| Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
| Dec. 31, 2018 |
| Summary of Significant Accounting Policies | |
| Recent Accounting Pronouncements | 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”). The FASB also issued various ASUs which subsequently amended ASU 2014-09. These amendments and ASU 2014-09, collectively known as Accounting Standard Codification 606 (“ASC 606”), were adopted on a modified retrospective basis in the quarter ended March 31, 2018. The Company applied the standard to contracts not completed at the date of initial application. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For contracts that were modified before January 1, 2018 the Company has not retrospectively restated the contracts for those modifications in accordance with the contract modification guidance, instead the Company reflected the aggregate effect of those modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligation. Given the nature of our arrangements, the Company does not believe the use of this practical expedient had a significant impact on the results of our adoption.
A majority of our managed care revenue continues to be recognized over the applicable coverage period on a per member basis for covered members. In addition, a majority of the PBM revenue continues to be recognized as the claims are adjudicated or when the drugs are dispensed. The main impacts of ASC 606 to the Company’s business relate to the timing of revenue recognition in relation to upfront fees in certain PBA contracts, as well as performance incentive, performance guarantee and risk share arrangements. Some of the Company’s PBA contracts contain upfront fees, which under ASC 605 were amortized over the life of the contract. Under ASC 606, these upfront fees constitute a material right and are amortized over the anticipated life of the customer. Certain contracts include performance incentive, performance guarantee and risk share arrangements, which under ASC 605 were recorded based on calculations using the current period’s data. Under ASC 606, the revenues are recognized on a probability weighted approach based on anticipated outcomes for the performance period. In addition, under ASC 606 the accounting for material rights in relation to some of the Company’s government contracts will impact the consolidated balance sheets for interim reporting periods.
The cumulative effect of changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09 were as follows (in thousands):
Balance at December 31, 2017
Adjustments Due to ASC 606
Balance at January 1, 2018
Assets
Other current assets
$
72,323
$
(667)
$
71,656
Total Current Assets
1,483,353
(667)
1,482,686
Deferred income taxes
813
1,335
2,148
Other long-term assets
22,567
(1,333)
21,234
Total Assets
2,957,234
(665)
2,956,569
Liabilities and Stockholders' Equity
Accrued liabilities
193,635
(2,182)
191,453
Total Current Liabilities
892,303
(2,182)
890,121
Deferred credits and other long-term liabilities
19,100
5,744
24,844
Total Liabilities
1,680,740
3,562
1,684,302
Retained earnings
1,399,495
(4,227)
1,395,268
Total Stockholders' Equity
1,276,494
(4,227)
1,272,267
Total Liabilities and Stockholders' Equity
2,957,234
(665)
2,956,569
The impact of the adoption of ASC 606 on our consolidated balance sheet as of December 31, 2018 was as follows (in thousands):
As Reported
Adjustments
Balance Without ASC 606 Adoption
Assets
Accounts receivable
$
756,059
$
(6,210)
$
749,849
Other current assets
95,400
2,218
97,618
Total Current Assets
1,547,167
(3,992)
1,543,175
Deferred income taxes
3,411
(1,335)
2,076
Other long-term assets
24,530
666
25,196
Total Assets
2,979,056
(4,661)
2,974,395
Liabilities and Stockholders' Equity
Accrued liabilities
231,356
3,390
234,746
Other medical liabilities
169,639
(165)
169,474
Total Current Liabilities
898,893
3,225
902,118
Deferred credits and other long-term liabilities
36,483
(8,030)
28,453
Total Liabilities
1,693,753
(4,805)
1,688,948
Retained earnings
1,419,449
144
1,419,593
Total Stockholders' Equity
1,285,303
144
1,285,447
Total Liabilities and Stockholders' Equity
2,979,056
(4,661)
2,974,395
The impact of the adoption of ASC 606 on our consolidated income statement for the year ended December 31, 2018 was as follows (in thousands):
As Reported
Adjustments
Balance Without ASC 606 Adoption
Managed care and other
$
4,878,442
$
(5,634)
$
4,872,808
Total net revenue
7,314,151
(5,634)
7,308,517
Income before income taxes
43,194
(5,634)
37,560
Provision for income taxes
19,013
(1,551)
17,462
Net income
24,181
(4,083)
20,098
Net income attributable to Magellan
24,181
(4,083)
20,098
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. The FASB also issued various ASUs which subsequently amended ASU 2016-02. These amendments and ASU 2016-02, collectively known as Accounting Standard Codification 842 (“ASC 842”), are effective for annual and interim reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The Company adopted the new standard on a modified retrospective basis and apply the transition method which did not require adjustments to comparative periods nor require modified disclosures in those comparative periods. The Company implemented new leasing software capable of producing the data to prepare the required accounting and disclosures prescribed by ASC 842. The Company is still assessing the impact of this ASU, but anticipates the adoption of this ASU will result in the recognition of right-of-use assets and lease liabilities of approximately $45 million to $65 million. The Company does not anticipate the adoption of this ASU will have a material impact on the Company’s consolidated results of operations.
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 January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in this ASU eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows. |
| Use of Estimates | Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company 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 “ Revenue Recognition ” below. Actual results could differ from those estimates. |
| Revenue Recognition | Revenue Recognition
Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the year ended December 31, 2018 by major service line, type of customer and timing of revenue recognition (in thousands):
Year Ended December 31, 2018
Healthcare
Pharmacy Management
Elimination
Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP
$
1,511,532
$
—
$
(263)
$
1,511,269
EAP risk-based
349,751
—
—
349,751
ASO
247,953
34,130
(344)
281,739
Magellan Complete Care
Risk-based, non-EAP
2,473,570
—
—
2,473,570
ASO
55,816
—
—
55,816
PBM, including dispensing
—
2,183,151
(189,708)
1,993,443
Medicare Part D
—
442,266
—
442,266
PBA
—
132,112
—
132,112
Formulary management
—
70,900
—
70,900
Other
—
3,285
—
3,285
Total net revenue
$
4,638,622
$
2,865,844
$
(190,315)
$
7,314,151
Type of Customer
Government
$
3,432,901
$
946,606
$
—
$
4,379,507
Non-government
1,205,721
1,919,238
(190,315)
2,934,644
Total net revenue
$
4,638,622
$
2,865,844
$
(190,315)
$
7,314,151
Timing of Revenue Recognition
Transferred at a point in time
$
—
$
2,625,417
$
(189,708)
$
2,435,709
Transferred over time
4,638,622
240,427
(607)
4,878,442
Total net revenue
$
4,638,622
$
2,865,844
$
(190,315)
$
7,314,151
Per Member Per Month (“PMPM”) Revenue. 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 entirely variable as it primarily includes per member per month fees associated with unspecified membership that fluctuates throughout the contract. In certain contracts, PMPM fees also include variable consideration for things such as performance incentives, performance guarantees, risk pool measures 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 probable that a 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 a distinct increment of the series (e.g. day or month) and is recognized as revenue in the month in which members are entitled to service. The remaining transaction price is recognized over the contract period (or portion of the series to which it specifically relates) based upon estimated membership as a measure of progress.
Under certain government contracts, our rates are subject to subsequent retroactive adjustment for things such as risk pool measures. In determining the adjustment necessary for various items, certain measures are compared with the relevant state and market pool. The adjustments are determined annually or semi-annually on a retrospective basis. Generally, if we are below the average, we are required to make a payment into the pool, and if we are above the average, we will receive a payment from the pool from these adjustments. These adjustments can have a positive or negative retroactive impact to rates. The adjustments to our rates are considered variable consideration and are estimated on a quarterly basis using an expected value method. Amounts of variable consideration are recognized as revenue only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Pharmacy Benefit Management Revenue. The Company’s customers for PBM business, including pharmaceutical dispensing operations, are 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 executed 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 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 and any associated administrative fees, when claims are adjudicated or the drugs are shipped. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co‑payments) as it is acting as the principal in the arrangement, 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 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. For dispensing, 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.
Medicare Part D. The Company is contracted with CMS as a Prescription Drug Plan (“PDP”) to provide prescription drug benefits to Medicare beneficiaries. 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 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 when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.
Government EAP Risk-Based Revenue. The Company has certain contracts with federal customers for the provision of various managed care services, which are classified as EAP risk-based business. These contracts are generally multi-year arrangements. The Company’s federal contracts are reimbursed on either a fixed fee basis or a 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 customer, such as the operation of a counseling services group or call center. The performance obligation represents a series for the duration of the arrangement. The 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 distinct increment of the series (e.g. day or month) and is recognized as revenue when the portion of the series for which it relates has been provided (i.e. as the 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 transferring the 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 per member per month fees associated with unspecified membership that fluctuates throughout the contract.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable, contract assets and contract liabilities consisted of the following (in thousands, except percentages):
January 1,
December 31,
2018
2018
$ Change
% Change
Accounts receivable
$
679,269
$
786,395
$
107,126
Contract assets
8,564
4,647
(3,917)
Contract liabilities - current
14,299
16,853
2,554
Contract liabilities - long-term
12,303
13,441
1,138
Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets on the consolidated balance sheets, increased by $107.1 million, mainly due to timing. Contract assets, which are included in other current assets on the consolidated balance sheets, decreased by $3.9 million, mainly due to the timing of accrual of certain performance incentives. Contract liabilities – current, which are included in accrued liabilities on the consolidated balance sheets, increased by $2.6 million, mainly due to the timing of receipts related to January 2019 revenues. Contract liabilities – long-term, which are included in deferred credits and other long-term liabilities on the consolidated balance sheets, increased by $1.1 million, mainly due to receipts for which recognition will be long-term.
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 generate contract assets or contract liabilities, however these amounts are immaterial.
Significant Customers
Customers exceeding ten percent of the consolidated Company’s net revenues
The Company has a contract with the State of Florida to provide integrated healthcare services to Medicaid enrollees in the state of Florida (the “Florida Contract”). The Florida Contract began on February 4, 2014 and extends through December 31, 2018, unless sooner terminated by the parties. Under the Florida Contract, the Company serves all of the members in the Florida Agency for Health Care Administration (“AHCA”) Regions 2, 4, 5, 6, 7, 9, 10, and 11. The State of Florida has the right to terminate the Florida Contract with cause, as defined, upon 24 hour notice and upon 30 days notice for any reason or no reason at all. The Florida Contract generated net revenues of $548.7 million, $605.9 million and $618.2 million for the years ended December 31, 2016, 2017 and 2018, respectively.
On July 14, 2017, the State of Florida issued an Invitation to Negotiate for a new contract for its Medicaid managed care program to replace the current contract with the Company and to be effective January 1, 2019. On April 24, 2018 the Company was notified by AHCA that the Company was not selected to negotiate a new contract to serve as a vendor for its Medicaid managed care program. The Company filed a protest with AHCA on May 7 2018. On August 30, 2018, the Company entered into a settlement with AHCA in regards to the Company’s protest. Pursuant to the terms of the settlement, Florida MHS, Inc. d/b/a Magellan Complete Care of Florida was awarded a contract extending through September 30, 2023 to serve Medicaid members with SMI in AHCA Regions 4, 5, and 7 alongside another vendor. The Company will no longer serve members in Regions 2, 6, 9, 10, and 11, which represents approximately 60% of the total current membership the Company serves under the existing Florida Contract. On September 4, 2018, the Company withdrew its protest under the terms of the settlement agreement.
Customers exceeding ten percent of segment net revenues
In addition to the Florida Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the years ended December 31, 2016, 2017 and 2018 (in thousands):
Segment
Term Date
2016
2017
2018
Healthcare
Customer A
(1)
$
138,966
*
$
265,192
*
$
691,616
Customer B
December 31, 2019 to December 31, 2020 (2)
—
109,049
*
682,059
Customer C
December 31, 2022
—
73,758
*
476,671
Pharmacy Management
Customer D
March 31, 2020
152,218
*
346,405
344,479
Customer E
December 31, 2016 (3)
264,152
4,764
*
2,864
*
*
(1)
The Company, along with other participating managed care plans in this state, continues to provide services while a new contract is being finalized.
(2)
The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.
(3)
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 drug formulary management services to the customer and is in negotiations with the customer to extend the 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 $461.6 million, $490.0 million and $544.6 million for the years ended December 31, 2016, 2017 and 2018, respectively. Net revenues from members in relation to its contract with CMS in aggregate totaled $272.8 million, $511.0 million and $442.3 million for the years ended December 31, 2016, 2017 and 2018, respectively. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled $252.5 million, $341.5 million, and $308.7 million for the years ended December 31, 2016, 2017 and 2018, 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 30 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. |
| Income Taxes | Income Taxes
The Company files a consolidated federal income tax return with its eighty-percent or more controlled subsidiaries. The Company previously filed separate consolidated federal income tax returns for AlphaCare of New York, Inc. (“AlphaCare”) and its parent, AlphaCare Holdings, Inc. (“AlphaCare Holdings”). During 2017, AlphaCare and AlphaCare Holdings became members of the Magellan federal consolidated group. The Company and its subsidiaries also file income tax returns in various state and local jurisdictions.
The Company estimates income taxes for each of the jurisdictions in which it operates. This process involves determining both permanent and temporary differences resulting from differing treatment for tax and book purposes. Deferred tax assets and/or liabilities are determined by multiplying the temporary differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The Company then assesses the likelihood that the deferred tax assets will be recovered from the reversal of temporary differences, the implementation of feasible and prudent tax planning strategies, and future taxable income. To the extent the Company cannot conclude that recovery is more likely than not, it establishes a valuation allowance. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. Reversals of both valuation allowances and unrecognized tax benefits are recorded in the period they occur, typically as reductions to income tax expense.
The Company recognizes interim period income taxes by estimating an annual effective tax rate and applying it to year‑to‑date results. The estimated annual effective tax rate is periodically updated throughout the year based on actual results to date and an updated projection of full year income. Although the effective tax rate approach is generally used for interim periods, taxes on significant, unusual and infrequent items are recognized at the statutory tax rate entirely in the period the amounts are realized. |
| Health Care Reform | Health Care Reform
The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from customers which the Company expects will cover the direct costs of these fees and the impact from non‑deductibility of such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. The Consolidated Appropriations Act of 2016 imposed a one-year moratorium on the Patient Protection and Affordable Care Act health insurer fee (“HIF”) fee , suspending its application for 2017. The HIF fee went back into effect for 2018, however, on January 23, 2018 the United States Congress passed the Continuing Resolution which imposed another one-year moratorium on the HIF fee, suspending its application for 2019. For 2016 and 2018, the HIF fees were $26.5 million and $29.9 million, respectively, which have been paid and which are included in direct service costs and other operating expenses in the consolidated statements of income. |
| Cash and Cash Equivalents | Cash and Cash Equivalents
Cash equivalents are short‑term, highly liquid interest‑bearing investments with maturity dates of three months or less when purchased, consisting primarily of money market instruments. At December 31, 2018, the Company’s excess capital and undistributed earnings for the Company’s regulated subsidiaries of $63.3 million are included in cash and cash equivalents. |
| Restricted Assets | Restricted Assets
The Company has certain assets which are considered restricted for: (i) the payment of claims under the terms of certain managed care contracts; (ii) regulatory purposes related to the payment of claims in certain jurisdictions; and (iii) the maintenance of minimum required tangible net equity levels for certain of the Company’s subsidiaries. Significant restricted assets of the Company as of December 31, 2017 and 2018 were as follows (in thousands):
2017
2018
Restricted cash and cash equivalents
$
229,013
$
160,967
Restricted short-term investments
219,111
363,840
Restricted deposits (included in other current assets)
41,121
43,401
Restricted long-term investments
17,287
2,854
Total
$
506,532
$
571,062
The Company’s equity in restricted net assets of consolidated subsidiaries represented approximately 24.6% of the Company’s consolidated stockholder’s equity as of December 31, 2018 and consisted of net assets of the Company which were restricted as to transfer to Magellan in the form of cash dividends, loans or advances under regulatory restrictions. |
| Fair Value Measurements | 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 financial assets and liabilities that are required to be measured at fair value as of December 31, 2017 and 2018 (in thousands):
December 31, 2017
Level 1
Level 2
Level 3
Total
Assets
Cash and cash equivalents (1)
$
—
$
284,064
$
—
$
284,064
Investments:
U.S. Government and agency securities
28,231
—
—
28,231
Obligations of government-sponsored enterprises (2)
—
22,088
—
22,088
Corporate debt securities
—
269,788
—
269,788
Taxable municipal bonds
—
5,000
—
5,000
Certificates of deposit
—
2,758
—
2,758
Total assets held at fair value
$
28,231
$
583,698
$
—
$
611,929
Liabilities
Contingent consideration
$
—
$
—
$
8,817
$
8,817
Total liabilities held at fair value
$
—
$
—
$
8,817
$
8,817
December 31, 2018
Level 1
Level 2
Level 3
Total
Assets
Cash and cash equivalents (3)
$
—
$
263,462
$
—
$
263,462
Investments:
U.S. Government and agency securities
67,815
—
—
67,815
Obligations of government-sponsored enterprises (2)
—
5,229
—
5,229
Corporate debt securities
—
292,049
—
292,049
Certificates of deposit
—
20,650
—
20,650
Total assets held at fair value
$
67,815
$
581,390
$
—
$
649,205
Liabilities
Contingent consideration
$
—
$
—
$
10,124
$
10,124
Total liabilities held at fair value
$
—
$
—
$
10,124
$
10,124
(1)
Excludes $114.7 million of cash held in bank accounts by the Company.
(2)
Includes investments in notes issued by the Federal Home Loan Bank, Federal Farm Credit Banks and Federal National Mortgage Association.
(3)
Excludes $ 8.8 million of cash held in bank accounts by the Company.
For the years ended December 31, 2017 and 2018, the Company did not transfer any assets between fair value measurement levels.
The carrying values of financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short-term maturities. The fair value of the Notes (as defined below) of $370.1 million as of December 31, 2018 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 $328.1 million as of December 31, 2018 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.
All of the Company’s investments are classified as “available-for-sale” and are carried at fair value.
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, 2017 and 2018, the Company estimated undiscounted future contingent payments of $9.9 million and $10.6 million, respectively. As of December 31, 2018, the aggregate amounts and projected dates of future potential contingent consideration payments were $8.0 million in 2019 and $2.6 million in 2020.
As of December 31, 2017, the fair value of the short-term and long-term contingent consideration was $6.9 million and $1.9 million, respectively, and is included in short-term contingent consideration and long-term contingent consideration, respectively, in the consolidated balance sheets. As of December 31, 2018, the fair value of the short-term and long-term contingent consideration was $8.0 million and $2.1 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 $(0.1) million, $0.7 million and $1.3 million for the years ended December 31, 2016, 2017 and 2018, respectively, which were recorded as direct service costs and other operating expenses in the consolidated statements of income. The increases during 2018 were mainly a result of changes in present value and the estimated undiscounted liability.
The following table summarizes the Company’s liability for contingent consideration (in thousands):
December 31,
December 31,
2017
2018
Balance as of beginning of period
$
11,153
$
8,817
Changes in fair value
696
1,307
Payments
(3,032)
—
Balance as of end of period
$
8,817
$
10,124 |
| Investments | Investments
All of the Company’s investments are classified as “available‑for‑sale” and are carried at fair value. Securities which have been classified as Level 1 are measured using quoted market prices in active markets for identical assets or liabilities while those which have been classified as Level 2 are measured using quoted prices for identical assets and liabilities in markets that are not active. The Company’s policy is to classify all investments with contractual maturities within one year as current. Investment income is recognized when earned and reported net of investment expenses. Net unrealized holding gains or losses are excluded from earnings and are reported, net of tax, as “accumulated other comprehensive income (loss)” in the accompanying consolidated balance sheets and consolidated statements of comprehensive income until realized, unless the losses are deemed to be other‑than‑temporary. Realized gains or losses, including any provision for other‑than‑temporary declines in value, are included in the consolidated statements of income.
If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other‑than‑temporary and is recorded to other‑than‑temporary impairment losses recognized in income in the consolidated statements of income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other‑than‑temporary impairment is recognized in other‑than‑temporary impairment losses recognized in income in the consolidated statements of income and the non‑credit component of the other‑than‑temporary impairment is recognized in other comprehensive income.
The credit component of an other‑than‑temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. Furthermore, unrealized losses entirely caused by non‑credit related factors related to debt securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.
As of December 31, 2017 and 2018, there were no material unrealized losses that the Company believed to be other‑than‑temporary. No realized gains or losses were recorded for the years ended December 31, 2016, 2017, or 2018. The following is a summary of short-term and long-term investments at December 31, 2017 and 2018 (in thousands):
December 31, 2017
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
U.S. Government and agency securities
$
28,313
$
—
$
(82)
$
28,231
Obligations of government-sponsored enterprises (1)
22,139
—
(51)
22,088
Corporate debt securities
270,154
1
(367)
269,788
Taxable municipal bonds
5,000
—
—
5,000
Certificates of deposit
2,758
—
—
2,758
Total investments at December 31, 2017
$
328,364
$
1
$
(500)
$
327,865
December 31, 2018
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
U.S. Government and agency securities
$
67,870
$
17
$
(72)
$
67,815
Obligations of government-sponsored enterprises (1)
5,257
—
(28)
5,229
Corporate debt securities
292,392
6
(349)
292,049
Certificates of deposit
20,650
—
—
20,650
Total investments at December 31, 2018
$
386,169
$
23
$
(449)
$
385,743
(1)
Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.
The maturity dates of the Company’s investments as of December 31, 2018 are summarized below (in thousands):
Amortized
Estimated
Cost
Fair Value
2019
$
383,022
$
382,582
2020
3,147
3,161
Total investments at December 31, 2018
$
386,169
$
385,743 |
| Concentration of Credit Risk | Concentration of Credit Risk
Accounts receivable subjects the Company to a concentration of credit risk with third party payors that include health insurance companies, managed healthcare organizations, healthcare providers and governmental entities.
The Company maintains cash and cash equivalents balances at financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, balances in certain bank accounts may exceed the FDIC insured limits. |
| Pharmaceutical Inventory | Pharmaceutical Inventory
Pharmaceutical inventory consists solely of finished goods (primarily prescription drugs) and is stated at the lower of first‑in first‑out, cost, or market. |
| Long-lived Assets | Long‑lived Assets
Long‑lived assets, including property and equipment and intangible assets to be held and used, are currently reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We group and evaluate these long-lived assets for impairment at the lowest level at which individual cash flows can be identified. Impairment is determined by comparing the carrying value of these long‑lived assets to management’s best estimate of the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The cash flow projections used to make this assessment are consistent with the cash flow projections that management uses internally in making key decisions. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset, which is generally determined by using quoted market prices or the discounted present value of expected future cash flows.
In the evaluation of indefinite-lived intangible assets for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If the Company determines that it is not more likely than not for the indefinite-lived intangible asset’s fair value to be less than its carrying value, a calculation of the fair value is not performed. If the Company determines that it is more likely than not that the indefinite-lived intangible asset’s fair value is less than its carrying value, a calculation is performed and compared to the carrying value of the asset. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The Company measures the fair value of its indefinite-lived intangible assets using the “relief from royalty” method. Significant estimates in this approach include projected revenues and royalty and discount rates for each trade name evaluated. |
| Property and Equipment | Property and Equipment
Property and equipment is stated at cost, except for assets that have been impaired, for which the carrying amount has been reduced to estimated fair value. Expenditures for renewals and improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. The Company capitalizes costs incurred to develop internal‑use software during the application development stage. Capitalization of software development costs occurs after the preliminary project stage is complete, management authorizes the project, and it is probable that the project will be completed and the software will be used for the function intended. Amortization of capital lease assets is included in depreciation expense and is included in accumulated depreciation as reflected in the table below. Depreciation is provided on a straight‑line basis over the estimated useful lives of the assets, which is generally two to ten years for building improvements (or the lease term, if shorter), three to fifteen years for equipment and three to five years for capitalized internal‑use software. The net capitalized internal use software as of December 31, 2017 and 2018 was $79.6 million and $71.7 million, respectively. Depreciation expense was $75.3 million, $76.5 million and $80.9 million for the years ended December 31, 2016, 2017 and 2018, respectively. Included in depreciation expense for the years ended December 31, 2016, 2017 and 2018 was $47.6 million, $49.5 million and $50.0 million, respectively, related to capitalized internal-use software.
Property and equipment, net, consisted of the following at December 31, 2017 and 2018 (in thousands):
2017
2018
Building improvements
$
17,974
$
18,954
Equipment
204,632
201,343
Capital leases - property
26,945
26,945
Capital leases - equipment
18,183
24,932
Capitalized internal-use software
486,013
527,129
753,747
799,303
Accumulated depreciation
(595,109)
(648,555)
Property and equipment, net
$
158,638
$
150,748 |
| Goodwill | Goodwill
The Company is required to test its goodwill for impairment on at least an annual basis. The Company has selected October 1 as the date of its annual impairment test. The goodwill impairment test is a two‑step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit with goodwill based on various valuation techniques, with the primary technique being a discounted cash flow analysis, which requires the input of various assumptions with respect to revenues, operating margins, growth rates and discount rates. The estimated fair value for each reporting unit is compared to the carrying value of the reporting unit, which includes goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of a reporting unit’s “implied fair value” of goodwill requires the Company to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to its corresponding carrying value.
Goodwill is tested for impairment at a level referred to as a reporting unit. The Company’s reporting units with goodwill as of December 31, 2017 were comprised of Commercial, Government and Pharmacy Management. During the third quarter of 2018, the Company re-evaluated how it was managing the Healthcare business segment and decided a reorganization was necessary to effectively manage the business going forward. As a result of this business reorganization, the Company concluded that changes to Healthcare’s reporting units were warranted. Healthcare now consists of two reporting units – Behavioral & Specialty Health and MCC. Effective August 1, 2018, the Company evaluated the impact of the reorganization on its previously identified reporting units. The Company allocated goodwill to the new reporting units using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and immediately after the reallocation and determined that no impairment existed.
The fair values of the Behavioral & Specialty Health (a component of the Healthcare segment), MCC (a component of the Healthcare segment) and Pharmacy Management reporting units were determined using a discounted cash flow method. This method involves estimating the present value of estimated future cash flows utilizing a risk adjusted discount rate. Key assumptions for this method include cash flow projections, terminal growth rates and discount rates.
The 2018 annual goodwill impairment testing as of October 1,2018, determined that the fair value of the MCC reporting unit had declined, largely due to continued economic challenges in certain markets, and was in excess of its carrying value by a margin of approximately 5%. We considered our observed fourth quarter performance in our October 1, 2018 test. At December 31, 2018, we evaluated whether our forecast for 2019 and beyond would have changed from what was used in our October 1 test. Based on this evaluation, we continue to believe that the fair value of the MCC reporting unit exceeds its carrying value by a margin of approximately 5%. While the reporting unit was not determined to be impaired at this time, the MCC reporting unit goodwill 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) 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.
Goodwill for each of the Company’s reporting units with goodwill at December 31, 2017 was as follows (in thousands):
2017
Commercial
$
242,255
Government
368,612
Pharmacy Management
395,421
Total
$
1,006,288
Goodwill for each of the Company’s reporting units with goodwill at December 31, 2018 was as follows (in thousands):
2018
Behavioral & Specialty Health
$
410,869
Magellan Complete Care
211,735
Pharmacy Management
395,552
Total
$
1,018,156
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2018 are reflected in the table below (in thousands):
2017
2018
Balance as of beginning of period
$
742,054
$
1,006,288
Acquisition of Veridicus
1,647
—
Acquisition of SWH
260,139
—
Other acquisitions and measurement period adjustments
2,448
11,868
Balance as of end of period
$
1,006,288
$
1,018,156 |
| Intangible Assets | Intangible Assets
The Company reviews other intangible assets for impairment when events or changes in circumstances occur which may potentially impact the estimated useful life of the intangible assets. During the second quarter of 2016, the Company recognized $4.8 million in impairment charges, which are reflected in direct service costs and other operating expenses in the consolidated statements of income and reported within the Healthcare segment. The fair value of the impairment was determined using the income method, which resulted in the full impairment of the customer agreement intangible asset recorded in conjunction with the AlphaCare acquisition.
The following is a summary of intangible assets at December 31, 2017 and 2018, and the estimated useful lives for such assets (in thousands, except useful lives):
December 31, 2017
Weighted Avg
Gross
Net
Original
Remaining
Carrying
Accumulated
Carrying
Asset
Useful Life
Useful Life
Amount
Amortization
Amount
Customer agreements and lists
2.5
to
18
years
5.3
years
$
441,346
$
(218,335)
$
223,011
Provider networks and other
1
to
16
years
3.0
years
25,410
(14,433)
10,977
Trade names and licenses
indefinite
indefinite
34,300
—
34,300
$
501,056
$
(232,768)
$
268,288
December 31, 2018
Weighted Avg
Gross
Net
Original
Remaining
Carrying
Accumulated
Carrying
Asset
Useful Life
Useful Life
Amount
Amortization
Amount
Customer agreements and lists
2.5
to
18
years
4.5
years
$
441,346
$
(262,729)
$
178,617
Provider networks and other
1
to
16
years
2.3
years
44,635
(21,789)
22,846
Trade names and licenses
indefinite
indefinite
30,420
—
30,420
$
516,401
$
(284,518)
$
231,883
Amortization expense was $30.7 million, $39.2 million and $51.8 million for the years ended December 31, 2016, 2017 and 2018, respectively. The Company estimates amortization expense will be $54.7 million, $53.2 million, $46.9 million, $25.2 million and $17.2 million for the years ending December 31, 2019, 2020, 2021, 2022 and 2023, respectively. |
| Cost of Care, Medical Claims Payable and Other Medical Liabilities | Cost of Care, Medical Claims Payable and Other Medical Liabilities
Cost of care is recognized in the period in which members receive managed healthcare services. In addition to actual benefits paid, cost of care in a period also includes the impact of accruals for estimates of medical claims payable. Medical claims payable represents the liability for healthcare claims reported but not yet paid and claims incurred but not yet reported (“IBNR”) related to the Company’s managed healthcare businesses. Such liabilities are determined by employing actuarial methods that are commonly used by health insurance actuaries and that meet actuarial standards of practice. Cost of care for the Company’s EAP contracts, which are mainly with the United States federal government, pertain to the costs to employ licensed behavioral health counselors to deliver non-medical counseling for these contracts.
The IBNR portion of medical claims payable is estimated based on past claims payment experience for member groups, enrollment data, utilization statistics, authorized healthcare services and other factors. This data is incorporated into contract‑specific actuarial reserve models and is further analyzed to create “completion factors” that represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Factors that affect estimated completion factors include benefit changes, enrollment changes, shifts in product mix, seasonality influences, provider reimbursement changes, changes in claims inventory levels, the speed of claims processing and changes in paid claim levels. Completion factors are applied to claims paid through the financial statement date to estimate the ultimate claim expense incurred for the current period. Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims. For the most recent incurred months (generally the most recent two months), the percentage of claims paid for claims incurred in those months is generally low. This makes the completion factor methodology less reliable for such months. Therefore, incurred claims for any month with a completion factor that is less than 70 percent are generally not projected from historical completion and payment patterns; rather they are projected by estimating claims expense based on recent monthly estimated cost incurred per member per month times membership, taking into account seasonality influences, benefit changes and healthcare trend levels, collectively considered to be “trend factors.” For new contracts, the Company estimates IBNR based on underwriting data until it has sufficient data to utilize these methodologies.
Medical claims payable balances are continually monitored and reviewed. If it is determined that the Company’s assumptions in estimating such liabilities are significantly different than actual results, the Company’s results of operations and financial position could be impacted in future periods. Adjustments of prior period estimates may result in additional cost of care or a reduction of cost of care in the period an adjustment is made. Further, due to the considerable variability of healthcare costs, adjustments to claim liabilities occur each period and are sometimes significant as compared to the net income recorded in that period. Prior period development is recognized immediately upon the actuary’s judgment that a portion of the prior period liability is no longer needed or that additional liability should have been accrued. The following table presents the components of the change in medical claims payable for the years ended December 31, 2016, 2017 and 2018 (in thousands):
2016
2017
2018
Claims payable and IBNR, beginning of period
$
253,299
$
188,618
$
326,642
Cost of care:
Current year
1,892,914
2,421,270
3,772,112
Prior years(3)
(10,300)
(7,500)
(9,700)
Total cost of care
1,882,614
2,413,770
3,762,412
Claim payments and transfers to other medical liabilities(1):
Current year
1,733,310
2,210,346
3,402,010
Prior years
213,985
161,798
292,904
Total claim payments and transfers to other medical liabilities
1,947,295
2,372,144
3,694,914
Acquisition of SWH
—
96,398
—
Claims payable and IBNR, end of period
188,618
326,642
394,140
Withhold (receivables) payable, end of period(2)
(4,482)
983
(593)
Medical claims payable, end of period
$
184,136
$
327,625
$
393,547
(1)
For any given period, a portion of unpaid medical claims payable could be covered by reinvestment liability (discussed below) and may not impact the Company’s results of operations for such periods.
(2)
Medical claims payable is offset by customer withholds from capitation payments in situations in which the customer has the contractual requirement to pay providers for care incurred.
(3)
Favorable development in 2016, 2017 and 2018 was $10.3 million, $7.5 million and $9.7 million, respectively, and was mainly related to lower medical trends and faster claims completion than originally assumed.
Actuarial standards of practice require that claim liabilities be adequate under moderately adverse circumstances. Adverse circumstances are situations in which the actual claims experience could be higher than the otherwise estimated value of such claims. In many situations, the claims paid amount experienced will be less than the estimate that satisfies the actuarial standards of practice. Any prior period favorable cost of care development related to a lack of moderately adverse conditions is excluded from “Cost of Care – Prior Years” adjustments, as a similar provision for moderately adverse conditions is established for current year cost of care liabilities and therefore does not generally impact net income.
Due to the existence of risk sharing and reinvestment provisions in certain customer contracts, principally in the Government contracts, a change in the estimate for medical claims payable does not necessarily result in an equivalent impact on cost of care.
The Company believes that the amount of medical claims payable is adequate to cover its ultimate liability for unpaid claims as of December 31, 2018; however, actual claims payments may differ from established estimates.
Other medical liabilities consist primarily of amounts payable to pharmacies for claims that have been adjudicated by the Company but not yet paid and “profit share” payables under certain risk-based contracts. Under a contract with profit share provisions, if the cost of care is below certain specified levels, the Company will “share” the cost savings with the customer at the percentages set forth in the contract. In addition, certain contracts include provisions to provide the Company additional funding if the cost of care is above the specified levels. Other medical liabilities also include “reinvestment” payables under certain managed healthcare contracts with Medicaid customers. Under a contract with reinvestment features, if the cost of care is less than certain minimum amounts specified in the contract (usually as a percentage of revenue), the Company is required to “reinvest” such difference in behavioral healthcare programs when and as specified by the customer or to pay the difference to the customer for their use in funding such programs. |
| Accrued Liabilities | Accrued Liabilities
As of December 31, 2017, the only individual current liability that exceeded five percent of total current liabilities related to accrued employee compensation liabilities of $45.6 million. As of December 31, 2018, the only individual current liability that exceeded five percent of total current liabilities related to accrued customer settlement liabilities of $93.8 million. |
| Net Income per Common Share attributable to Magellan | Net Income per Common Share attributable to Magellan
Net income per common share attributable to Magellan is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period (see Note 6—“Stockholders’ Equity”). |
| Stock Compensation | Stock Compensation
At December 31, 2017 and 2018, the Company had equity-based employee incentive plans, which are described more fully in Note 6—“Stockholders’ Equity”. In addition, the Company issued restricted stock awards (“RSAs”) associated with the Armed Forces Services Corporation (“AFSC”) acquisition, which are also described more fully in Note 6—“Stockholders’ Equity”. The Company uses the Black‑Scholes‑Merton formula to estimate the fair value of substantially all stock options granted to employees, and recorded stock compensation expense of $37.4 million, $39.1 million and $29.5 million for the years ended December 31, 2016, 2017 and 2018, respectively. As stock compensation expense recognized in the consolidated statements of income for the years ended December 31, 2016, 2017 and 2018 is based on awards ultimately expected to vest, it has been reduced for annual estimated forfeitures of zero to four percent. If the actual number of forfeitures differs from those estimated, additional adjustments to compensation expense may be required in future periods. If vesting of an award is conditioned upon the achievement of performance goals, compensation expense during the performance period is estimated using the most probable outcome of the performance goals, and adjusted as the expected outcome changes. The Company recognizes compensation costs for awards that do not contain performance conditions on a straight‑line basis over the requisite service period, which is generally the vesting term of three years. For restricted stock units (“RSUs”) that include performance conditions, stock compensation is recognized using an accelerated method over the vesting period. |
