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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, 2010Oro

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 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 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No ý

The number of shares of the registrant's Ordinary Common Stock outstanding as of March 31, 2010 was 33,337,110.



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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

3Consolidated Balance SheetsDecember 31, 2009 and March 31, 2010

3Consolidated Statements of IncomeFor the Three Months Ended March 31, 2009 and 2010

4Consolidated Statements of Cash FlowsFor the Three Months Ended March 31, 2009 and 2010

5Notes to Consolidated Financial Statements

6Item 2:

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

22Item 3:

Quantitative and Qualitative Disclosures About Market Risk

36Item 4:

Controls and Procedures

36PART IIOther Information:Item 1:

Legal Proceedings

37Item 1A:

Risk Factors

37Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

39Item 3:

Defaults Upon Senior Securities

40Item 4:

Submission of Matters to a Vote of Security Holders

40Item 5:

Other Information

40Item 6:

Exhibits

41Signatures

42


2

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Table of Contents

PART IFINANCIAL INFORMATION



Item 1.    Financial Statements.



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

December 31,
2009

March 31,
2010
(unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
196,507

$
206,268Restricted cash


159,659


121,451Accounts receivable, less allowance for doubtful accounts of $1,358 and $1,544 at December 31, 2009 and March 31, 2010, respectively


114,434


115,198Short-term investments (restricted investments of $102,922 and $120,641 at December 31, 2009 and March 31, 2010, respectively)


162,922


178,678Deferred income taxes


57,329


57,329Other current assets (restricted deposits of $15,467 and $23,134 at December 31, 2009 and March 31, 2010, respectively)


62,737


58,570Total Current Assets


753,588


737,494Property and equipment, net


108,219


108,931Long-term investments (restricted investments of $60,230 and $43,692 at December 31, 2009 and March 31, 2010, respectively)


67,523


43,692Deferred income taxes


17,725


11,246Other long-term assets


2,703


2,435Goodwill


426,471


426,471Other intangible assets, net


64,812


62,108Total Assets

$
1,441,041

$
1,392,377LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable

$
27,086

$
40,692Accrued liabilities


93,760


71,641Medical claims payable


143,669


171,451Other medical liabilities


104,649


63,470Current maturities of long-term capital lease obligation





452Total Current Liabilities


369,164


347,706Long-term capital lease obligation





475Tax contingencies


118,859


120,277Deferred credits and other long-term liabilities


2,526


2,501Total Liabilities


490,549


470,959Preferred stock, par value $.01 per share
Authorized10,000 sharesIssued and outstandingnone





Ordinary common stock, par value $.01 per share
Authorized100,000 shares at December 31, 2009 and March 31, 2010Issued and outstanding41,044 shares and 34,535 shares at December 31, 2009, respectively, and 41,509 and 33,337 shares at March 31, 2010,
respectively


410


415Multi-Vote common stock, par value $.01 per share
Authorized40,000 sharesIssued and outstandingnone





Other Stockholders' Equity:Additional paid-in capital


614,483


632,187Retained earnings


555,923


581,442Warrants outstanding


5,382


5,380Accumulated other comprehensive income


114


140Ordinary common stock in treasury, at cost, 6,509 shares and 8,172 shares at December 31, 2009 and March 31, 2010, respectively


(225,820
)

(298,146
)Total Stockholders' Equity


950,492


921,418Total Liabilities and Stockholders' Equity

$
1,441,041

$
1,392,377


See accompanying notes to consolidated financial statements.

3

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

2009

2010Net revenue

$
619,515

$
728,053Cost and expenses:Cost of care


431,718


476,679Cost of goods sold


52,072


56,296Direct service costs and other operating expenses(1)


103,064


138,254Depreciation and amortization


11,043


13,422Interest expense


427


685Interest income


(2,311
)

(817
)596,013


684,519Income from continuing operations before income taxes


23,502


43,534Provision for income taxes


9,942


18,015Net income


13,560


25,519Other comprehensive (loss) income


(286
)

26Comprehensive income

$
13,274

$
25,545Weighted average number of common shares outstandingbasic (See Note B)


36,208


34,382Weighted average number of common shares outstandingdiluted (See Note B)


36,386


35,074Net income per common sharebasic:

$
0.37

$
0.74Net income per common sharediluted:

$
0.37

$
0.73


(1)Includes
stock compensation expense of $6,432 and $4,528 for the three months ended March 31, 2009 and 2010, respectively.


See
accompanying notes to consolidated financial statements.

4

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,

(Unaudited)

(In thousands)

2009

2010Cash flows from operating activities:Net income

$
13,560

$
25,519Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


11,043


13,422Non-cash interest expense


232


219Non-cash stock compensation expense


6,432


4,528Non-cash income tax expense


4,639


7,880Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:Restricted cash


64,356


38,208Accounts receivable, net


(2,236
)

(764
)Other assets


8,297


4,217Accounts payable and accrued liabilities


(23,813
)

(21,561
)Medical claims payable and other medical liabilities


(24,434
)

(13,397
)Other


568


2,001Net cash provided by operating activities


58,644


60,272Cash flows from investing activities:Capital expenditures


(5,310
)

(10,005
)Purchase of investments


(77,730
)

(30,942
)Maturity of investments


48,757


37,035Net cash used in investing activities


(34,283
)

(3,912
)Cash flows from financing activities:Payments on long-term debt and capital lease obligations


(2
)

(499
)Payments to acquire treasury stock


(59,476
)

(59,279
)Proceeds from exercise of stock options and warrants


912


14,510Other


662


(1,331
)Net cash used in financing activities


(57,904
)

(46,599
)Net (decrease) increase in cash and cash equivalents


(33,543
)

9,761Cash and cash equivalents at beginning of period


211,825


196,507Cash and cash equivalents at end of period

$
178,282

$
206,268


See
accompanying notes to consolidated financial statements.

5

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        March 31, 2010        (Unaudited)

NOTE AGeneral

Basis of Presentation

The accompanying unaudited consolidated financial statements of Magellan Health Services, Inc., a Delaware corporation
("Magellan"), include the accounts of Magellan, its majority owned subsidiaries, and the variable interest entity ("VIE") 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, 2010 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.

The
Company evaluated all events or transactions that occurred after March 31, 2010 and through the date we issued these financial statements. Other than entering into the 2010
Credit Facility (as defined below), the Company did not have any material recognizable subsequent events during this period.

These
unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2009
and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2010.

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. During 2009, the
Company expanded into Medicaid administration. The Company provides services to health plans, insurance companies, employers, labor unions and various governmental agencies. The Company's business is
divided into the following six 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

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

services.
The Company generally does not directly provide, or own any provider of, treatment services except as related 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. In 2008 and 2009, the Company entered into agreements to transition all
behavioral health direct care facilities over various dates. All of the direct care facilities were transitioned as of December 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 health plans and insurance companies 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 ("Radiology Benefits Management") 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 health plans and insurance
companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid
recipients. The Company offers its 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 CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

Specialty
Pharmaceutical Management

The
Specialty Pharmaceutical Management segment ("Specialty Pharmaceutical Management") 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 often with sensitive handling or storage needs. Patients receiving these drugs require greater amounts of clinical and financial support than those taking
more traditional agents. The Company's specialty pharmaceutical management services are provided under contracts with health plans, insurance companies, and governmental agencies 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) dispensing specialty pharmaceutical drugs on behalf of health plans; (iii) providing strategic consulting services to health plans and pharmaceutical manufacturers;
and (iv) providing oncology management services to health plans and state Medicaid programs.

Medicaid
Administration

The
Medicaid Administration segment ("Medicaid Administration") generally reflects integrated clinical management services provided to the public sector to
manage Medicaid, pharmacy, mental health and long-term care programs. The Company's Medicaid Administration services include the management of pharmacy benefits administration ("PBA"),
medical management information services and fiscal agent services ("FAS"), and health care management services ("HCM"). Medicaid Administration management services are provided under contracts with
states to Medicaid and other state sponsored program recipients. Medicaid Administration's contracts encompass Fee-For-Service ("FFS") arrangements.

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 June 2009, the Financial Accounting Standards Board ("FASB") established the FASB Accounting Standards Codification ("ASC") as the
source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles ("GAAP"). This
statement has been incorporated into ASC 105. This guidance explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.
Such guidance was effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009 (the quarter ending September 30, 2009 for the
Company) and did not have an impact on the Company's

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

results
of operations or financial condition, but changed the referencing system for accounting standards. All public filings of the Company now reference the ASC as the sole source of authoritative
literature.

In
June 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 167, "Amendments to FASB Interpretation No. 46R". This statement has been
incorporated into ASC 810 "Consolidation" ("ASC 810") and amends FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" to require an analysis to
determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the quantitative
approach previously required for determining whether an entity is the primary beneficiary. This statement is effective for fiscal years beginning after November 15, 2009. Accordingly, the
Company adopted ASC 810 on January 1, 2010. The adoption of this standard did not have a material impact on the consolidated financial statements.

In
January 2010, the FASB issued Accounting Standards Update, ("ASU"), No. 2010-06, "Improving Disclosures about Fair Value Measurements", ("ASU 2010-06").
ASU 2010-06 amends ASC Topic 820, "Fair Value Measurements and Disclosures", to require a number of additional disclosures regarding fair value measurements. Effective January 1,
2010, ASU 2010-06 requires disclosure of the amounts of significant transfers between Level I and Level II and the reasons for such transfers, the reasons for any transfers
in or out of Level III, and disclosure of the policy for determining when transfers between levels are recognized. ASU 2010-06 also clarified that disclosures should be provided for
each class of assets and liabilities and clarified the requirement to disclose information about the valuation techniques and inputs used in estimating Level II and Level III
measurements. Beginning January 1, 2011, ASU 2010-06 also requires that information in the reconciliation of recurring Level III measurements about purchases, sales,
issuances and settlements be provided on a gross basis. The adoption of ASU 2010-06 only required additional disclosures and did not have an impact on the consolidated financial
statements. As the Company does not have significant transfers between Levels, no additional disclosures were necessary.

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

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

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 $554.2 million and $583.3 million for the three months ended March 31, 2009 and 2010, respectively.

Fee-For-Service and Cost-Plus Contracts

The Company has certain fee-for-service ("FFS") contracts, including cost-plus contracts, with
customers under which the Company recognizes revenue as services are performed and as costs are incurred. Revenues from fee-for-service and cost-plus contracts
approximated $9.4 million and $49.4 million for the three months ended March 31, 2009 and 2010, respectively. FFS revenue for 2010 includes the activity from the Medicaid
Administration segment.

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 $25.5 million and
$26.2 million for the three months ended March 31, 2009 and 2010, respectively.

Dispensing Revenue

The Company recognizes dispensing revenue, which includes the co-payments received from members of the health plans the
Company serves, when the specialty pharmaceutical drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the Company's customer to pay for the specialty
pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund. Revenues from the dispensing of specialty
pharmaceutical drugs on behalf of health plans were $56.6 million and $61.0 million for the three months ended March 31, 2009 and 2010, 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 $1.3 million and $0.9 million
for the three months ended March 31, 2009 and 2010, respectively.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

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, 2009 and 2010. 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.

Pursuant
to the Maricopa Contract, the Company provides behavioral healthcare management and other related services to approximately 701,000 members in Maricopa County, Arizona. Under
the Maricopa Contract, the Company is responsible for providing covered behavioral health services to persons eligible under Title XIX (Medicaid) and Title XXI (State Children's Health Insurance
Program) of the Social Security Act, non-Title XIX and non-Title XIX eligible children and adults with a serious mental illness, and to certain non-Title XIX and
non-Title XXI adults with behavioral health or substance abuse disorders. The Maricopa Contract began on September 1, 2007 and extends through August 31, 2011 unless sooner
terminated by the parties. The State of Arizona has the right to terminate the Maricopa Contract for cause, as defined, upon ten days' notice with an opportunity to cure, and without cause immediately
upon notice from the State. The Maricopa Contract generated net revenues of $168.5 million and $192.0 million for the three months ended March 31, 2009 and 2010, respectively.

Total
net revenues from the Company's contracts with WellPoint were $44.0 million and $44.0 million during the three months ended March 31, 2009 and 2010,
respectively, including radiology benefits management revenue of $40.6 million and $40.1 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 has a term through December 31, 2010, and cannot be terminated early, except for cause, as defined in the agreement.

Net
revenues from the Pennsylvania Counties in the aggregate totaled $74.8 million and $84.1 million for the three months ended March 31, 2009 and 2010,
respectively.



Two
customers generated greater than ten percent of Commercial net revenues for the three months ended March 31, 2009 and 2010. The first customer has a
contract that extends through December 31, 2012 and generated net revenues of $57.3 million and $64.5 million for the three months ended March 31, 2009 and 2010,
respectively. The second customer has a contract that extends through June 30, 2014, terminable without cause upon 180 days' notice after June 30, 2012, and generated net revenues
of $21.9 million and $18.2 million for the three months ended March 31, 2009 and 2010, respectively.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

In
addition to the Maricopa Contract, 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, 2009 and 2010. This customer has a contract that extends through June 30, 2012, with options for the customer to extend the term of the contract for three one year terms, and
generated net revenues of $36.0 million and $36.0 million for the three months ended March 31, 2009 and 2010, respectively.

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, 2009 and three customers generated greater than ten percent of the net revenues for the Radiology Benefits Management segment for the three months ended March 31, 2010. The
first customer has a contract that extends through May 31, 2011 and generated net revenues of $22.6 million and $19.6 million for the three months ended March 31, 2009 and
2010, respectively. For the three months ended March 31, 2010, the remaining two of three such customers generated $26.2 million and $12.8 million of the net revenues for this
segment.

For
the three months ended March 31, 2009, four customers each exceeded ten percent of the net revenues for the Specialty Pharmaceutical Management segment. 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. For the three months ended
March 31, 2010, four customers each exceeded ten percent of the net revenues for this segment. Such customers generated $22.2 million, $15.1 million, $10.1 million, and
$7.8 million of net revenues during the three months ended March 31, 2010.

For
the three months ended March 31, 2010, four customers each exceeded ten percent of the net revenues for the Medicaid Administration segment. Three of such customers generated
$7.5 million, $6.5 million, and $5.6 million of net revenues for this segment. The other customer generated revenue of $4.8 million during this period, and this contract is
scheduled to terminate June 30, 2010, although the Company is obligated under the contract to operate the contract on a month-to-month basis for up to twelve months
after its scheduled termination, if requested, unless terminated earlier by the customer.

Fair Value Measurements

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. 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 the Company has the ability to access at the measurement date.

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

Level 3Unobservable
inputs that reflect the Company's assumptions about the assumptions that market participants would use in pricing the asset or liability. The
Company develops these inputs based on the best information available, including the Company's data.

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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

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, 2010 (in thousands):

Fair Value Measurements at March 31, 2010Level 1

Level 2

Level 3

TotalCash and Cash Equivalents(1)

$


$
10,524

$


$
10,524Restricted Cash(2)





114,466





114,466Investments:U.S. Government and agency securities


379








379Obligations of government-sponsored enterprises(3)





9,400





9,400Corporate debt securities





200,089





200,089Certificates of deposit





9,750





9,750Taxable municipal bonds





2,752





2,752$
379

$
346,981

$


$
347,360


(1)Excludes
$195.8 million of cash held in bank accounts by the Company.(2)Excludes
$7.0 million of restricted cash held in bank accounts by the Company.(3)Includes
investments in notes issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan
Bank.


All
of the Company's investments are classified as "available-for-sale" and are carried at fair value, based on quoted market prices. The Company's policy is to
classify all investments with contractual maturities within one year as current. Investment income is recognized
when earned and reported net of investment expenses. Net unrealized holding gains or losses are excluded from earnings and are reported, net of tax, as "accumulated other comprehensive income (loss)"
in the accompanying consolidated balance sheets and consolidated statements of income until realized, unless the losses are deemed to be other-than-temporary. Realized gains or
losses, including any provision for other-than-temporary declines in value, are included in the consolidated statements of income.

ASC
320-10-65 applies to debt securities only and provides guidance on the recognition and presentation of other-than-temporary
impairments. In addition, additional disclosures are required related to other-than-temporary impairments. Under this revised guidance, if a debt security is in an unrealized
loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis,
the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the
consolidated statements of income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the
Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in
other-than-temporary impairment losses recognized in income in the consolidated

13

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Table of Contents

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

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

The
credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost
basis of the debt security. The net present value is calculated by discounting the best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date
of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated
with a default. Furthermore, unrealized losses entirely caused by non-credit related factors related to debt securities for which the Company expects to fully recover the amortized cost
basis continue to be recognized in accumulated other comprehensive income.

As
of December 31, 2009 and March 31, 2010, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains
or losses were recorded for either the three months ended March 31, 2009 or March 31, 2010. The following is a summary of short-term and long-term investments at
December 31, 2009 and March 31, 2010 (in thousands):

December 31, 2009Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair ValueU.S. Government and agency securities

$
378

$
1

$


$
379Obligations of government-sponsored enterprises(1)


11,297


39


(8
)

11,328Corporate debt securities


208,832


458


(302
)

208,988Certificates of deposit


9,750








9,750Total investments at December 31, 2009

$
230,257

$
498

$
(310
)
$
230,445




March 31, 2010Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair ValueU.S. Government and agency securities

$
378

$
1

$


$
379Obligations of government-sponsored enterprises(1)


9,375


25





9,400Corporate debt securities


199,865


359


(135
)

200,089Certificates of deposit


9,750








9,750Taxable municipal bonds


2,771





(19
)

2,752Total investments at March 31, 2010

$
222,139

$
385

$
(154
)
$
222,370


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


14

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Table of Contents

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)




The
maturity dates of the Company's investments as of March 31, 2010 are summarized below (in thousands):

Amortized Cost

Estimated Fair Value2010

$
144,035

$
144,2422011


78,104


78,128Total investments at March 31, 2010

$
222,139

$
222,370


The
carrying value for the Company's current assets (other than short-term investments) and current liabilities approximate their fair value due to their short maturities.

Income Taxes

The Company's effective income tax rates were 42.3 percent and 41.4 percent for the three months ended March 31,
2009 and 2010, 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

At December 31, 2009 and March 31, 2010, the Company had equity-based employee incentive plans, which are described more
fully in Note 6 in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. The Company recorded stock compensation expense of
$6.4 million and $4.5 million for the three months ended March 31, 2009 and 2010, respectively. Stock compensation expense recognized in the consolidated statements of income for
the three months ended March 31, 2009 and 2010 has been reduced for estimated forfeitures, estimated at five percent for each period.

The
weighted average grant date fair value of all stock options granted during the three months ended March 31, 2010 was $11.80 as estimated using the Black-Scholes-Merton option
pricing model, which also assumed an expected volatility of 31.7 percent based on the historical volatility of the Company's stock price.

The
benefits of tax deductions in excess of recognized stock compensation expense are reported as a financing cash flow, rather than as an operating cash flow. In the three months ended
March 31, 2009 and 2010, approximately $1.1 million and $0 million of benefits of such tax deductions related to stock compensation expense were realized and as such were reported as
financing cash flows, respectively.

15

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Table of Contents

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

Summarized
information related to the Company's stock options for the three months ended March 31, 2010 is as follows:

Options

Weighted
Average
Exercise
PriceOutstanding, beginning of period


5,185,091

$
38.19Granted


809,772


42.72Cancelled


(82,103
)

42.89Exercised


(406,574
)

35.67Outstanding, end of period


5,506,186


38.98Vested and expected to vest at end of period


5,345,041


38.98Exercisable, end of period


3,201,500

$
39.33


All
of the Company's options granted during the three months ended March 31, 2010 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, 2010 is as follows:

Shares

Weighted
Average
Grant Date
Fair ValueOutstanding, beginning of period


28,910

$
30.27Awarded





Vested





Forfeited





Outstanding, ending of period


28,910

$
30.27


Summarized
information related to the Company's nonvested restricted stock units for the three months ended March 31, 2010 is as follows:

Shares

Weighted
Average
Grant Date
Fair ValueOutstanding, beginning of period


184,454

$
34.99Awarded


101,812


42.75Vested


(84,004
)

36.16Forfeited


(427
)

35.79Outstanding, ending of period


201,835

$
38.42


16

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Table of Contents

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

Restricted
stock awards and restricted stock units granted during the three months ended March 31, 2010 generally 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 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 provided 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 matured on April 28, 2010. The 2009 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 2009 Credit Facility, the annual interest rate on Revolving Loan borrowings was equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin
of 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 had the option to borrow in U.S. dollar denominated loans or
Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bore interest at the rate of 3.375 percent. The commitment commission on the 2009
Credit Facility was 0.625 percent of the unused Revolving Loan Commitment.

On
April 28, 2010, the Company entered into an amendment to the 2009 Credit Facility with Deutsche Bank AG, Citibank, N.A., and Bank of America, N.A. that provided 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 "2010 Credit
Facility"). Borrowings under the 2010 Credit Facility mature on April 28, 2013. The 2010 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 2010 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin
of 1.75 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 2.75 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 2.875 percent. The commitment commission on the 2010
Credit Facility is 0.50 percent of the unused Revolving Loan Commitment.

17

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Table of Contents

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE AGeneral (Continued)

There were $0.9 million of capital lease obligations and no Revolving Loan borrowings at March 31, 2010.

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 31,2009

2010Numerator:Net income

$
13,560

$
25,519Denominator:Weighted average number of common shares outstandingbasic


36,208


34,382Common stock equivalentsstock options


86


431Common stock equivalentswarrants


87


150Common stock equivalentsrestricted stock


5


19Common stock equivalentsrestricted stock units





92Common stock equivalentsemployee stock purchase plan





Weighted average number of common shares outstandingdiluted


36,386


35,074Net income per common sharebasic

$
0.37

$
0.74Net income per common sharediluted

$
0.37

$
0.73


The
weighted average number of common shares outstanding for the three months ended March 31, 2009 and 2010 were 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, 2009 and 2010 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.

For
the three months ended March 31, 2010, the Company had additional potential dilutive securities outstanding representing 1.6 million options 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

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Table of Contents

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE CBusiness Segment Information (Continued)

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):

Three Months Ended March 31, 2009

Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Corporate
and
Other

ConsolidatedNet 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, 2010

Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Medicaid
Administration

Corporate
and
Other

ConsolidatedNet revenue

$
161,702

$
349,468

$
109,457

$
68,138

$
39,288

$


$
728,053Cost of care


(90,672
)

(309,062
)

(76,945
)










(476,679
)Cost of goods sold











(56,296
)







(56,296
)Direct service costs


(37,468
)

(17,547
)

(14,838
)

(5,551
)

(32,588
)




(107,992
)Other operating expenses

















(30,262
)

(30,262
)Stock compensation expense(1)


238


201


393


143


18


3,535


4,528Segment profit (loss)

$
33,800

$
23,060

$
18,067

$
6,434

$
6,718

$
(26,727
)
$
61,352


(1)Stock
compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment
Profit since it is managed on a consolidated basis.


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MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(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 31,2009

2010Segment profit

$
39,093

$
61,352Stock compensation expense


(6,432
)

(4,528
)Depreciation and amortization


(11,043
)

(13,422
)Interest expense


(427
)

(685
)Interest income


2,311


817Income from continuing operations before income taxes

$
23,502

$
43,534


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 Repurchases

On July 30, 2008 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up
to $200 million of its outstanding common stock through January 31, 2010. Stock repurchases under the program could be executed through open market repurchases, privately negotiated
transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions under the program from time to time and in such
amounts and via such methods as management deemed appropriate. The stock repurchase program could be limited or terminated at any time without prior notice. Pursuant to this program, the Company made
open market purchases of 3,866,505 shares of the Company's common stock at an aggregate cost of $136.0 million (excluding broker commissions) during the year

20

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Table of Contents

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2010

(Unaudited)

NOTE DCommitments and Contingencies (Continued)

ended
December 31, 2008 and made open market purchases of 1,859,959 shares of the Company's common stock at an average share price of $34.39 per share for an aggregate cost of
$64.0 million (excluding broker commissions) during the period January 1, 2009 through April 7, 2009, which was the date that the repurchase program was completed, the
$200 million authorization having been exhausted.

On
July 28, 2009 the Company's board of directors approved a stock repurchase plan which authorizes the Company to purchase up to $100 million of its outstanding common
stock through July 28, 2011. 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 under the program 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 782,400 shares of the
Company's common stock at an average price of $32.75 per share for an aggregate cost of $25.6 million (excluding broker commissions) during the period from August 17, 2009 through
December 31, 2009. Pursuant to this program, the Company made open market purchases of 1,663,589 shares of the Company's common stock at an average price of $43.45 per share for an aggregate
cost of $72.3 million (excluding broker commissions) during the three months ended March 31, 2010.

As
of March 31, 2010, the Company has recorded a liability in the amount of $13.0 million for stock repurchases for which cash settled subsequent to such date.

The
Company made additional open market purchases of 48,292 shares at an aggregate cost of $2.1 million, excluding broker commissions and transaction fees, on April 1,
2010, which was the date that the repurchase program was completed, the $100 million authorization having been exhausted.

Acquisition of First Health Services

Pursuant to the June 4, 2009 Purchase Agreement (the "Purchase Agreement") with Coventry, on July 31, 2009 the Company
acquired (the "Acquisition") all of the outstanding equity interests of Coventry's direct and indirect subsidiaries First Health Services Corporation ("FHS"), FHC, Inc. ("FHC") and Provider
Synergies, LLC (together with FHS and FHC, "First Health Services") and certain assets of Coventry which are related to the operation of the business conducted by First Health Services. First
Health Services provides pharmacy benefits management and other services to Medicaid programs. As consideration for the Acquisition, the Company paid $115.4 million in cash, excluding cash
acquired and including a payment of $7.4 million for excess working capital with such amount being subject to final adjustments as provided in the Purchase Agreement. The Company funded the
Acquisition with cash on hand.

As
of March 31, 2010, settlement of the working capital receivable and certain contractual liabilities remain open and therefore subject to further estimation. In addition, the
amount recognized for deferred tax liabilities may be impacted by the determination of these items. The Company will make appropriate adjustments to the purchase price allocation prior to the
completion of the measurement period as required.

The
Company reports the results of operations of First Health Services within Medicaid Administration.

21

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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 Consolidated Financial Statements and the notes to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and the Company's
Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission ("SEC") on February 26, 2010.

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:



22

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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, 2009. 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. During 2009, the
Company expanded into Medicaid administration. The Company provides services to health plans, insurance companies, employers, labor unions and various governmental agencies. The Company's business is
divided into the following six 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 related 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. In
2008 and 2009, the Company entered into agreements to transition all behavioral health direct care facilities over various dates. All of the direct care facilities were transitioned as of
December 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

23

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Table of Contents

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 health plans and insurance companies 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, 2010, Commercial's covered lives were
4.0 million, 12.3 million and 20.0 million for risk-based, EAP and ASO products, respectively. For the three months ended March 31, 2010, Commercial's revenue
was $107.4 million, $23.1 million and $31.2 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, 2010, Public Sector's covered
lives were 1.6 million and 0.3 million for risk-based and ASO products, respectively. For the three months ended March 31, 2010, Public Sector's revenue was
$348.0 million and $1.4 million for risk-based and ASO products, respectively.

Radiology
Benefits Management

The
Radiology Benefits Management segment ("Radiology Benefits Management") 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 health plans and insurance
companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid
recipients. The Company offers its 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, 2010, covered lives for Radiology Benefits Management were 3.9 million and 14.6 million for risk-based and ASO
products, respectively. For the
three months ended March 31, 2010, revenue for Radiology Benefits Management was $96.8 million and $12.7 million for risk-based and ASO products, respectively.

Specialty
Pharmaceutical Management

The
Specialty Pharmaceutical Management segment ("Specialty Pharmaceutical Management") 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 often with sensitive handling or storage needs. Patients receiving these drugs require greater amounts of clinical and financial support than those taking
more traditional agents. The Company's specialty pharmaceutical management services are provided under contracts with health plans, insurance companies, and governmental agencies for some or all of
their commercial, Medicare and Medicaid members. The Company's specialty pharmaceutical services include (i) contracting and formulary optimization on

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behalf
of health plans and pharmaceutical manufacturers; (ii) dispensing specialty pharmaceutical drugs on behalf of health plans; (iii) providing strategic consulting services to health
plans and pharmaceutical manufacturers; and (iv) providing oncology management services to health plans and state Medicaid programs. The Company's Specialty Pharmaceutical Management segment
had contracts with 38 health plans as of March 31, 2010.

Medicaid
Administration

The
Medicaid Administration segment ("Medicaid Administration") generally reflects integrated clinical management services provided to the public sector to
manage Medicaid, pharmacy, mental health and long-term care programs. The Company's Medicaid Administration services include the management of pharmacy benefits administration ("PBA"),
medical management information services and fiscal agent services ("FAS"), and health care management services ("HCM"). Medicaid Administration management services are provided under contracts with
states to Medicaid and other state sponsored program recipients. Medicaid Administration's contracts encompass Fee-For-Service ("FFS") arrangements. The Company's Medicaid
Administration segment had contracts with 26 states and the District of Columbia as of March 31, 2010.

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, 2009 and 2010. 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.

Pursuant
to the Maricopa Contract, the Company provides behavioral healthcare management and other related services to approximately 701,000 members in Maricopa County, Arizona. Under
the Maricopa Contract, the Company is responsible for providing covered behavioral health services to persons eligible under Title XIX (Medicaid) and Title XXI (State Children's Health Insurance
Program) of the Social Security Act, non-Title XIX and non-Title XIX eligible children and adults with a serious mental illness, and to certain non-Title XIX and
non-Title XXI adults with behavioral health or substance abuse disorders. The Maricopa Contract began on September 1, 2007 and extends through August 31, 2011 unless sooner
terminated by the parties. The State of Arizona has the right to terminate the Maricopa Contract for cause, as defined, upon ten days' notice with an opportunity to cure, and without cause immediately
upon notice from the State. The Maricopa Contract generated net revenues of $168.5 million and $192.0 million for the three months ended March 31, 2009 and 2010, respectively.

Total
net revenues from the Company's contracts with WellPoint were $44.0 million and $44.0 million during the three months ended March 31, 2009 and 2010,
respectively, including radiology benefits management revenue of $40.6 million and $40.1 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

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converted
from an ASO arrangement to a risk arrangement effective July 1, 2007. Such risk contract has a term through December 31, 2010, and cannot be terminated early, except for cause,
as defined in the agreement.

Net
revenues from the Pennsylvania Counties in the aggregate totaled $74.8 million and $84.1 million for the three months ended March 31, 2009 and 2010,
respectively.



Two
customers generated greater than ten percent of Commercial net revenues for the three months ended March 31, 2009 and 2010. The first customer has a
contract that extends through December 31, 2012 and generated net revenues of $57.3 million and $64.5 million for the three months ended March 31, 2009 and 2010,
respectively. The second customer has a contract that extends through June 30, 2014, terminable without cause upon 180 days' notice after June 30, 2012, and generated net revenues
of $21.9 million and $18.2 million for the three months ended March 31, 2009 and 2010, respectively.

In
addition to the Maricopa Contract, 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, 2009 and 2010. This customer has a contract that extends through June 30, 2012, with options for the customer to extend the term of the contract for three one year terms, and
generated net revenues of $36.0 million and $36.0 million for the three months ended March 31, 2009 and 2010, respectively.

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, 2009 and three customers generated greater than ten percent of the net revenues for the Radiology Benefits Management segment for the three months ended March 31, 2010. The
first customer has a contract that extends through May 31, 2011 and generated net revenues of $22.6 million and $19.6 million for the three months ended March 31, 2009 and
2010, respectively. For the three months ended March 31, 2010, the remaining two of three such customers generated $26.2 million and $12.8 million of the net revenues for this
segment.

For
the three months ended March 31, 2009, four customers each exceeded ten percent of the net revenues for the Specialty Pharmaceutical Management segment. 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. For the three months ended
March 31, 2010, four customers each exceeded ten percent of the net revenues for this segment. Such customers generated $22.2 million, $15.1 million, $10.1 million, and
$7.8 million of net revenues during the three months ended March 31, 2010.

For
the three months ended March 31, 2010, four customers each exceeded ten percent of the net revenues for the Medicaid Administration segment. Three of such customers generated
$7.5 million, $6.5 million, and $5.6 million of net revenues for this segment. The other customer generated revenue of $4.8 million during this period, and this contract is
scheduled to terminate June 30, 2010, although the Company is obligated under the contract to operate the contract on a month-to-month basis for up to twelve months
after its scheduled termination, if requested, unless terminated earlier by the customer.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization,

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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. 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 26, 2010.

Income Taxes

The Company's effective income tax rates were 42.3 percent and 41.4 percent for the three months ended March 31,
2009 and 2010, 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 assessments by tax authorities for years ended prior to December 31, 2006. Further, the statute
of limitations regarding the assessment of the federal and most state and local income taxes for the year ended December 31, 2006 will expire during 2010.

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):

Three Months Ended March 31, 2009

Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Corporate
and
Other

ConsolidatedNet 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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Three Months Ended
March 31, 2010

Commercial

Public
Sector

Radiology
Benefits
Management

Specialty
Pharmaceutical
Management

Medicaid
Administration

Corporate
and
Other

ConsolidatedNet revenue

$
161,702

$
349,468

$
109,457

$
68,138

$
39,288

$


$
728,053Cost of care


(90,672
)

(309,062
)

(76,945
)










(476,679
)Cost of goods sold











(56,296
)







(56,296
)Direct service costs


(37,468
)

(17,547
)

(14,838
)

(5,551
)

(32,588
)




(107,992
)Other operating expenses

















(30,262
)

(30,262
)Stock compensation expense(1)


238


201


393


143


18


3,535


4,528Segment profit (loss)

$
33,800

$
23,060

$
18,067

$
6,434

$
6,718

$
(26,727
)
$
61,352


(1)Stock
compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment
Profit since it is managed on a consolidated basis.


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

Three Months Ended
March 31,2009

2010Segment profit

$
39,093

$
61,352Stock compensation expense


(6,432
)

(4,528
)Depreciation and amortization


(11,043
)

(13,422
)Interest expense


(427
)

(685
)Interest income


2,311


817Income from continuing operations before income taxes

$
23,502

$
43,534


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Quarter ended March 31, 2010 ("Current Year Quarter"), compared to the quarter ended March 31, 2009 ("Prior Year Quarter")

Commercial

Net Revenue

Net revenue related to Commercial increased by 1.9 percent or $2.9 million from the Prior Year Quarter to the Current
Year Quarter. The increase in revenue is mainly due to favorable rates changes of $9.9 million, revenue from new contracts implemented after the Prior Year Quarter of $1.3 million,
increased membership from existing customers of $0.9 million, and favorable retroactive membership adjustments of $0.6 million recorded in the Current Year Quarter, which increases were
partially offset by terminated contracts of $8.0 million, favorable retroactive membership and rate adjustments of $0.8 million recorded in the Prior Year Quarter, program changes of
$0.6 million, and other net unfavorable variances of $0.4 million.

Cost of Care

Cost of care increased by 1.0 percent or $0.9 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 $1.4 million, unfavorable medical claims development for the Prior Year Quarter which was recorded
after the Prior Year Quarter of $0.4 million, and care trends and other net variances of $3.4 million, which increases were partially offset by terminated contracts of
$3.2 million, unfavorable prior period medical claims development recorded in the Prior Year Quarter of $0.4 million, program changes of $0.4 million, and favorable prior period
medical claims development recorded in the Current Year Quarter of $0.3 million. Cost of care decreased as a percentage of risk revenue (excluding EAP business) from 81.4 percent in the
Prior Year Quarter to 77.8 percent in the Current Year Quarter, mainly due to rate changes in excess of care trends, out of period care development, and changes in business mix.

Direct Service Costs

Direct service costs decreased by 2.7 percent or $1.1 million from the Prior Year Quarter to the Current Year Quarter.
The decrease in direct service costs is mainly attributable to terminated contracts. Direct service costs decreased as a percentage of revenue from 24.3 percent in the Prior Year Quarter to
23.2 percent in the Current Year Quarter. The decrease in the percentage of direct service costs in relation to revenue is mainly due to rate changes and changes in business mix.

Public Sector

Net Revenue

Net revenue related to Public Sector increased by 8.6 percent or $27.6 million from the Prior Year Quarter to the Current
Year Quarter. This increase is primarily due to the net impact of increased membership from existing customers offset by terminated contracts of $37.3 million and other net favorable variances
of $0.8 million, which increases were partially offset by unfavorable rate and contract funding changes of $7.3 million, favorable retroactive rate and membership changes recorded in the
Prior Year Quarter of $2.1 million, and unfavorable retroactive rate and membership changes recorded in the Current Year Quarter of $1.1 million.

Cost of Care

Cost of care increased by 5.8 percent or $16.9 million from the Prior Year Quarter to the Current Year Quarter. This
increase is primarily due to the net impact of care associated with increased membership from existing customers offset by terminated contracts of $32.6 million and care trends and

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other
net unfavorable variances of $0.1 million, which increases were partially offset by care associated with rate changes for contracts with minimum care requirements recorded in the Current
Year Quarter of $8.0 million, unfavorable prior period medical claims development recorded in the Prior Year Quarter of $3.1 million, care associated with retroactive rate and membership
changes in the Prior Year Quarter of $1.9 million, care associated with retroactive rate and membership changes in the Current Year Quarter of $1.3 million, and favorable prior period
medical claims development recorded in the Current Year Quarter of $1.5 million. Cost of care decreased as a percentage of risk revenue from 91.2 percent in the Prior Year Quarter to
88.8 percent in the Current Year Quarter mainly due to business mix and net favorable care development.

Direct Service Costs

Direct service costs increased by 1.5 percent or $0.3 million from the Prior Year Quarter to the Current Year Quarter.
Direct service costs decreased as a percentage of revenue from 5.4 percent for the Prior Year Quarter to 5.0 percent in the Current Year Quarter mainly due to business mix.

Radiology Benefits Management

Net Revenue

Net revenue related to Radiology Benefits Management increased by 48.8 percent or $35.9 million from the Prior Year
Quarter to the Current Year Quarter. This increase is primarily due to revenue from new contracts implemented after the Prior Year Quarter of $40.1 million, favorable rate changes of
$4.9 million, and other net favorable variances of $1.2 million, which increases were partially offset by decreased membership from existing customers of $8.2 million, and
favorable retroactive membership and rate adjustments recorded in the Prior Year Quarter of $2.1 million

Cost of Care

Cost of care increased by 54.6 percent or $27.2 million from the Prior Year Quarter to the Current Year Quarter. This
increase is primarily attributed to new contracts implemented after the Prior Year Quarter of $36.5 million and favorable prior period medical claims development of $1.0 million recorded
in the Prior Year Quarter, which increases were partially offset by decreased membership from existing customers of $6.4 million, favorable prior period medical claims development recorded in
the Current Year Quarter of $2.7 million, and favorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $1.2 million. Cost of
care decreased as a percentage of risk revenue from 83.0 percent in the Prior Year Quarter to 79.5 percent in the Current Year Quarter mainly due to care development and business mix.

Direct Service Costs

Direct service costs increased by 13.8 percent or $1.8 million from the Prior Year Quarter to the Current Year Quarter.
The increase in direct service costs is mainly attributable to costs associated with new business. As a percentage of revenue, direct service costs decreased from 17.7 percent in the Prior Year
Quarter to 13.6 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 4.3 percent or $2.8 million from the Prior Year
Quarter to the Current Year Quarter. This increase is primarily due to net increased dispensing activity of $4.7 million, which increase was partially offset by contract terminations and
membership losses of $1.5 million and other net decreases of $0.4 million.

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Cost of Goods Sold

Cost of goods sold increased by 8.1 percent or $4.2 million from the Prior Year Quarter to the Current Year Quarter. This
increase is primarily due to net increased dispensing activity. As a percentage of the portion of net revenue that relates to dispensing activity, cost of goods
sold increased from 91.9 percent in the Prior Year Quarter to 92.3 percent in the Current Year Quarter, mainly due to business mix.

Direct Service Costs

Direct service costs decreased by 13.2 percent or $0.8 million from the Prior Year Quarter to the Current Year Quarter.
This decrease is primarily due to a reduction in stock compensation expense, partially offset by an increase in expenses to support the development of new products. As a percentage of revenue, direct
service costs decreased from 9.8 percent in the Prior Year Quarter to 8.1 percent in the Current Year Quarter, mainly due to a decrease in stock compensation expense.

Medicaid Administration

Net Revenue

Net revenue related to Medicaid Administration was $39.3 million for the Current Year Quarter. The acquisition of First Health
closed on July 31, 2009 and the Prior Year Quarter does not include any operating results for this segment of the Company.

Direct Service Costs

Direct service costs were $32.6 million for the Current Year Quarter. As a percentage of revenue, direct service costs were
82.9 percent in the Current Year Quarter.

Corporate and Other

Other Operating Expenses

Other operating expenses related to the Corporate and Other Segment increased by 8.8 percent or $2.5 million from the
Prior Year Quarter to the Current Year Quarter. The increase results primarily from increased discretionary benefit costs in the Current Year Quarter of $1.4 million and other net unfavorable
variances of $1.1 million. As a percentage of total net revenue, other operating expenses decreased from 4.5 percent for the Prior Year Quarter to 4.2 percent for the Current Year
Quarter, primarily due to changes in business mix.

Depreciation and Amortization

Depreciation and amortization expense increased by 21.5 percent or $2.4 million from the Prior Year Quarter to the
Current Year Quarter, primarily due to asset additions after the Prior Year Quarter (inclusive of assets related to the acquisition of First Health Services).

Interest Expense

Interest expense increased by $0.3 million from the Prior Year Quarter to the Current Year Quarter, mainly due to increased
letter of credit fees in the Current Year Quarter.

Interest Income

Interest income decreased by $1.5 million from the Prior Year Quarter to the Current Year Quarter, mainly due to lower yields.

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Income Taxes

The Company's effective income tax rate was 42.3 percent in the Prior Year Quarter and 41.4 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. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

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 Commercial care trend factor for 2010 will be 7 to 9 percent,
the Public Sector care trend factor for 2010 will be 1 to 3 percent and the Radiology Benefits Management care trend for 2010 will be 8 to 10 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 2009 Credit Facility. Based on the amount of cash equivalents and investments and the borrowing levels under the 2009 Credit Facility
as of March 31, 2010, 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 $58.6 million and $60.3 million for
the Prior
Year Quarter and Current Year Quarter, respectively. The $1.7 million increase in operating cash flows from the Prior Year Quarter to the Current Year Quarter is primarily attributable to the
increase in segment profit of $22.3 million from the Prior Year Quarter and other net favorable variances of $15.7 million primarily associated with working capital changes. Partially
offsetting these items is the year over year reduction of $36.3 million in the amount shifted from 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 and Current Year Quarter, restricted cash of $37.5 million and $1.2 million, respectively, was shifted to
restricted investments.

During
the Current Year Quarter, the Company's restricted cash decreased $38.2 million. The change in restricted cash is attributable to a reduction in restricted cash of
$37.5 million associated with the Company's regulated entities and the shift of restricted cash of $1.2 million to restricted investments, partially offset by other net increases of
$0.5 million. In regards to the decrease in restricted cash associated with the Company's regulated entities, $37.8 million is offset by changes in other assets and liabilities,
primarily accounts receivable, accrued liabilities, medical claims payable and other medical liabilities, thus having no impact on operating cash flows. Partially offsetting these net reductions is
the net funding of $0.3 million in additional restricted cash associated with the Company's regulated entities.

Investing Activities.The Company utilized $5.3 million and $10.0 million during the Prior Year Quarter and Current Year
Quarter,
respectively, for capital expenditures. The majority of the increase

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in
capital expenditures of $4.7 million is attributable to management information systems and related equipment.

During
the Prior Year Quarter, the Company used net cash of $29.0 million for the net purchase of "available for sale" investments. During the Current Year Quarter, the Company
received net cash of $6.1 million from the net maturity of "available-for-sale" investments.

Financing Activities.During the Prior 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.

During
the Current Year Quarter, the Company paid $59.3 million for repurchase of treasury stock under the Company's share repurchase program. In addition, the Company received
$14.5 million from the exercise of stock options and had other net unfavorable items of $1.8 million.

OutlookLiquidity and Capital Resources

Liquidity.During the remainder of 2010, the Company expects to fund its additional estimated capital expenditures of $28 to
$38 million with
cash from operations. The Company does not anticipate that it will need to draw on amounts available under the 2010 Credit Facility for its operations, capital needs or debt service in 2010. 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.

Stock Repurchases.On July 30, 2008 the Company's board of directors approved a stock repurchase plan which authorized the Company
to purchase
up to $200 million of its outstanding common stock through January 31, 2010. Stock repurchases under the program could be executed through open market repurchases, privately negotiated
transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions under the program from time to time and in such
amounts and via such methods as management deemed appropriate. The stock repurchase program could be limited or terminated at any time without prior notice. Pursuant to this program, the Company made
open market purchases of 3,866,505 shares of the Company's common stock at an aggregate cost of $136.0 million (excluding broker commissions) during the year ended December 31, 2008 and
made open market purchases of 1,859,959 shares of the Company's common stock at an average share price of $34.39 per share for an aggregate cost of $64.0 million (excluding broker commissions)
during the period January 1, 2009 through April 7, 2009, which was the date that the repurchase program was completed, the $200 million authorization having been exhausted.

On
July 28, 2009 the Company's board of directors approved a stock repurchase plan which authorizes the Company to purchase up to $100 million of its outstanding common
stock through July 28, 2011. 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 under the program 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 782,400 shares of the
Company's common stock at an average price of $32.75 per share for an aggregate cost of $25.6 million (excluding broker commissions) during the period from August 17, 2009 through
December 31, 2009. Pursuant to this program, the Company made open market purchases of 1,663,589 shares of the Company's common stock at an

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average
price of $43.45 per share for an aggregate cost of $72.3 million (excluding broker commissions) during the three months ended March 31, 2010.

As
of March 31, 2010, the Company has recorded a liability in the amount of $13.0 million for stock repurchases for which cash settled subsequent to such date.

The
Company made additional open market purchases of 48,292 shares at an aggregate cost of $2.1 million, excluding broker commissions and transaction fees, on April 1,
2010, which was the date that the repurchase program was completed, the $100 million authorization having been exhausted.

Off-Balance Sheet Arrangements.As of March 31, 2010, the Company has no material off-balance sheet arrangements.

Credit Facility.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 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 provided 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 matured on April 28, 2010. The 2009 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 2009 Credit Facility, the annual interest rate on Revolving Loan borrowings was equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin
of 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 had the option to borrow in U.S. dollar denominated loans or
Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bore interest at the rate of 3.375 percent. The commitment commission on the 2009
Credit Facility was 0.625 percent of the unused Revolving Loan Commitment.

On
April 28, 2010, the Company entered into an amendment to the 2009 Credit Facility with Deutsche Bank AG, Citibank, N.A., and Bank of America, N.A. that provided 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 "2010 Credit
Facility"). Borrowings under the 2010 Credit Facility mature on April 28, 2013. The 2010 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 2010 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin
of 1.75 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 2.75 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
2.875 percent. The commitment commission on the 2010 Credit Facility is 0.50 percent of the unused Revolving Loan Commitment.

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There
were $0.9 million of capital lease obligations and no Revolving Loan borrowings at March 31, 2010.

Restrictive Covenants in Debt Agreements.The 2010 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
2010 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 2010 Credit Facility
pursuant to its terms, would result in an event of default under the 2010 Credit Facility.

Net Operating Loss Carryforwards.The Company estimates that it had reportable federal net operating loss carryforwards ("NOLs") as of
December 31, 2009 of approximately $54.9 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 Internal Revenue Service.

As
of December 31, 2009, the Company's valuation allowances against deferred tax assets were $7.3 million, mostly relating to uncertainties regarding the eventual
realization of certain state NOLs. 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 June 2009, the Financial Accounting Standards Board ("FASB") established the FASB Accounting Standards Codification ("ASC") as the
source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles ("GAAP"). This
statement has been incorporated into ASC 105. This guidance explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC
registrants. Such guidance was effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009 (the quarter ending September 30, 2009
for the Company) and did not have an impact on the Company's results of operations or financial condition, but changed the referencing system for accounting standards. All public filings of the
Company now reference the ASC as the sole source of authoritative literature.

In
June 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 167, "Amendments to FASB Interpretation No. 46R". This statement has been
incorporated into ASC 810

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"Consolidation"
("ASC 810") and amends FASB Interpretation ("FIN") No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46R") to require an analysis
to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the
quantitative approach previously required for determining whether an entity is the primary beneficiary. This statement is effective for fiscal years beginning after November 15, 2009.
Accordingly, the Company adopted ASC 810 on January 1, 2010. The adoption of this standard did not have a material impact on the consolidated financial statements.

In
January 2010, the FASB issued Accounting Standards Update, ("ASU"), No. 2010-06, "Improving Disclosures about Fair Value Measurements", ("ASU 2010-06").
ASU 2010-06 amends ASC Topic 820, "Fair Value Measurements and Disclosures", to require a number of additional disclosures regarding fair value measurements. Effective
January 1, 2010, ASU 2010-06 requires disclosure of the amounts of significant transfers between Level I and Level II and the reasons for such transfers, the reasons
for any transfers in or out of Level III, and disclosure of the policy for determining when transfers between levels are recognized. ASU 2010-06 also clarified that disclosures
should be provided for each class of assets and liabilities and clarified the requirement to disclose information about the valuation techniques and inputs used in estimating Level II and
Level III measurements. Beginning January 1, 2011, ASU 2010-06 also requires that information in the reconciliation of recurring Level III measurements about
purchases, sales, issuances and settlements be provided on a gross basis. The adoption of ASU 2010-06 only required additional disclosures and did not have an impact on the consolidated
financial statements. As the Company does not have significant transfers between Levels, no additional disclosures were necessary.

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 2009 Credit Facility. Based on the Company's investment balances, and the borrowing levels under the 2009 Credit Facility as of
March 31, 2010, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect
the Company's future earnings and cash outflows.

Item 4.    Controls and Procedures.

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, 2010. 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, 2010.

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, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

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 1A.    Risk Factors.

Federal health care reform legislation could adversely affect the Company's business, revenues, profitability
and results of operation.

During
the first quarter of 2010, the U.S. Congress passed and the President signed into law the Patient Protection and Affordable Care Act as well as the Health Care and Education
Reconciliation Act of 2010, which represent significant changes to the current U.S. health care system. The legislation is far-reaching and is intended to expand access to health insurance
coverage over time by increasing the eligibility thresholds for most state Medicaid programs and providing certain other individuals and small businesses with tax incentives to subsidize a portion of
the cost of health insurance coverage. The legislation includes a requirement that most individuals obtain health insurance coverage beginning in 2014 and that most large employers offer coverage to
their employees or they will be required to pay a financial penalty.

In
addition, the new laws encompass certain new taxes and fees on our health plan customers, including an excise tax on high premium insurance policies, limitations on the amount of
compensation that is tax deductible and new fees on companies in our industry which may not be deductible for income tax purposes. The legislation also imposes new regulations on the health insurance
sector, including, but not limited to, guaranteed coverage requirements, prohibitions on some annual and all lifetime limits on insurance benefits, increased restrictions on rescinding insurance
coverage, establishment of minimum medical loss ratio requirements for our health plan customers, and greater restrictions on how our health plan customers price certain of their products. The
legislation also reduces the reimbursement levels for health plans participating in the Medicare Advantage program over time.

Some
provisions of the health care reform legislation become effective this year, including those that bar health insurance companies from placing lifetime limits on insurance coverage
and those related to the increased restrictions on rescinding coverage. However, some of the more significant changes, including the annual fees on health insurance companies, the excise tax on high
premium insurance policies, the guaranteed coverage requirements and the requirement that individuals obtain coverage, do not become effective until 2014 or later. Many of the details of the new law
require additional guidance and specificity to be provided by the Department of Health and Human Services, National Association of Insurance Commissioners, Department of Labor and Treasury Department.

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While
many of the provisions of the recently enacted healthcare reform legislation will not be applicable directly to the Company, they will affect the business of the Company's health plan and
employer customers in its Commercial, Radiology Benefits Management and Specialty Pharmaceutical segments, and will also affect the Medicaid programs of the states with whom the Company has contracts
in its Public Sector and Managed Medicaid segments.

Although,
it is too early to fully understand the impacts of the legislation on the Company's business or on the business of the Company's customers, there is no assurance that the
legislation will not have a material adverse effect on the Company's business, cash flows, financial condition and results of operations.

The Mental and Substance Abuse Benefit Parity Law and Regulations could adversely affect the Company's business, revenues, profitability and results of
operation.

In
October 2008, the United States Congress passed the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 ("MHPAEA") establishing parity in financial
requirements (e.g. co-pays, deductibles, etc.) and treatment limitations (e.g. limits on the number of visits) between mental health and substance use disorder benefits and
medical/surgical benefits for group health plan members. This new law does not require coverage for mental health or substance use disorders but if coverage is provided it must be provided at parity.
No specific disorders are mandated for coverage; health plans are able to define mental health and substance use disorders to determine what they are going to cover as long as their definitions are
consistent with generally recognized independent standards of current medical practice. State mandated benefits laws are not preempted except to the extent that they prohibit the application of the
federal law. The law applies to group health benefit plans including ERISA plans, Medicaid managed care plans and State Children's Health Insurance Program ("SCHIP") plans. Self-funded
non-federal government plans can opt out of these federal parity requirements. There is an exemption for small employers with 50 or fewer employees. On February 2, 2010, the
Department of the Treasury, the Department of Labor and the Department of Health and Human Services promulgated Interim Final Rules interpreting the MHPAEA. These regulations apply to all plans
covered under MHPAEA except for Medicaid managed care plans and SCHIP plans. The regulations, which are effective for health benefit plan years beginning or renewing on or after July 1, 2010,
provide more detail on the application of the MPHAEA and require that health plans may not apply any financial requirements or quantitative treatment limitations to mental health or substance use
disorder benefits that are more restrictive than the predominant financial requirements or quantitative treatment limitations applied to
substantially all medical/surgical benefits in the same classification. The classifications include in-patient/in network benefits, inpatient/out-of-network
benefits, outpatient/in network benefits, outpatient/out-of network benefits, emergency care, and prescription drugs. Financial requirements include deductibles, co-payments,
coinsurance or out of pocket maximums. The regulation includes the requirement that there be no separate cumulative financial requirements or cumulative quantitative treatment limitations, essentially
requiring a single deductible for medical/surgical and mental health and substance use disorder benefits. The regulations classify the treatment limitations into two types. The first is quantitative
treatment limitations such as limits on benefits based on the frequency of treatment, number of visits, days of coverage, or days in a waiting period.

The
second is non-quantitative treatment limitations. The regulations state that plans may not impose any nonquantitative treatment limitations on behavioral health benefits
unless the limitations are comparable to and applied no more stringently than a limitation on the medical/surgical benefits in the same classification, except to the extent that recognized clinically
appropriate standards of care may permit a difference. The regulation contains an illustrative list of nonquantitative treatment limitations that includes medical management standards limiting or
excluding benefits based on medical necessity or medical appropriateness or based on whether the treatment is experimental or investigative, formulary design for prescription drugs, standards for
provider admission to participate in a network

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(including
reimbursement rates), plan methods for determining usual, customary and reasonable charges, refusal to pay for higher cost therapies until it can be shown that a lower cost therapy is
effective, and exclusions based on failure to complete a course of treatment. In many instances, the regulations do not provide clear guidance as to their application in particular circumstances and
will require further clarification and interpretation by the responsible regulatory agencies. The Company is currently working with its customers to assess the effect of the regulations to their
businesses and to the business of the Company. The interim final regulations will require changes in the business practices of the Company's health plan customers and the business practices of the
Company. No assurance can be given that such legislation will not have a material adverse effect on the Company's customers or on the Company. However, the Company's risk contracts do allow for
repricing to occur effective the same date that any legislation or regulations becomes effective if that legislation is projected to have a material affect on cost of care.

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 authorized the Company to purchase up
to $200 million of its outstanding common stock through January 31, 2010. Stock repurchases under the program could be executed through open market repurchases, privately negotiated
transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions
under the program from time to time and in such amounts and via such methods as management deemed appropriate. The stock repurchase program could be limited or terminated at any time without prior
notice. Pursuant to this program, the Company made open market purchases of 3,866,505 shares of the Company's common stock at an aggregate cost of $136.0 million (excluding broker commissions)
during the year ended December 31, 2008 and made open market purchases of 1,859,959 shares of the Company's common stock at an average share price of $34.39 per share for an aggregate cost of
$64.0 million (excluding broker commissions) during the period January 1, 2009 through April 7, 2009, which was the date that the repurchase program was completed, the
$200 million authorization having been exhausted.

On
July 28, 2009 the Company's board of directors approved a stock repurchase plan which authorizes the Company to purchase up to $100 million of its outstanding common
stock through July 28, 2011. 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 under the program 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 782,400 shares of the
Company's common stock at an average price of $32.75 per share for an aggregate cost of $25.6 million (excluding broker commissions) during the period from August 17, 2009 through
December 31, 2009. Pursuant to this program, the Company made open market purchases of 1,663,589 shares of the Company's common stock at an average price of $43.45 per share for an aggregate
cost of $72.3 million (excluding broker commissions) during the three months ended March 31, 2010.

As
of March 31, 2010, the Company has recorded a liability in the amount of $13.0 million for stock repurchases for which cash settled subsequent to such date.

The
Company made additional open market purchases of 48,292 shares at an aggregate cost of $2.1 million, excluding broker commissions and transaction fees, on April 1,
2010, which was the date that the repurchase program was completed, the $100 million authorization having been exhausted.

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Following
is a summary of stock repurchases made subsequent to December 31, 2009 (dollars in thousands):

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 of
Shares that
May Yet Be
Purchased Under
the Plan(1)(2)January 1 - 31, 2010




$
0.00




$
74,376February 1 - 28, 2010


16,200

$
37.88


16,200


73,762March 1 - 31, 2010


1,647,389

$
43.50


1,647,389


2,099April 1, 2010


48,292

$
43.47


48,292


1,711,881





1,711,881

$



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


Item 3.    Defaults Upon Senior Securities.

None.

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

None.

Item 5.    Other Information.

(i)2010 Credit Facility:On April 28, 2010, the Company entered into an amendment to the 2009 Credit
Facility with Deutsche Bank AG, Citibank, N.A., and Bank of America, N.A. that provided 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 "2010 Credit Facility"). Borrowings under the 2010 Credit Facility mature on April 28, 2013. The 2010 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 2010 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin
of 1.75 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 2.75 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 2.875 percent. The commitment commission on the 2010
Credit Facility is 0.50 percent of the unused Revolving Loan Commitment.

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Item 6.    Exhibits.

Exhibit No.

Description4.1

Third Amendment to Credit Agreement, dated as of April 28, 2010, 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 (furnished).32.2

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


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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, 2010

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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