Selling, general and administrative ("SG&A") expense includes $57.3 million, $51.6 million, $47.0 million, $265.9 million and $105.0 million for the years ended December 31, 2013, 2012, 2011, 2010, and 2009, respectively, of aggregate costs related to the resolution of the previously disclosed governmental and Company investigations, such as settlement accruals and related fair value accretion, legal fees and other similar costs. The 2010 and 2009 costs are net of $25.8 million and $6.4 million, respectively, of D&O insurance recoveries related to the consolidated securities class action during these periods.
Interest expense for 2013 includes interest related to the $600 million 5.75% senior notes issued in November 2013, as well as the term loans borrowed under the 2011 Credit Agreement. A portion of the net proceeds from the issuance of the senior notes was used to pay off the remaining $336.5 million term loan balance under the 2011 Credit Agreement in November 2013.
Membership increased 7% compared to December 31, 2012 due to growth in our Medicaid segment, mainly attributable to growth in Kentucky and Florida and our acquisitions in South Carolina and Missouri in January 2013 and March 2013, respectively. Additionally, membership in our Medicare Advantage ("MA") segment increased 36%, driven by service area expansion, product design and marketing activities within this segment. These increases were partially offset by lower prescription drug plan ("PDP") membership based on our 2013 bid results.
Net Income decreased 5% compared to the same period in 2012 mainly due to the impact of lower net favorable development in prior year medical benefits payable, lower results in our PDP segment and increased interest expense and other costs resulting from higher average debt levels in 2013 associated with additional borrowings, partially offset by the impact of increased premium revenue in our Medicaid and MA segments.
Presented below are key developments and accomplishments relating to progress on our business priorities that occurred or impacted our financial condition and results of operations during 2013, or occurred in 2014 prior to the filing of this 2013 Form 10-K.
In February 2014, we executed a contract with the Florida Agency for Health Care Administration ("AHCA") to provide managed care services to Medicaid recipients in eight of the state’s eleven regions as part of the state’s Managed Medical Assistance (MMA) program. These regions include the Jacksonville, Miami, Orlando, Tallahassee and Tampa metropolitan areas. As a result of these awards, we anticipate that our Florida Temporary Assistance for Needy Families ("TANF") and SSI membership will increase in 2014 to at least 500,000 from the 394,000 members that we served in December 2013.
In January 2014, we executed a contract with the Hawaii Department of Human Services for our 'Ohana plan to continue serving the state through the new QUEST Integration program. ‘Ohana will cover Medicaid and other eligible individuals across Hawaii. Implementation of the QUEST Integration program is anticipated for January 1, 2015. Under Hawaii's Community Care Services Program, which began on a statewide basis in March 2013, we case manage, authorize and facilitate the delivery of behavioral health services to Medicaid-eligible adults who have serious mental illnesses and who are participants in the state's QUEST Expanded Access (QExA) health program.
In November 2013, we completed the offering and sale of $600.0 million 5.75% unsecured senior notes due 2020 (the "Senior Notes"), and used a portion of the proceeds to repay the $336.5 million principal amount outstanding under the senior secured credit facility dated August 1, 2011, as amended to date (the "2011 Credit Agreement"). The remaining net proceeds from the issuance of the Senior Notes were be used for general corporate purposes, including organic growth opportunities and potential acquisitions. See Note 12 - Debt of the Notes to Consolidated Financial Statements for further information.
In November 2013, we were approved by the South Carolina Department of Health and Human Services (SCDHHS) to offer Medicaid in six additional counties in the state, effective January 1, 2014. With this approval, we provide Medicaid services in 45 out of 46 counties in South Carolina. Also, membership from Carolina Medical Homes (“CMH”) transitioned to us on January 1, 2014 as a result of changes SCDHHS made to its Healthy Connections Choices Medicaid managed care program and WellCare's purchase of certain assets from CMH.
For the 2014 plan year, we have expanded the geographic footprint of our MA plans to offer plans in a total of 210 counties in 14 states, excluding Windsor, but including dual special needs plans (“D-SNPs”) for those who are dually-eligible for Medicare and Medicaid in most of the MA markets we serve. This expansion is consistent with our focus on the lower-income demographic of the market and our ability over time to provide both the Medicaid- and Medicare-related coverage of these members.
Effective July 5, 2013, Centene Corporation ("Centene") terminated its Medicaid contract with the Commonwealth of Kentucky ("the Commonwealth") and is no longer serving members. Consequently, on July 6, 2013, the Commonwealth transferred approximately 57,000 members to us as part of its transition process. We began serving the members as of that date.
Please refer to Part I, Item 1 - Business, General Economic and Political Environment Impacting our Business and Health Care Reform for a further discussion of the current economic and political environment that is affecting our business, including discussion of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act") and its potential impact on our business.
The Affordable Care Act will impose certain new taxes and fees, including limitations on the amount of compensation that is tax deductible, as well as an annual premium-based health insurance industry assessment (the "industry fee") on health insurers beginning in 2014. The total industry fee levied on the health insurance industry will be $8 billion in 2014, with increasing annual amounts thereafter and growing to $14.3 billion by 2018. After 2018, the industry fee increases according to an index based on net premium growth. The assessment will be levied on certain health insurers that provide insurance in the assessment year, and will be allocated to health insurers based on each health insurer's share of net premiums for all U.S health insurers in the year preceding the assessment. The industry fee will not be deductible for income tax purposes, which will significantly increase our effective income tax rate. We currently estimate that we will incur between approximately $125 to $135 million in such fees in 2014, based on our estimated share of total 2013 industry premiums. However, the final fee amount will not be determined until August 2014. We currently expect to be reimbursed by our state customers for the impact of the fee on our Medicaid plans, including its non-deductibility for income tax purposes. However, the timing of revenue recognition for such reimbursement may be delayed and not match the expense recognition of the fee, depending on the timing of contractual agreements. MA and PDP premiums will not be adjusted to offset the impact of the fee. In addition, refer to the risks and uncertainties related to health care reform as discussed in Part I, Item 1A - Risk Factors - Future changes in health care law present challenges for our business that could have a material adverse effect on our results of operations and cash flows.
Medicaid - membership increased by approximately 136,000 mainly from membership growth in Florida, membership growth in our Kentucky Medicaid program following its launch in the fourth quarter of 2011 and subsequent open enrollment in November 2012, and membership growth in our Hawaii Medicaid program due to our participation in Hawaii's QUEST program beginning in July 2012. Our Kentucky Medicaid membership increased from 129,000 at December 31, 2011 to 207,000 at December 31, 2012. Kentucky membership also increased due to retroactive member re-assignments.
MA - membership increased by approximately 78,000 compared to December 31, 2011, due to the Easy Choice acquisition, and as a result of the 2012 annual election period, which resulted in an increase of approximately 10,000 members effective January 1, 2012, as well as our continued focus on dually-eligible beneficiaries and expansion into 19 new counties during 2012. Excluding the Easy Choice plan, MA membership as of December 31, 2012 was 174,000, an increase of 29% from December 31, 2011.
Investment and other income in 2013 was $18.8 million, a $10.0 million increase from $8.8 million in 2012, primarily driven by higher volumes of prescription drug plan copayments and specialty prescription drugs sold to non-members.
SG&A expense includes aggregate costs related to the resolution of the previously disclosed governmental investigations and related litigation, such as settlement accruals and related fair value accretion, legal fees and other similar costs. Refer to Note 13-Commitments and Contingencies within the Consolidated Financial Statements for additional discussion of
Excluding investigation-related litigation and other resolution costs, our SG&A expense for the year ended December 31, 2013 increased approximately $160.0 million, or 25%, to $799.2 million. The increase is driven mainly by the growth in membership, investments in technology and infrastructure, including costs necessary to meet regulatory changes, investments related to our medical cost initiatives,increased SG&A from the integration of recent acquisitions. Additionally, during the third quarter of 2013, we determined that we would be discontinuing certain projects going forward and, as a result, the software and development costs acquired to support these projects would not be fully recoverable. Consequently, we recorded a pre-tax asset impairment charge of $9.0 million. The increase in costs noted above were partially offset by improvements in operating efficiency. Our SG&A ratio, was 9.1% for the year ended December 31, 2013 compared to 9.4% for the same period in 2012. After excluding the investigation-related litigation and other resolution costs, our SG&A ratio in 2013 was 8.5% compared to 8.7% for the same period in 2012.
Our adjusted administrative expense ratio for 2014 is expected to be between approximately 8.6% and 8.7%, an increase from 8.5% percent in 2013. We expect to report the health insurance industry fee expense separately from SG&A expense. Consequently, our administrative expense ratio guidance does not include the ACA fee.
Depreciation and amortization expense incurred for the year ended December 31, 2012 was $31.6 million, compared to $26.4 million for the same period in 2012. The year-over-year increase was mainly attributable to incremental infrastructure related investments made during 2012.
We expect that interest expense will increase materially in 2014 compared to 2013 due to higher average debt outstanding from the issuance of the Senior Notes, and is anticipated to be between $38 and $39 million.
Income tax expense for the year ended December 31, 2012 was $111.7 million, or 37.7% of pre-tax income, compared to $154.2 million, or 36.9% of pre-tax income, for the year ended December 31, 2011. The effective tax rate for the year ended December 31, 2012 increased compared to the same period in 2011 due to the settlement of a state tax matter in 2012 which increased the effective rate, partially offset by a decrease in the prevailing state income tax rate.
Reportable operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated on a regular basis by the enterprise's decision-makers to determine how resources should be allocated to an individual segment and to assess performance of those segments. Accordingly, we have three reportable segments: Medicaid, MA and PDP.
We use three measures to assess the performance of our reportable operating segments: premium revenue, MBR and gross margin. MBR measures the ratio of medical benefits expense to premium revenue excluding Medicaid premium taxes. Gross margin is defined as premium revenue less medical benefits expense. For further information regarding premium revenues and medical benefits expense, please refer below to "Premium Revenue Recognition and Premiums Receivable", and "Medical Benefits Expense and Medical Benefits Payable" under "Critical Accounting Estimates."
Our Medicaid segment includes plans for beneficiaries of TANF, Supplemental Security Income ("SSI"), Aged Blind and Disabled ("ABD") and other state-based programs that are not part of the Medicaid program, such as Children's Health Insurance Program ("CHIP"), Family Health Plus ("FHP") and Managed Long-Term Care ("MLTC") programs. As of December 31, 2013, we operated Medicaid health plans in Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, New York and South Carolina. We began serving WCSC members on February 1, 2013, and Missouri Care members on April 1, 2013. As of July 1, 2013, we no longer provided Medicaid services in Ohio.
We received an approximate 7.0% premium rate increase for the Kentucky Medicaid program effective January 1, 2013, as well as an additional 3.0% rate effective July 1, 2013, which was previously scheduled for October 1, 2013. These rate increases apply to all Medicaid geographic regions of the Commonwealth, other than Region 3.
The acquisitions of WCSC and Missouri Care in January 2013 and March 2013, respectively, increased our membership by approximately 50,000 and 104,000 beneficiaries, respectively, as of December 31, 2013.
We were not awarded a Medicaid contract in Ohio for the 2013 fiscal year; however, the state contracted with us to provide services to Ohio Medicaid beneficiaries through the transition period, which ended June 30, 2013. As of July 1, 2013, we no longer provided Medicaid services in Ohio. Ohio membership as of December 31, 2012 was approximately 97,000.
Medicaid medical benefits expense for the year ended December 31, 2013 increased 27%, which is consistent with the increase in membership and premiums. Our Medicaid MBR for the year ended December 31, 2013 decreased by approximately 50 basis points when compared to the same period in 2012, mainly reflecting the impact of improved results in Kentucky, partially offset by a lower amount of net favorable development of prior years' medical benefits payable in 2013 compared to 2012. The Kentucky program MBR declined to 90.0% in 2013 compared to 105.1% in 2012, as 2012 performance was adversely impacted by relatively high transitional medical benefit expenses for the program which launched in late 2011. The Missouri and South Carolina acquisitions also contributed to the decrease in the Medicaid segment MBR in 2013, as the MBR for these programs was lower than the segment average.
We anticipate Medicaid segment premium revenue to increase approximately 22% to 23%, in 2014 compared to 2013, mainly as a result of the Florida MMA implementation, growth in Kentucky and our entry into New Jersey.
In February 2014, our Florida Medicaid plan executed a contract with the Florida AHCA to provide managed care services to Medicaid recipients in eight of the state’s eleven regions as part of the state’s MMA program. These regions include the Jacksonville, Miami, Orlando, Tallahassee and Tampa metropolitan areas. As result of the MMA contract awards, we anticipate that our Florida TANF and SSI membership should increase to at least 500,000 by December 2014, compared to the 394,000 members that we served in December 2013.
We contract with CMS under the Medicare program to provide a comprehensive array of Part C and Part D benefits to Medicare eligible persons. These benefits are provided through our MA plans, which are comprised of coordinated care plans ("CCPs"). CCPs are administered through HMOs and generally require members to seek health care services and select a primary care physician from a network of health care providers. In addition, we offer Medicare Part D coverage, which provides prescription drug benefits, as a component of our MA plans.
As of December 31, 2013, we operated our MA CCPs in Arizona, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Missouri, New Jersey, New York, Ohio and Texas, and offered MA plans in a total of 204 counties across these14 states, with over 15 million eligible beneficiaries in these service areas. We offer duals special needs plans ("D-SNPs") in nearly all the counties that we serve, and approximately 33% of our MA members are "dually eligible" for Medicare and Medicaid and are enrolled in one of our D-SNPs. We cover a wide spectrum of medical services through our MA plans. For many of our plans, we provide additional benefits not covered by Original Medicare, such as vision, dental and hearing services. Through these enhanced benefits, out-of-pocket expenses incurred by our members are generally reduced, which allows our members to better manage their health care costs.
For 2013, we expanded our Medicare Advantage service area by 64 counties in California, Florida, Georgia, Illinois, Kentucky, New York, and Texas.
MA premium revenue for the year ended December 31, 2013 increased $1.1 billion, or 59%, when compared to the same period in 2012. The Easy Choice and Desert Canyon acquisitions contributed $533.2 million, or 27%, to the year-over-year growth, while the remaining $601.4 million, or 32%, increase was mainly attributable to organic membership growth associated with our service area expansion, higher risk adjusted premium, prior period revenue adjustments and the strengthening of our sales processes and our product design.
The $1.0 billion, or 63%, increase in MA medical benefits expense during 2013 compared to the same period in 2012 reflects the increase in membership and premiums and increase in the MA segment MBR. MA segment MBR increased by 240 basis points for the year ended December 31, 2013 compared to 2012 due to the impact of Easy Choice, which operated at a higher MBR relative to the segment average, our 2013 plan design and the impact of the federal government's budget sequestration, partially offset by favorable prior period revenue adjustments.
MA premium revenue for the year ended December 31, 2012 increased $456.6 million, or 31%, when compared to the same period in 2011. Excluding the impact of the Easy Choice acquisition, MA premium revenue for 2012 increased by approximately $384.6 million, or 26% , compared to 2011 mainly attributable to organic membership growth due to our product design, strengthening of our sales processes and heightened focus on membership growth activities during the annual election period in 2011.
We expect premium revenue for our MA segment to increase approximately 22% to 24% in 2014 compared to 2013, driven mainly by the Windsor acquisition.
In addition, on April 1, 2013, CMS announced revised proposed 2014 benchmark rates, which will result in a rate decrease of approximately 2.0% to 4.0% from 2013 rates. In April 2013, CMS also announced changes to the MA and PDP Medicare risk adjustment system involving a risk coding recalibration which will be phased in over the 2014 and 2015 plan years. In addition, CMS will implement an MA coding intensity reduction of 4.91% for payment year 2014. This new risk adjustment model includes an adjustment to the calculation of health status cost risk based on each beneficiary’s diagnosis codes that will reduce the positive adjustments for high-risk patients and increase the negative adjustments for low-risk patients. The change appears to most severely affect our rates for those individuals with complex medical conditions, including many of our dual-eligible and lower income members.
We have contracted with CMS to serve as a plan sponsor offering stand-alone Medicare Part D PDP plans to Medicare eligible beneficiaries through our PDP segment. As of December 31, 2013, we offered PDP plans in 49 states and the District of Columbia. The PDP benefit design generally results in our incurring a greater portion of the responsibility for total prescription drug costs in the early stages of a plan year, and less in the latter stages of a plan year, due to the members' share of cumulative out-of-pocket costs increasing throughout the plan year. As a result, the PDP MBR generally decreases throughout the year. Also, the level and mix of members who are auto-assigned to us as and those who actively choose our PDP plans will impact the segment MBR pattern across periods.
Effective April 1, 2013, premium payments to PDP plans were reduced by 2% pursuant to the sequestration provisions of the Budget Control Act of 2011 and our 2013 results of operations were negatively impacted.
PDP premium revenue decreased 22% for the year ended December 31, 2013 when compared to the same period in 2012, primarily due to the decline in membership and the outcome of our 2013 bids. PDP MBR for the year ended December 31, 2013 increased 780 basis points over the same period in 2012 mainly due to the addition of our new enhanced product, designed for those who choose a PDP, and a shift in membership to this product, as well as higher drug unit costs and the outcome of our 2013 bids. Transition of care costs for the enhanced product also contributed to the increased MBR. The transition period concluded at the end of March.
prior years. PDP MBR for the year ended December 31, 2012 decreased 420 basis points over the same period in 2011 due to the outcome of our 2012 bids and improvements in our pharmacy claims experience, resulting from our focus on member
We anticipate that PDP segment premium revenue will increase 33% to 37% in 2014 compared to 2013, primarily as a result of our membership growth, offset in part by lower premium rates resulting from our 2014 bids.
As a result of legislation passed in December 2013 (see Part I, Item 1 - Business, General Economic and Political Environment Impacting our Business for additional discussion), the 2% sequestration reduction to Medicare provider and plan payments will continue in 2014 and extend through 2023, so our results of operations will continue to be negatively impacted. Additionally, our PDP premium rates have not been adjusted to offset the impact of the health insurance industry fee assessment imposed by the Affordable Care Act.
Excluding Windsor, PDP membership as of January 1, 2014 was approximately 1.1 million, an increase of approximately 320,000, or 40%, from 797,000 as of December 31, 2012. The increased membership in 2014 is primarily based on the outcome of our 2014 PDP bids, in which our plans were below the benchmarks in 30 of the 33 CMS regions for which we submitted 2014 bids. The favorable 2014 outcome resulted from the realignment of our benefit designs and cost structure to allow for prudent, competitive bids. In 2014, we are being auto-assigned newly-eligible members into our plans for the 30 regions that are below the benchmark. We are retaining our auto-assigned members in the three regions in which we bid within the de minimis range; however, we are not being auto-assigned new members in those regions during 2014. We expect membership to continue to grow organically during the remaining months of 2014.
Effective January 1, 2014, as a result of our acquisition of Windsor, we began serving approximately 154,000 individual and group beneficiaries across 11 of the 34 CMS regions. Including Windsor, January 2014 membership was approximately 1.2 million.
The Company maintains liquidity at two levels: the regulated subsidiary level and the non-regulated parent and subsidiary level.
Unregulated cash, cash equivalents and investments was $495.1 million at December 31, 2013, an increase of $301.6 million from $193.5 million at December 31, 2012. The increase was attributable to aggregate net proceeds of $451.4 million resulting from debt transactions executed during 2013, $147.0 million in dividends received from our regulated subsidiaries and cash flows from operations. The above increases were partially offset by cash used in relation to our 2013 acquisitions, as well as approximately $133.6 million advanced in December 2013 relating to the Windsor acquisition which closed in January 2014. $55.0 million of capital contributions made to certain regulated subsidiaries, total payments of $37.6 million made during the first half of 2013 in connection with our previously reported settlement with the Civil Division of the U.S. Department of Justice (the "Civil Division"), as well as other certain investigation-related litigation and other resolution costs. The $133.6 million payment advanced for the Windsor acquisition was paid on December 31, 2013 in accordance with the terms of the purchase agreement; however, control of ownership did not transfer to us until the January 1, 2014 closing date.
days. As of the date of this 2013 Form 10-K, auctions have failed for our auction rate securities and there is no assurance that auctions will succeed in the future. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar instruments. The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every seven or 35 days until the auction succeeds, the issuer calls the securities, or they mature. As a result, our ability to liquidate and fully recover the carrying value of our remaining auction rate securities in the near term may be limited or non-existent. In addition, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments.
Cash provided by operating activities for 2013 was $178.9 million compared to cash used in operating activities of $30.7 million for 2012. The year-over-year improvement primarily resulted from the increase in premiums associated with the growth in membership. Operating cash flow was negatively impacted in 2013 and 2012 by approximately $37.6 million and $39.8 million, respectively, relating to payments made to the Civil Division under the terms of the settlement agreement discussed in "Financial Impact of Government Investigation and Litigation" below.
Cash used in operating activities in 2012 was $30.7 million compared to cash provided by operations of $162.0 million for 2011. For the year ended December 31, 2012, cash from operating activities was negatively impacted by certain delayed Medicaid premiums, primarily associated with our Georgia Medicaid supplemental payments for obstetric deliveries and newborns. Operating cash flow was negatively impacted in 2012 by approximately $39.8 million relating to payments made to the Civil Division under the terms of the settlement agreement, while in 2011 we paid approximately $87.5 million in connection with resolving shareholder class action complaints.
relating to the Windsor acquisition which closed in January 2014. The $133.6 million advance was completed on December 31, 2013 in accordance with the terms of the purchase agreement; however, control of ownership did not transfer to us until January 1, 2014. The Windsor advance was partially offset by the impact from lower collective amounts paid in connection with the 2013 acquisitions as compared to the collective amounts paid in connection with the 2012 acquisitions.
Aggregate net proceeds of $451.4 million resulting from the debt transactions executed during 2013, which includes net proceeds of $228.5 million received in connection with the second amendment to our 2011 credit agreement and $587.9 million of net proceeds from the issuance of the Senior Notes in November 2013, partially offset by $28.5 million of payments made on the term loan during the first three quarters of 2013. During November 2013, we used a portion of the net proceeds from the issuance of the Senior Notes to pay off the remaining $336.5 million term loan balance under our 2011 credit agreement, plus accrued interest, and plan to use the remaining net proceeds for general corporate purposes, including organic growth opportunities and potential acquisitions.
Net funds received for the benefit of members of $34.0 million and $36.3 million for 2013 and 2012, respectively, compared to a net cash outflow for the benefit of members of $129.6 million in 2011. These funds represent reinsurance, low-income cost sharing, and coverage gap discount subsidies funded by CMS in connection with the Medicare Part D program, for which we assume no risk.
Repurchase in full of approximately $101.7 million subordinated notes in 2011, which was offset by $147.4 million of proceeds, net of financing costs, resulting from the issuance of the term loan under the 2011 Credit Agreement.
In November 2013, we completed the offer and sale of $600.0 million of 5.75% unsecured senior notes due 2020 (the “Senior Notes”). We received net proceeds of $587.9 million upon issuance of the Senior Notes, which consists of the $600.0 million principal balance of the notes less approximately $12.1 million incurred in debt issuance costs. The Senior Notes will mature on November 15, 2020, with interest on the Senior Notes being payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2014. We used a portion of the net proceeds from the offering to repay the full $336.5 million outstanding under the 2011 Credit Agreement, and will use the remaining net proceeds for general corporate purposes, including organic growth opportunities and potential acquisitions.
incur restrictions on the ability of restricted subsidiaries to pay dividends or make other payments, and in the case of our subsidiaries, guarantee indebtedness;
The Credit Agreement includes negative and financial covenants that limit certain activities of our company and its subsidiaries, including (i) restrictions on our ability to incur additional indebtedness; and (ii) financial covenants that require (a) the ratio of total debt to cash flow not to exceed a maximum; (b) a minimum interest expense and principal payment coverage ratio; and (c) a minimum level of statutory net worth for our health maintenance organization and insurance subsidiaries. The Credit Agreement also contains customary representations and warranties that must be accurate in order for us to borrow under the Revolving Credit Facility. In addition, the Credit Agreement contains customary events of default. If an event of default occurs and is continuing, we may be required immediately to repay all amounts outstanding under the Credit Agreement. Lenders holding at least 50% of the loans and commitments under the Credit Agreement may elect to accelerate the maturity of the loans and/or terminate the commitments under the Credit Agreement upon the occurrence and during the continuation of an event of default.
Additionally, in November 2013, we terminated the 2011 Credit Agreement in connection with our entry into the Credit Agreement described above. All amounts outstanding under the 2011 Credit Agreement were paid in full on November 14, 2013. For additional information on our long-term debt, see Note 12 - Debt to the Consolidated Financial Statements.
On September 30, 2011, we issued tradable unsecured subordinated notes having an aggregate par value of $112.5 million, in connection with the settlement of putative class action complaints filed against us in 2007. On December 15, 2011, we paid $101.7 million to repurchase the subordinated notes at a 10% discount and paid accrued interest of approximately $4.1 million. For further information regarding the subordinated notes, refer to Note 12 - Debt to the Consolidated Financial Statements.
Each of our HMO and insurance subsidiaries must maintain a minimum amount of statutory capital determined by statute
or regulation. The minimum statutory capital requirements differ by state and are generally based on a percentage of annualized premium revenue, a percentage of annualized health care costs, a percentage of certain liabilities, a statutory minimum, risk-based capital ("RBC") requirements or other financial ratios. The RBC requirements are based on guidelines established by the NAIC, and have been adopted by most states. As of December 31, 2013, our operating HMO and insurance company subsidiaries in all states except California, New York and Florida were subject to RBC requirements. The RBC requirements may be modified as each state legislature deems appropriate for that state. The RBC formula, based on asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level ("ACL"), which represents the amount of capital required to support the regulated entity's business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain a minimum of the greater of 200% of the required ACL or the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. Our subsidiaries operating in Texas and Ohio are required to maintain statutory capital at RBC levels equal to 225% and 300%, respectively, of the applicable ACL. Failure to maintain these requirements would trigger regulatory action by the state. At December 31, 2013, our HMO and insurance subsidiaries were in compliance with these minimum capital requirements. The combined statutory capital and surplus of our HMO and insurance subsidiaries was approximately $1.1 billion and $926.0 million at December 31, 2013 and 2012, respectively, compared to the required surplus of approximately $489.0 million and $383.0 million at December 31, 2013 and 2012, respectively.
The statutory framework for our regulated subsidiaries' minimum capital requirements changes over time. For instance, RBC requirements may be adopted by more of the states in which we operate. These subsidiaries are also subject to their state regulators' overall oversight powers. For example, the State of New York adopted regulations that increase the reserve requirement annually until 2018. In addition, regulators could require our subsidiaries to maintain minimum levels of statutory net worth in excess of the amount required under the applicable state laws if the regulators determine that maintaining such additional statutory net worth is in the best interest of our members and other constituencies. Moreover, if we expand our plan offerings in a state or pursue new business opportunities, we may be required to make additional statutory capital contributions.
The following table sets forth information regarding our contractual obligations as of December 31, 2013.
We earn premium revenue through our participation in Medicaid, Medicaid-related and Medicare programs. Our contracts with various state Medicaid programs generally are multi-year contracts subject to annual renewal provisions. Our Medicare contracts with CMS renew annually. Our Medicare and Medicaid contracts establish fixed, monthly rates per member ("PMPM"). However, our contracts also have additional provisions as described in the sections below. The premiums we receive for each member vary according to the specific government program and are generally determined at the beginning of each new contract renewal period or each state's fiscal year; however, premiums may be adjusted by CMS and state agencies throughout the terms of the contracts in certain cases, as described below. For a further description of the revenue elements related to our segments, see Part I - Item 1 - Business - OUR PRODUCT SEGMENTS.
subsequently determined to belong to our plan for periods in which we received no premium for those members. We estimate the amount of outstanding retroactivity adjustments each period and adjust premium revenue based on historical trends, premiums billed, the volume of member and contract renewal activity and other information. We record the amounts receivable or payable identified by us through reconciliation and verification of membership eligibility lists, which relate to current and prior periods, in premiums receivable, net and other accrued expenses and liabilities in the accompanying consolidated balance sheets. In 2012, we settled with the Georgia Department of Community Health (the "Georgia DCH") regarding retroactive premium adjustments related to a reconciliation of duplicate member records dating back to the beginning of the program in 2006. As a result, we revised our previous estimates for additional premium revenue receivable related to a previous settlement negotiated with the Georgia DCH in 2011 and we recorded related reductions of premium revenue totaling approximately $21.4 million during the third and fourth quarters of 2012. The settlement resolved issues with certain premium payments that covered the period from the inception of the program through the settlement, and resulted from a comprehensive review and negotiation involving the three health plans that operate in the program.
CMS employs a risk-adjustment model to determine the premium amount it pays for each MA and PDP member. This model apportions premiums paid to all plans according to the health status of each beneficiary enrolled, resulting in higher scores for members with predictably higher costs. The model uses diagnosis data from inpatient and ambulatory treatment settings to calculate each risk score. We collect claims and encounter data for our MA members and submit the necessary diagnosis data to CMS within prescribed deadlines. After reviewing the respective submissions, CMS establishes the premium payments to MA plans at the beginning of the plan year, and then adjusts premium levels on a retroactive basis. The first retroactive adjustment for a given plan year generally occurs during the third quarter of that year and represents the update of risk scores for the current plan year based on the severity of claims incurred in the prior plan year. CMS then issues a final retroactive risk-adjusted premium settlement for that plan year in the following year.
We develop our estimates for risk-adjusted premiums utilizing historical experience and predictive models as sufficient member risk score data becomes available over the course of each CMS plan year. We populate our models with available risk score data on our members and base risk premium adjustments on risk score data from the previous year. We are not privy to risk score data for members new to our plans in the current plan year; therefore we include assumptions, if estimable, regarding these members' risk scores. We periodically revise our estimates of risk-adjusted premiums as additional diagnosis code information is reported to CMS and adjust our estimates to actual amounts when the ultimate adjustment settlements are either received from CMS or we receive notification from CMS of such settlement amounts. As a result of the variability of factors that determine our estimates for risk-adjusted premiums, the actual amount of the CMS retroactive payment could be materially more or less than our estimates and could have a material effect on our results of operations, financial position and cash flows. We record any changes in estimates in current operations as adjustments to premium revenue. Historically, we have not experienced significant differences between our estimates and amounts ultimately received. However, during the third quarter of 2013, we recognized risk adjusted premium received as part of the 2012 final settlement that was higher than our original estimates, mainly related to members in our California MA plan that were new to Medicare in 2012. Additionally, the data provided to CMS to determine members' risk scores is subject to audit by CMS even after the annual settlements occur. Our Florida and Arizona MA plans have been selected by CMS for audits of the 2011 contract year and we anticipate that CMS will conduct audits of other contracts and contract years on an on-going basis. An audit may result in the refund of premiums to CMS. While our experience to date has not resulted in a material refund, future refunds could materially reduce premium revenue in the year in which CMS determines a refund is required and could be material to our results of operations, financial position and cash flows.
Low-income cost sharing, catastrophic reinsurance and coverage gap discount subsidies represent funding from CMS for which we assume no risk. The receipt of these subsidies and the payments of the actual prescription drug costs related to the low-income cost sharing, catastrophic reinsurance and coverage gap discounts are not recognized as premium revenues or benefits expense, but are reported on a net basis as funds receivable/held for the benefit of members in the consolidated balance sheets. These receipts and payments are reported as a financing activity in our consolidated statements of cash flows. Approximately nine months after the close of the annual plan year, except for the coverage gap discount which has a longer settlement timeframe, CMS reconciles actual experience to prospective payments paid to our plans and any differences are settled between CMS and our plans. Historically, we have not experienced material adjustments related to the CMS annual reconciliation of prior plan year low-income cost sharing, catastrophic reinsurance subsidies or coverage gap discount subsidies.
After determining an estimate of the base reserve, actuarial standards of practice require that a margin for uncertainty be considered in determining the estimate for unpaid claim liabilities. If such a margin is included, the claim liabilities should be adequate under moderately adverse conditions. Therefore, we make an additional estimate in the process of establishing the IBNR, which also uses standard actuarial techniques, to account for moderately adverse conditions that may cause actual claims to be higher than estimated compared to the base reserve. We refer to this additional liability as the provision for moderately adverse conditions. The provision for moderately adverse conditions is a component of our overall determination of the adequacy of our IBNR reserve and is intended to capture the potential adverse development from factors such as our entry into new geographical markets, our provision of services to new populations such as the aged, blind and disabled, the variations in utilization of benefits and increasing medical cost, changes in provider reimbursement arrangements, variations in claims processing speed and patterns, claims payment, the severity of claims, and outbreaks of disease such as the flu. Because of the complexity of our business, the number of states in which we operate, and the need to account for different health care benefit packages among those states, we make an overall assessment of IBNR after considering the base actuarial model reserves and the provision for moderately adverse conditions. We consistently apply our IBNR estimation methodology from period to period. We review our overall estimates of IBNR on a monthly basis. As additional information becomes known to us, we adjust our assumptions accordingly to change our estimate of IBNR. Therefore, if moderately adverse conditions do not occur, evidenced by more complete claims information in the following period, then our prior period estimates will be revised downward, resulting in favorable development. However, when a portion of the development related to the prior year incurred claims is offset by an increase determined to address moderately adverse conditions for the current year incurred claims, we do not consider that development amount as having any impact on net income during the period. If moderately adverse conditions occur and are more than we estimated, then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease current period net income.
The following table provides a reconciliation of the beginning and ending balance of medical benefits payable:
In addition to the release of the provision for moderately adverse conditions, medical benefits expense for the years ended December 31, 2013, 2012 and 2011 was impacted by approximately $3.0 million, $76.7 million and $191.2 million respectively, of net favorable development related to prior years. The net favorable development in 2013 was due mainly to the medical cost trend emerging favorably in our Medicaid segment due to lower utilization. The net favorable development in 2012 was due to the medical cost trend emerging favorably, mostly in our Medicaid segment and to a lesser extent in our MA and PDP segments, primarily due to lower than projected utilization, partially offset by higher than expected medical services in Kentucky. The net favorable development during 2011 was attributable to the 2010 medical cost trend emerging favorably than we originally estimated, mostly in our Medicaid segment and to a lesser extent in our MA segment, primarily due to lower than projected utilization.