Our reportable segments are comprised of Western Region Operations and Government Contracts. Effective January 1, 2013, our Divested Operations and Services segment was closed out after we substantially completed the transition and run-out of our divested businesses, as further discussed below.
The ACA also contains premium stabilization provisions designed to apportion risk amongst insurers. These stabilization provisions include permanent risk adjustment provisions applicable to the individual and small group markets that became effective at the beginning of 2014 and will shape the economics of health care coverage both within and outside the exchanges. These risk adjustment provisions will effectively transfer funds from health plans with relatively lower risk enrollees to plans with relatively higher risk enrollees to help protect against the consequences of adverse selection. The individual and small group markets are expected to represent a significant portion of our commercial business and the relevant amounts transferred may be substantial. To adapt to this new economic framework, we have dedicated significant resources and incurred significant general and administrative costs to implement numerous strategic and operational initiatives both within and outside the exchanges that, among other things, require us to focus on and manage different populations of potential members than we have in the past.
providing funds to expand Medicaid eligibility to all individuals with incomes up to 133 percent of the federal poverty level, commonly referred to as “Medicaid expansion” (this provision was made optional for states under the Supreme Court's ruling on the ACA in June 2012);
limiting the ability of health plans to vary premiums based on assessments of underlying risk in the individual and small group markets;
B - For the years ended December 31, 2013 and 2011, we had no sale of a discontinued operation; therefore, income tax expense from gain on sale of discontinued operation and the corresponding effective income tax rate are not applicable.
The effective income tax rate for continuing operations was 37.0% and 18.9% for the years ended December 31, 2013 and 2012, respectively. The effective income tax rate varies from the statutory federal tax rate of 35% for the year ended December 31, 2013 primarily due to state income taxes, tax exempt investment income, and non-deductible compensation.
The most significant change in the effective income tax rates from the 2011 to 2012 periods presented above was as a result of the absence of litigation effects in 2012. During the year ended December 31, 2011, a judgment was rendered in the AmCareco litigation (see Note 13 to our consolidated financial statements for additional information regarding the AmCareco litigation) that resulted in deferred tax assets of $51.1 million. Realization of these deferred tax assets was uncertain and therefore, a valuation allowance for the full amount was established. Additionally, our tax rate for the year ended December 31, 2012 was lower than the statutory federal rate of 35% primarily due to the effect of tax-exempt income and reductions of valuation allowances against deferred assets, which resulted from the utilization of capital loss carryforwards against gains on sale of marketable securities. Such beneficial impacts were partially offset by the effect of
In 2012, the California legislature enacted the Coordinated Care Initiative, or “CCI.” The stated purpose of the CCI is to provide a more efficient health care delivery system and improved coordination of care to individuals that are fully eligible for Medicare and Medi-Cal benefits, or "dual eligibles," as well as to all Medi-Cal only beneficiaries who rely on long-term services and supports, or “LTSS,” which includes institutional long-term care and home and community-based services and other support services.
The Medicare Advantage MCR in in our Western Region Operations segment was 90.6 percent for the year ended December 31, 2013 compared with 89.3 percent for the year ended December 31, 2012. The Medicare Advantage MCR deteriorated by 130 basis points for the year ended December 31, 2013 compared to the same period in 2012 primarily due to lower premium yield from lower federal rates.
Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services including: provider network management, referral management, medical management, disease management, enrollment, customer service, clinical support service, and claims processing. We also provided assistance in the transition activities related to the T-3 contract, and will provide assistance in any transition out of the T-3 contract. These services are structured as cost reimbursement arrangements for health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, and contingent fees and payments based on various incentives and penalties. We recognize revenue related to administrative services on a straight-line basis over the option period, when the fees become fixed and determinable. The T-3 members are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the terms of the T-3 contract, we are not the primary obligor for health care services and accordingly, we do not include health care costs and related reimbursements in our consolidated statement of operations. The contract also includes various performance-based incentives and penalties. For each of the incentives or penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at each interim date and are legally entitled to in the event of a contract termination. See Note 2 to our consolidated financial statements under the heading “Government Contracts” for additional information on the T-3 contract.
Government contracts revenues decreased by $116.9 million, or 17.0 percent, for the year ended December 31, 2013 as compared to the same period in 2012. Government contracts costs decreased by $101.4 million or 16.9 percent for the year ended December 31, 2013 as compared to the same period in 2012. These declines were primarily due to the terms and structure of the MFLC contract entered into in August 2012, as compared to the prior MFLC contract.
As of December 31, 2013, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto. See Note 6 to our consolidated financial statements for a discussion of our letters of credit.
Approximately 50%, 45%, and 40% in 2013, 2012 and 2011, respectively, of our health plan services premium revenues were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these programs, including CMS' proposed methodology with respect to risk adjustment data validation (“RADV”) audits, are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount.