	2019		2020
Healthcare
Customer A	December 31, 2021	$	161,887	$	175,107

Pharmacy Management
Customer B	March 31, 2021	$	174,535	$	195,930

* 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.

Concentration of Business

The Company also has a significant concentration of business with various counties in the State of Pennsylvania (the “Pennsylvania Counties”) which are part of the Pennsylvania Medicaid program, with members under its contract with CMS and with various agencies and departments of the United States federal government. Net revenues from the Pennsylvania Counties in the aggregate totaled ~~$343.2~~$271.4 million and ~~$357.3~~$272.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017,~~2020, respectively. Net revenues from members in relation to its ~~contract~~contracts with CMS in aggregate totaled ~~$192.0~~$133.2 million and ~~$368.2~~$112.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017,~~2020, respectively. As of December 31, 2019 and June 30, 2020, the Company had $117.4 million and $114.3 million, respectively, in net receivables associated with Medicare Part D from CMS and other parties related to this business. In May 2020, the Company announced its decision to exit the Part D business at the end of 2020. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled ~~$164.3~~$156.7 million and ~~$257.7~~$136.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017,~~2020, respectively.

The Company’s contracts with customers typically have stated terms of one to three years, and in certain cases contain renewal provisions (at the customer’s option) for successive terms of between one and two years (unless terminated earlier). Substantially all of these contracts may be immediately terminated with cause and many of the Company’s contracts are terminable without cause by the customer or the Company either upon the giving of requisite notice and the passage of a specified period of time (typically between 6030 and 180 days) or upon the occurrence of other specified events. In addition, the Company’s contracts with federal, state and local governmental agencies generally are conditioned on legislative appropriations. These contracts generally can be terminated or modified by the customer if such appropriations are not made.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)

Leases

The Company leases certain office space, distribution centers, land and equipment. We assess our contracts to determine if it contains a lease. This assessment is based on (i) the right to control the use of an identified asset; (ii) the right to obtain substantially all of the economic benefits from the use of the identified asset; and (iii) the right to use the identified asset. The Company elected the short-term lease practical expedient; thus, leases with an initial term of twelve months or less are not capitalized and the expense is recognized on a straight-line basis. Most leases include 1 or more options to renew, with renewal terms that can extend the lease from one to ten years. The exercise of renewal options are at the sole discretion of the Company. Renewal options that the Company is reasonably certain to accept are recognized as part of the right-of-use (“ROU”) asset.

Operating leases are included in other long-term assets, accrued liabilities and deferred credits and other long-term liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current debt, finance lease deferred financing obligations and long-term debt, finance lease and deferred financing obligations in the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments per the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. As the rate implicit in most of our leases is not readily determinable, the Company used its incremental borrowing rate to determine the present value of lease payments.

The following table shows the components of lease expenses for the three and six months ended June 30, 2020 (in thousands):


	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Operating lease cost	$	2,503	$	4,604
Finance lease cost:
Amortization of right-of-use asset		1,046		2,378
Interest on lease liabilities		213		427
Total finance lease cost		1,259		2,805
Short-term lease cost		80		204
Variable lease cost		505		1,011
Total lease cost		4,347		8,624
Sublease income		(66)		(179)
Net lease cost	$	4,281	$	8,445

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

The following table shows the components of the lease assets and liabilities as of June 30, 2020 (in thousands):


	June 30, 2020
Operating leases:
Other long-term assets	$	20,832

Accrued liabilities	$	23,959
Deferred credits and other long-term liabilities		9,661
Total operating lease liabilities	$	33,620

Finance leases:
Property and equipment, net	$	13,489

Current debt, finance lease and deferred financing obligations	$	4,989
Long-term debt, finance lease and deferred financing obligations		14,024
Total finance lease liabilities	$	19,013

The maturity dates of the Company’s leases as of June 30, 2020 are summarized below (in thousands):


	June 30, 2020
2020	$	8,201
2021		13,819
2022		12,518
2023		9,295
2024		7,927
2025 and beyond		2,581
Total lease payments		54,341
Less interest		(1,708)
Present value of lease liabilities	$	52,633

The following table shows the weighted average remaining lease term and discount rate as of June 30, 2020:


	June 30, 2020
Weighted average remaining lease term
Operating leases		3.96
Finance leases		4.08
Weighted average discount rate
Operating leases		4.79%
Finance leases		4.39%

Supplemental cash flow information relating to leases is as follows (in thousands):


	Six months ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	6,196
Operating cash flows from finance leases		2,815
Financing cash flows from finance leases		427
Right-of-use asset obtained in exchange for new lease obligation
Operating leases		902
Finance leases		3,599

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Fair Value Measurements

The Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

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

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s assets and liabilities that are required to be measured at fair value as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017~~2020 (in thousands):


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	—	$	111,085	$	—	$	111,085
Investments:
U.S. Government and agency securities		30,775		—		—		30,775
Corporate debt securities		—		69,581		—		69,581
Certificates of deposit		—		1,305		—		1,305
Total assets held at fair value	$	30,775	$	181,971	$	—	$	212,746
								��


	June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (2)	$	—	$	132,038	$	—	$	132,038
Investments:
U.S. Government and agency securities		32,174		—		—		32,174
Corporate debt securities		—		42,192		—		42,192
Certificates of deposit		—		1,305		—		1,305
Total assets held at fair value	$	32,174	$	175,535	$	—	$	207,709

December 31, 2016


Level 1

Level 2

Level 3

Total

Assets

Cash and cash equivalents (1)

$
—

$
177,495

$
—

$
177,495

Investments:

U.S. Government and agency securities

5,817

—

—

5,817

Obligations of government-sponsored enterprises (2)

—

25,767

—

25,767

Corporate debt securities

—

272,219

—

272,219

Certificates of deposit

—

1,450

—

1,450

Total assets held at fair value

$
5,817

$
476,931

$
—

$
482,748

Liabilities

Contingent consideration

$
—

$
—

$
11,153

$
11,153

Total liabilities held at fair value

$
—

$
—

$
11,153

$
11,153

September 30, 2017


Level 1

Level 2

Level 3

Total

Assets

Cash and cash equivalents (3)

$
—

$
392,039

$
—

$
392,039

Investments:

U.S. Government and agency securities

8,668

—

—

8,668

Obligations of government-sponsored enterprises (4)

—

13,264

—

13,264

Corporate debt securities

—

295,181

—

295,181

Taxable municipal bonds

—

5,014

—

5,014

Certificates of deposit

—

1,350

—

1,350

Total assets held at fair value

$
8,668

$
706,848

$
—

$
715,516

Liabilities

Contingent consideration

$
—

$
—

$
9,490

$
9,490

Total liabilities held at fair value

$
—

$
—

$
9,490

$
9,490

(1)

~~(1)~~

Excludes ~~$127.0~~$4.7 million of cash held in bank accounts by the Company.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September 30, 2017~~

~~(Unaudited)~~

(2)

~~(2)~~

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

~~(3)~~

Excludes ~~$112.7~~$28.4 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.~~

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the Company has not transferred any assets between fair value measurement levels.

The carrying values of financial instruments, including accounts receivable and accounts payable, ~~and revolving loan borrowings,~~ approximate their fair values due to their short-term maturities. The fair value of the Notes (as defined below) of ~~$406.2~~$366.2 million as of ~~September~~June 30, ~~2017~~2020 was determined based on quoted market prices and would be classified within Level 1 of the fair value hierarchy. The estimated fair value of the Company’s term loan of ~~$350.0~~$271.9 million as of ~~September~~June 30, ~~2017~~2020 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

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 investments are classified as “available-for-sale” and are carried at fair value.

The contingent consideration liability reflects the fair value of potential future payments related to the Cobalt Therapeutics, LLC (“Cobalt”), The Management Group, LLC (“TMG”) and Armed Forces Services Corporation (“AFSC”) acquisitions. The Cobalt, TMG and AFSC purchase agreements provide for potential contingent payments of up to a maximum of $6.0 million, $15.0 million and $10.0 million, respectively. As of September 30, 2017, there are remaining potential future payments of $15.0 million and $10.0 million for 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 operating income, member engagement and new contract execution. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. As the fair value measurement for the contingent consideration is based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurement guidance. The 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 September 30, 2017, the Company estimated undiscounted future contingent payments of $12.7 million and $9.9 million, respectively. The net decrease was mainly due to payments made in 2017 and changes in operational forecasts and probabilities of payment. As of September 30, 2017, the aggregate amounts and projected dates of future potential contingent consideration payments were $9.0 million in 2017 and $0.9 million in 2020.

As of December 31, 2016, the fair value of the short-term and long-term contingent consideration was $9.4 million and $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 September 30, 2017, the fair value of the short-term and long-term contingent consideration was $8.9 million and $0.6 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 $0.3 million and $0.5 million for the three and nine months ended September 30, 2016, respectively, and $(0.8) million and $(0.6) million for the three and nine months ended September 30, 2017, respectively, which were recorded as direct service costs and other operating expenses in the consolidated statements of income. The decreases during 2017 were mainly a result of changes in present value and the estimated undiscounted liability.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September 30, 2017~~

~~(Unaudited)~~

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

September 30,

2017

Balance as of beginning of period

$
11,153

Changes in fair value

(631)

Payments

(1,032)

Balance as of end of period

$
9,490

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. Book overdrafts are reflected within accounts payable on the balance sheets. At ~~September~~June 30, ~~2017,~~2020, the Company’s excess capital and undistributed earnings for the Company’s regulated subsidiaries of ~~$125.6~~approximately $29 million are included in cash and cash equivalents.

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

As of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017,~~2020, there were no material unrealized losses that the Company determined to be ~~other‑than‑temporary. No~~other-than-temporary. NaN realized gains or losses were recorded for the ~~nine~~three months or six months ended ~~September~~June 30, ~~2016~~2019 or ~~2017.~~2020. The following is a summary of ~~short‑term~~short-term and ~~long‑term~~long-term investments at December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017~~2020 (in thousands):

December 31, 2016

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated


Cost

Gains

Losses

Fair Value

U.S. Government and agency securities

$
5,832

$
—

$
(15)

$
5,817

Obligations of government-sponsored enterprises (1)

25,779

2

(14)

25,767

Corporate debt securities

272,479

1

(261)

272,219

Certificates of deposit

1,450

—

—

1,450

Total investments at December 31, 2016

$
305,540

$
3

$
(290)

$
305,253


	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	30,742	$	38	$	(5)	$	30,775
Corporate debt securities		69,552		40		(11)		69,581
Certificates of deposit		1,305		—		—		1,305
Total investments at December 31, 2019	$	101,599	$	78	$	(16)	$	101,661


	June 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	32,066	$	108	$	—	$	32,174
Corporate debt securities		42,129		71		(8)		42,192
Certificates of deposit		1,305		—		—		1,305
Total investments at June 30, 2020	$	75,500	$	179	$	(8)	$	75,671

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)

September 30, 2017

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated


Cost

Gains

Losses

Fair Value

U.S. Government and agency securities

$
8,689

$
—

$
(21)

$
8,668

Obligations of government-sponsored enterprises (2)

13,279

—

(15)

13,264

Corporate debt securities

295,384

1

(204)

295,181

Taxable municipal bonds

5,017

—

(3)

5,014

Certificates of deposit

1,350

—

—

1,350

Total investments at September 30, 2017

$
323,719

$
1

$
(243)

$
323,477

~~(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.~~

The maturity dates of the Company’s investments as of ~~September~~June 30, ~~2017~~2020 are summarized below (in thousands):

Amortized

Estimated


Cost

Fair Value

2017

$
98,136

$
98,105

2018

216,697

216,498

2019

8,886

8,874

Total investments at September 30, 2017

$
323,719

$
323,477


	Amortized		Estimated
	Cost		Fair Value
2020	$	63,787	$	63,901
2021		11,713		11,770
Total investments at June 30, 2020	$	75,500	$	75,671

Income Taxes

The Company’s effective income tax rates from continuing operations were ~~51.9~~163.0 percent and ~~34.4~~(197.6) percent for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017,~~2020, respectively. These rates differ from the applicable federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and ~~changes~~a discrete adjustment for the recognition of a $38.9 million nonrecurring tax benefit in the current year for tax basis in excess of net book value for certain assets to ~~recorded tax contingencies and valuation allowances.~~be included in the MCC Sale. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income taxes. The significant effective income tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 is ~~lower than~~primarily due to the impact of the discrete adjustment for recognized stock compensation expense in excess of tax deductions relative to the reduced level of earnings for the period. The significant negative effective income tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2016 mainly~~2020 is primarily due to the ~~suspension~~discrete adjustment for ~~2017 of~~ the ~~non-deductible HIF fees, valuation allowance increases~~nonrecurring tax benefit related to the divestiture recognized in ~~2016 with respect to losses at AlphaCare of New York, Inc. (“AlphaCare”) and more significant tax deductions in 2017 in excess of recognized stock compensation expense.~~the current year.

The Company files a consolidated federal income tax return with ~~most of~~ its eighty-percent or more controlled subsidiaries. ~~The Company files a separate consolidated federal income tax return for AlphaCare and its parent, AlphaCare Holdings, Inc.~~ The Company and its subsidiaries also file income tax returns in various state and local jurisdictions.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law to provide widespread emergency relief for the economy and to provide aid to corporations. The CARES Act includes several significant provisions related to taxes. As of June 30, 2020, the Company ~~is no longer subject~~has not utilized any of the provisions that would result in a material impact on its results. However, the Company continues to ~~federal income tax assessments for years ended prior to 2014 or, with few exceptions, to state or local income tax assessments for years ended prior to 2013. Further,~~evaluate the ~~statutes of limitation regarding~~relief options available under the ~~assessment of 2013 federal~~CARES Act, as well as other emergency relief initiatives and ~~certain state and local income taxes expired during~~stimulus packages instituted by the quarter ended September 30, 2017 (“Current Year Quarter”). As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2016 were reversed in the Current Year Quarter, of which $1.2 million is reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the Current Year Quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.Federal Government.

Net Operating Loss Carryforwards

The Company has ~~$1.8~~$16.2 million of federal net operating loss carryforwards (“NOLs”) available to reduce ~~its federal~~ consolidated taxable income in ~~2017~~2020 and subsequent years. These NOLs were incurred by AlphaCare prior to its membership in the Magellan consolidated group and will expire in ~~2018 and 2019 if not used and are subject to examination and adjustment by the Internal Revenue Service (“IRS”). AlphaCare has $40.4 million of~~

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September 30, 2017~~

~~(Unaudited)~~

federal NOLs available to reduce its consolidated taxable income in 2017 and subsequent years. These NOLs will expire in 2033 through 2036 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $104.2 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2017 and subsequent years. Most of these state NOLs will expire in 20172032 through 2035 if not used and are subject to examination and adjustment by the IRS. In addition, the Company’s utilization of these NOLs is subject to limitations under the Internal Revenue Code as to the timing and use. At this time, the Company does not believe these limitations will restrict the Company’s ability to use any federal NOLs before they expire. However, upon completion of the MCC Sale, any federal NOL carryovers that remain at that time will be assumed by Molina. As such, the deferred tax asset related to these net operating loss carryforwards is netted within deferred tax liabilities included in current portion of liabilities held for sale in the consolidated balance sheets.

The Company and its subsidiaries also have $89.0 million of NOLs available to reduce state and local taxable income at certain subsidiaries in 2020 and subsequent years. Most of these NOLs will expire in 2020 through 2038 if not used and are subject to examination and adjustment by the respective ~~state~~ tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to limitations as to the timing and use. Other than those considered in determining the valuation allowances discussed below, the Company does not believe these limitations will restrict the Company’s ability to use any of these state and local NOLs before they expire. However, $17.1 million of these state and local NOLs will, to the extent not utilized beforehand, be assumed by Molina upon completion of the MCC Sale. As such, the deferred tax asset related to these net operating loss carryforwards is netted within deferred tax liabilities included in current portion of liabilities held for sale in the consolidated balance sheets.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Deferred tax assets as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017~~2020 are shown net of valuation allowances of ~~$17.1 million and $17.2 million, respectively.~~$2.1 million. These valuation allowances mostly relate to uncertainties regarding the eventual realization of ~~the AlphaCare federal NOLs and~~ certain state NOLs. Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. ~~Future changes~~The Company believes taxable income expected to be generated in the ~~estimated realizable portion~~future will be sufficient to support realization of the Company’s deferred tax assets, ~~could materially affect the Company’s financial condition~~as reduced by valuation allowances. This determination is based upon earnings history and ~~results of operations.~~future earnings expectations.

Health Care Reform

The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from customers which the Company expects will cover the direct costs of these fees and the impact from ~~non‑deductibility~~non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. ~~The Consolidated Appropriations Act of 2016~~On January 23, 2018, the United States Congress passed the Continuing Resolution which imposed a one-year moratorium on the HIF fee, suspending its application for ~~2017. The~~2019. For 2020 the HIF fee is ~~scheduled~~expected to ~~go back into effect for 2018. For 2016 the HIF fees were $26.5~~be $36.2 million, of which ~~has been paid. Of this amount, $6.7~~$12.4 million and ~~$19.9~~$23.8 million ~~was expensed in the three and nine months ended September 30, 2016, which was~~is included in ~~direct service costs~~accrued liabilities and ~~other operating expenses~~current portion of liabilities held for sale, respectively, in the consolidated statements of income. The Company recorded revenues of $11.0 million and $32.4 million in the three and nine months ended September 30, 2016, associated with the accrual for the reimbursement of the economic impact of the HIF fees from its customers. As of September 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 rece~~ivable.~~balance sheets.

~~Stock~~Stock Compensation

At December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017,~~2020, the Company had ~~equity‑based~~equity-based employee incentive plans, which are described more fully in Note 6 in the Company’s Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016,~~2019, which was filed with the SEC on February ~~24, 2017.~~28, 2020. The Company recorded stock compensation expense of ~~$9.2~~$5.4 million and ~~$27.6~~$15.0 million, of which $0.2 million and $0.4 million is included in discontinued operations, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019, respectively, and ~~$10.3~~$7.0 million and ~~$31.8~~$13.0 million, of which $0.4 million and $0.6 million is included in discontinued operations, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively. Stock compensation expense recognized in the consolidated statements of comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 has been reduced for forfeitures, estimated at between ~~zero~~0 and ~~four~~4 percent for all periods.

The weighted average grant date fair value of all stock options granted during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 was ~~$17.15~~$18.55 as estimated using the ~~Black‑Scholes‑Merton~~Black-Scholes-Merton option pricing model, which also assumed an expected volatility of ~~27.8~~35.56 percent based on the historical volatility of the Company’s stock price.

For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019 and 2020, the ~~benefit~~tax expense for deficiencies included in continuing operations (net of the tax deductions in excess of recognized stock compensation ~~expense (net of deficiencies)~~expense) was ~~$0.3~~$1.6 million and $1.7 million, respectively, which was ~~reported~~included as ~~a change~~an increase to ~~additional paid‑in capital. For~~income tax expense. The net tax expense to discontinued operations for the ~~nine~~six months ended ~~September~~June 30, ~~2017, the benefit of tax deductions in excess of recognized stock~~2019 and 2020 was insignificant.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)

~~compensation expense (net of deficiencies) was $3.7 million. Due to the adoption of ASU 2016-09 in the 4~~th 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 tax benefit is reflected as an operating cash flow rather than a financing cash flow.

Summarized information related to the Company’s stock options for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 is as follows:


		Weighted
		Average
		Exercise
	Options	Price

					Weighted
					Average
					Exercise
				Options	Price
Outstanding, beginning of period	2,843,177	$	57.42	2,125,861	$	69.22
Granted	454,596		69.44	63,771		62.93
Forfeited	(53,596)		59.65	(23,638)		83.80
Exercised	(583,395)		52.76	(541,148)		58.22
Outstanding, end of period	2,660,782	$	60.46	1,624,846	$	72.42
Vested and expected to vest at end of period	2,640,924	$	60.41	1,617,751	$	72.43
Exercisable, end of period	1,597,984	$	57.12	1,287,233	$	72.52

All of the Company’s options granted during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 vest ratably on each anniversary date over the three years subsequent to grant and have a ten year life.

Summarized information related to the Company’s nonvested restricted stock awards (“RSAs”) for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 is as follows:



		Weighted
		Average
		Grant Date
	Shares	Fair Value


					Weighted
					Average
					Grant Date
				Shares	Fair Value
Outstanding, beginning of period	615,472	$	58.71	39,761	$	65.40
Awarded	14,959		70.20	16,976		70.70
Vested	(47,710)		65.24	(18,008)		66.66
Forfeited	—		—	—		—
Outstanding, ending of period	582,721		58.47	38,729		67.14

Summarized information related to the Company’s nonvested restricted stock units (“RSUs”) for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 is as follows:



		Weighted
		Average
		Grant Date
	Shares	Fair Value


					Weighted
					Average
					Grant Date
				Shares	Fair Value
Outstanding, beginning of period	200,178	$	61.65	256,430	$	74.12
Awarded	107,417		68.53	316,495		61.07
Vested	(117,069)		60.52	(100,416)		74.93
Forfeited	(16,285)		65.48	(12,096)		72.70
Outstanding, ending of period	174,241		66.29	460,413		65.01

~~The vesting period for~~Grants of RSAs ~~ranges from 12 months to 42 months.~~vest on the anniversary of the grant. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant.

1721

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)

Summarized information related to the Company’s nonvested restricted performance stock units (“PSUs”) for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 is as follows:


		Weighted
		Average
		Grant Date
	Shares	Fair Value

					Weighted
					Average
					Grant Date
				Shares	Fair Value
Outstanding, beginning of period	102,977	$	93.03	248,559	$	104.27
Awarded	101,989		76.24	133,752		75.65
Vested	—		—	(52,861)		76.24
Forfeited	(2,651)		87.75	(31,793)		79.22
Outstanding, end of period	202,315		84.63	297,657		99.06

The weighted average estimated fair value of the PSUs granted in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 was ~~$76.24,~~$75.65, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of ~~1.54%~~0.68%, and expected volatility of ~~18%~~20% to ~~61%~~70% (average of ~~33%~~35%). The PSUs granted in the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, will entitle the grantee to receive a number of shares of the Company’s common stock determined over a three-year performance period ending on December 31, ~~2019~~2022 and vesting on March ~~3, 2020,~~5, 2023, the settlement date, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of these awards ratably over the requisite service period. The number of shares for which the PSUs will be settled ~~will be~~is calculated as a percentage of ~~shares for which~~ the award ~~is targeted~~target and will depend on the Company’s total shareholder return (as defined below), expressed as a percentile ranking of the Company’s total shareholder return as compared to the Company’s peer group (as defined below). The number of shares for which the PSUs will be settled ~~vary~~varies from ~~zero~~0 to 200 percent of the shares specified in the grant. Total shareholder return is determined by dividing the average share value of the Company’s common stock over the 30 trading days preceding January 1, ~~2020~~2023 by the average share value of the Company’s common stock over the 30 trading days beginning on January 1, ~~2017,~~2020, with a deemed reinvestment of any dividends declared during the performance period. The Company’s peer group includes 5148 companies which comprise the S&P Health Care Services Industry Index, which was selected by the compensation committee of the Company’s board of directors and includes a range of healthcare companies operating in several business segments.

~~Long Term~~Goodwill

At June 30, 2020, we evaluated whether changes in facts and circumstances would rise to an impairment indicator that it was more likely than not that any of our reporting units were impaired. The evaluation included whether our forecast for 2020 and beyond would have changed from what was used in our annual test performed as of October 1, 2019 test. We also considered the impact of economic and market volatility caused by the novel coronavirus (“COVID-19”) pandemic in the first six months of 2020. Based on our evaluation we do not believe that as of June 30, 2020 it was more likely than not that any of our reporting units were impaired. We do believe however, that while the fair value of the Pharmacy Management reporting unit continues to be in excess of its carrying value, the margin by which the fair value exceeds the carrying value has decreased. While the reporting unit was not determined to be impaired at this time, the Pharmacy Management reporting unit goodwill of $395.6 million is at risk of future impairment in the event of significant unfavorable changes in the Company’s forecasted future results and cash flows. In addition, market factors utilized in the impairment analysis, including long-term growth rates or discount rates, could negatively impact the fair value of our reporting units. For testing purposes, management's best estimates of the expected future results are the primary driver in determining the fair value. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill test will prove to be an accurate prediction of the future.

Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in membership or rates or customer attrition and increase in costs that could significantly impact our immediate and long-range results, unfavorable working capital changes and an inability to successfully achieve our cost savings targets, (ii) adverse changes in macroeconomic conditions or an economic recovery that significantly differs from our assumptions in timing and/or degree (such as a recession); and (iii)

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

volatility in the equity and debt markets or other country specific factors which could result in a higher weighted-average cost of capital.

Based on known facts and circumstances, we evaluate and consider recent events and uncertain items, as well as related potential implications, as part of our annual assessment and incorporate into the analyses as appropriate. These facts and circumstances are subject to change and may impact future analyses.

While historical performance and current expectations have resulted in fair values of our reporting units and indefinite-lived intangible assets in excess of carrying values, if our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future.

Long-Term Debt and ~~Capital~~Finance Lease Obligations

Senior Notes

On September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of September 22, 2017 (the “Base Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental Indenture” together with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee. During the year ended December 31, 2019 and six months ended June 30, 2020, the Company purchased and subsequently retired $11.1 million and $28.9 million of its Notes, respectively, which resulted in a loss on retirement of $0.3 million and $0.7 million, respectively, that is included in interest expense. The Notes were issued at a discount and had a carrying value of $388.4 million and $359.6 million at December 31, 2019 and June 30, 2020, respectively.

The Notes bear interest payable semiannually in cash in arrears on March 22 and September 22 of each year, commencing on March 22, 2018, which rate is subject to an interest rate adjustment upon the occurrence of certain credit rating events. The Notes mature on September 22, 2024. The Indenture provides that the Notes are redeemable at the Company’s option, in whole or in part, at any time on or after July 22, 2024, at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

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

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September 30, 2017~~

~~(Unaudited)~~

The net proceeds from the issuance and sale of the Notes were approximately $394.7 million after deducting the underwriting discounts and commissions and offering expenses. The net proceeds from this offering were and will be used for working capital and general corporate purposes, and the termination and repayment of the obligations under its Previous Credit Agreements (as defined below) which were scheduled to expire on July 23, 2019 and December 29, 2017.

~~Credit Agreements~~

~~On July 23, 2014, the Company entered into a $500.0 million~~ Credit Agreement with various lenders that provided for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan) to borrow up to $250.0 million of revolving loans, with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company, and a term loan in an original aggregate principal amount of $250.0 million (the “2014 Credit 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) became a party to the $500.0 million Credit Agreement as the borrower and assumed all of the obligations of Magellan Rx Management, Inc. Under the 2014 Credit Facility, on September 30, 2014, the Company completed a draw-down of the $250.0 million term loan (the “2014 Term Loan”). The 2014 Credit Facility was scheduled to mature on July 23, 2019. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2014 Credit Facility was terminated. During the period the 2014 Term Loan was outstanding, from January 1, 2017 through September 22, 2017, the weighted average interest rate was approximately 2.634 percent.

On June 27, 2016, the Company entered into a $200.0 million Credit Agreement with various lenders that provided for a $200.0 million term loan (the “2016 Term Loan”) to Magellan Pharmacy Services, Inc. (the “2016 Credit Facility”). The 2016 Credit Facility was guaranteed by substantially all of the non-regulated subsidiaries of the Company and was scheduled to mature on December 29, 2017. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2016 Credit Facility was terminated. During the period the 2016 Term Loan was outstanding, from January 1, 2017 through September 22, 2017, the weighted average interest rate was approximately 2.390 percent.

On January 10, 2017, the Company entered into a Credit Agreement with various lenders that provided for a $200.0 million delayed draw term loan (the “2017 Term Loan”) to Magellan Pharmacy Services, Inc. (the “2017 Credit Facility”). The 2017 Credit Facility was guaranteed by substantially all of the non-regulated subsidiaries of the Company and was scheduled to mature on December 29, 2017. Upon consummation of the Refinancing (as defined below) on September 22, 2017, the 2017 Credit Facility was terminated. During the period the 2017 Term Loan was outstanding, from January 1, 2017 through September 22, 2017, the weighted average interest rate was approximately 2.691 percent.

On September 22, 2017, the Company entered into a credit agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the borrower (the “2017 Credit Agreement”). On August 13, 2018, the Company entered into an amendment to the 2017 Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio covenant, and which was necessary in order for us to remain in compliance with the terms of the 2017 Credit Agreement. The 2017 Credit Agreement is scheduled to mature on September 22, ~~2022.~~

The proceeds from the 2017 Credit Agreement were and will be used for (a) working capital and general corporate purposes of the Company and its subsidiaries, including investments and the funding of acquisitions, (b) the repayment of all outstanding loans and other obligations (and the termination of all commitments) under the 2014 Credit Facility, 2016 Credit Facility and 2017 Credit Facility (collectively, the “Previous Credit Agreements”) (the termination and repayment of the obligations under the Previous Credit Agreements, collectively, the “Refinancing”) and (c) payment of fees and expenses incurred in connection with (i) the entering into the 2017 Credit Agreement and related documents and the incurrence of loans and issuance of letters of credit thereunder and (ii) the consummation of the Refinancing. ~~Upon consummation of the Refinancing, the Previous Credit Agreements were terminated.~~2023.

Under the 2017 Credit Agreement, the annual interest rate on the loan borrowing is equal to (i) in the case of base rate loans, the sum of an initial borrowing margin of 0.500 percent plus the higher of the prime rate, ~~one-half~~one-half of one percent in excess of the overnight “federal funds” rate, or the Eurodollar rate for one month plus 1.000 percent, or (ii) in the case of Eurodollar rate loans, the sum of an initial borrowing margin of 1.500 percent plus the Eurodollar rate for the selected interest period. The borrowing margin is subject to adjustment based on the Company’s debt rating as provided

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September 30, 2017~~

~~(Unaudited)~~

by certain rating agencies. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. The commitment commission on the revolving credit facility under the 2017 Credit Agreement is 0.200

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

percent of the unused revolving credit commitment, which rate shall be subject to adjustment based on the Company’s debt rating as provided by certain rating agencies. ~~During~~For the ~~period the term loan was outstanding, from September 22, 2017 through September~~six months ended June 30, ~~2017,~~2020, the weighted average interest rate was approximately ~~2.740~~3.3217 percent.

~~On July 13, 2017, in connection with the Company’s pending acquisition of SWH Holdings, Inc. (“SWH”),~~In August 2019, the Company ~~secured committed financing for up to $400.0 million at closing under a bridge facility (“SWH Bridge Facility”).~~

made voluntary term loan repayments of $30.0 million. As of ~~September~~June 30, ~~2017,~~2020, the contractual maturities, totaling $271.9 million of the term loan under the 2017 Credit Agreement were as follows: ~~2017—$4.4 million; 2018—$17.5 million; 2019—$17.5 million;~~ 2020—$~~17.5~~0.0 million; 2021—$~~17.5~~0.0 million; 2022—$13.8 million; and ~~2022—~~2023—$~~275.6~~258.1 million. The Company had $33.7 million and $5.0 million of letters of credit outstanding issued under credit facilities at December 31, 2016 and September 30, 2017, respectively. Beginning in April 2016, dueDue to the timing of working capital needs, the Company ~~had~~will periodically ~~borrowed~~borrow from the revolving loan under the ~~2014~~2017 Credit ~~Facility. The revolving loan borrowings had been in the form of Eurodollar rate loans and totaled $175.0 million at~~Agreement. At December 31, ~~2016, which were settled during the period from January 1, 207 through September 22, 2017. At September 30, 2017,~~2019, the Company had no0 revolving loan ~~borrowings, resulting in~~borrowings. At June 30, 2020 the Company had a revolving loan of $80.0 million, with a borrowing capacity of ~~$395.0~~$320.0 million under the 2017 Credit Agreement. Included in long-term debt, finance lease and ~~capital lease~~deferred financing obligations are deferred loan and bond issuance costs as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017 are deferred loan issuance costs~~2020 of ~~$1.4~~$5.7 million and ~~$8.3~~$4.9 million, respectively.

Letter of Credit Agreement

On August 22, 2017, the Company entered into a Continuing Agreement for Standby Letters of Credit with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), as issuer (the “L/C Agreement”), under which BTMU, at its sole discretion, may provide stand-by letter of credit to the Company. The Company had ~~$21.5 million of~~ letters of credit outstanding ~~at September 30, 2017~~ under the L/C ~~Agreement.~~Agreement as of December 31, 2019 and June 30, 2020 of $66.4 million and $32.1 million, respectively.

~~Capital~~Finance Lease and Deferred Financing Obligations

There were ~~$26.0~~$18.1 million and ~~$23.8~~$19.0 million of ~~capital~~finance lease and deferred financing obligations at December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017,~~2020, respectively. The Company’s ~~capital~~finance lease and deferred financing 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.

~~Redeemable Non‑Controlling Interest~~

As The recorded gross cost of September 30, 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 all or any portion of the remaining shares. In addition, the Company has the right to purchase all remaining shares. Non‑controlling interests with redemption features, such as put options, that are not solely within the Company’s control are considered redeemable non‑controlling interests. Redeemable non‑controlling interest is considered to be temporaryfinance lease assets was $56.0 million and ~~is therefore reported in a mezzanine level between liabilities and stockholders’ equity on the Company’s consolidated balance sheet~~$61.6 million at the greater of the initial carrying amount adjusted for the non‑controlling interest’s share of net income or loss or its redemption value. The carrying value of the non‑controlling interest as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017 was $4.8 million and $4.7 million,~~2020, respectively. The $(0.1) million decrease in carrying value is a result of operating 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 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 interest. The Company will reflect redemption value adjustments in the earnings per share (“EPS”) calculation if redemption value is in excess of the carrying value of the non‑controlling interest. As of September 30, 2017, the carrying value of the non‑controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)

~~Reclassifications~~

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

The Company elected to early adopt ASUs 2016-09 and 2016-18 effective for the fiscal year ended December 31, 2016 and applied them retrospectively. Adoption of these standards resulted in a net reduction to the Company’s cash flows of $78.4 million for the nine months ended September 30, 2016. In addition, as a result of the adoption of ASU 2016-09, the diluted weighted average shares outstanding as of September 30, 2016 have been adjusted. There was no impact to the net income per common share – diluted.

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): for the three and six months ended June 30:

Three Months Ended

Nine Months Ended

September 30,

September 30,


2016

2017

2016

2017

Numerator:

Net income attributable to Magellan

$
25,509

$
32,451

$
42,704

$
55,698

Denominator:

Weighted average number of common shares outstanding—basic

23,052

23,282

23,394

23,135

Common stock equivalents—stock options (1)

226

572

287

485

Common stock equivalents—RSAs  (1)

696

483

647

461

Common stock equivalents—RSUs  (1)

29

61

28

46

Common stock equivalents—PSUs  (1)

2

162

23

111

Common stock equivalents—employee stock purchase plan

4

3

3

3

Weighted average number of common shares outstanding—diluted (1)

24,009

24,563

24,382

24,241

Net income attributable to Magellan per common share—basic

$
1.11

$
1.39

$
1.83

$
2.41

Net income attributable to Magellan per common share—diluted

$
1.06

$
1.32

$
1.75

$
2.30


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Numerator:
Net income (loss) from continuing operations	$	7,215	$	47,108	$	(976)	$	46,038
Income from discontinued operations, net of tax		6,398		36,397		15,020		55,717
Net income	$	13,613	$	83,505	$	14,044	$	101,755
Denominator:
Weighted average number of common shares outstanding—basic		24,101		25,054		24,024		24,891
Common stock equivalents—stock options		153		31		132		46
Common stock equivalents—RSAs		7		28		7		25
Common stock equivalents—RSUs		18		46		19		48
Common stock equivalents—PSUs		130		118		127		59
Common stock equivalents—employee stock purchase plan		7		1		6		5
Weighted average number of common shares outstanding—diluted		24,416		25,278		24,315		25,074
Net income (loss) per common share—basic:
Continuing operations	$	0.30	$	1.88	$	(0.04)	$	1.85
Discontinued operations		0.26		1.45		0.62		2.24
Consolidated operations	$	0.56	$	3.33	$	0.58	$	4.09
Net income (loss) per common share—diluted:
Continuing operations	$	0.30	$	1.86	$	(0.04)	$	1.84
Discontinued operations		0.26		1.44		0.62		2.22
Consolidated operations	$	0.56	$	3.30	$	0.58	$	4.06

~~(1)~~

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 September 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 ~~nine~~three and six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 were calculated using outstanding shares of the Company’s common stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the ~~nine~~three and six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 represent stock options to purchase shares of the 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 ~~1.8~~1.1 million and ~~1.2~~1.1 million options for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, respectively, and ~~0.4~~1.3 million and ~~0.6~~1.4 million options for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, 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.

NOTE C—Business Segment Information

The accounting policies of the Company’s segments are the same as those described in Note A—“General.” The Company evaluates performance of its segments based on profit or loss from operations before stock compensation

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September 30, 2017~~

~~(Unaudited)~~

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”). 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 customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The 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 September 30, 2016

													Corporate
											Pharmacy		and
									Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2019
Managed care and other revenue	$	690,572	$	61,106	$	(89)	$	751,589	$	546,113	$	62,648	$	(147)	$	608,614
PBM and dispensing revenue		—		570,231		(29,688)		540,543
PBM revenue										—		550,010		(4,335)		545,675
Cost of care		(480,243)		—		—		(480,243)		(408,911)		—		—		(408,911)
Cost of goods sold		—		(538,113)		28,440		(509,673)		—		(505,203)		4,122		(501,081)
Direct service costs and other		(152,992)		(66,475)		(9,627)		(229,094)		(98,314)		(78,776)		(18,817)		(195,907)
Stock compensation expense (1)		2,267		5,368		1,541		9,176		2,237		2,124		846		5,207
Changes in fair value of contingent consideration (1)		313		—		—		313
Less: non-controlling interest segment profit (loss) (2)		(189)		—		(5)		(194)
Segment profit (loss)	$	60,106	$	32,117	$	(9,418)	$	82,805
Segment Profit (Loss)									$	41,125	$	30,803	$	(18,331)	$	53,597


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		��	Consolidated
Three Months Ended September 30, 2017

														Corporate
												Pharmacy		and
										Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2020
Managed care and other revenue	$	769,451	$	65,131	$	(224)		$	834,358	$	481,021	$	67,867	$	(177)	$	548,711
PBM and dispensing revenue		—		618,178		(33,130)			585,048
PBM revenue											—		556,195		(4,831)		551,364
Cost of care		(569,306)		—		—			(569,306)		(321,831)		—		—		(321,831)
Cost of goods sold		—		(575,327)		31,645			(543,682)		—		(532,685)		4,618		(528,067)
Direct service costs and other		(143,550)		(74,976)		(8,846)			(227,372)		(100,450)		(80,082)		(19,224)		(199,756)
Stock compensation expense (1)		2,623		5,680		2,020			10,323		2,102		1,939		2,551		6,592
Changes in fair value of contingent consideration (1)		(834)		—		—			(834)
Less: non-controlling interest segment profit (loss) (2)		789		—		(1)			788
Segment profit (loss)	$	57,595	$	38,686	$	(8,534)		$	87,747
Segment Profit (Loss)										$	60,842	$	13,234	$	(17,063)	$	57,013


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2019
Managed care and other revenue	$	1,052,935	$	122,543	$	(316)	$	1,175,162
PBM revenue		—		1,106,575		(8,442)		1,098,133
Cost of care		(778,008)		—		—		(778,008)
Cost of goods sold		—		(1,035,410)		8,015		(1,027,395)
Direct service costs and other (1)		(198,424)		(158,411)		(41,372)		(398,207)
Stock compensation expense (1)		3,780		3,796		7,031		14,607
Segment Profit (Loss)	$	80,283	$	39,093	$	(35,084)	$	84,292

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2020
Managed care and other revenue	$	969,927	$	132,302	$	(350)	$	1,101,879
PBM revenue		—		1,129,973		(9,398)		1,120,575
Cost of care		(670,939)		—		—		(670,939)
Cost of goods sold		—		(1,070,259)		8,951		(1,061,308)
Direct service costs and other (1)		(206,386)		(161,948)		(35,663)		(403,997)
Stock compensation expense (1)		3,863		4,046		4,480		12,389
Segment Profit (Loss)	$	96,465	$	34,114	$	(31,980)	$	98,599

Corporate


Pharmacy

and


Healthcare

Management

Elimination

Consolidated

Nine Months Ended September 30, 2016

Managed care and other revenue

$
1,947,470

$
180,658

$
(217)

$
2,127,911

PBM and dispensing revenue

—

1,535,864

(90,276)

1,445,588

Cost of care

(1,410,403)

—

—

(1,410,403)

Cost of goods sold

—

(1,448,699)

86,637

(1,362,062)

Direct service costs and other

(418,574)

(191,402)

(25,651)

(635,627)

Stock compensation expense (1)

6,737

16,338

4,498

27,573

Changes in fair value of contingent consideration (1)

383

127

—

510

Impairment of intangible assets (1)

4,800

—

—

4,800

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

(1,325)

—

(16)

(1,341)

Segment profit (loss)

$
131,738

$
92,886

$
(24,993)

$
199,631

Corporate


Pharmacy

and


Healthcare

Management

Elimination

Consolidated

Nine Months Ended September 30, 2017

Managed care and other revenue

$
2,190,097

$
195,970

$
(670)

$
2,385,397

PBM and dispensing revenue

—

1,856,856

(98,085)

1,758,771

Cost of care

(1,634,624)

—

—

(1,634,624)

Cost of goods sold

—

(1,742,610)

93,940

(1,648,670)

Direct service costs and other

(428,432)

(225,782)

(26,016)

(680,230)

Stock compensation expense (1)

8,388

17,094

6,352

31,834

Changes in fair value of contingent consideration (1)

(631)

—

—

(631)

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

(56)

—

(3)

(59)

Segment profit (loss)

$
134,854

$
101,528

$
(24,476)

$
211,906

(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 from continuing operations before income taxes to Segment Profit from continuing operations (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2017

2016

2017


Income before income taxes

$
43,940

$
44,975

$
83,271

$
84,838

Stock compensation expense

9,176

10,323

27,573

31,834

Changes in fair value of contingent consideration

313

(834)

510

(631)

Impairment of intangible assets

—

—

4,800

—

Non-controlling interest segment (profit) loss

194

(788)

1,341

59

Depreciation and amortization

26,885

28,189

77,472

82,896

Interest expense

3,038

7,663

6,780

16,711

Interest and other income

(741)

(1,781)

(2,116)

(3,801)

Segment Profit

$
82,805

$
87,747

$
199,631

$
211,906


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Income from continuing operations before income taxes	$	12,950	$	10,780	$	1,550	$	15,472
Stock compensation expense		5,207		6,592		14,607		12,389
Depreciation and amortization		28,191		23,888		53,608		47,246
Interest expense		9,070		7,995		18,107		16,953
Interest and other income		(1,821)		(551)		(3,580)		(1,770)
Special charges		—		8,309		—		8,309
Segment Profit from continuing operations	$	53,597	$	57,013	$	84,292	$	98,599

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

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

~~September 30, 2017~~

~~(Unaudited)~~

NOTE D—Commitments and Contingencies

Legal

The 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~~for whom the Company provides managed care ~~is being managed by the Company.~~services. 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~~practices including employment practices, and privacy and data protection.

The Company maintains a program of insurance coverage against a broad range of risks in the ~~opinion~~Company’s business, including certain of ~~management,~~ the class actions and other litigation and claims asserted against the Company, subject to deductibles and self-insured retentions as is described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 28, 2020. The Company has recorded reserves that, in the opinion of management, are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company’s financial condition or results of operations; however, there can be no assurance in this regard.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Regulatory Issues

The managed healthcare industry is subject to numerous laws and regulations. The subjects of such laws and regulations cover, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, information privacy and security, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Over the past several years, government activity has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse and false claims statutes and/or regulations by healthcare organizations and insurers. Entities that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

The Company is subject to various federal, state and other laws and rules regarding the use, storage, protection and disclosure of confidential member and protected personal or health information, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) and other applicable laws. The Company has experienced data security incidents resulting in disclosure of confidential or protected personal or health information. We have notified government agencies as appropriate and are cooperating with investigations and requests for information. Noncompliance with any applicable privacy or data security laws and regulations could result in enforcement actions, fines, penalties, and reputational and financial harm to the Company.

In addition, regulators of certain of the Company’s subsidiaries may exercise certain discretionary rights under regulations including increasing their supervision of such entities, requiring additional restricted cash or other security or seizing or otherwise taking control of the assets and operations of such subsidiaries.

The Company is subject to certain federal laws and regulations in connection with its contracts with the federal government. These laws and regulations affect how the Company conducts business with its federal agency customers and may impose added costs on its business. The Company’s failure to comply with federal procurement laws and regulations could cause it to lose business, incur additional costs and subject it to a variety of civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to reputation, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. The Company’s wholly owned subsidiary, Armed Forces Services Corporation (“AFSC”), conducts business with federal agency customers and federal contractors to such agencies. The Company is investigating, with the assistance of outside counsel, matters relating to compliance by AFSC with Small Business Administration ( “SBA”) regulations and other federal laws applicable to government contractors and has reported findings to the SBA and the Department of Defense, including facts indicating violations of SBA regulations and other federal laws, such as the Anti-Kickback Act, by former AFSC executives, none of which was disclosed to Magellan prior to its acquisition of AFSC. The Company is voluntarily responding to government requests for further information regarding the Company’s investigation. In June 2020, the United States Attorney’s Office for the Eastern District of Virginia informed the Company of a civil investigation regarding the Company and AFSC related to potential violations of the False Claims Act and/or the Anti-Kickback Act in connection with the matters self-disclosed by the Company. Contingencies, if any, arising from the results of these investigations and self-reporting could require us to record balance sheet liabilities or accrue expenses, the amount of which we are not able to currently estimate. While the Company believes that it has responded appropriately by self-reporting findings regarding matters that incepted prior to its acquisition of AFSC in order to mitigate the risk of adverse consequences, should the SBA, Department of Defense and/or other federal agencies seek to hold the Company or AFSC responsible for the reported conduct, we may be required to pay damages and/or penalties and AFSC could be suspended or debarred from government contracting. AFSC generated approximately 3.0% and 2.5% of the Company’s total revenue from continuing operations for the year ended December 31, 2019 and six months ended June 30, 2020, respectively.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Stock Repurchases

The 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 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 (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,~~22, 2018. On May 24, 2018, the Company’s board of directors approved an increase of $200 million to the current $200 million stock repurchase plan which will now authorize the Company to purchase up to $400 million of its outstanding common stock under the 2015 Repurchase Program. As of June 30, 2020, the remaining capacity under the 2015 Repurchase Program was $186.3 million. The board also extended the program from October 22, 2018 to October 22, 2020. Stock repurchases under the programs may be 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 shares, general market and economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company’s board of directors at any time.

Pursuant to the 2015 Stock Repurchase Program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):


	Total Number	Average
	of Shares	Price Paid		Aggregate

						Total Number	Average
						of Shares	Price Paid		Aggregate
Period	Purchased	per Share		Cost		Purchased	per Share		Cost
October 26, 2015 - December 31, 2015	345,044	$	53.46	$	18.4	345,044	$	53.46	$	18.4
January 1, 2016 - December 31, 2016	1,828,183		58.40		106.8	1,828,183		58.40		106.8
January 1, 2017 - September 30, 2017	204,881		75.42		15.5
	2,378,108			$	140.7
January 1, 2017 - December 31, 2017						280,140		77.67		21.8
January 1, 2018 - December 31, 2018						844,872		74.59		63.0
January 1, 2019 - December 31, 2019						60,901		61.15		3.7
January 1, 2020 - June 30, 2020						—		—		—
						3,359,140			$	213.7

The Company made ~~additional open market purchases of 20,994 shares~~0 share repurchases from July 1, 2020 through July 24, 2020.

NOTE E—Discontinued Operations

Magellan Complete Care – Stock and Asset Purchase Agreement

As discussed in Note A— “General”, on April 30, 2020, the Company and Molina entered into the Purchase Agreement pursuant to which the Company has agreed to sell its MCC business to Molina for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the ~~Company’s common stock at an aggregate cost~~MCC business.

The consummation of ~~$1.8 million (excluding broker commissions) during~~ the MCC Sale is subject to customary closing conditions, including: (i) the expiration of the waiting period ~~from October 1, 2017 through October 27, 2017.~~

applicable to the Purchase Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) the absence of any law or governmental order prohibiting the MCC Sale, (iii) obtaining all required

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)

consents, authorizations, permits and approvals under Health Regulatory Laws (as defined in the Purchase Agreement), (iv) no material adverse effect on the Company having occurred since the signing of the Purchase Agreement, and (v) the accuracy of the representations and warranties of each party (subject to materiality qualifiers) in the Purchase Agreement and the compliance by each party with its covenants in all material respects. The consummation of the MCC Sale is not subject to any financing contingency.

~~NOTE E—Acquisitions~~In connection with the MCC Sale, the Company and Molina are entering into commercial agreements for certain behavioral health, utilization management and related services to be provided by the Company to Molina and the MCC business. In addition, the parties will enter into a transition services agreement pursuant to which the Company and certain of its affiliates will provide, or cause third parties to provide, certain services to accommodate the transition of the MCC business to Molina.

~~Acquisition~~The foregoing description of ~~AFSC~~

~~Pursuant~~the Purchase Agreement and the MCC Sale does not purport to be complete and is qualified in its entirety by the terms and conditions of the Purchase Agreement, which was filed as Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q which was filed with the SEC on May 15, 2016 share purchase agreement (the “AFSC Agreement”) with Armed Forces Services Corporation (“AFSC”), on July 1, 2016 the Company acquired all of the outstanding equity interests of AFSC (the “AFSC Acquisition”). AFSC has extensive experience providing11, 2020, and ~~managing behavioral health and specialty services to various agencies of the federal government, including all five branches of the U.S. Armed Forces.~~any related agreements.

The ~~base purchase price~~accounting requirements for reporting a business to be divested as a discontinued operation were met during the ~~AFSC Acquisition per~~second quarter of 2020. Accordingly, the ~~AFSC Agreement was $117.5 million, subject to working capital adjustments. The Company reports~~accompanying consolidated financial statements for all periods presented reflect the ~~results of operations of AFSC within its Healthcare segment. Pursuant to the AFSC Agreement, certain members of AFSC’s management, who were also shareholders of AFSC, purchased~~MCC business as 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, 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 September 30, 2017, the Company had a working capital receivable of $2.7 million.~~

~~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.discontinued operation.

The ~~base purchase price for~~following table summarizes the ~~Veridicus Acquisition per the Veridicus Agreements was $74.5 million, subject to working capital adjustments. The Company reports the results~~major classes of ~~operations of Veridicus within its Pharmacy Management segment.~~

~~The Company’s estimated fair values of Veridicus~~ assets ~~acquired~~ and liabilities ~~assumed at~~held for sale that were included in the ~~date~~Company’s consolidated balance sheets as of ~~acquisition are determined based on certain valuations~~December 31, 2019 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 nine months ended September~~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.2020 (in thousands):


	December 31,		June 30,
	2019		2020
Assets Held For Sale
Cash and cash equivalents ($95,202 and $69,971 restricted at December 31, 2019 and June 30, 2020, respectively)	$	209,497	$	235,873
Accounts receivable, net		209,496		163,216
Short-term and long-term investments ($243,496 and $343,348 restricted at December 31, 2019 and June 30, 2020, respectively)		243,496		398,741
Property and equipment, net		6,710		7,477
Goodwill		211,735		211,735
Other intangible assets, net		85,669		76,628
Other current and long-term assets ($2,387 and $2,387 restricted at December 31, 2019 and June 30, 2020, respectively)		32,386		52,234
Total Assets Held For Sale		998,989		1,145,904
Less: current portion		663,276		1,145,904
Total Assets Held For Sale, Less Current Portion	$	335,713	$	—

Liabilities Held For Sale
Accounts payable	$	4,625	$	3,449
Accrued liabilities		92,170		145,558
Medical claims payable		281,419		271,998
Other medical liabilities		31,769		50,384
Deferred income taxes		15,063		13,910
Tax contingencies		5,388		5,462
Deferred credits and other long-term liabilities		16,850		13,698
Total Liabilities Held For Sale		447,284		504,459
Less: current portion		409,983		504,459
Total Liabilities Held For Sale, Less Current Portion	$	37,301	$	—

~~NOTE F—Subsequent Events~~

Pursuant to the July 13, 2017 Agreement and Plan of Merger (“the SWH Agreement”), on October 31, 2017 the Company acquired (the “SWH Acquisition”) all of the outstanding equity interests of SWH Holdings, Inc. (“SWH”). SWH 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.

As consideration for the Acquisition, Magellan Healthcare paid $400.0 million in cash, inclusive of a $10.0 million payment based on SWH’s Medicare plan in Massachusetts receiving a Centers for Medicare & Medicaid

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~September~~June 30, ~~2017~~2020

(Unaudited)

~~Services 2018 Star Rating~~The following table summarizes the components of ~~at least 4, subject to adjustments as provided~~income from discontinued operations that is included in the ~~SWH Agreement. The Company will report~~Company’s consolidated income statements for the ~~results operations of SWH in it Healthcare segment.~~

~~On October~~three and six months ended June 30, 2017, in order to fund the SWH Acquisition, the Company borrowed $135.0 million of the available revolving loans under the 2017 Credit Agreement. The Company did not need to draw on the SWH Bridge Facility to close the SWH Acquisition. The SWH Bridge Facility was terminated on October, 23, 2017.2019 and 2020 (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Managed care and other revenue	$	674,760	$	735,357	$	1,332,385	$	1,455,391
Costs and expenses:
Cost of care		592,975		573,374		1,165,839		1,175,908
Direct service costs and other operating expenses (1)(2)(3)		71,346		92,078		141,591		176,575
Depreciation and amortization		5,299		5,379		10,590		10,705
Interest expense		71		18		141		89
Interest and other income		(3,200)		(1,478)		(6,415)		(4,018)
Total costs and expenses		666,491		669,371		1,311,746		1,359,259
Income from discontinued operation before income taxes		8,269		65,986		20,639		96,132
Provision for income taxes		1,871		29,589		5,619		40,415
Net income from discontinued operations	$	6,398	$	36,397	$	15,020	$	55,717

(1)	Includes stock compensation expense of $207 and $366 for the three months ended June 30, 2019 and 2020, respectively, and $414 and $626 for the six months ended June 30, 2019 and 2020, respectively.

(2)	Includes changes in fair value of contingent consideration of $(2,149) and $(2,005) for the three and six months ended June 30, 2019, respectively.

(3)	Includes divestiture related expenses of $3,353 and $3,958 for the three and six months ended June 30, 2020, respectively.

The Company has ~~received all regulatory approvals necessary~~retained corporate overhead expenses previously allocated to MCC of $8.5 million and $7.0 million for the ~~merger (the “NY MLTC Merger”) of its existing New York managed long-term care (“NY MLTC”) plan, AlphaCare of New York, Inc. (“AlphaCare of NY”),~~three months ended June 30, 2019 and ~~Senior Whole Health of New York, Inc., SWH’s NY MLTC plan. The Company plans to close on~~2020, respectively, and $17.5 million and $13.7 million for the ~~NY MLTC Merger by year-end 2017 so as to more fully integrate its NY MLTC operations.~~six months ended June 30, 2019 and 2020, respectively.

At June 30, 2020, the Company’s excess capital and undistributed earnings for the Company’s regulated subsidiaries is approximately $160 million which are included in assets held for sale.

NOTE F—Special Charges

~~On October 25, 2017, minority shareholder of AlphaCare Holdings, Inc., the holding company for Alpha Care of NY, filed a lawsuit against~~In 2020, the Company established a transformation office which has an initiative (the “Transformation Initiative”) to lower our operating costs and reinvest in ~~U.S. District Court~~our business by improving and automating processes, leveraging technology, consolidating platforms and reducing any friction our customers, providers and members experience when doing business with us. As part of the Transformation Initiative, the Company is reevaluating its current office lease footprint. Recoverability of existing operating right-of-use lease assets, and the related fixed assets held at the office locations, to be held and used are measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the ~~Eastern District of New York, alleging that~~amount by which the planned NY MLTC Merger is unfair to them. The complaint seeks an injunction, money damages and any other relief that the court deems appropriate. On October 26, 2017, the court denied the plaintiffs’ request for a temporary restraining order prohibiting the completioncarrying amount of the ~~NY MLTC Merger. A further hearing for a preliminary injunction sought by~~asset exceeds the ~~plaintiffs to prohibit the completion~~fair value of the ~~NY MLTC Merger~~asset. Any lease terminations or abandonments initiated as a result of the Transformation Initiative that result in an impairment of such right-of-use assets and the location’s related fixtures will be reported as special charges. For the three and six months ended June 30, 2020, lease terminations and abandonments resulted in the recognition of non-cash pre-tax impairment of $8.3 million within special charges in the consolidated statement of operations. The impairment charge reduced the carrying value of these assets to their estimated fair value. Outstanding liabilities of approximately $9.6 million related to the Transformation Initiative are included in the accompanying June 30, 2020 consolidated balance sheet in accrued liabilities and deferred credits and other long-term liabilities. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is ~~scheduled for December 4, 2017. The~~impaired, the Company ~~believes~~will adjust the ~~lawsuit is without merit and intends to vigorously defend against it.~~carrying value of these long-lived assets in the period in which the impairment occurs.

2631

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Item 2. 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 and the Company’s Annual Report on Form 10‑K for the year ended December 31, 2016, which was filed with the SEC on February 24, 2017.

~~Forward‑Looking Statements~~

This Form 10‑Q includes “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 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 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 statements. Important factors currently known to management that could cause actual results to differ materially from those in 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 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;

~~Table of Contents~~

~~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 it does 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 statements is set forth under the heading “Risk Factors” in Item 1A of Magellan’s Annual Report on Form 10‑K for the year ended December 31, 2016. When used in this Quarterly Report on Form 10‑Q, the words “estimate,” “anticipate,” “expect,” “believe,” “should,” and similar expressions are intended to be forward‑looking statements. Magellan undertakes no obligation to update or revise 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~~meeting needs in areas of ~~health, including~~healthcare that are fast growing, highly complex and high cost, with an emphasis on 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 it serves.population management. The Company provides services to health plans and other MCOs, employers, labor unions, various military and governmental agencies, TPAs, consultants and ~~TPAs.~~brokers. The Company’s business is divided into three segments, based on the services it provides and/or the customers that it serves. See ~~Note A—~~Item 1—“~~General~~”Business” for more information on the Company’s business segments.

~~Table~~Results of ~~Contents~~

Operations

The following ~~tables summarize,~~table summarizes, for the periods indicated, ~~revenues and covered lives for Healthcare by product classification and customer type~~operating results from continuing operations (in thousands):


	Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change
Continuing Operations	2019		2020		'19 vs '20	2019		2020		'19 vs '20
Statement of Operations Data:
Net revenue	$	1,154,289	$	1,100,075	(4.7%)	$	2,273,295	$	2,222,454	(2.2%)
Cost of Care		408,911		321,831	(21.3%)		778,008		670,939	(13.8%)
Cost of goods sold		501,081		528,067	5.4%		1,027,395		1,061,308	3.3%
Direct service costs and other operating expenses (1)		195,907		199,756	2.0%		398,207		403,997	1.5%
Depreciation and amortization		28,191		23,888	(15.3%)		53,608		47,246	(11.9%)
Interest expense		9,070		7,995	(11.9%)		18,107		16,953	(6.4%)
Interest and other income		(1,821)		(551)	(69.7%)		(3,580)		(1,770)	(50.6%)
Special charges		-		8,309	N/A		-		8,309	N/A
Income before income taxes		12,950		10,780	(16.8%)		1,550		15,472	898.2%
Provision (benefit) for income taxes		5,735		(36,328)	(733.4%)		2,526		(30,566)	(1310.1%)
Net income (loss) from continuing operations	$	7,215	$	47,108	552.9%	$	(976)	$	46,038	(4817.0%)

Covered lives as of

September 30, 2017

Risk-based

ASO

Commercial

Behavioral(1)

14,394

11,266

Specialty

9,101

16,075

Government(2)

4,042

1,017

Revenue for the nine months ended

September 30, 2017


Risk-based

ASO

Total

Commercial

Behavioral(1)

$
302,650

$
97,883

$
400,533

Specialty

446,169

53,323

499,492

Government(2)

1,218,513

71,559

1,290,072

Total

$
1,967,332

$
222,765

$
2,190,097

(1)

~~(1)~~

Includes ~~revenues~~stock compensation expense of ~~$36.8 million from EAP services provided on a risk basis to health plans~~$5,207 and ~~employers with 10.7 million covered lives.~~

$6,592 for the three months ended June 30, 2019 and 2020, respectively, and $14,607 and $12,389 for the six months ended June 30, 2019 and 2020, respectively.

Quarter ended June 30, 2020 (“Current Year Quarter”) compared to Quarter ended June 30, 2019 (“Prior Year Quarter”)

Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses

Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow.

Depreciation and amortization

Depreciation and amortization expense decreased by 15.3 percent or $4.3 million from the Prior Year Quarter to the Current Year Quarter, primarily due to asset maturities, partially offset by normal asset additions after the Prior Year Quarter.

Interest expense

Interest expense decreased by 11.9 percent or $1.1 million from the Prior Year Quarter to the Current Year Quarter primarily due to lower interest rates.

~~(2)~~

~~Includes revenues of $251.1~~

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Interest and other income

Interest income decreased by $1.3 million from ~~EAP services provided on a risk basis to federal governmental entities with 3.5 million covered lives.~~

~~During~~ the ~~nine~~Prior Year Quarter to the Current Year Quarter primarily due to a reduction in rates.

Special charges

Special charges increased by $8.3 million from the Prior Year Quarter to the Current Year Quarter due to recognition of the special charges in the Current Year Quarter, see Note F—“Special Charges” for further discussion.

Income taxes

The Company’s effective income tax rates from continuing operations were 44.3 percent and (337.0) percent for the Prior Year Quarter and Current Year Quarter, respectively. The effective income tax rate for the Prior Year Quarter differs from the effective income tax rate for the Current Year Quarter primarily due to recognition of the nonrecurring tax benefit related to the divestiture in the Current Year Quarter. Theeffective income tax rate for the Current Year Quarter differs from the federal and state statutory rates primary due to the recognition of the nonrecurring tax benefit related to the divestiture that was recorded in the Current Year Quarter.

Six months ended ~~September~~June 30, ~~2017,~~2020 (“Current Year Period”) compared to six months ended June 30, 2019 (“Prior Year Period”)

Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses

Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow.

Depreciation and amortization

Depreciation and amortization expense decreased by 11.9 percent or $6.4 million from the Prior Year Period, primarily due to asset maturities, partially offset by normal asset additions after the Prior Year Period.

Interest expense

Interest expense decreased by $1.2 million from the Prior Year Period to the Current Year Period primarily due to lower interest rates.

Interest and other income

Interest income decreased by $1.8 million from the Prior Year Period to the Current Year Period primarily due to a reduction in rates.

Special charges

Special charges increased by $8.3 million from the Prior Year Period to the Current Year Period due to recognition of special charges in the Current Year Period, see Note F—“Special Charges” for further discussion.

Income taxes

The Company’s effective income tax rates from continuing operations were 163.0 percent and (197.6) percent for the Prior Year Period and Current Year Period, respectively. The effective income tax rate for the Prior Year Period differs from the effective income tax rate for the Current Year Period primarily due to the recognition of the nonrecurring tax benefit related to the divestiture in the Current Year Period. The effective income tax rate for the Current Year Period differs from the federal and state statutory rates primarily due to the recognition of the nonrecurring tax benefit related to the divestiture recorded in the Current Year Period.

Segment Results

The Company manages and measures operational performance through three segments: Healthcare, Pharmacy Management ~~paid 21.6 million adjusted commercial network claims in its PBM business, 55.4 million adjusted PBA claims~~ and 0.1 million specialty dispensing claims. Adjusted claim totals apply a multiple of three for each 90‑day and traditional mail claim. As of September 30, 2017, Pharmacy Management had a generic dispensing rate of 86.9 percent within its commercial PBM business and served 1.9 million commercial PBM members, 13.1 million members in its medical pharmacy management programs, and 27 states and the District of Columbia in its PBA business.

~~Critical Accounting Policies and Estimates~~

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies, legal liabilities and contingent consideration payable. Actual results could differ from those estimates. Except as noted below, the Company’s critical accounting policies are summarized in the Company’s Annual Report on Form 10‑K, filed with the SEC on February 24, 2017.

~~Results of Operations~~

~~The accounting policies of the Company’s segments are the same as those described in Note A—“General.”~~Corporate. The Company evaluates performance of its segments based on Segment Profit. Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation,

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

Healthcare

The Healthcare segment includes the Company’s: (i) management of behavioral healthcare services and EAP services and (ii) management of other specialty areas including diagnostic imaging and musculoskeletal management. The Healthcare segment provides management services to health plans, accountable care organizations, employers, state Medicaid agencies, the United States military and various federal government agencies for whom Magellan provides carve-out management services for behavioral health, employee assistance plans, and other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac, and physical medicine.

The following table summarizes, for the periods indicated, operating results for the Healthcare segment (in thousands):


	Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change
Healthcare Segment Results	2019		2020		'19 vs '20	2019		2020		'19 vs '20
Risk-based, non-EAP	$	400,591	$	344,199	(14.1%)	$	762,399	$	694,044	(9.0%)
EAP risk-based		87,296		77,419	(11.3%)		176,913		157,357	(11.1%)
ASO		58,226		59,403	2.0%		113,623		118,526	4.3%
Managed care and other revenue		546,113		481,021	(11.9%)		1,052,935		969,927	(7.9%)
Cost of care		408,911		321,831	(21.3%)		778,008		670,939	(13.8%)
		137,202		159,190	16.0%		274,927		298,988	8.8%
Direct service costs and other		98,314		100,450	2.2%		198,424		206,386	4.0%
		38,888		58,740	51.0%		76,503		92,602	21.0%
Stock compensation expense		2,237		2,102	(6.0%)		3,780		3,863	2.2%
Segment Profit	$	41,125	$	60,842	47.9%	$	80,283	$	96,465	20.2%

Direct service cost as % of revenue		18.0%		20.9%			18.8%		21.3%
MLR Behavioral & Specialty Health risk		87.3%		78.3%			86.7%		81.0%
MLR Behavioral & Specialty Health EAP risk		67.8%		67.9%			66.3%		69.5%
							.
Membership
Risk (1)							12,155		10,601	(12.8%)
EAP risk							14,719		13,836	(6.0%)
ASO							26,119		25,386	(2.8%)
							52,993		49,823	(6.0%)

(1)

May include some duplicate count of membership for customers that contract with Magellan for both behavioral and other specialty management services.

Current Year Quarter compared to the Prior Year Quarter

Managed care and other revenue

Net revenue decreased by 11.9 percent or $65.1 million from the Prior Year Quarter to the Current Year Quarter. The decrease in revenue is primarily due to terminated contracts of $33.1 million, decreased membership partially offset by favorable rate changes of $21.0 million, favorable retroactive program changes in the Prior Year Quarter of $9.6 million, the revenue impact of program changes of $9.0 million, the revenue impact of favorable prior period care development recorded in the Current Year Quarter of $4.3 million, favorable retroactive rate and membership adjustments in the Prior Year Quarter of $3.1 million, the revenue impact of net favorable prior period medical claims development recorded in the Prior Year Quarter of $2.3 million and other net unfavorable variances of $0.2 million. These decreases were partially offset by new contracts implemented after (or during) the Prior Year Quarter of $13.9 million and net revenue recorded for HIF fees in the Current Year Quarter of $3.6 million.

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Cost of care

Cost of care decreased by 21.3 percent or $87.1 million from the Prior Year Quarter to the Current Year Quarter. The decrease is primarily due to terminated contracts of $24.3 million, decreased membership of $23.8 million, unfavorable retroactive program changes in the Prior Year Quarter of $8.9 million, favorable prior period care development recorded in the Current Year Quarter of $8.5 million, program changes of $8.2 million and care trends and other favorable variances of $21.0 million. These decreases were partially offset by care cost of new contracts implemented after (or during) the Prior Year Quarter of $6.9 million and net favorable prior period medical claims development recorded in the Prior Year Quarter of $0.7 million. Cost of care as a percentage of risk revenue (excluding EAP business) decreased from 87.3 percent in Prior Year Quarter to 78.3 percent in the Current Year Quarter mainly due to the impact of prior period care development, decreased utilization and business mix.

Direct service costs and other

Direct service costs increased 2.2 percent or $2.1 million from the Prior Year Quarter to the Current Year Quarter primarily due to HIF fees in the Current Year Quarter. Direct services costs increased as a percentage of revenue from 18.0 percent in the Prior Year Quarter to 20.9 percent in the Current Year Quarter primarily due to the previously discussed revenue decreases as well as HIF fees in the Current Year Quarter.

Current Year Period compared to the Prior Year Period

Managed care and other revenue

Net revenue decreased by 7.9 percent or $83.0 million from the Prior Year Period to the Current Year Period. The decrease in revenue is primarily due to terminated contracts of $70.7 million, decreased membership partially offset by favorable rate changes of $23.9 million, the revenue impact of program changes of $18.0 million and the revenue impact of favorable period care development recorded in the Current Year Period of $4.9 million. These decreases were partially offset by new contracts implemented after (or during) the Prior Year Period of $22.7 million, net revenue recorded for HIF fees in the Current Year Period of $7.9 million and other net favorable variances of $3.9 million.

Cost of care

Cost of care decreased by 13.8 percent or $107.1 million from the Prior Year Period to the Current Year Period. The decrease is primarily due to terminated contracts of $48.4 million, decreased membership of $35.3 million, program changes of $16.5 million, favorable prior period care development recorded in the Current Year Period of $6.3 million and care trends and other favorable variances of $23.5 million. These decreases were partially offset by care cost of new contracts implemented after (or during) the Prior Year Period of $11.9 million and net favorable prior period medical claims development recorded in the Prior Year Period of $11.0 million. Cost of care as a percentage of risk revenue (excluding EAP business) decreased from 86.7 percent in the Prior Year Period to 81.0 percent in the Current Year Period, mainly due to the impact of prior period care development, decreased utilization and business mix.

Direct service costs and other

Direct service costs increased by 4.0 percent or $8.0 million from the Prior Year Period to the Current Year Period primarily due to HIF fees in the Current Year Period. Direct service costs increased as a percentage of revenue from 18.8 percent in the Prior Year Period to 21.3 percent in the Current Year Period, primarily due to the previously discussed revenue decreases as well as HIF fees in the Current Year Period.

MCC Stock and Asset Purchase Agreement

On April 30, 2020, the Company and Molina entered into the Purchase Agreement pursuant to which the Company has agreed to sell its MCC business to Molina for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business. See Note E— “Discontinued Operations” for additional information.

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Pharmacy Management

The Pharmacy Management segment comprises products and solutions that provide clinical and financial management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy Management’s services include: (i) PBM services; (ii) 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. Pharmacy Management’s services are provided under contracts with health plans, employers, state Medicaid programs, Medicare Part D and other government agencies.

The following table summarizes, for the periods indicated, operating results for the Pharmacy Management segment (in thousands, except state count):


	Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change
Pharmacy Segment Results	2019		2020		'19 vs '20	2019		2020		'19 vs '20
Formulary management	$	18,426	$	25,061	36.0%	$	35,609	$	47,222	32.6%
PBA and other		44,222		42,806	(3.2%)		86,934		85,080	(2.1%)
Managed care and other revenue		62,648		67,867	8.3%		122,543		132,302	8.0%
PBM, including dispensing		480,167		499,484	4.0%		973,392		1,017,596	4.5%
Medicare Part D		69,843		56,711	(18.8%)		133,183		112,377	(15.6%)
PBM revenue		550,010		556,195	1.1%		1,106,575		1,129,973	2.1%
Total net revenue		612,658		624,062	1.9%		1,229,118		1,262,275	2.7%
Cost of goods sold		505,203		532,685	5.4%		1,035,410		1,070,259	3.4%
		107,455		91,377	(15.0%)		193,708		192,016	(0.9%)
Direct service costs and other		78,776		80,082	1.7%		158,411		161,948	2.2%
		28,679		11,295	(60.6%)		35,297		30,068	(14.8%)
Stock compensation expense		2,124		1,939	(8.7%)		3,796		4,046	6.6%
Segment Profit	$	30,803	$	13,234	(57.0%)	$	39,093	$	34,114	(12.7%)

Direct service cost as % of revenue		12.9%		12.8%			12.9%		12.8%
COGS as % of PBM revenue		91.9%		95.8%			93.6%		94.7%

Pharmacy Operational Statistics
Adjusted commercial network claims							13,900		11,661
Adjusted PBA claims							39,508		34,530
Total adjusted claims							53,408		46,191

Generic dispensing rate							87.3%		88.1%
Commercial PBM covered lives							1,863		1,876
Medical pharmacy covered lives							12,569		15,833
Total states and DC that participate in PBA							27		26

Current Year Quarter compared to the Prior Year Quarter

Managed care and other revenue

Managed care and other revenue increased by 8.3 percent or $5.2 million from the Prior Year Quarter to the Current Year Quarter primarily due to increased formulary management revenue of $6.6 million mainly due to utilization, and increased medical pharmacy revenue of $3.7 million mainly due to increased membership. The increase is partially offset by terminated contracts of $4.4 million and other net unfavorable variances of $0.7 million.

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PBM revenue

PBM revenue increased by 1.1 percent or $6.2 million from the Prior Year Quarter to the Current Year Quarter. The increase is primarily due to an increase in membership and utilization of $8.8 million partially offset by other net unfavorable variances of $2.6 million, mainly related to higher customer settlements related to prior periods.

Cost of goods sold

Cost of goods sold increased by 5.4 percent or $27.5 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to an increase in membership and utilization of $20.8 million and other net unfavorable variances of $6.7 million. As a percentage of the portion of net revenue that relates to PBM, cost of goods sold increased from 91.9 percent in the Prior Year Quarter to 95.8 percent in the Current Year Quarter, mainly due to higher utilization and business mix.

Direct service costs and other

Direct service costs increased by 1.7 percent or $1.3 million from the Prior Year Quarter to the Current Year Quarter primarily due to start-up costs associated with a new contract implementation. Direct service costs decreased slightly as a percentage of revenue from 12.9 percent in the Prior Year Quarter to 12.8 percent in the Current Year Quarter.

Current Year Period compared to Prior Year Period

Managed care and other revenue

Managed care and other revenue increased by 8.0 percent or $9.8 million from the Prior Year Period to the Current Year Period primarily due to increased formulary management revenue of $11.6 million due to utilization, increased medical pharmacy management revenue of $7.2 million due to increased membership, and increased government pharmacy revenue of $2.5 million. These increases were partially offset by terminated contracts of $8.9 million and other net unfavorable variances of $2.6 million.

PBM revenue

PBM revenue increased by 2.1 percent or $23.4 million from the Prior Year Period to the Current Year Period. The increase is primarily due to increase in membership and utilization of $26.0 million partially offset by other net unfavorable variances of $2.6 million, mainly related to higher customer settlements related to prior periods.

Cost of goods sold

Cost of goods sold increased by 3.4 percent or $34.8 million from the Prior Year Period to the Current Year Period. This increase is primarily due to an increase in membership and utilization of $30.8 million and other net unfavorable variances of $4.0 million. As a percentage of the portion of net revenue that relates to PBM, cost of goods sold increased from 93.6 percent in the Prior Year Period to 94.7 percent in the Current Year Period, mainly due to higher utilization and business mix.

Direct service costs and other

Direct service costs increased by 2.2 percent or $3.5 million from the Prior Year Period to the Current Year Period primarily due to start-up costs associated with a new contract implementation. Direct service costs decreased slightly as a percentage of revenue from 12.9 percent in the Prior Year Period to 12.8 percent in the Current Year Period.

Corporate Segment

The Corporate segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments, and that are largely associated with costs related to being a publicly traded company.

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The following table summarizes, for the periods indicated, operating results for the Corporate segment (in thousands):


	Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change
Corporate Segment & Eliminations	2019		2020		'19 vs '20	2019		2020		'19 vs '20
Managed care and other revenue	$	(147)	$	(177)	20.4%	$	(316)	$	(350)	10.8%
PBM revenue		(4,335)		(4,831)	11.4%		(8,442)		(9,398)	11.3%
Cost of goods sold		4,122		4,618	12.0%		8,015		8,951	11.7%
		(360)		(390)	8.3%		(743)		(797)	7.3%
Direct service costs and other		18,817		19,224	2.2%		41,372		35,663	(13.8%)
		(19,177)		(19,614)	2.3%		(42,115)		(36,460)	(13.4%)
Stock compensation expense		846		2,551	201.5%		7,031		4,480	(36.3%)
Segment Loss	$	(18,331)	$	(17,063)	(6.9%)	$	(35,084)	$	(31,980)	(8.8%)

Current Year Quarter compared to the Prior Year Quarter

The Corporate segment loss decreased by 6.9 percent or $1.3 million from the Prior Year Quarter to the Current Year Quarter. As a percentage of revenue, the Corporate segment loss decreased slightly from 1.6 percent in the Prior Year Quarter to 1.5% in the Current Year Quarter.

Current Year Period compared to the Prior Year Period

The Corporate segment loss decreased by 8.8 percent or $3.1 million from the Prior Year Period to the Current Year Period primarily due to lower stock compensation. As a percentage of revenue, the Corporate segment loss decreased slightly from 1.5 percent in the Prior Year Period to 1.4 percent in the Current Year Period.

Inter segment revenues and expenses

MCC subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain MCC customers. The Company will continue to provide these services post transition, thus the associated revenues, cost of goods sold and direct service costs related to these arrangements are reflected within both continuing operations and discontinued operations.

Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain ~~of Healthcare’s~~Healthcare customers. In addition, Pharmacy Management provides pharmacy benefits management for the 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 segments are defined in Note A—“General”.~~eliminated within the Corporate segment.

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~~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 September 30, 2016

Managed care and other revenue

$
690,572

$
61,106

$
(89)

$
751,589

PBM and dispensing revenue

—

570,231

(29,688)

540,543

Cost of care

(480,243)

—

—

(480,243)

Cost of goods sold

—

(538,113)

28,440

(509,673)

Direct service costs and other

(152,992)

(66,475)

(9,627)

(229,094)

Stock compensation expense (1)

2,267

5,368

1,541

9,176

Changes in fair value of contingent consideration (1)

313

—

—

313

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

(189)

—

(5)

(194)

Segment profit (loss)

$
60,106

$
32,117

$
(9,418)

$
82,805

Corporate


Pharmacy

and


Healthcare

Management

Elimination

Consolidated

Three Months Ended September 30, 2017

Managed care and other revenue

$
769,451

$
65,131

$
(224)

$
834,358

PBM and dispensing revenue

—

618,178

(33,130)

585,048

Cost of care

(569,306)

—

—

(569,306)

Cost of goods sold

—

(575,327)

31,645

(543,682)

Direct service costs and other

(143,550)

(74,976)

(8,846)

(227,372)

Stock compensation expense (1)

2,623

5,680

2,020

10,323

Changes in fair value of contingent consideration (1)

(834)

—

—

(834)

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

789

—

(1)

788

Segment profit (loss)

$
57,595

$
38,686

$
(8,534)

$
87,747

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~~(1)~~

~~(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 Profit (in thousands):~~

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

~~Healthcare~~

~~Net Revenue~~

Net revenue related to Healthcare increased by 11.4 percent or $78.9 million. The increase in revenue is mainly due to higher membership and net favorable rate changes of $75.1 million, contracts implemented after (or during) the Prior Year Quarter of $55.2 million, net retroactive program changes in the Current Year Quarter of $6.2 million, the revenue impact of unfavorable prior period medical claims development recorded in the Current Year Quarter of $5.7 million, net program changes of $4.5 million and favorable retroactive rate adjustments in the Current Year Quarter of $2.8 million. These increases were partially offset by terminated contracts of $36.7 million, net revenue recorded for HIF fees in the Prior Year Quarter of $11.0 million, the revenue impact of unfavorable prior period medical claims development recorded in the Prior Year Quarter of $3.4 million, performance penalty in the Current Year Quarter of $1.8 million and other net unfavorable variances of $17.7 million (mainly profit share impact of favorable care trends).

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~~Cost of Care~~

Cost of care increased by 18.5 percent or $89.1 million. The increase is mainly due to increased membership and higher care associated with net favorable rate changes of $62.0 million, new contracts implemented after (or during) the Prior Year Quarter of $48.4 million, net favorable prior period medical claims development recorded in the Prior Year Quarter of $9.6 million, net unfavorable prior period medical claims development recorded in the Current Year Quarter of $7.2 million, net retroactive program changes in the Current Year Quarter of $5.6 million and net program changes of $3.9 million. These increases were partially offset by terminated contracts of $29.5 million and care trends and other net favorable variances of $18.1 million. For our commercial contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 80.0 percent in the Prior Year Quarter to 87.6 percent in the Current Year Quarter, mainly due to unfavorable care trends and business mix. For our government contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 81.3 percent in the Prior Year Quarter to 83.3 percent in the Current Year Quarter, mainly due to business mix.

~~Direct Service Costs~~

Direct service costs decreased by 6.2 percent or $9.4 million, primarily due to the impact of terminated contracts and HIF fees in the Prior Year Quarter, partially offset by costs related to new business. Direct service costs decreased as a percentage of revenue from 22.2 percent in the Prior Year Quarter to 18.7 percent in the Current Year Quarter, mainly due to an increase in revenue from business growth, partially offset by terminated contracts.

~~Pharmacy Management~~

~~Managed Care and Other Revenue~~

Managed care and other revenue related to Pharmacy Management increased by 6.6 percent or $4.0 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $2.3 million, medical pharmacy revenue of $2.3 million and revenue for Veridicus acquired on December 13, 2016 of $1.3 million. These increases were partially offset by terminated contracts of $0.8 million and other net unfavorable variances of $1.1 million.

~~PBM and Dispensing Revenue~~

PBM and dispensing revenue related to Pharmacy Management increased by 8.4 percent or $47.9 million. This increase is primarily due to Medicare revenue of $56.2 million, revenue for Veridicus of $48.0 million, pharmacy MCO revenue of $8.3 million, new contracts implemented after (or during) the Prior Year Quarter of $8.0 million and an increase in government pharmacy revenue of $4.3 million. These favorable variances were partially offset by terminated contracts of $64.2 million, net decreased dispensing activity from existing customers of $8.3 million, decrease in pharmacy employer revenue of $3.4 million and other net unfavorable variances of $1.0 million.

~~Cost of Goods Sold~~

Cost of goods sold increased by 6.9 percent or $37.2 million. This increase is primarily due to an increase in Medicare of $55.8 million, cost for Veridicus of $44.4 million, an increase in pharmacy MCO of $7.7 million, new contracts implemented after (or during) the Prior Year Quarter of $7.2 million and an increase in government pharmacy of $4.2 million. These increases were partially offset by terminated contracts of $63.0 million, decrease in pharmacy employer of $10.5 million, net decreased dispensing activity from existing customers of $8.1 million and other net favorable variances of $0.5 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.4 percent in the Prior Year Quarter to 93.1 percent in the Current Year Quarter, mainly due to business mix.

~~Direct Service Costs~~

Direct service costs increased by 12.8 percent or $8.5 million, mainly due to the acquisition of Veridicus, contract implementation costs and ongoing costs to support new business. Direct service costs increased as a percentage of revenue from 10.5 percent in the Prior Year Quarter to 11.0 percent in the Current Year Quarter, mainly due to business mix and implementation costs to support business growth.

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~~Corporate and Elimination~~

Net expenses related to Corporate, which includes eliminations, decreased by 3.7 percent or $0.4 million, primarily due to a decrease in discretionary benefits partially offset by an increase in stock and other compensation expense in the Current Year Quarter. As a percentage of revenue, corporate and elimination was 0.7 percent in the Current Year Quarter, which decreased slightly from the Prior Year Quarter.

~~Depreciation and Amortization~~

~~Depreciation and amortization expense increased by 4.9 percent or $1.3 million, primarily due to asset additions after the Prior Year Quarter and acquisition activity.~~

~~Interest Expense~~

~~Interest expense increased by $4.6 million, primarily due to an increase in interest rates, the amount of outstanding debt and the acceleration of loan costs due to the extinguishment of debt.~~

~~Interest Income~~

~~Interest income increased by $1.0 million, primarily due to higher yields and invested balances.~~

~~Income Taxes~~

The Company’s effective income tax rates were 42.4 percent and 26.1 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 to the suspension for 2017 of the non-deductible HIF fees, valuation allowance increases in 2016 with respect to losses at AlphaCare, and more significant tax deductions in 2017 in excess of recognized stock compensation expense.

The statutes of limitation regarding the assessment of 2013 federal and certain state and local income taxes expired during the Current Year Quarter. As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2016 were reversed in the Current Year Quarter, of which $1.2 million is reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the Current Year Quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

The statutes of limitation regarding the assessment of 2012 federal and certain state and local income taxes expired during the Prior Year Quarter. As a result, $1.6 million of tax contingency reserves recorded as of December 31, 2015 were reversed in the Prior Year Quarter, of which $1.1 million was reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the Prior Year Quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

~~Nine months ended September 30, 2017 (“Current Year Period”), compared to the nine months ended September 30, 2016 (“Prior Year Period”)~~

~~Healthcare~~

~~Net Revenue~~

Net revenue related to Healthcare increased by 12.5 percent or $242.6 million. The increase in revenue is mainly due to higher membership and net favorable rate changes of $194.8 million, contracts implemented after (or during) the Prior Year Period of $108.9 million, revenue for AFSC acquired July 1, 2016 of $92.3 million, net retroactive program changes recorded in the Current Year Period of $23.3 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

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Period of $2.0 million. These increases were partially offset by terminated contracts of $106.9 million, net revenue recorded for HIF fees in the Prior Year Period of $32.4 million, net program changes of $16.6 million, the revenue impact of favorable prior period medical claims development recorded in the Current Year Period of $4.9 million, performance penalty in the Current Year Period of $4.1 million, favorable retroactive rate adjustments in the Prior Year Period of $3.3 million, the revenue impact of unfavorable prior period medical claims development recorded in the Prior Year Period of $3.4 million and other net unfavorable variances of $21.1 million (mainly profit share impact of favorable care trends).

~~Cost of Care~~

Cost of care increased by 15.9 percent or $224.2 million. The increase is mainly due to increased membership and higher care associated with net favorable rate changes of $153.8 million, new contracts implemented after (or during) the Prior Year Period of $104.2 million, care costs for AFSC of $77.5 million, net retroactive program changes recorded in the Current Year Period of $21.2 million and net favorable prior period medical claims development recorded in the Prior Year Period of $3.6 million. These increases were partially offset by terminated contracts of $84.5 million, net program changes of $14.2 million, favorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $11.9 million, net favorable prior period medical claims development recorded in the Current Year Period of $8.4 million, customer settlements of $2.7 million and care trends and other net favorable variances of $14.4 million. For our commercial contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 82.7 percent in the Prior Year Period to 87.6 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 84.4 percent in the Prior Year Period to 84.0 percent in the Current Year Period, mainly due to favorable care trends and business mix.

~~Direct Service Costs~~

Direct service costs increased by 2.4 percent or $9.9 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 21.5 percent in the Prior Year Period to 19.6 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 8.5 percent or $15.3 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $6.3 million, medical pharmacy revenue of $4.2 million, revenue for Veridicus acquired on December 13, 2016 of $3.9 million, increased rebate revenue of $1.4 million and other net favorable variances of $1.9 million. These increases were partially offset by terminated contracts of $2.4 million.

~~PBM and Dispensing Revenue~~

PBM and dispensing revenue related to Pharmacy Management increased by 20.9 percent or $321.0 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $210.6 million, Medicare revenue of $176.6 million, revenue for Veridicus of $133.5 million, pharmacy employer revenue of $34.4 million, pharmacy MCO revenue of $20.6 million, government pharmacy revenue of $4.9 million and other net favorable variances of $2.3 million. These favorable variances were partially offset by terminated contracts of $251.0 million and net decreased dispensing activity from existing customers of $10.9 million.

~~Cost of Goods Sold~~

Cost of goods sold increased by 20.3 percent or $293.9 million. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of $206.0 million, an increase in Medicare of $175.9 million, cost for Veridicus of $122.2 million, pharmacy employer of $22.7 million, an increase in pharmacy MCO of $19.0 million, government pharmacy of $4.9 million and other net unfavorable variances of $2.1 million. These increases were partially

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offset by terminated contracts of $246.7 million and net decreased dispensing activity from existing customers of $12.2 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.3 percent in the Prior Year Period to 93.8 percent in the Current Year Period, mainly due to business mix.

~~Direct Service Costs~~

Direct service costs increased by 18.0 percent or $34.4 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 11.2 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 4.5 percent or $1.3 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 decreased slightly from the Prior Year Period.

~~Depreciation and Amortization~~

~~Depreciation and amortization expense increased by 7.0 percent or $5.4 million, primarily due to asset additions after the Prior Year Period and acquisition activity.~~

~~Interest Expense~~

~~Interest expense increased by $9.9 million primarily due to an increase in interest rates, the amount of outstanding debt and the acceleration of loan costs due to the extinguishment of debt.~~

~~Interest Income~~

~~Interest income increased by $1.7 million, primarily due to higher yields and invested balances.~~

~~Income Taxes~~

The Company’s effective income tax rates were 51.9 percent and 34.4 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, valuation allowance increases in 2016 with respect to losses at AlphaCare, and more significant tax deductions in 2017 in excess of recognized stock compensation expense.

The statutes of limitation regarding the assessment of 2013 federal and certain state and local income taxes expired during the Current Year Period. As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2016 were reversed in the Current Year Period, of which $1.2 million is reflected as a discrete reduction to income tax expense, and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the Current Year Period and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

The statutes of limitation regarding the assessment of 2012 federal and certain state and local income taxes expired during the Prior Year Period. As a result, $1.6 million of tax contingency reserves recorded as of December 31, 2015 were reversed in the Prior Year Period, of which $1.1 million was reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the Prior Year Period and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

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~~Non‑GAAP~~Non-GAAP Measures

The Company reports its financial results in accordance with ~~GAAP,~~GAAP; however, the Company’s management also assesses business performance and makes business decisions regarding the 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~~from continuing operations (“Adjusted Net ~~Income”~~Income from Continuing Operations”) and adjusted net income from continuing operations per common share ~~attributable to Magellan~~ on a diluted basis (“Adjusted EPS”). Adjusted Net Income from Continuing Operations 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.~~intangibles, special charges and any impact related to the sale of MCC. The Company believes these ~~non‑GAAP~~non-GAAP measures provide a more useful comparison of the Company’s underlying business performance from period to period and are more representative of the earnings capacity of the Company. ~~Non‑GAAP~~Non-GAAP financial measures disclosed, such as Segment Profit, Adjusted Net Income from Continuing Operations 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 (in thousands):~~38

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2017

2016

2017

Net income attributable to Magellan

$
25,509

$
32,451

$
42,704

$
55,698

Adjusted for acquisitions starting in 2013

Stock compensation expense relating to acquisitions

5,105

4,960

14,217

14,718

Changes in fair value of contingent consideration

313

(834)

510

(631)

Amortization of acquired intangibles

6,649

8,424

17,938

25,189

Impairment of intangible assets, net of non-controlling interest

—

—

3,936

—

Tax impact

(4,254)

(4,605)

(12,203)

(14,372)

Adjusted Net Income

$
33,322

$
40,396

$
67,102

$
80,602

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The following table reconciles income from continuing operations before income taxes to Segment Profit from continuing operations (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Income from continuing operations before income taxes	$	12,950	$	10,780	$	1,550	$	15,472
Stock compensation expense		5,207		6,592		14,607		12,389
Depreciation and amortization		28,191		23,888		53,608		47,246
Interest expense		9,070		7,995		18,107		16,953
Interest and other income		(1,821)		(551)		(3,580)		(1,770)
Special charges		—		8,309		—		8,309
Segment Profit from continuing operations	$	53,597	$	57,013	$	84,292	$	98,599

The following table reconciles net income from continuing operations to Adjusted Net Income from continuing operations (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Net income (loss) from continuing operations	$	7,215	$	47,108	$	(976)	$	46,038
Adjustments
Amortization of acquired intangibles		7,749		9,573		15,501		19,259
Special charges		—		8,309		—		8,309
Tax impact		(2,047)		(4,808)		(4,097)		(7,413)
Nonrecurring tax benefit - divestiture		—		(38,907)		—		(38,907)
Adjusted Net Income from continuing operations	$	12,917	$	21,275	$	10,428	$	27,286

The following table reconciles net income from continuing operations per common share—diluted to Adjusted EPS ~~to net income per common share attributable to Magellan—diluted:~~from continuing operations:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2017

2016

2017

Net income per common share attributable to Magellan—diluted

$
1.06

$
1.32

$
1.75

$
2.30

Adjusted for acquisitions starting in 2013

Stock compensation expense relating to acquisitions

0.22

0.20

0.59

0.61

Changes in fair value of contingent consideration

0.01

(0.03)

0.02

(0.03)

Amortization of acquired intangibles

0.28

0.34

0.74

1.04

Impairment of intangible assets, net of non-controlling interest

—

—

0.16

—

Tax impact

(0.18)

(0.19)

(0.50)

(0.59)

Adjusted EPS

$
1.39

$
1.64

$
2.76

$
3.33


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Net income (loss) from continuing operations per common share—diluted	$	0.30	$	1.86	$	(0.04)	$	1.84
Adjustments
Amortization of acquired intangibles		0.32		0.38		0.64		0.77
Special charges		—		0.33		—		0.33
Tax impact		(0.09)		(0.19)		(0.17)		(0.30)
Nonrecurring tax benefit - divestiture		—		(1.54)		—		(1.55)
Adjusted EPS from continuing operations	$	0.53	$	0.84	$	0.43	$	1.09

Outlook—Results of Operations

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

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pharmacy revenues, including rebates and ~~(viii)~~Medicare Part D; and (ix) changes in the estimates of contingent consideration.

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

~~Care Trends.~~ ~~The Company expects that 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.~~

Interest Rate Risk. Changes in interest rates affect interest income earned on the Company’s cash equivalents and investments, as well as interest expense on the variable interest rate borrowings under the 2017 Credit Agreement. In addition, interest rates on the Notes isare subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments, the borrowing levels under the 2017 Credit Agreement and the principal amount of the Notes as of ~~September~~June 30, ~~2017,~~2020, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company’s future earnings and cash outflows.

Historical—Liquidity and Capital Resources

Operating Activities. The Company reported net cash ~~used~~provided by operating activities of ~~$7.6~~$29.4 million and $170.8 million for the Prior Year Period and ~~net cash provided by operating activities of $112.7 million for the~~ Current Year ~~Period.~~Period, respectively. The ~~$120.3~~$141.4 million increase in operating cash flows from the Prior Year Period is mainly attributable to higher segment profit from continuing and discontinued operations, and favorable working capital changes, ~~and an increase in Segment Profit~~ partially offset by increased tax payments ~~between years.~~and lower interest income collected.

The net favorable impact of working capital changes between periods totaled ~~$112.6~~$51.8 million. For the Prior Year Period, operating cash flows were impacted by net unfavorable working capital changes of ~~$166.0~~$67.4 million, ~~which were largely~~mainly attributable to an increase in accounts receivable, specifically related to our Medicare Part D business, payment of the HIF fee and contingent consideration payments of $91.7 million, of which $51.1 million is reflected as operating activities.receivable. For the Current Year Period, operating cash flows were impacted by net unfavorable working capital changes of ~~$53.4~~$15.6 million, ~~a large portion of which was~~mainly attributable to the timing of ~~discretionary bonus activity~~receivables and ~~an increase in accounts receivable related to our Medicare Part D business.~~payables.

Segment Profit for the Current Year Period increased $12.3 million from the Prior Year Period. Tax payments for the Current Year Period totaled $45.8 million, which represents an increase of $4.6 million compared to the Prior Year Period.

Investing Activities. The Company utilized ~~$44.3~~$27.8 million and ~~$42.7~~$38.3 million during the Prior Year Period and the 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 ~~$9.8~~$7.6 million and ~~$34.5~~$20.2 million, respectively, as compared to additions for the Current Year Period related to hard assets and capitalized software of ~~$11.7~~$11.1 million and ~~$31.0~~$27.2 million, respectively.

During the Prior Year Period ~~the Company received net cash of $8.1 million from the net maturity of "available-for-sale" securities, with the Company using $21.2 million during~~and the Current Year Period the Company used $7.5 million and $129.6 million, respectively, for the net purchase of "available-for-sale" securities. During the Prior Year Period, the Company used net cash of $111.4 million and $16.0 million for the acquisition of AFSC and TMG, respectively, partially offset by a working capital adjustment of $0.5 million related to the acquisition of 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 ~~$106.8 million for the repurchase of treasury stock under the Company’s share repurchase program, $9.4~~$10.0 million on debt obligations, ~~and $4.2~~$6.2 million for payments on ~~capital lease obligations. The Company made a~~ contingent consideration, payment totaling $91.7 million, of which $40.6 million was related to financing activities. In addition, the Company received $290.0 million from the issuance of debt, $10.9 million from exercise of stock options, and had other net favorable items of $1.4 million.

~~During the Current Year Period, the Company paid $793.8 million on debt obligations, $15.5~~$4.1 million for the repurchase of treasury stock under the Company's share repurchase program, ~~$8.5 million in debt issuance fees, $4.6~~

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$5.5 million on ~~capital~~finance lease obligations and had other net unfavorable items of ~~$0.4~~$0.5 million. In addition, the Company received ~~$949.2~~$20.6 million from the exercise of stock options.

During the Current Year Period, the Company received $80.0 million from the issuance of debt and ~~$28.3~~$29.8 million from the exercise of stock options. In addition, the Company paid $37.7 million on debt obligations, $2.6 million on finance lease obligations and had other net unfavorable items of $1.1 million.

Outlook—Liquidity and Capital Resources

Liquidity. ~~During the remainder of 2017, the Company will have estimated capital expenditures of between $22.3 million and $32.3 million.~~ The Company may draw on the 2017 Credit Agreement (discussed further below) as required to meet working capital needs associated with the timing of receivables and payables, fund share repurchases 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. At June 30, 2020, the Company had a revolving loan of $80.0 million with the remaining $320.0 million of the revolving credit facility still available to the Company for additional drawdown. 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 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 the

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Company will not experience any such losses in the future.

Stock Repurchases. 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. On July 26, 2017, the Company’s board of directors approved an extension of the 2015 Repurchase Program through October ~~26,~~22, 2018. On May 24, 2018, the Company’s board of directors approved an increase of $200 million to the current $200 million stock repurchase plan which will now authorize the Company to purchase up to $400 million of its outstanding common stock. The board also extended the program from October 22, 2018 to October 22, 2020. As of June 30, 2020, the remaining capacity under the 2015 Repurchase Program was $186.3 million. See ~~Note D~~—Part II, Item 2—“~~Commitments~~Unregistered Sales of Equity Securities and ~~Contingencies”~~Use of Proceeds” for more information on the Company’s share repurchase program.

~~Off‑Balance~~Off-Balance Sheet Arrangements. As of ~~September~~June 30, ~~2017,~~2020, the Company ~~has~~had no material ~~off‑balance~~off-balance sheet arrangements.

Credit Agreement.On September 22, 2017, the Company entered into ~~a credit agreement~~the 2017 Credit Agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the ~~borrower (the “2017~~borrower. On August 13, 2018, the Company entered into an amendment to the 2017 Credit ~~Agreement”).~~Agreement, which extended the maturity date by one year. On February 27, 2019, the Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio covenant, and which was necessary in order for the Company to remain in compliance with the terms of the 2017 Credit Agreement. The 2017 Credit Agreement is scheduled to mature on September 22, ~~2022.~~2023. See Note A—“~~General~~”General” for more information on the 2017 Credit Agreement.

Restrictive Covenants in Debt Agreements. The 2017 Credit Agreement ~~contain~~contains covenants that potentially limit management’s discretion in operating the Company’s business by, in certain circumstances, restricting or limiting the 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.

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

The 2017 Credit Agreement also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 2017 Credit Agreement pursuant to its terms, or amended, would result in an event of default under the 2017 Credit Agreement.

As of June 30, 2020, the Company was in compliance with all covenants, including financial covenants, under the 2017 Credit Agreement.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under ASC 606 which are explained in more detail in Note A—“General – Revenue Recognition.” Actual results could differ from those estimates. Except as noted above, the Company’s critical accounting policies are summarized in the Company’s Annual Report on Form 10-K, filed with the SEC on February 28, 2020.

Forward-Looking Statements

This Form 10-Q includes “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 statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Existing and prospective investors are cautioned that any such 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 statements. Important factors currently known to management that could cause actual results to differ materially from those in 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;

●

risks relating to the Company’s proposed sale of the MCC business to Molina, including the ability of the Company to realize the expected benefits of the transaction, the ability of the Company to obtain regulatory approvals for the transaction and to satisfy other closing conditions, and the ability of the parties to close the transaction in the anticipated timeframe;

●

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

●

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;

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●

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 healthcare reform legislation;

●

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

●

government regulation;

●

proposed changes to current Federal law and regulations;

●

noncompliance with regulations;

●

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

●

failure to maintain satisfactory Medicare and Medicaid quality performance measures;

●

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 it does business;

●

risk associated with outsourcing services and functions to third parties;

●

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;

●

the Company’s ability to successfully implement its margin improvement initiatives and plans;

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●

tax matters, including changes in corporate tax rates, disagreements with taxing authorities and imposition of new taxes;

●

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

●

the impact of an epidemic or health crisis such as the COVID-19 pandemic, natural disasters, political disruptions, acts of war or terrorism, cybersecurity attacks or other data breaches or intrusions and other extraordinary events.

Further discussion of factors currently known to management that could cause actual results to differ materially from those in forward-looking statements is set forth under the heading “Risk Factors” in Item 1A of Magellan’s Annual Report on Form 10-K for the year ended December 31, 2019 and in Item 1A of this Quarterly Report on Form 10-Q. When used in this Quarterly Report on Form 10-Q, the words “estimate,” “anticipate,” “expect,” “believe,” “should,” and similar expressions are intended to be forward-looking statements. Magellan undertakes no obligation to update or revise 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Changes in interest rates affect interest income earned on the Company’s cash equivalents and investments, as well as interest expense on the variable interest rate borrowings under the 2017 Credit Agreement. In addition, interest rates on the Notes is subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments, the borrowing levels under the 2017 Credit Agreement and the principal amount of the Notes as of ~~September~~June 30, ~~2017,~~2020, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company’s future earnings and cash outflows.

Item 4. Controls and ~~Procedures.~~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 Rule 13a-15(e) under the Exchange Act), as of June 30, 2020. 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, 2020.

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, 2020 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 September 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 September 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 September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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Item 1A. Risk Factors.

~~There has~~Other than the risk factors below, there have been no material ~~change~~changes in ~~our~~the risk factors as disclosed in Part I—Item 1A—“Risk Factors” of the Company’s Annual Report on Form ~~10‑~~10 K for the year ended December 31, ~~2016,~~2019, which was filed with the SEC on February ~~24, 2017.~~28, 2020:

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

As part of its normal operations, the Company collects, processes and retains confidential member and protected personal or health information making the Company subject to various federal and state laws and rules regarding the use and disclosure of confidential member and protected personal or health information, including HIPAA. The Company also maintains other confidential information related to its business and operations. Despite our security measures, the Company is subject to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. For example, we have experienced data security breaches resulting in disclosure of confidential or protected personal or health information. Noncompliance with any privacy or security laws and regulations (including, but not limited to, state and federal laws and international regulations, such as GDPR) or any security incident or breach, whether by the Company or by its vendors, could result in enforcement actions, material fines and penalties, reputational and financial harm to the Company, and could also subject the Company to litigation.

IT Systems – The Company’s ability to effectively maintain and upgrade its information systems is critical to its business.

The Company’s operations are dependent on effective information systems. Our information systems require routine maintenance, enhancements and upgrades in order to meet operational needs and regulatory requirements. The maintenance, upgrade and enhancement of our information systems requires significant economic resources. If the Company encounters difficulties in its information systems, or with the transition to or from its information systems, or does not appropriately maintain, enhance and upgrade its information systems, such events could adversely impact the Company’s operations materially. In addition, our ability to manage effectively our information systems could be impacted by events outside of our control, including acts of nature, such as floods, earthquakes, fires, pandemics, or acts of terrorism or war.

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

Our business requires us to securely store, process and transmit confidential, proprietary and other information in our operations, including protected personal or health information. Security incidents or breaches may arise from, among other things, computer hackers penetrating our systems or approaching our employees to obtain personal information for financial gain, attempting to cause harm to our operations, or intending to obtain competitive, confidential or protected personal or health information. It is widely reported that the healthcare industry, including providers, plans and pharmacies, are increasingly prime targets for cyber-attacks. Our data assets and systems continue to be subject to attack by viruses, worms, phishing attempts and other malicious software programs on a regular basis, and we routinely identify attempts to gain unauthorized access to our systems.

We maintain a comprehensive system of preventive and detective controls through our security programs; however given the rapidly evolving nature and proliferation of cyber threats, our controls may not prevent or identify all

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such attacks in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems and operations, and we cannot eliminate the risk of human error or employee or vendor malfeasance. For example, we were the target of a criminal ransomware attack on our computer network recently, which resulted in a temporary systems outage and the exfiltration of certain confidential company and personal information as well as protected health information of certain members. We are investigating the incident with forensic experts, notifying our customers, employees, impacted individuals, and appropriate government agencies, as applicable, and working with law enforcement authorities.

Any costs that we incur as a result of a data security incident or breach, including costs to update our security protocols to mitigate such an incident or breach could be significant. Any breach or failure in our operational security systems can result in loss of data or an unauthorized disclosure of or access to sensitive or confidential member or protected personal or health information and could result in significant penalties or fines, litigation, loss of customers, significant damage to our reputation and business, and other losses, which could adversely impact the Company’s financial condition and results of operations materially.

We are subject to risks associated with outsourcing services and functions to third parties.

We contract with third party vendors and service providers who provide services to us and our subsidiaries or to whom we delegate selected functions. Some of these third parties also have direct access to our systems. Our arrangements with third party vendors and service providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of our information and data or the protected personal or health information and data relating to our members or customers. We are also at risk of a data security incident or breach involving a vendor or third party, which could result in a breakdown of such third party’s data protection processes or cyber-attackers gaining access to our infrastructure through the third party, or can result in loss of data or an unauthorized disclosure of or access to sensitive or confidential member or protected personal or health information.

To the extent that a vendor or third party suffers a security incident or breach that compromises its operations, we could incur significant costs and possible service interruption, which could have an adverse effect on our business, operations and reputation. In addition, we may have disagreements with third party vendors and service providers regarding relative responsibilities for any such failures or security incidents or breaches under applicable business associate agreements or other applicable outsourcing agreements.

Any contractual remedies and/or indemnification obligations we may have for vendor or service provider failures or security incidents or breaches may not be adequate to fully compensate us for any losses suffered as a result of any vendor’s failure to satisfy its obligations to us or under applicable law. Further, we may not be adequately indemnified against all possible losses through the terms and conditions of our contracts with third party vendors and service providers. Our outsourcing arrangements could be adversely impacted by changes in vendors’ or service providers’ operations or financial condition or other matters outside of our control.

If we fail to adequately monitor and regulate the performance of our third-party vendors and service providers, we could be subject to additional risk, including significant cybersecurity risk. Violations of, or noncompliance with, laws and/or regulations governing our business (including, but not limited to, state and federal laws and international regulations, such as GDPR) or noncompliance with contract terms by third-party vendors and service providers could increase our exposure to liability to our members, providers, or other third parties, or sanctions and/or fines from the regulators that oversee our business, as well as litigation. In turn, this could increase the costs associated with the operation of our business or have an adverse impact on our business and reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur significant costs and/or disruption to our operations in connection with any such vendor or service provider transition. As a result, we may not be able to meet the full demands of our members or customers and, in turn, our business, financial condition, or results of operations may be harmed materially. In addition, we may not fully realize the anticipated economic and other benefits from our outsourcing projects or other relationships we enter into with third party vendors and service providers, as a result of regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations to the third party, vendor or service provider noncompliance with contract terms or violations of laws and/or regulations, or otherwise. This could result in substantial costs or other operational or financial problems that could have a material adverse effect on our business, financial condition, cash flows, or results of operations.

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Extraordinary Events—Extraordinary events, including the COVID-19 pandemic, could adversely affect the Company’s business, financial condition and results of operations.

The Company’s operations could be subject to an epidemic or health crisis such as the COVID-19 pandemic, natural disasters, political disruptions, acts of war or terrorism and other such extraordinary events. These events could cause significant disruptions in the Company’s operations and its ability to serve its members. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position and cash flows could be materially adversely affected. Such events could also impact the Company’s utilization, which could have a favorable or unfavorable impact to its medical loss ratios. In addition, such events could impact the financial markets, which could adversely impact the Company’s investment portfolio and its ability to access the credit markets.

In 2020, the spread of the COVID-19 pandemic has caused significant financial market volatility and economic uncertainty, and is currently impacting countries, communities and workforces around the world. The effects of the COVID-19 pandemic on the Company and the duration of any such effects, including any impact on the Company’s medical loss ratios (which could increase or decrease), are not known and are not quantifiable at this time. To date, other than the transition of our employees to a work at home environment, the Company has not experienced any significant interruptions to normal business activities and has not experienced any disruptions in its services. In addition, the Company does not expect the valuation of its investments to be materially affected. No effect from the subsequent events associated with the COVID-19 pandemic has been recorded within the accompanying financial statements.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition are dependent on future developments for which there is significant uncertainty at this time and cannot be predicted, such as the scope, duration and severity of the pandemic, the extent and effectiveness of containment actions, any actions that may be taken by various governmental authorities in response to the outbreak, the possible impact on the global economy and local economies in which we operate and the resumption of normal economic conditions. The long-term financial and economic impacts of the COVID-19 pandemic may continue for a significant period of time and cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.

Risks Associated with the Intended Sale of the MCC Business to Molina.

On April 30, 2020, the Company and Molina entered into the Purchase Agreement pursuant to which the Company has agreed to sell the MCC business to Molina for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business. The Company has also agreed to provide certain transition services to Molina following the closing.

There are numerous risks associated with the MCC Sale, including but not limited to the ability of the Company to obtain regulatory approvals for the MCC Sale and to satisfy other closing conditions; the anticipated timing of the closing of the MCC Sale; the benefits to the Company of the commercial agreements entered into in connection with the MCC Sale; the ability of the Company to use the proceeds of the MCC Sale to fund future growth initiatives or otherwise create value for the Company, the ability of the Company to strategically focus on enhancing its behavioral and specialty health business, as well as the continued growth of its pharmacy business; the ability of the Company to achieve our strategic and growth goals; any disruption that may result from the announcement or pendency of the MCC Sale, including potential adverse reactions by customers, employees, suppliers, regulators, or federal or state legislators, making it more difficult to maintain business and operational relationships; any disruption to our operations that may result from the diversion of management’s attention from our day-today operations and efforts to grow our other businesses due to the significant resources that the separation of the MCC business from the rest of the Company’s business will require; unexpected costs are incurred in connection with the completion and/or divestiture of the MCC business; and the possibility that we will be required to perform under the indemnification obligations that we provided to Molina under the Purchase Agreement in a manner that has a material adverse effect on our business, results of operations and financial condition. Any of the foregoing risks could have an adverse effect on our business, financial condition, cash flows, or results of operations.

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

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)

July 1 - 31, 2017

18,004

$
73.98

18,004

$
68.1

August 1-31, 2017

67,668

77.05

67,668

62.9

September 1-30, 2017

43,028

82.12

43,028

59.4

128,700

128,700

program from October 22, 2018 to October 22, 2020. The Company made ~~additional open market purchases of 20,994 shares of the Company’s common stock at an aggregate cost of $1.8 million (excluding broker commissions)~~no repurchases during the ~~period~~six months ended June 30, 2020. As of June 30, 2020, the Company had approximately $186.3 million remaining available for future repurchases under the current plan. The Company made no share repurchases from ~~October~~July 1, ~~2017~~2020 through ~~October 27, 2017.~~ July 24, 2020.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

40Item 6. Exhibits.

See Exhibit Index.

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~~Item 5. Other Information.~~

Exhibit Index

~~None.~~

~~Item 6. Exhibits.~~

~~See Exhibit Index.~~

Exhibit Number

~~Table of Contents~~

~~Exhibit Index~~

		Description of Exhibit
~~Exhibit Number~~31.1	~~Description of Exhibit~~
~~1.1~~		Underwriting Agreement, dated September 15, 2017, among Magellan Health, Inc., as issuer, and J.P. Morgan Securities LLC, MUFG Securities Americas Inc. and Wells Fargo Securities, LLC, as representatives of the several underwriters named therein, which was filed as Exhibit 1.1 to the Company’s current report on Form 8-K, which was filed on September 18, 2017.
~~4.1~~		Base Indenture, dated as of September 22, 2017, between the Company, as issuer and U.S. Bank National Association, as trustee, which was filed as Exhibit 4.1 to the Company’s current report on Form 8-K, which was filed on September 25, 2017.
~~4.2~~		First Supplemental Indenture, dated September 22, 2017, between the Company, as issuer and U.S. Bank National Association, as trustee, which was filed as Exhibit 4.2 to the Company’s current report on Form 8-K, which was filed on September 25, 2017.
~~4.3~~		Form of Global Note for the 4.400% Senior Notes due 2024 (included as an exhibit to Exhibit 4.2), which was filed as Exhibit 4.3 to the Company’s current report on Form 8-K, which was filed on September 25, 2017.
~~4.4~~		Credit Agreement dated as of September 22, 2017, among the Company, as borrower, BTMU, JPMorgan Chase Bank, N.A., Compass Bank (d/b/a BBVA Compass), U.S. Bank National Association and Wells Fargo Securities, LLC as co-syndication agents, BTMU as administrative agent and the lenders party thereto from time to time, which was filed as Exhibit 4.4 to the Company’s current report on Form 8-K, which was filed on September 25, 2017.
~~31.1~~		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the ~~Sarbanes‑Oxley~~Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the ~~Sarbanes‑Oxley~~Sarbanes-Oxley Act of 2002 (furnished).
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the ~~Sarbanes‑Oxley~~Sarbanes-Oxley Act of 2002 (furnished).
101			The following materials from the Company’s Quarterly Report on Form ~~10‑Q~~10-Q for the quarter ended ~~September~~June 30, ~~2017~~2020 formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) the ~~Consolidated Statements of Income,~~cover page, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and ~~(v)~~(vi) related notes.
104	Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

4249

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~~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: ~~November 1, 2017~~July 29, 2020	Magellan Health, Inc. (Registrant)

	By:	/s/ Jonathan N. Rubin
		Jonathan N. Rubin
		Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

4350


			September 30,
	December 31,		2017
	2016			(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ($81,776 and $98,277 restricted at December 31, 2016 and September 30, 2017, respectively)	$	304,508	$	504,764
Accounts receivable, less allowance of $5,644 and $8,657 at December 31, 2016 and September 30, 2017, respectively		606,764		622,431
Short-term investments ($227,795 and $238,869 restricted at December 31, 2016 and September 30, 2017, respectively)		297,493		312,902
Pharmaceutical inventory		58,995		48,941
Other current assets ($38,785 and $23,140 restricted at December 31, 2016 and September 30, 2017, respectively)		51,507		52,896
Total Current Assets		1,319,267		1,541,934
Property and equipment, net		172,524		161,437
Long-term investments ($6,306 and $10,575 restricted at December 31, 2016 and September 30, 2017, respectively)		7,760		10,575
Deferred income taxes		3,125		5,249
Other long-term assets		12,725		40,621
Goodwill		742,054		745,947
Other intangible assets, net		186,232		156,351
Total Assets	$	2,443,687	$	2,662,114
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	95,635	$	66,530
Accrued liabilities		202,176		173,701
Short-term contingent consideration		9,354		8,875
Medical claims payable		184,136		213,692
Other medical liabilities		197,856		193,881
Current debt and capital lease obligations		403,693		19,231
Total Current Liabilities		1,092,850		675,910
Long-term debt and capital lease obligations		214,686		745,543
Tax contingencies		13,981		14,348
Long-term contingent consideration		1,799		615
Deferred credits and other long-term liabilities		15,882		18,290
Total Liabilities		1,339,198		1,454,706
Redeemable non-controlling interest		4,770		4,704
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2016 and September 30, 2017-Issued and outstanding-none		—		—
Ordinary common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2016 and September 30, 2017-Issued and outstanding-51,993 and 23,517 shares at December 31, 2016, respectively, and 52,723 and 24,042 shares at September 30, 2017, respectively		520		527
Other Stockholders’ Equity:
Additional paid-in capital		1,186,283		1,248,993
Retained earnings		1,289,288		1,344,986
Accumulated other comprehensive loss		(175)		(148)
Treasury stock, at cost, 28,476 and 28,681 shares at December 31, 2016 and September 30, 2017, respectively		(1,376,197)		(1,391,654)
Total Stockholders’ Equity		1,099,719		1,202,704
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity	$	2,443,687	$	2,662,114


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2017		2016		2017
Net revenue:
Managed care and other	$	751,589	$	834,358	$	2,127,911	$	2,385,397
PBM and dispensing		540,543		585,048		1,445,588		1,758,771
Total net revenue		1,292,132		1,419,406		3,573,499		4,144,168
Costs and expenses:
Cost of care		480,243		569,306		1,410,403		1,634,624
Cost of goods sold		509,673		543,682		1,362,062		1,648,670
Direct service costs and other operating expenses (1)(2)(3)		229,094		227,372		635,627		680,230
Depreciation and amortization		26,885		28,189		77,472		82,896
Interest expense		3,038		7,663		6,780		16,711
Interest and other income		(741)		(1,781)		(2,116)		(3,801)
Total costs and expenses		1,248,192		1,374,431		3,490,228		4,059,330
Income before income taxes		43,940		44,975		83,271		84,838
Provision for income taxes		18,631		11,739		43,259		29,206
Net income		25,309		33,236		40,012		55,632
Less: net (loss) income attributable to non-controlling interest		(200)		785		(2,692)		(66)
Net income attributable to Magellan	$	25,509	$	32,451	$	42,704	$	55,698
Net income attributable to Magellan per common share:
Basic (See Note B)	$	1.11	$	1.39	$	1.83	$	2.41
Diluted (See Note B)	$	1.06	$	1.32	$	1.75	$	2.30


	2016		2017
Cash flows from operating activities:
Net income	$	40,012	$	55,632
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		77,472		82,896
Non-cash impairment of intangible assets		4,800		—
Non-cash interest expense		385		3,120
Non-cash stock compensation expense		27,573		31,834
Non-cash income tax provision (benefit)		2,998		(2,160)
Non-cash amortization on investments		4,224		3,052
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net		(31,926)		(13,539)
Pharmaceutical inventory		(10,425)		9,609
Other assets		(72,374)		(15,481)
Accounts payable and accrued liabilities		23,870		(70,006)
Medical claims payable and other medical liabilities		(18,017)		25,578
Contingent consideration		(50,591)		(631)
Tax contingencies		(111)		158
Deferred credits and other long-term liabilities		(5,393)		2,408
Other		(57)		210
Net cash (used in) provided by operating activities		(7,560)		112,680
Cash flows from investing activities:
Capital expenditures		(44,345)		(42,703)
Acquisitions and investments in businesses, net of cash acquired		(126,931)		(3,200)
Purchase of investments		(365,521)		(341,280)
Maturity of investments		373,694		320,045
Net cash used in investing activities		(163,103)		(67,138)
Cash flows from financing activities:
Proceeds from issuance of debt		290,000		949,239
Payments to acquire treasury stock		(106,806)		(15,457)
Proceeds from exercise of stock options and warrants		10,933		28,328
Payments on debt and capital lease obligations		(13,569)		(798,359)
Payments on contingent consideration		(40,559)		(1,032)
Other		1,274		(8,005)
Net cash provided by financing activities		141,273		154,714
Net (decrease) increase in cash and cash equivalents		(29,390)		200,256
Cash and cash equivalents at beginning of period		249,029		304,508
Cash and cash equivalents at end of period	$	219,639	$	504,764

Supplemental cash flow data:
Non-cash investing activities:
Property and equipment acquired under capital leases	$	4,193	$	2,418


Segment	Term Date	2016		2017

Healthcare
None

Pharmacy Management
Customer A	December 31, 2016 (1)	$	261,094	$	3,709	*
Customer B	March 31, 2019		78,471		266,795


	December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	—	$	177,495	$	—	$	177,495
Investments:
U.S. Government and agency securities		5,817		—		—		5,817
Obligations of government-sponsored enterprises (2)		—		25,767		—		25,767
Corporate debt securities		—		272,219		—		272,219
Certificates of deposit		—		1,450		—		1,450
Total assets held at fair value	$	5,817	$	476,931	$	—	$	482,748

Liabilities
Contingent consideration	$	—	$	—	$	11,153	$	11,153
Total liabilities held at fair value	$	—	$	—	$	11,153	$	11,153


	September 30, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (3)	$	—	$	392,039	$	—	$	392,039
Investments:
U.S. Government and agency securities		8,668		—		—		8,668
Obligations of government-sponsored enterprises (4)		—		13,264		—		13,264
Corporate debt securities		—		295,181		—		295,181
Taxable municipal bonds		—		5,014		—		5,014
Certificates of deposit		—		1,350		—		1,350
Total assets held at fair value	$	8,668	$	706,848	$	—	$	715,516

Liabilities
Contingent consideration	$	—	$	—	$	9,490	$	9,490
Total liabilities held at fair value	$	—	$	—	$	9,490	$	9,490


	September 30,
	2017
Balance as of beginning of period	$	11,153
Changes in fair value		(631)
Payments		(1,032)
Balance as of end of period	$	9,490


	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


	Covered lives as of
	September 30, 2017
	Risk-based	ASO
Commercial
Behavioral(1)	14,394	11,266
Specialty	9,101	16,075
Government(2)	4,042	1,017


	Revenue for the nine months ended
	September 30, 2017
	Risk-based		ASO		Total
Commercial
Behavioral(1)	$	302,650	$	97,883	$	400,533
Specialty		446,169		53,323		499,492
Government(2)		1,218,513		71,559		1,290,072
Total	$	1,967,332	$	222,765	$	2,190,097


	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)
July 1 - 31, 2017	18,004	$	73.98	18,004	$	68.1
August 1-31, 2017	67,668		77.05	67,668		62.9
September 1-30, 2017	43,028		82.12	43,028		59.4
	128,700			128,700