Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2009Oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                        toCommission File No. 1-6639


MAGELLAN HEALTH SERVICES, INC.(Exact name of registrant as specified in its charter)

Delaware

58-1076937(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)55 Nod Road, Avon, Connecticut

06001(Address of principal executive offices)

(Zip code)


(860) 507-1900(Registrant's telephone number, including area code)



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

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

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company o


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 (§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 o    No o

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes ý    No o

The number of shares of the registrant's Ordinary Common Stock outstanding as of March 31, 2009 was 35,296,577.



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Table of Contents

FORM 10-Q

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

INDEX



Page No.PART IFinancial Information:Item 1:

Financial Statements


3Condensed Consolidated Balance SheetsDecember 31, 2008 and March 31, 2009


3Condensed Consolidated Statements of IncomeFor the Three Months Ended March 31, 2008 and 2009


4Condensed Consolidated Statements of Cash FlowsFor the Three Months Ended March 31, 2008 and 2009


5Notes to Condensed Consolidated Financial Statements


6Item 2:

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


19Item 3:

Quantitative and Qualitative Disclosures About Market Risk


32Item 4:

Controls and Procedures


33PART IIOther Information:Item 1:

Legal Proceedings


34Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds


34Item 3:

Defaults Upon Senior Securities


35Item 4:

Submission of Matters to a Vote of Security Holders


35Item 5:

Other Information


35Item 6:

Exhibits


35Signatures


36


2

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Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    Financial Statements.



MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS        (In thousands, except per share amounts)

December 31,
2008

March 31,
2009(unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
211,825

$
178,282Restricted cash


192,395


128,039Accounts receivable, less allowance for doubtful accounts of $1,915 and $1,689 at December 31, 2008 and March 31, 2009, respectively


82,076


84,312Short-term investments (restricted investments of $116,112 and $143,422 at December 31, 2008 and March 31, 2009, respectively)


225,372


243,126Deferred income taxes


58,092


58,092Other current assets (restricted deposits of $17,769 and $16,896 at December 31, 2008 and March 31, 2009, respectively)


52,660


43,994Total Current Assets


822,420


735,845Property and equipment, net


88,436


84,615Long-term investmentsrestricted


8,527


18,747Deferred income taxes


76,769


71,488Other long-term assets


3,472


3,604Goodwill


367,325


367,325Other intangible assets, net


50,615


48,474Total Assets

$
1,417,564

$
1,330,098LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable

$
21,527

$
24,651Accrued liabilities


96,533


71,649Medical claims payable


155,860


142,875Other medical liabilities


99,953


88,504Current maturities of long-term debt and capital lease obligations


8


7Total Current Liabilities


373,881


327,686Long-term debt and capital lease obligations


20


14Deferred credits and other long-term liabilities


135,590


134,875Total Liabilities


509,491


462,575Preferred stock, par value $.01 per shareAuthorized10,000 sharesIssued and outstandingnone





Ordinary common stock, par value $.01 per shareAuthorized100,000 shares at December 31, 2008 and March 31, 2009Issued and outstanding40,873 shares and 40,963 shares at
December 31, 2008 and March 31, 2009, respectively


409


410Multi-Vote common stock, par value $.01 per shareAuthorized40,000 sharesIssued and outstandingnone





Other Stockholders' Equity:Additional paid-in capital


589,011


597,017Retained earnings


449,252


462,812Warrants outstanding


5,382


5,382Accumulated other comprehensive income (loss)


172


(114
)Ordinary common stock in treasury, at cost, 3,867 shares and 5,666 shares at December 31, 2008 and March 31, 2009, respectively


(136,153
)

(197,984
)Total Stockholders' Equity


908,073


867,523Total Liabilities and Stockholders' Equity

$
1,417,564

$
1,330,098


See accompanying notes to condensed consolidated financial statements.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF INCOME  FOR THE THREE MONTHS ENDED MARCH 31,        (Unaudited)
    (In thousands, except per share amounts)

2008

2009Net revenue

$
650,290

$
619,515Cost and expenses:Cost of care


454,074


431,718Cost of goods sold


46,824


52,072Direct service costs and other operating expenses(1)


109,748


103,064Depreciation and amortization


14,374


11,043Interest expense


1,215


427Interest income


(5,493
)

(2,311
)620,742


596,013Income from continuing operations before income taxes


29,548


23,502Provision for income taxes


12,304


9,942Net income


17,244


13,560Other comprehensive loss


(14
)

(286
)Comprehensive income

$
17,230

$
13,274Weighted average number of common shares outstandingbasic (See Note B)


39,736


36,208Weighted average number of common shares outstandingdiluted (See Note B)


40,340


36,386Net income per common sharebasic:

$
0.43

$
0.37Net income per common sharediluted:

$
0.43

$
0.37


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See
accompanying notes to condensed consolidated financial statements.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE THREE MONTHS ENDED MARCH 31,    
(Unaudited)        (In thousands)

2008

2009Cash flows from operating activities:Net income

$
17,244

$
13,560Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


14,374


11,043Non-cash interest expense


573


232Non-cash stock compensation expense


12,018


6,432Non-cash income tax expense


10,586


4,639Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:Restricted cash


(10,435
)

64,356Accounts receivable, net


(15,063
)

(2,236
)Other assets


4,997


8,297Accounts payable and accrued liabilities


(15,778
)

(23,813
)Medical claims payable and other medical liabilities


(5,532
)

(24,434
)Other


(537
)

568Net cash provided by operating activities


12,447


58,644Cash flows from investing activities:Capital expenditures


(7,979
)

(5,310
)Acquisitions and investments in businesses, net of cash acquired


(425
)

Purchase of investments


(35,013
)

(77,730
)Maturity of investments


53,130


48,757Net cash provided by (used in) investing activities


9,713


(34,283
)Cash flows from financing activities:Payments on long-term debt and capital lease obligations


(4,307
)

(2
)Payments to acquire treasury stock





(59,476
)Proceeds from exercise of stock options and warrants


4,010


912Other


(1,456
)

662Net cash used in financing activities


(1,753
)

(57,904
)Net increase (decrease) in cash and cash equivalents


20,407


(33,543
)Cash and cash equivalents at beginning of period


312,372


211,825Cash and cash equivalents at end of period

$
332,779

$
178,282


See
accompanying notes to condensed consolidated financial statements.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        March 31, 2009    
(Unaudited)

NOTE AGeneral

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Magellan Health Services, Inc., a Delaware corporation
("Magellan"), include the accounts of Magellan, its majority owned subsidiaries, and all variable interest entities ("VIEs") for which Magellan
is the primary beneficiary (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 months ended March 31, 2009 are not necessarily indicative
of the results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation.

These
unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended
December 31, 2008 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on February 27, 2009.

Business Overview

The Company is engaged in the specialty managed healthcare business. Through 2005, the Company predominantly operated in the managed
behavioral healthcare business. During 2006, the Company expanded into radiology benefits management and specialty pharmaceutical management as a result of certain acquisitions. The Company provides
services to health plans, insurance companies, corporations, labor unions and various governmental agencies. The Company's business is divided into the following five segments, based on the services
it provides and/or the customers that it serves, as described below.

Managed
Behavioral Healthcare

Two
of the Company's segments are in the managed behavioral healthcare business. This line of business generally reflects the Company's coordination and
management of the delivery of behavioral healthcare treatment services that are provided through its contracted network of third-party treatment providers, which includes psychiatrists, psychologists,
other behavioral health professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities. The treatment services
provided through the Company's provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial
hospitalization services), inpatient treatment and crisis intervention services. The Company generally does not directly provide, or own any provider of, treatment services except as relates to the
Company's contract to provide managed behavioral healthcare services to Medicaid recipients and other beneficiaries of the Maricopa County Regional Behavioral Health Authority (the "Maricopa
Contract"). Under the Maricopa Contract, effective August 31, 2007 the

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

Company
was required to assume the operations of twenty-four behavioral health direct care facilities for a transitional period and to divest itself of these facilities over a two year
period. During March 2009, the Company began the operation of two additional behavioral health direct care facilities. At various dates in 2008 and 2009, the Company entered into agreements with three
separate Provider Network Organizations ("PNOs") to transition 20 of the 26 behavioral health direct care facilities to the PNOs over various dates. Fourteen of such direct care facilities have been
transitioned through April 2009 and the Company expects to divest itself of the remainder of these facilities before August 31, 2009.

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

The
managed behavioral healthcare business is managed based on the services provided and/or the customers served, through the following two segments:

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

Public Sector.The Managed Behavioral Healthcare Public Sector segment ("Public Sector") generally reflects services provided to
Medicaid recipients
under contracts with state and local governmental agencies. Public Sector contracts encompass either risk-based or ASO arrangements.

Radiology
Benefits Management

The
Radiology Benefits Management segment generally reflects the management of the delivery of diagnostic imaging services to ensure that such services are
clinically appropriate and cost effective. The Company's radiology benefits management services currently are provided under contracts with managed care companies, health insurers and other health
plans for some or all of their commercial, Medicaid and Medicare members. The Company has bid on contracts with state and local governmental agencies for the provision of such services to Medicaid
recipients. The Company has won one state Medicaid contract, which was implemented in July 2008. The Company offers its radiology benefits management services through ASO contracts, where the Company
provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the imaging services, and through risk-based contracts, where the
Company assumes all or a substantial portion of the responsibility for the cost of providing diagnostic imaging services.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

Specialty
Pharmaceutical Management

The
Specialty Pharmaceutical Management segment generally reflects the management of specialty drugs used in the treatment of cancer, multiple sclerosis,
hemophilia, infertility, rheumatoid arthritis, chronic forms of hepatitis and other diseases. Specialty pharmaceutical drugs represent high-cost injectible, infused, oral, or inhaled drugs
which traditional retail pharmacies often do not supply due to their high cost, sensitive handling, and storage needs. The Company's specialty pharmaceutical management services are provided under
contracts with managed care companies, health insurers and other health plans for some or all of their commercial, Medicare and Medicaid members. The Company's specialty pharmaceutical services
include (i) contracting and formulary optimization on behalf of health plans and pharmaceutical manufacturers; (ii) distributing specialty pharmaceutical drugs on behalf of health plans;
(iii) providing strategic consulting services to
health plans and pharmaceutical manufacturers; and (iv) providing oncology benefits management services to health plans.

Corporate
and Other

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

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 157 ("SFAS 157"), which provides guidance for using fair value to measure assets and liabilities. It also responds to investors' requests for expanded information about the extent to
which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"),
which delays the effective date of SFAS 157 by one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities. The adoption did not
have a material impact on the consolidated financial statements. On January 1, 2009, the Company adopted SFAS 157 for non-financial assets and non-financial
liabilities. The adoption did not have a material impact on the consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS 141(R)") and SFAS No. 160, "Non-controlling Interests in Consolidated
Financial Statements" ("SFAS 160"). SFAS 141(R) requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective
acquisition-date fair values and changes other practices under

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

SFAS 141,
some of which could have a material impact on how the Company accounts for future business combinations. SFAS 141(R) also requires additional disclosure of information
surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. SFAS 160 requires
entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. The Company adopted SFAS 141(R) and SFAS 160
simultaneously in the Company's year beginning January 1, 2009. Prior to 2009 and in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP")
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), reversals of both valuation allowances and unrecognized tax benefits
with respect to years prior to the Company's reorganization were recorded to goodwill. All other reversals of these balances were recorded as reductions to income tax expense. As a result of the
implementation of SFAS 141(R), beginning in 2009 all reversals of valuation allowances and unrecognized tax benefits are reflected as reductions to income tax expense, even if related to years
prior to the Company's reorganization. The adoption of SFAS 160 did not have a material impact on the consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, valuation allowances
for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual
results could differ from those estimates.

Managed Care Revenue

Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage
period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is
recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments
are identified, with the exception of retroactivity that can be reasonably estimated. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated
$593.3 million and $554.2 million for the three months ended March 31, 2008 and 2009, respectively.

Cost-Plus Contracts

The Company has certain cost-plus contracts with customers under which the Company recognizes revenue as costs are incurred
and as services are performed. Revenues from cost-plus contracts approximated $7.2 million and $7.5 million for the three months ended March 31, 2008 and 2009,
respectively.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

Block Grant Revenues

The Maricopa Contract is partially funded by federal, state and county block grant money, which represents annual appropriations. The
Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $30.6 million and
$25.5 million for the three months ended March 31, 2008 and 2009, respectively.

Distribution Revenue

The Company recognizes distribution revenue, which includes the co-payments received from members of the health plans the
Company serves, when the specialty pharmaceutical drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the Company's customer to pay for the specialty
pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund. Revenues from the distribution of specialty
pharmaceutical drugs on behalf of
health plans were $50.0 million and $56.6 million for the three months ended March 31, 2008 and 2009, respectively.

Performance-based Revenue

The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based
revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and
records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue
is recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were $3.9 million and $1.3 million
for the three months ended March 31, 2008 and 2009, respectively.

Significant Customers



The
Maricopa Contract generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the three months ended March 31, 2008
and 2009. In addition to the Maricopa Contract, the Company's contract with the State of Tennessee's TennCare program ("TennCare") generated net revenues that exceeded, in the aggregate, ten percent
of net revenues for the consolidated Company for the three months ended March 31, 2008. The Company also has a significant concentration of business from contracts with subsidiaries of
WellPoint, Inc. ("WellPoint") and with various counties in the State of Pennsylvania (the "Pennsylvania Counties") which are part of the Pennsylvania Medicaid program.

The
Maricopa Contract, which began September 1, 2007 and which extends through June 30, 2010, generated net revenues of $149.5 million and $168.5 million for
the three months ended March 31, 2008 and 2009, respectively.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

The
TennCare program is divided into three regions, and through March 31, 2007 the Company's TennCare contracts encompassed all of the TennCare membership for all three regions.
As of April 1, 2007 substantially all of the membership in the Middle Grand Region was re-assigned to managed care companies in accordance with contract awards by TennCare pursuant
to its request for proposals for the management of the integrated delivery of behavioral and physical medical care to the region. Substantially all of the membership in the West Grand and East Grand
Regions was similarly re-assigned to managed care companies in accordance with contract awards by TennCare effective November 1, 2008 and January 1, 2009, respectively. The
Company continues to manage behavioral healthcare services for children enrolled in TennCare Select High, statewide, as well as for certain out-of-state TennCare members
pursuant to contracts that extend through June 30, 2009. The Company recorded net revenues of $70.8 million and $12.8 million for the three months ended March 31, 2008 and
2009, respectively, from its TennCare contracts.

Total
net revenues from the Company's contracts with WellPoint were $51.6 million and $44.0 million during the three months ended March 31, 2008 and 2009,
respectively, including radiology benefits management revenue of $42.0 million and $40.6 million, respectively.

In
July 2007, WellPoint acquired a radiology benefits management company, and has expressed its intent to in-source all of its radiology benefits management contracts when
such contracts expire. The Company had several radiology benefits management contracts with WellPoint including one that converted from an ASO arrangement to a risk arrangement effective
July 1, 2007. Such risk contract originally had a three-year term through June 30, 2010, and cannot be terminated early, except for cause, as defined in the agreement. The
term of this risk contract has been extended through December 31, 2010. The Company's other radiology benefits management ASO contracts with WellPoint generated $4.6 million of net
revenues for the three months ended March 31, 2008, and these ASO contracts terminated at various dates in 2008.

Net
revenues from the Pennsylvania Counties in the aggregate totaled $71.3 million and $74.8 million for the three months ended March 31, 2008 and 2009,
respectively.



Two
customers generated greater than ten percent of Commercial net revenues for the three months ended March 31, 2008 and 2009. The first customer has a
contract that
extends through December 31, 2012 and generated net revenues of $49.6 million and $57.3 million for the three months ended March 31, 2008 and 2009, respectively. The second
customer has a contract that extends through June 30, 2009 and generated net revenues of $22.1 million and $21.9 million for the three months ended March 31, 2008 and 2009,
respectively. On April 30, 2009, the Company and this customer entered into a new contract with a term expiring June 30, 2014, terminable without cause upon 180 days' notice after
the third anniversary of the contract.

In
addition to the Maricopa Contract and TennCare, one other customer generated net revenues greater than ten percent of the net revenues for the Public Sector segment for the three
months ended March 31, 2008 and 2009. This customer has a contract that extends through December 31, 2009 and generated net revenues of $37.2 million and $36.0 million,
respectively. Pursuant to an RFP process,

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

the
customer notified the Company of its intent to award the contract to provide servicing beyond December 31, 2009. The award is subject to the negotiation and execution of a contract between
the Company and the customer. The proposed new contract will have a term of 2.5 years beginning on January 1, 2010 with options for the customer to extend the term of the contract for
three one year terms.

In
addition to WellPoint, one other customer generated greater than ten percent of the net revenues for the Radiology Benefits Management segment for the three months ended
March 31, 2008 and 2009. This customer has a contract that extends through May 31, 2011 and generated net revenues of $24.9 million and $22.6 million for the three months
ended March 31, 2008 and 2009, respectively.

Included
in the Company's Specialty Pharmaceutical Management segment are five customers that each exceeded ten percent of the net revenues for this segment for the three months ended
March 31, 2008. Four of such customers generated $17.1 million, $13.6 million, $7.5 million, and $7.1 million of net revenues during the three months ended
March 31, 2008. The other contract generated net revenues of $7.2 million for the three months ended March 31, 2008, and this contract terminated as of December 31, 2008.
For the three months ended March 31, 2009, four customers each exceeded ten percent of the net revenues for this segment. Four of such customers generated $20.2 million,
$13.9 million, $9.3 million, and $7.3 million of net revenues during the three months ended March 31, 2009. The previously mentioned contract that terminated as of
December 31, 2008 generated net revenues for run-off activity of $6.6 million for the three months ended March 31, 2009.

Fair Value Measurements

The Company adopted SFAS 157 on January 1, 2008. SFAS 157 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and
comparability of fair value measurements and the related disclosures. Under generally accepted accounting practices, certain assets and liabilities must be measured at fair value, and SFAS 157
details the disclosures that are required for items measured at fair value.

The
Company has various financial instruments that must be measured under the new fair value standard including investments, which consist primarily of U.S. Government securities,
obligations of government-sponsored enterprises, corporate debt securities and certificates of deposit. The Company currently does not have non-financial assets and
non-financial liabilities that are required to be measured at fair value on a recurring basis. Pursuant to SFAS 157, financial 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 we have 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

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

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 our 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 March 31, 2009 (in thousands):

Fair Value Measurements at March 31, 2009Level 1

Level 2

Level 3

TotalCash and Cash Equivalents(1)

$


$
116,409

$


$
116,409Restricted Cash(2)





100,948





100,948Investments:U.S. Government and agency securities


685








685Obligations of government-sponsored enterprises(3)





50,570





50,570Corporate debt securities





184,349





184,349Certificates of deposit





26,269





26,269$
685

$
478,545

$


$
479,230


---

Income Taxes

The Company's effective income tax rate was 41.6 percent and 42.3 percent for the three months ended March 31,
2008 and 2009, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also
accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

Stock Compensation

The Company measures stock compensation under SFAS No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R"). At
December 31, 2008 and March 31, 2009, the Company had equity-based employee incentive plans, which are described more fully in Note 7 in the Company's Annual Report on
Form 10-K for the year ended December 31, 2008. Under SFAS 123R, the Company recorded stock compensation expense of $12.0 million and $6.4 million for
the three months ended March 31, 2008

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

and
2009, respectively. Stock compensation expense recognized in the condensed consolidated statements of income for the three months ended March 31, 2008 and 2009 has been reduced for
estimated forfeitures, estimated at two percent and five percent, respectively.

The
weighted average grant date fair value of all stock options granted during the three months ended March 31, 2009 was $8.69 as estimated using the Black-Scholes-Merton option
pricing model, which also assumed an expected volatility of 30.2 percent based on the historical volatility of the Company's stock price.

SFAS 123R
also requires the benefits of tax deductions in excess of recognized stock compensation expense to be reported as a financing cash flow, rather than as an operating cash
flow. In the three months ended March 31, 2008 and 2009, approximately $0.1 million and $1.1 million of benefits of such tax deductions related to stock compensation expense were
realized and as such were reported as financing cash flows, respectively.

Summarized
information related to the Company's stock options for the three months ended March 31, 2009 is as follows:

Options

Weighted Average
Exercise PriceOutstanding, beginning of period


4,668,490

$
39.82Granted


1,095,769


33.08Cancelled


(167,007
)

41.53Exercised


(29,435
)

30.99Outstanding, end of period


5,567,817


38.49Vested and expected to vest at end of period


5,386,817


38.53Exercisable, end of period


2,916,350

$
39.09


All
of the Company's options granted during the three months ended March 31, 2009 vest ratably on each anniversary date over the three years subsequent to grant, and all have a
ten year life.

Summarized
information related to the Company's nonvested restricted stock awards for the three months ended March 31, 2009 is as follows:

Shares

Weighted
Average
Grant Date
Fair ValueOutstanding, beginning of period


321,935

$
42.92Awarded


869


33.51Vested


(25,717
)

35.83Forfeited


(481
)

34.57Outstanding, ending of period


296,606

$
43.52


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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

Summarized information related to the Company's nonvested restricted stock units for the three months ended March 31, 2009 is as follows:

Shares

Weighted
Average
Grant Date
Fair ValueOutstanding, beginning of period


176,112

$
38.72Awarded


121,065


32.91Vested


(76,471
)

32.60Forfeited


(13,871
)

39.78Outstanding, ending of period


206,835

$
37.51


Restricted
stock awards and restricted stock units granted during the three months ended March 31, 2009 vest ratably on each anniversary date over the three years subsequent to
grant.

Long Term Debt and Capital Lease Obligations

On April 30, 2008, the Company entered into a credit facility with Deutsche Bank AG and Citigroup Global Markets Inc.
that provided for a $100.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with a sublimit of up to $30.0 million for revolving
loans (the "2008 Credit Facility"). On April 30, 2008, the Company's credit agreement with Deutsche Bank AG dated January 5, 2004, as amended (the "Credit Agreement") was terminated.
Borrowings under the 2008 Credit Facility, if any, matured on April 29, 2009. The 2008 Credit Facility was guaranteed by substantially all of the subsidiaries of the Company and was secured by
substantially all of the assets of the Company and the subsidiary guarantors.

Under
the 2008 Credit Facility, the annual interest rate on Revolving Loan borrowings bear interest at a rate equal to the sum of (i) a borrowing margin of 1.00 percent
plus (ii) (A) in the case of U.S. dollar
denominated loans, the higher of the prime rate or one-half of one percent in excess of the overnight "federal funds" rate, or (B) in the case of Eurodollar denominated loans, an
interest rate which is a function of the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its
discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 1.125 percent. The commitment commission on the 2008 Credit Facility was
0.375 percent of the unused Revolving Loan Commitment.

At
March 31, 2009, the annual interest rate on the Company's capital lease obligation due through 2011 was 6.87 percent. There were no Revolving Loan borrowings at
March 31, 2009.

On
April 29, 2009, the Company entered into an amendment to the 2008 Credit Facility with Deutsche Bank AG, Citibank, N.A., and Bank of America, N.A. that provides for an
$80.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with a sublimit of up to $30.0 million for revolving loans (the "2009 Credit
Facility"). Borrowings under the 2009 Credit Facility will mature on April 28, 2010. The 2009 Credit Facility is guaranteed by

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE AGeneral (Continued)

substantially
all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors.

Under
the 2009 Credit Facility, the annual interest rate on Revolving Loan borrowings bear interest at a rate equal to (i) in the case of U.S. dollar denominated loans, the sum of
a borrowing margin of 2.25 percent plus the higher of the prime rate or one-half of one percent in excess of the overnight "federal funds" rate, or (ii) in the case of
Eurodollar denominated loans, the sum of a borrowing margin of 3.25 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar
denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 3.375 percent. The commitment
commission on the 2009 Credit Facility is 0.625 percent of the unused Revolving Loan Commitment.

NOTE BNet Income per Common Share

The following tables reconcile income (numerator) and shares (denominator) used in the computations of net income per common share (in thousands, except per share data):

Three Months
Ended
March 31,2008

2009Numerator:Net income

$
17,244

$
13,560Denominator:Weighted average number of common shares outstandingbasic


39,736


36,208Common stock equivalentsstock options


394


86Common stock equivalentswarrants


167


87Common stock equivalentsrestricted stock


7


5Common stock equivalentsrestricted stock units


36


Common stock equivalentsemployee stock purchase plan





Weighted average number of common shares outstandingdiluted


40,340


36,386Net income per common sharebasic

$
0.43

$
0.37Net income per common sharediluted

$
0.43

$
0.37


The
weighted average number of common shares outstanding for the three months ended March 31, 2008 and 2009 was calculated using outstanding shares of the Company's Ordinary
Common Stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2008 and 2009 represent stock
options to purchase shares of the Company's Ordinary Common Stock, restricted stock awards and restricted stock units, stock to be purchased under the Employee Stock Purchase Plan and shares of
Ordinary Common Stock related to certain warrants issued on January 5, 2004.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE BNet Income per Common Share (Continued)

For
the three months ended March 31, 2009, the Company had additional potential dilutive securities outstanding representing 4.3 million options, 0.3 million
restricted stock awards and 0.3 million restricted stock units 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 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 continuing operations before stock compensation expense, depreciation and amortization, interest expense, interest income, 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. Intersegment sales and transfers are not significant.

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

Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Corporate
and
Other

ConsolidatedThree Months Ended March 31, 2008Net revenue

$
159,603

$
358,238

$
75,499

$
56,950

$


$
650,290Cost of care


(81,573
)

(323,174
)

(49,327
)







(454,074
)Cost of goods sold











(46,824
)




(46,824
)Direct service costs


(37,425
)

(16,623
)

(13,100
)

(5,920
)




(73,068
)Other operating expenses














(36,680
)

(36,680
)Stock compensation expense(1)


423


174


505


2,104


8,812


12,018Segment profit (loss)

$
41,028

$
18,615

$
13,577

$
6,310

$
(27,868
)
$
51,662




Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Corporate
and
Other

ConsolidatedThree Months Ended March 31, 2009Net revenue

$
158,753

$
321,860

$
73,559

$
65,343

$


$
619,515Cost of care


(89,786
)

(292,146
)

(49,786
)







(431,718
)Cost of goods sold











(52,072
)




(52,072
)Direct service costs


(38,525
)

(17,296
)

(13,038
)

(6,394
)




(75,253
)Other operating expenses














(27,811
)

(27,811
)Stock compensation expense(1)


332


235


370


2,082


3,413


6,432Segment profit (loss)

$
30,774

$
12,653

$
11,105

$
8,959

$
(24,398
)
$
39,093


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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2009

(Unaudited)

NOTE CBusiness Segment Information (Continued)

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

Three Months Ended
March 31,2008

2009Segment profit

$
51,662

$
39,093Stock compensation expense


(12,018
)

(6,432
)Depreciation and amortization


(14,374
)

(11,043
)Interest expense


(1,215
)

(427
)Interest income


5,493


2,311Income from continuing operations before income taxes

$
29,548

$
23,502


NOTE DCommitments and Contingencies

Legal

The management and administration of the delivery of specialty managed healthcare entails significant risks of
liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of
business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to
malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial
damages and therefore require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions, litigation and claims relating
to its operations and business practices. In the opinion of management, the
Company has recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably
estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company's financial condition or results of operations; however, there
can be no assurance in this regard.

Stock Repurchase

On July 30, 2008 the Company's board of directors approved a stock repurchase plan which authorizes the Company
to purchase up to $200 million of its outstanding common stock through January 31, 2010. Stock repurchases under the program may 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 deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice. Pursuant to this program, the Company made open market
purchases of 1,799,933 shares of the Company's common stock at an average share price of $34.32 per share for an aggregate cost of $61.8 million (excluding broker commissions) during the three
months ended March 31, 2009. As of March 31, 2009, the amount of stock repurchases that remained under the program was $2.2 million and such remaining repurchases were made during
the period subsequent to March 31, 2009, completing the repurchase program as of April 7, 2009.

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Table of Contents

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 Health Services, Inc.
("Magellan"), and its majority-owned subsidiaries and all variable interest entities ("VIEs") for which Magellan is the primary beneficiary (together with Magellan, the "Company") should be read
together with the Condensed Consolidated Financial Statements and the notes to the Condensed 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, 2008, which was filed with the Securities and Exchange Commission
("SEC") on February 27, 2009.

Forward-Looking Statements

This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act
of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (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:



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Table of Contents



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, 2008. 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.

Business Overview

The Company is engaged in the specialty managed healthcare business. Through 2005, the Company predominantly operated in the managed
behavioral healthcare business. During 2006, the Company expanded into radiology benefits management and specialty pharmaceutical management as a result of certain acquisitions. The Company provides
services to health plans, insurance companies, corporations, labor unions and various governmental agencies. The Company's business is divided into the following five segments, based on the services
it provides and/or the customers that it serves, as described below.

Managed
Behavioral Healthcare

Two
of the Company's segments are in the managed behavioral healthcare business. This line of business generally reflects the Company's coordination and
management of the delivery of behavioral healthcare treatment services that are provided through its contracted network of third-party treatment providers, which includes psychiatrists, psychologists,
other behavioral health professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities. The treatment services
provided through the Company's provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial
hospitalization services), inpatient treatment and crisis intervention services. The Company generally does not directly provide, or own any provider of, treatment services except as relates to the
Company's contract to provide managed behavioral healthcare services to Medicaid recipients and other beneficiaries of the Maricopa County Regional Behavioral Health Authority (the "Maricopa
Contract"). Under the Maricopa Contract, effective August 31, 2007 the Company was required to assume the operations of twenty-four behavioral health direct care facilities for a
transitional period and to divest itself of these facilities over a two year period. During March 2009, the Company began the operation of two additional behavioral health direct care facilities. At
various dates in 2008 and 2009, the Company entered into agreements with three separate Provider

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Table of Contents

Network
Organizations ("PNOs") to transition 20 of the 26 behavioral health direct care facilities to the PNOs over various dates. Fourteen of such direct care facilities have been transitioned
through April 2009 and the Company expects to divest itself of the remainder of these facilities before August 31, 2009.

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

The
managed behavioral healthcare business is managed based on the services provided and/or the customers served, through the following two segments:

Commercial.The Managed Behavioral Healthcare Commercial segment ("Commercial") generally reflects managed behavioral healthcare
services and EAP
services provided under contracts with managed care companies, health insurers and other health plans for some or all of their commercial, Medicaid and Medicare members, as well as with employers,
including corporations and governmental agencies, and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements. As of March 31, 2009, Commercial's covered
lives were 4.0 million, 13.7 million and 20.8 million for risk-based, EAP and ASO products, respectively. For the three months ended March 31, 2009,
Commercial's revenue was $100.9 million, $26.2 million and $31.7 million for risk-based, EAP and ASO products, respectively.

Public Sector.The Managed Behavioral Healthcare Public Sector segment ("Public Sector") generally reflects services provided to
Medicaid recipients
under contracts with state and local governmental agencies. Public Sector contracts encompass either risk-based or ASO arrangements. As of March 31, 2009, Public Sector's covered
lives were 1.4 million and 0.3 million for risk-based and ASO products, respectively. For the three months ended March 31, 2009, Public Sector's revenue was
$320.3 million and $1.6 million for risk-based and ASO products, respectively.

Radiology
Benefits Management

The
Radiology Benefits Management segment generally reflects the management of the delivery of diagnostic imaging services to ensure that such services are
clinically appropriate and cost effective. The Company's radiology benefits management services currently are provided under contracts with managed care companies, health insurers and other health
plans for some or all of their commercial, Medicaid and Medicare members. The Company has bid on contracts with state and local governmental agencies for the provision of such services to Medicaid
recipients. The Company has won one state Medicaid contract, which was implemented in July 2008. The Company offers its radiology benefits management services through ASO contracts, where the Company
provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the imaging services, and through risk-based contracts, where the
Company assumes all or a substantial portion of the responsibility for the cost of providing diagnostic imaging services. As of March 31, 2009, covered lives for Radiology Benefits Management
were 2.4 million and 14.9 million for risk-based and ASO products, respectively. For the three months ended March 31, 2009, revenue for Radiology Benefits Management
was $60.0 million and $13.6 million for risk-based and ASO products, respectively.

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Specialty
Pharmaceutical Management

The
Specialty Pharmaceutical Management segment generally reflects the management of specialty drugs used in the treatment of cancer, multiple sclerosis,
hemophilia, infertility, rheumatoid arthritis, chronic forms of hepatitis and other diseases. Specialty pharmaceutical drugs represent high-cost injectible, infused, oral, or inhaled drugs
which traditional retail pharmacies often do not supply due to their high cost, sensitive handling, and storage needs. The Company's specialty pharmaceutical management services are provided under
contracts with managed care companies, health insurers and other health plans for some or all of their commercial, Medicare and Medicaid members. The Company's specialty pharmaceutical services
include (i) contracting and formulary optimization on behalf of health plans and pharmaceutical manufacturers; (ii) distributing specialty pharmaceutical drugs on behalf of health plans;
(iii) providing strategic consulting services to health plans and pharmaceutical manufacturers; and (iv) providing oncology benefits management services to health plans. The Company's
Specialty Pharmaceutical Management segment had contracts with 40 health plans as of March 31, 2009.

Corporate
and Other

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

Significant Customers



The
Maricopa Contract generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the three months
ended March 31, 2008 and 2009. In addition to the Maricopa Contract, the Company's contract with the State of Tennessee's TennCare program ("TennCare") generated net revenues that exceeded, in
the aggregate, ten percent of net revenues for the consolidated Company for the three months ended March 31, 2008. The Company also has a significant concentration of business from contracts
with subsidiaries of WellPoint, Inc. ("WellPoint") and with various counties in the State of Pennsylvania (the "Pennsylvania Counties") which are part of the Pennsylvania Medicaid program.

The
Maricopa Contract, which began September 1, 2007 and which extends through June 30, 2010, generated net revenues of $149.5 million and $168.5 million for
the three months ended March 31, 2008 and 2009, respectively.

The
TennCare program is divided into three regions, and through March 31, 2007 the Company's TennCare contracts encompassed all of the TennCare membership for all three regions.
As of April 1, 2007 substantially all of the membership in the Middle Grand Region was re-assigned to managed care companies in accordance with contract awards by TennCare pursuant
to its request for proposals for the management of the integrated delivery of behavioral and physical medical care to the region. Substantially all of the membership in the West Grand and East Grand
Regions was similarly re-assigned to managed care companies in accordance with contract awards by TennCare
effective November 1, 2008 and January 1, 2009, respectively. The Company continues to manage behavioral healthcare services for children enrolled in TennCare Select High, statewide, as
well as for certain out-of-state TennCare members pursuant to contracts that extend through June 30, 2009. The Company recorded net revenues of $70.8 million and
$12.8 million for the three months ended March 31, 2008 and 2009, respectively, from its TennCare contracts.

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Total
net revenues from the Company's contracts with WellPoint were $51.6 million and $44.0 million during the three months ended March 31, 2008 and 2009,
respectively, including radiology benefits management revenue of $42.0 million and $40.6 million, respectively.

In
July 2007, WellPoint acquired a radiology benefits management company, and has expressed its intent to in-source all of its radiology benefits management contracts when
such contracts expire. The Company had several radiology benefits management contracts with WellPoint including one that converted from an ASO arrangement to a risk arrangement effective
July 1, 2007. Such risk contract originally had a three-year term through June 30, 2010, and cannot be terminated early, except for cause, as defined in the agreement. The
term of this risk contract has been extended through December 31, 2010. The Company's other radiology benefits management ASO contracts with WellPoint generated $4.6 million of net
revenues for the three months ended March 31, 2008, and these ASO contracts terminated at various dates in 2008.

Net
revenues from the Pennsylvania Counties in the aggregate totaled $71.3 million and $74.8 million for the three months ended March 31, 2008 and 2009,
respectively.



Two
customers generated greater than ten percent of Commercial net revenues for the three months ended March 31, 2008 and 2009. The first customer has a
contract that extends through December 31, 2012 and generated net revenues of $49.6 million and $57.3 million for the three months ended March 31, 2008 and 2009,
respectively. The second customer has a contract that extends through June 30, 2009 and generated net revenues of $22.1 million and $21.9 million for the three months ended
March 31, 2008 and 2009, respectively. On April 30, 2009, the Company and this customer entered into a new contract with a term expiring June 30, 2014, terminable without cause
upon 180 days' notice after the third anniversary of the contract.

In
addition to the Maricopa Contract and TennCare, one other customer generated net revenues greater than ten percent of the net revenues for the Public Sector segment for the three
months ended March 31, 2008 and 2009. This customer has a contract that extends through December 31, 2009 and generated net revenues of $37.2 million and $36.0 million,
respectively. Pursuant to an RFP process, the customer notified the Company of its intent to award the contract to provide servicing beyond December 31, 2009. The award is subject to the
negotiation and execution of a contract between the Company and the customer. The proposed new contract will have a term of 2.5 years beginning on January 1, 2010 with options for the
customer to extend the term of the contract for three one year terms.

In
addition to WellPoint, one other customer generated greater than ten percent of the net revenues for the Radiology Benefits Management segment for the three months ended
March 31, 2008 and 2009. This customer has a contract that extends through May 31, 2011 and generated net revenues of $24.9 million and $22.6 million for the three months
ended March 31, 2008 and 2009, respectively.

Included
in the Company's Specialty Pharmaceutical Management segment are five customers that each exceeded ten percent of the net revenues for this segment for the three months ended
March 31, 2008. Four of such customers generated $17.1 million, $13.6 million, $7.5 million, and $7.1 million of net revenues during the three months ended
March 31, 2008. The other contract generated net revenues of $7.2 million for the three months ended March 31, 2008, and this contract terminated as of December 31, 2008.
For the three months ended March 31, 2009, four customers each exceeded ten percent of the net revenues for this segment. Four of such customers generated $20.2 million,
$13.9 million, $9.3 million, and $7.3 million of net revenues during the three months ended March 31, 2009. The previously mentioned contract that terminated as of
December 31, 2008 generated net revenues for run-off activity of $6.6 million for the three months ended March 31, 2009.

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Off-Balance Sheet Arrangements

The Company does not maintain any off-balance sheet arrangements that have, or are reasonably likely to have, a current or
future effect on the Company's finances that is material to investors.

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. 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 27, 2009.

Income Taxes

The Company's effective income tax rate was 41.6 percent and 42.3 percent for the three months ended March 31,
2008 and 2009, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also
accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

The
Company files a consolidated federal income tax return for the Company and its eighty-percent or more owned subsidiaries, and the Company and its subsidiaries file income tax
returns in various states and local jurisdictions. With few exceptions, the Company is no longer subject to state or local income tax examinations by tax authorities for years ended prior to
December 31, 2005. The statute of limitations regarding the assessment of federal and most state and local income taxes for the year ended December 31, 2005 will expire during 2009.

Prior
to 2009 and in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), reversals of both valuation allowances and unrecognized tax benefits with respect to years prior to the Company's
reorganization were recorded to goodwill. All other reversals of these balances were recorded as reductions to income tax expense. As a result of implementation of SFAS 141(R), beginning in
2009 all reversals of valuation allowances and unrecognized tax benefits will be reflected as reductions to income tax expense, even if related to years prior to the Company's reorganization.

24

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Table of Contents

Results of Operations

The Company evaluates performance of its segments based on profit or loss from continuing operations before stock compensation expense,
depreciation and amortization, interest expense, interest income, 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. Intersegment sales and transfers are not significant. The Company's segments are defined above.

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

Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Corporate
and
Other

ConsolidatedThree Months Ended March 31, 2008Net revenue

$
159,603

$
358,238

$
75,499

$
56,950

$


$
650,290Cost of care


(81,573
)

(323,174
)

(49,327
)







(454,074
)Cost of goods sold











(46,824
)




(46,824
)Direct service costs


(37,425
)

(16,623
)

(13,100
)

(5,920
)




(73,068
)Other operating expenses














(36,680
)

(36,680
)Stock compensation expense(1)


423


174


505


2,104


8,812


12,018Segment profit (loss)

$
41,028

$
18,615

$
13,577

$
6,310

$
(27,868
)
$
51,662




Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Corporate
and
Other

ConsolidatedThree Months Ended March 31, 2009Net revenue

$
158,753

$
321,860

$
73,559

$
65,343

$


$
619,515Cost of care


(89,786
)

(292,146
)

(49,786
)







(431,718
)Cost of goods sold











(52,072
)




(52,072
)Direct service costs


(38,525
)

(17,296
)

(13,038
)

(6,394
)




(75,253
)Other operating expenses














(27,811
)

(27,811
)Stock compensation expense(1)


332


235


370


2,082


3,413


6,432Segment profit (loss)

$
30,774

$
12,653

$
11,105

$
8,959

$
(24,398
)
$
39,093


---

Three Months Ended
March 31,2008

2009Segment profit

$
51,662

$
39,093Stock compensation expense


(12,018
)

(6,432
)Depreciation and amortization


(14,374
)

(11,043
)Interest expense


(1,215
)

(427
)Interest income


5,493


2,311Income from continuing operations before income taxes

$
29,548

$
23,502


25

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Table of Contents

Quarter ended March 31, 2009 ("Current Year Quarter"), compared to the quarter ended March 31, 2008 ("Prior Year Quarter")

Commercial

Net Revenue

Net revenue related to Commercial decreased by 0.5 percent or $0.9 million from the Prior Year Quarter to the Current
Year Quarter. The decrease in revenue is mainly due to terminated contracts of $9.5 million and favorable retroactive rate and membership adjustments of $3.9 million recorded in the
Prior Year Quarter, which decreases were partially offset by increased membership from existing customers of $7.3 million, favorable retroactive membership and rate adjustments of
$0.8 million recorded in the Current Year Quarter, revenue from new contracts implemented after (or during) the Prior Year Quarter of $0.8 million, favorable rate changes of
$0.6 million, and other net favorable variances of $3.0 million.

Cost of Care

Cost of care increased by 10.1 percent or $8.2 million from the Prior Year Quarter to the Current Year Quarter. The
increase in cost of care is primarily due to increased membership from existing customers of $4.9 million, unfavorable medical claims development for the Prior Year Quarter which was recorded
after the Prior Year Quarter of $1.5 million, unfavorable prior period medical claims development recorded in the Current Year Quarter of $0.4 million, and care trends and other net
variances of $13.2 million, which increases were partially offset by terminated contracts of $6.2 million and unfavorable prior period medical claims development recorded in the Prior
Year Quarter of $5.6 million. Cost of care increased as a percentage of risk revenue (excluding EAP business) from 73.8 percent in the Prior Year Quarter to 81.4 percent in the
Current Year Quarter, mainly due to unfavorable care trends, out of period care development, and changes in business mix.

Direct Service Costs

Direct service costs increased by 2.9 percent or $1.1 million from the Prior Year Quarter to the Current Year Quarter.
The increase in direct service costs is mainly attributable to cost incurred to claims processing costs. Direct service costs increased as a percentage of revenue from 23.4 percent in the Prior
Year Quarter to 24.3 percent in the Current Year Quarter. The increase in the percentage of direct service costs in relation to revenue is mainly due to changes in business mix.

Public Sector

Net Revenue

Net revenue related to Public Sector decreased by 10.2 percent or $36.4 million from the Prior Year Quarter to the
Current Year Quarter. This decrease is primarily due to the net impact of terminated contracts offset by increased membership from existing customers of $39.2 million, favorable retroactive
rate changes recorded in the Prior Year Quarter of $3.6 million, unfavorable retroactive rate and membership changes recorded in the Current Year Quarter of $2.1 million, and other net
unfavorable variances of $0.2 million, which decreases was partially offset by net favorable rate and contract funding changes of $8.7 million.

Cost of Care

Cost of care decreased by 9.6 percent or $31.0 million from the Prior Year Quarter to the Current Year Quarter. This
decrease is primarily due to care associated with terminated contracts offset by increased membership from existing customers of $32.4 million, favorable medical claims development for the
Prior Year Quarter which was recorded after the Prior Year Quarter of $5.5 million, care

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associated
with retroactive rate changes for contracts with minimum care requirements recorded in the Prior Year Quarter of $3.1 million, and unfavorable prior period medical claims development
recorded in the Prior Year Quarter of $1.2 million, which decreases were partially offset by unfavorable prior period medical claims development recorded in the Current Year Quarter of
$3.1 million, care associated with rate changes for contracts with minimum cost of care requirements of $3.9 million, and care trends and other net unfavorable variances of
$4.2 million. Cost of care increased as a percentage of risk revenue from 90.5 percent in the Prior Year Quarter to 91.2 percent in the Current Year Quarter mainly due to business
mix and net unfavorable care development.

Direct Service Costs

Direct service costs increased by 4.0 percent or $0.7 million from the Prior Year Quarter to the Current Year Quarter.
The increase in direct service costs is primarily due to increased costs associated with the Maricopa Contract. Direct service costs increased as a percentage of revenue from 4.6 percent for
the Prior Year Quarter, partially offset by costs from terminated contracts to 5.4 percent in the Current Year Quarter mainly due to business mix.

Radiology Benefits Management

Net Revenue

Net revenue related to Radiology Benefits Management decreased by 2.6 percent or $1.9 million from the Prior Year Quarter
to the Current Year Quarter. This decrease is primarily due to decreased membership from existing customers of $5.8 million, terminated contracts of $3.2 million, and other net decreases
of $1.0 million, which decreases were partially offset by favorable rate changes of $8.1 million (including $1.4 million of retroactive rate changes recorded in the Current Year
Quarter).

Cost of Care

Cost of care increased by 0.9 percent or $0.5 million from the Prior Year Quarter to the Current Year Quarter. This
increase is primarily attributed to favorable prior period medical claims development of $1.1 million recorded in the Prior Year Quarter and care trends and other net variances of
$7.3 million, which increases were partially offset by decreased membership from existing customers of $4.9 million, favorable medical claims development for the Prior Year Quarter which
was recorded after the Prior Year Quarter of $2.0 million, and favorable prior period medical claims development recorded in the Current Year Quarter of $1.0 million. Cost of care
increased as a percentage of risk revenue from 82.6 percent in the Prior Year Quarter to 83.0 percent in the Current Year Quarter mainly due to care trends.

Direct Service Costs

Direct service costs decreased by 0.5 percent or $0.1 million from the Prior Year Quarter to the Current Year Quarter. As
a percentage of revenue, direct service costs increased from 17.4 percent in the Prior Year Quarter to 17.7 percent in the Current Year Quarter, mainly due to business mix.

Specialty Pharmaceutical Management

Net Revenue

Net revenue related to Specialty Pharmaceutical Management increased by 14.7 percent or $8.4 million from the Prior Year
Quarter to the Current Year Quarter. This increase is primarily due to increased distribution activity from new and existing customers of $9.4 million, and increased consulting and rebate
revenue of $1.6 million which increases were partially offset by terminated distribution contracts of $2.6 million.

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Table of Contents

Cost of Goods Sold

Cost of goods sold increased by 11.2 percent or $5.2 million from the Prior Year Quarter to the Current Year Quarter.
This increase is primarily due to increased distribution activity from new and existing customers of $8.6 million, which increase was partially offset by terminated contracts of
$2.4 million and other net favorable variances of $1.0 million. As a percentage of the portion of net revenue that relates to distribution activity, cost of goods sold decreased from
93.6 percent in the Prior Year Quarter to 91.9 percent in the Current Year Quarter, mainly due to business mix.

Direct Service Costs

Direct service costs increased by 8.0 percent or $0.5 million from the Prior Year Quarter to the Current Year Quarter.
This increase is primarily due to expenses required to support the aforementioned increases to revenue. As a percentage of revenue, direct service costs decreased from 10.4 percent in the Prior
Year Quarter to 9.8 percent in the Current Year Quarter.

Corporate and Other

Other Operating Expenses

Other operating expenses related to the Corporate and Other Segment decreased by 24.2 percent or $8.9 million from the
Prior Year Quarter to the Current Year Quarter. The decrease results primarily from prior year expenses incurred pursuant to the former Chief Executive Officer's employment agreement in relation to
his service to the Company ending of $10.1 million (including $5.4 million of stock compensation expense related to the acceleration of vesting for certain equity awards), which decrease
was partially offset by other net unfavorable variances of $1.2 million. As a percentage of total net revenue, other operating expenses decreased from 5.6 percent for the Prior Year
Quarter to 4.5 percent for the Current Year Quarter, primarily due to prior year expenses incurred pursuant to the former Chief Executive Officer's employment agreement.

Depreciation and Amortization

Depreciation and amortization expense decreased by 23.2 percent or $3.3 million from the Prior Year Quarter to the
Current Year Quarter, primarily due to assets that became fully depreciated as of December 31, 2008.

Interest Expense

Interest expense decreased by 64.9 percent or $0.8 million from the Prior Year Quarter to the Current Year Quarter,
mainly due to reductions in outstanding debt balances as a result of scheduled payments and lower interest rates in the Current Year Quarter.

Interest Income

Interest income decreased by $3.2 million from the Prior Year Quarter to the Current Year Quarter, mainly due to lower yields.

Income Taxes

The Company's effective income tax rate was 41.6 percent in the Prior Year Quarter and 42.3 percent in the Current Year
Quarter. The Prior Year Quarter and Current Year Quarter effective income tax rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences
between book and tax income.

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Table of Contents

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 Statements" as well as a variety of other factors including: (i) changes in utilization
levels by enrolled members of the Company's risk-based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective
membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price
competition in general); and (vi) changes in estimates regarding medical costs and incurred but not yet reported medical claims.

Care Trends.The Company expects that the care trend factors for 2009 for Commercial will be 7 to 9 percent, Public Sector will be
3 to
5 percent, and Radiology Benefits Management will be 10 to 13 percent.

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 variable interest rate borrowings under the Company's credit facility with Deutsche Bank AG and Citigroup Global Markets Inc. dated April 30, 2008 (the "2008 Credit
Facility"). Based on the amount of cash equivalents and investments and the borrowing levels under the 2008 Credit Facility as of March 31, 2009, 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 provided by operating activities of $12.4 million and $58.6 million for
the Prior
Year Quarter and Current Year Quarter, respectively. The $46.2 million increase in operating cash flows from the Prior Year Quarter to the Current Year Quarter is primarily attributable to the
shift of restricted cash to restricted investments, which results in an operating cash flow source that is directly offset by an investing cash flow use. During the Prior Year Quarter,
$10.9 million of restricted cash was shifted to restricted investments as compared to the Current Year Quarter in which $37.5 million of restricted cash was shifted to restricted
investments, which results in a net increase in operating cash flows of $26.6 million. The Prior Year Quarter included restricted cash funding of $15.0 million for a risk radiology
contract, the run-out of net contract liabilities associated with terminated Commercial contracts of $11.4 million and the net funding of restricted cash of $10.6 million
associated with the Company's regulated entities. Partially offsetting these items is the decrease in Segment Profit of $12.6 from the Prior Year Quarter and other net unfavorable variances of
$4.8 million primarily associated with working capital changes.

During
the Current Year Quarter, the Company's restricted cash decreased $64.4 million. The change in restricted cash is attributable to the shift of $37.5 million in
restricted cash to restricted investments, a reduction in restricted cash of $22.9 million associated with the Company's regulated entities and other net decreases of $4.0 million. In
regards to the decrease in restricted cash associated with the Company's regulated entities, $24.0 million is offset by changes in other assets and liabilities, primarily medical claims payable
and other medical liabilities, thus having no impact on operating cash flows. Partially offsetting these reductions is the net funding of $1.1 million in additional restricted cash associated
with the Company's regulated entities.

Investing Activities.The Company utilized $8.0 million and $5.3 million during the Prior Year Quarter and Current Year
Quarter,
respectively, for capital expenditures. The majority of the decrease in capital expenditures of $2.7 million is attributable to capital expenditures incurred during the Prior Year Quarter of
$1.5 million associated with the Maricopa Contract. Most of the remainder of the

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capital
expenditures for the Prior Year Quarter and the majority of capital expenditures for the Current Year Quarter related to management information systems and related equipment.

During
the Prior Year Quarter, the Company received net cash of $18.1 million from the net maturity of "available for sale" investments. During the Current Year Quarter, the
Company used net cash of $29.0 million for the purchase of "available for sale" investments. The net purchase of "available for sale" investments during the Current Year Quarter is primarily
attributable to the shift of restricted cash of $37.5 million to restricted investments, partially offset by matured unrestricted investments that were not reinvested.

During
the Prior Year Quarter, the Company made the final working capital payment of $0.4 million related to the acquisition of ICORE Healthcare LLC.

Financing Activities.During the Prior Year Quarter, the Company repaid $4.2 million of indebtedness outstanding under the
Company's credit
agreement with Deutsche Bank AG dated January 5, 2004, as amended (the "Credit Agreement") and made payments on capital lease obligations of $0.1 million. In addition, the Company
received $4.0 million from the exercise of stock options and warrants and had other net unfavorable items of $1.5 million.

During
the Current Year Quarter, the Company paid $59.5 million for repurchase of treasury stock under the Company's share repurchase program. In addition, the Company received
$0.9 million from the exercise of stock options and warrants and had other net favorable items of $0.7 million.

OutlookLiquidity and Capital Resources

Liquidity.During 2009, the Company expects to fund its estimated capital expenditures of $20 to $30 million with cash from
operations. The
Company does not anticipate that it will need to draw on amounts available under the 2009 Credit Facility (as defined below) for its operations, capital needs or debt service in 2009. The Company also
currently expects to have adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. The Company maintains its current investment strategy of
investing in a diversified, high quality, liquid portfolio of investments and continues to closely monitor the situation in the financial and credit markets. The Company estimates that it has no risk
of any material permanent loss on its investment portfolio; however, there can be no assurance that the Company will not experience any such losses in the future.

Off-Balance Sheet Arrangements.As of March 31, 2009, the Company has no material off-balance sheet arrangements.

2008 Credit Facility.On April 30, 2008, the Company's Credit Agreement was terminated, and the Company entered into a credit
facility with
Deutsche Bank AG and Citigroup Global Markets Inc. that provided for a $100.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with
a sublimit of up to $30.0 million for revolving loans (the "2008 Credit Facility"). Borrowings under the 2008 Credit Facility, if any, matured on April 29, 2009. The 2008 Credit Facility
was guaranteed by substantially all of the subsidiaries of the Company and was secured by substantially all of the assets of the Company and the subsidiary guarantors.

Under
the 2008 Credit Facility, the annual interest rate on Revolving Loan borrowings bear interest at a rate equal to the sum of (i) a borrowing margin of 1.00 percent
plus (ii) (A) in the case of U.S. dollar denominated loans, the higher of the prime rate or one-half of one percent in excess of the overnight "federal funds" rate, or
(B) in the case of Eurodollar denominated loans, an interest rate which is a function of the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S.
dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 1.125 percent. The

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commitment
commission on the 2008 Credit Facility was 0.375 percent of the unused Revolving Loan Commitment.

On
April 29, 2009, the Company entered into an amendment to the 2008 Credit Facility with Deutsche Bank AG, Citibank, N.A., and Bank of America, N.A. that provides for an
$80.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with a sublimit of up
to $30.0 million for revolving loans (the "2009 Credit Facility"). Borrowings under the 2009 Credit Facility will mature on April 28, 2010. The 2009 Credit Facility is guaranteed by
substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors.

Under
the 2009 Credit Facility, the annual interest rate on Revolving Loan borrowings bear interest at a rate equal to (i) in the case of U.S. dollar denominated loans, the sum of
a borrowing margin of 2.25 percent plus the higher of the prime rate or one-half of one percent in excess of the overnight "federal funds" rate, or (ii) in the case of
Eurodollar denominated loans, the sum of a borrowing margin of 3.25 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar
denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 3.375 percent. The commitment
commission on the 2009 Credit Facility is 0.625 percent of the unused Revolving Loan Commitment.

Restrictive Covenants in Debt Agreements.The 2009 Credit Facility contains covenants that limit management's discretion in operating
the Company's
business by restricting or limiting the Company's ability, among other things, to:



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
2009 Credit Facility also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 2009 Credit Facility
pursuant to their terms, would result in an event of default under such credit facilities.

Net Operating Loss Carryforwards.The Company estimates that it had reportable federal NOLs as of December 31, 2008 of
approximately
$124.5 million available to reduce future federal taxable income. These estimated NOLs expire in 2011 through 2020 and are subject to examination and adjustment by the IRS. In addition, the
Company's utilization of such NOLs is subject to limitation under Internal Revenue Code Section 382, which affects the timing of the use of these NOLs. At this time, the Company does not
believe these limitations will limit the Company's ability to use any federal NOLs before they expire. Although the Company has NOLs that may be available to offset future taxable income, the Company
may be subject to Federal Alternative Minimum Tax.

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As
of December 31, 2008, the Company's valuation allowances against deferred tax assets were $9.4 million, mostly relating to uncertainties regarding the eventual
realization of certain state NOLs and other state deferred tax assets. Determination of the amount of deferred tax assets considered realizable required significant judgment and estimation. Changes in
these estimates in the future could materially affect the Company's financial condition and results of operations.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 157 ("SFAS 157"), which provides guidance for using fair value to measure assets and liabilities. It also responds to investors' requests for expanded information about the extent to
which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"),
which delays the effective date of SFAS 157 by one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities. The adoption did not
have a material impact on the consolidated financial statements. On January 1, 2009, the Company adopted SFAS 157 for non-financial assets and non-financial
liabilities. The adoption did not have a material impact on the consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS 141(R)") and SFAS No. 160, "Non-controlling Interests in Consolidated
Financial Statements" ("SFAS 160"). SFAS 141(R) requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective
acquisition-date fair values and changes other practices under SFAS 141, some of which could have a material impact on how the Company accounts for future business combinations.
SFAS 141(R) also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and
financial impact of the business combination. SFAS 160 requires entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial
statements. The Company adopted SFAS 141(R) and SFAS 160 simultaneously in the Company's year beginning January 1, 2009. Prior to 2009 and in accordance with American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"),
reversals of both valuation allowances and unrecognized tax benefits with respect to years prior to the Company's reorganization were recorded to goodwill. All other reversals of these balances were
recorded as reductions to income tax expense. As a result of the implementation of SFAS 141(R), beginning in 2009 all reversals of valuation allowances and unrecognized tax benefits are
reflected as reductions to income tax expense, even if related to years prior to the Company's reorganization. The adoption of SFAS 160 did not have a material impact on the consolidated
financial statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

Changes in interest rates affect interest income earned on the Company's cash equivalents and restricted cash and investments, as well
as interest expense on variable interest rate borrowings under the 2008 Credit Facility. Based on the Company's investment balances, and the borrowing levels under the 2008 Credit Facility as of
March 31, 2009, 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.

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Item 4.    Controls and Procedures.

a)    The
Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act), as of March 31, 2009. 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 March 31, 2009.

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 March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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Table of Contents

PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

The management and administration of the delivery of specialty managed healthcare entails significant risks of liability. From time to
time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company
receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional
negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require
the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions, litigation and claims relating to its operations or business
practices. In the opinion of management, the Company
has recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably
estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company's financial condition or results of operations; however, there
can be no assurance in this regard.

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

On July 30, 2008 the Company's board of directors approved a stock repurchase plan which authorizes the Company to purchase up
to $200 million of its outstanding common stock through January 31, 2010. Stock repurchases under the program may 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 deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice. Pursuant to this program, the Company made open market purchases of
1,799,933 shares of the Company's common stock at an average share price of $34.32 per share for an aggregate cost of $61.8 million (excluding broker commissions) during the three months ended
March 31, 2009. As of March 31, 2009, the amount of stock repurchases that remained under the program was $2.2 million and such remaining repurchases were made during the period
subsequent to March 31, 2009, completing the repurchase program as of April 7, 2009.

Following
is a summary of stock repurchases made from January 1, 2009 through the completion of the repurchase program on April 7, 2009:

Period

Total number
of Shares
Purchased

Average
Price Paid
per Share(2)

Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs

Approximate Dollar Value
(in thousands) of Shares that
May Yet Be Purchased
Under the Plan(1)(2)January 1-31, 2009


117,200

$
37.36


117,200

$
59,585February 1-28, 2009


422,000

$
34.72


422,000


44,932March 1-31, 2009


1,260,733

$
33.91


1,260,733


2,185April 1-7, 2009


60,026

$
36.42


60,026


1,859,959





1,859,959





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Item 3.    Defaults Upon Senior Securities.

None.

Item 4.    Submission of Matters to a Vote of Security Holders.

None.

Item 5.    Other Information.

(i) 2009 Credit Facility:On April 29, 2009, the Company entered into an amendment to the 2008 Credit Facility with Deutsche Bank
AG,
Citibank, N.A., and Bank of America, N.A. that provides for an $80.0 million Revolving Loan Commitment for the issuance of letters of credit for the account of the Company with a sublimit of up
to $30.0 million for revolving loans (the "2009 Credit Facility"). Borrowings under the 2009 Credit Facility will mature on April 28, 2010. The 2009 Credit Facility is guaranteed by
substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors.

Under
the 2009 Credit Facility, the annual interest rate on Revolving Loan borrowings bear interest at a rate equal to (i) in the case of U.S. dollar denominated loans, the sum of
a borrowing margin of 2.25 percent plus the higher of the prime rate or one-half of one percent in excess of the overnight "federal funds" rate, or (ii) in the case of
Eurodollar denominated loans, the sum of a borrowing margin of 3.25 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar
denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 3.375 percent. The commitment
commission on the 2009 Credit Facility is 0.625 percent of the unused Revolving Loan Commitment.

(ii) Managed Behavioral Health Contract:As previously reported, the Company has a managed behavioral healthcare contract with a
customer that
extends through June 30, 2009 and generated net revenues of $90.8 million for the year ended December 31, 2008. On April 30, 2009, the Company and its customer entered into a new contract with a term
expiring June 30, 2014, terminable without cause upon 180 days' notice after the third anniversary of the contract. The contract is expected to generate revenues in excess of $90 million during fiscal
2009.

Item 6.    Exhibits

4.1

Second Amendment to Credit Agreement, dated as of April 29, 2009, among Magellan Health Services, Inc., various lenders and Deutsche Bank AG New York Branch, as administrative agent.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 Act of 2002.32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

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


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Table of Contents

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: April 30, 2009

MAGELLAN HEALTH SERVICES, INC.(Registrant)By:

/s/ JONATHAN N. RUBIN Jonathan N. Rubin Executive Vice President and Chief Financial
Officer (Principal Financial Officer and Duly
Authorized Officer)


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