Except for 25,506 square feet of leased space under a contract which expires November 2014.
Premiums for our Medicare products are generally fixed in advance of the period during which health care is covered. Each of our Medicare plans submits rate proposals to CMS, generally by county or service area, in June for each Medicare product that will be offered beginning January 1 of the subsequent year. Retroactive rate adjustments are made periodically with respect to each of our Medicare plans based on the aggregate health status and risk scores of our plan populations. For a further explanation of the Company’s accounting for retroactive risk payments, see “-Results of Operations -Risk Adjustment Payments” below. Our risk adjustment payments are subject to review and audit by CMS. See “- CMS RADV Audits” below.
Investment Income. Investment income consists primarily of interest income on cash and investments and gross realized gains and losses from sales of investments.
Medicare Advantage: Medicare Advantage (including MA-PD) premiums increased $0.3 billion, or 14.0%, to $2.6 billion for the year ended December 31, 2010 as compared to 2009. The increase in Medicare Advantage premiums in 2010 is primarily attributable to the inclusion of premiums recorded by Bravo Health from November 30, 2010, the date we acquired Bravo Health, and increases in membership in our existing health plans. PMPM premiums for the current year averaged $1,058, which reflects an increase of 0.7% as compared to 2009. The PMPM premium increase in the current year is the result of increases in the drug component portion of the premium; the inclusion of Bravo Health, which historically has experienced higher PMPM premium revenue than HealthSpring; and increases related to member risk scores, which were partially offset by decreases in CMS-calculated base rates.
Medicare Advantage. Medicare Advantage (including MA-PD) medical expense for the year ended December 31, 2009 increased $0.4 billion, or 26.7%, to $1.9 billion from $1.5 billion for 2008, which is primarily attributable to membership increases in 2009 as compared to 2008 and increases in PMPM medical expense. For the year ended December 31, 2009, the Medicare Advantage MLR was 81.0% as compared to 79.0% for 2008. The increase in the MLR for 2009 was primarily attributable to increases in inpatient procedure costs in our Tennessee health plan and increases in outpatient expenses in our Alabama, Tennessee, and Texas health plans. The MLR increase in 2009 was partially offset by improvements in our Florida plan’s MLR attributable primarily to hospital recontracting efforts. The MLR for 2008 includes favorable final CMS settlement adjustments associated with prior years which reduced MLR by approximately 70 basis points. Similar adjustments in 2009 were not material to MLR.
2010 Compared With 2009. The increase in cash flow provided by operating activities to $221.1 million for 2010 from $170.0 million for 2009 is primarily due to increased earnings driven primarily by favorable trends in Medicare Advantage medical expenses and by the receipt of $50.0 million of prior year final CMS settlements compared to receipts in 2009 of $31.8 million.
Actual amounts ultimately owed for 2009 services and paid to providers in 2010 under risk-sharing and quality care management initiatives being less than the related liabilities recorded at December 31, 2009 resulting in $3.4 million of favorable development.
The consolidated financial statements include the accounts of HealthSpring, Inc. and its wholly owned subsidiaries as of December 31, 2010 and 2009, and for the three years ended December 31, 2010. All significant intercompany accounts and transactions, including intercompany transactions with consolidated VIEs, have been eliminated in consolidation.
Under our cash management system, checks issued but not yet presented to banks result in overdraft balances in certain of our subsidiaries for accounting purposes and are classified as a current liability in the consolidated balance sheets. Changes in book overdraft from period to period are reported in the consolidated statement of cash flows as a financing activity.
The Company’s Medicare premium revenue is subject to adjustment based on the health risk of its members. Risk adjustment uses health status indicators to correlate the payments to the health acuity of the member, and consequently establish incentives for plans to enroll and treat less healthy Medicare beneficiaries. This process for adjusting premiums is referred to as the CMS risk adjustment payment methodology. Under the risk adjustment payment methodology, managed care plans must capture, collect, and report diagnosis code information to CMS. After reviewing the respective submissions, CMS establishes the payments to Medicare plans generally at the beginning of the calendar year, and then adjusts premium levels on two separate occasions on a retroactive basis. The first retroactive risk premium adjustment for a given fiscal year generally occurs during the third quarter of such fiscal year. This initial settlement represents the updating of risk scores for the current year based on the prior year’s dates of service. CMS then issues a final retroactive risk premium adjustment settlement for the fiscal year in the following year. The Company estimates and records CMS settlement amounts on a monthly basis. All such estimated amounts are periodically updated as necessary as additional diagnosis code information is reported to CMS and adjusted to actual amounts when the ultimate adjustment settlements are either received from CMS or the Company receives notification from CMS of such settlement amounts.
Computed intrinsic value per share amounts are based upon the amount by which the fair market value of the Company’s common stock at December 31, 2010 of $26.53 per share exceeded the weighted average exercise price. The aggregate value amounts are calculated using the actual exercise prices and include only those options that were exercisable and with positive intrinsic value at the end of the period.
Restricted stock awards in 2010, 2009, and 2008 were granted with a fair value equal to the market price of the Company’s common stock on the date of grant. Compensation expense related to the restricted stock awards is based on the market price of the underlying common stock on the grant date and is recorded straight-line over the vesting period, generally ranging from one to four years from the date of grant. The weighted average grant date fair value of the Company’s restricted stock awards was $17.93, $12.70, and $19.16 for the years ended December 31, 2010, 2009, and 2008, respectively.
Share-based compensation is included in selling, general and administrative expense. Share-based compensation for the years ended December 31, 2010, 2009, and 2008 consisted of the following (in thousands):
At December 31, 2010 and 2009, the Company had current assets of $578,000 and $2.8 million, respectively, recorded on its consolidated balance sheets for amounts due from the sellers of LMC Health Plans under settlement provisions included in the Stock Purchase Agreement regarding working capital and risk adjustment premiums related to the period prior to the acquisition date.
The above amounts are classified as current or long-term in the consolidated balance sheets in accordance with the asset or liability to which they relate or, when applicable, based on the expected timing of the reversal. Current deferred tax assets at December 31, 2010 and 2009 were $15.5 million and $7.0 million, respectively. Non-current deferred tax liabilities at December 31, 2010 and 2009 were $104.3 million and $80.5 million, respectively.
Income taxes payable of $15.3 million and $6.3 million at December 31, 2010 and 2009, respectively, are included in other current liabilities on the Company’s consolidated balance sheets. In addition, income taxes payable of $316,000 and $750,000 at December 31, 2010 and 2009, respectively, are included in other long-term liabilities on the Company’s consolidated balance sheets. The balance in other long-term liabilities relates to certain tax matters associated with the acquisition of LMC Health Plans which were recorded through goodwill, as well as certain unrecognized tax benefits.
Financial data by reportable segment for the years ended December 31 is as follows (in thousands):
A reconciliation of reportable segment EBITDA to net income included in the consolidated statements of income for the years ended December 31 is as follows (in thousands):