We lease office space for our principal executive offices in Woodland Hills, California, which is used by each of our reportable segments. The operating lease for our executive offices expires on December 31, 2017 and relates to approximately 115,488 square feet. We also lease a separate 333,954 square foot facility in Woodland Hills primarily to house the operations for a significant portion of our Western Regions Operations reportable segment. The lease for this two-building facility expires December 31, 2021.
In addition to the office space referenced above, we lease approximately 49 sites in 10 states, totaling approximately 628,794 square feet of space, which are used by our reportable segments for their respective operations. We also lease approximately 389,754 square feet of office space in Shelton, Connecticut under leases expiring at various dates ranging from 2016 to 2017. We no longer conduct operations in Shelton, and have subleased a portion of this space under subleases expiring at various dates ranging from 2016 to 2017.
Our health plan services are provided under our Western Region Operations reportable segment, which includes the operations primarily conducted in California, Arizona, Oregon and Washington for our commercial, Medicare, Medicaid and dual eligibles health plans, our health and life insurance companies, our pharmaceutical services subsidiary and certain operations of our behavioral health subsidiaries. As of December 31, 2014, we had approximately 3.2 million medical members in our Western Region Operations reportable segment. On April 1, 2012, we completed the sale of our Medicare stand-alone prescription drug plan business ("Medicare PDP business") to Pennsylvania Life Insurance Company, a subsidiary of CVS Caremark Corporation ("CVS Caremark"). As a result, the operating results related to our Medicare PDP business have been excluded from continuing operations results and are classified in this Annual Report on Form 10-K as discontinued operations for the year ended December 31, 2012. Accordingly, the information included in this Annual Report on Form 10-K regarding our Western Region Operations reportable segment excludes the operating results of our Medicare PDP business for the year ended December 31, 2012. For additional information regarding the sale of our Medicare PDP business, see Note 3 to our consolidated financial statements.
Prior to January 1, 2013, our Divested Operations and Services reportable segment included the operations of our businesses that provided administrative and run-out support services to an affiliate of UnitedHealth Group Incorporated ("United") and its affiliates under administrative services and claims servicing agreements in connection with the Northeast Sale (as defined below), as well as the transition-related revenues and expenses of our divested Medicare PDP business. The "Northeast Sale" referred to the sale of all of the outstanding shares of capital stock of our health plan subsidiaries that were domiciled and/or had conducted businesses in Connecticut, New Jersey, New York and
Our profitability depends in large part on our ability to, among other things, effectively price our health care products; accurately predict and effectively manage health care and pharmacy costs; effectively contract with health care providers; attract and retain members; and manage our general and administrative (“G&A”) and selling expenses. In addition, factors such as state and federal health care reform legislation and regulation, competition and general economic conditions affect our operations and profitability. The effect of escalating health care costs, as well as any changes in our ability to negotiate competitive rates with our providers, may impose further risks to our ability to profitably underwrite our business. Each of these factors may have a material impact on our business, financial condition or results of operations.
G&A expenses include, among other things, those costs related to employees and benefits, consulting and professional fees, marketing, business expansion and cost reduction initiatives, premium taxes and assessments, Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the "ACA") related fees, occupancy costs and litigation and regulatory-related costs. Such costs are driven by membership levels, introduction of new products or provision of new services, system consolidations, outsourcing activities and compliance requirements for changing regulations, among other things. These expenses also include expenses associated with corporate shared services and other costs to reflect the fact that such expenses are incurred primarily to support health plan services. Selling expenses consist of external broker commission expenses and generally vary with premium volume.
Other government contracts revenues are recognized in the month in which the eligible beneficiaries are entitled to health care services or in the month in which the administrative services are performed or the period that coverage for services is provided. See Note 2 to our consolidated financial statements under the heading "Government Contracts" for additional information on our other government contracts such as the MFLC contract and that PC3 Program.
For a detailed description of the ACA’s provisions and related health care reform programs, initiatives, rules and regulations, see "Item 1. Business-Government Regulation-Health Care Reform Legislation and Implementation." For additional discussion of some of our risks and uncertainties related to the ACA, including certain legal, legislative and regulatory developments, see "Item 1A. Risk Factors."
The ACA also required the establishment of state-run or federally facilitated "exchanges" where individuals and small groups may purchase health coverage. We currently participate as Qualified Health Plans ("QHPs") in the exchanges in California and Arizona. In California, we currently operate in 13 of 19 exchange rating regions in California in the individual market and in all 19 exchange rating regions in the small business health options program ("SHOP").
The Cognizant Transaction is expected to close in the first half of 2015, subject to the receipt of required regulatory approvals. We expect that certain of our employees will become employees of Cognizant or its subcontractors, and that certain positions will be eliminated as part of the transaction.
The initial term of the Master Services Agreement is seven years, commencing on the later of (i) ten business days following final regulatory approval of the transaction, and (ii) March 1, 2015 (the "Commencement Date"). We have two options to extend the Master Services Agreement for one year each by giving notice to Cognizant no less than three months prior to the end of the then existing term.
We will pay Cognizant for the BP and IT Services through a combination of fixed and variable fees, with the variable fees fluctuating based on our actual need for such services. Based on the currently projected usage of BP and IT Services over the initial term of the Master Services Agreement, we expect to pay Cognizant approximately $2.8 billion, subject to price adjustments described in the Master Services Agreement. The Master Services Agreement is currently expected to generate approximately $150 million to $200 million in annual general and administrative and depreciation expense savings for us by 2017.Our operating results in our Corporate/Other segment for the year ended December 31, 2014 were impacted by an $88.5 million pretax asset impairment primarily related to our assets held for
In the year ended December 31, 2014, we reported net income of $145.6 million or $1.80 per diluted share as compared to net income of $170.1 million or $2.12 per share, for the same period in 2013.
Western Region Operations segment pretax income increased to $315.6 million in 2014 compared to $207.5 million in 2013.
Net cash provided by operating activities totaled $776.0 million for the year ended December 31, 2014 compared to $95.8 million for the same period in 2013.
Fees imposed under the ACA, including $141.4 million for the health insurer fee and $97.6 million in other ACA fees. See Note 2 to our consolidated financial statements under the heading "Accounting for Certain Provisions of the ACA" for additional information.
Our government contracts revenues increased by 5.5 percent in 2014 to $604.0 million from $572.3 million in 2013. Our government contracts costs increased by 6.7 percent in 2014 to $536.6 million from $502.9 million in 2013. The increases in our government contracts revenues and costs were primarily due to services provided for the PC3 Program. For additional information see “-Government Contracts Reportable Segment".
Our operating results for the year ended December 31, 2012 were impacted by approximately $34.5 million of negative prior period reserve development. This negative prior period reserve development was recorded as part of health care costs. For the year ended December 31, 2013, we had approximately $56.2 million in favorable reserve developments related to prior years. The reserve developments related to prior years when considered together with the provision for adverse deviation recorded as of December 31, 2013, did not have a material impact on our operating results or financial condition. Our operating results for the year ended December 31, 2013 were impacted by $12.0 million in pretax costs primarily related to our continuing efforts to address scale issues. Our operating results for the year ended December 31, 2012 were impacted by pretax costs of $35.6 million related to our G&A cost reduction
efforts, $5.0 million related to the early termination of a medical management contract and $1.3 million in litigation-related expenses net of an insurance reimbursement.
A - For the years ended December 31, 2014 and 2013, we had no discontinued operations; therefore, income tax expense from discontinued operation and the corresponding effective income tax rate are not applicable.
Enrollment in our Medicare Advantage plans in our Western Region Operations at December 31, 2014 was 275,000 members, an increase of 12.7 percent compared with December 31, 2013. The increase in Medicare Advantage membership was due to gains of approximately 20,000 members in California, 8,000 members in the Northwest, and 3,000 members in Arizona. We have exited certain under-performing counties in our Medicare business, and consequently expect lower enrollment in our Medicare Advantage plans in 2015.
Medicaid enrollment in California increased by 29,000 members or 2.7 percent to 1,113,000 members at December 31, 2013 compared with 1,084,000 members at December 31, 2012. As of December 31, 2013, we had approximately 4,000 Medicaid members in Arizona.
As of December 31, 2013, approximately 572,000 of our Medi-Cal members resided in Los Angeles County, representing approximately 51 percent of our Medi-Cal membership and approximately 51 percent of our membership in all California state health programs.
In 2012, the California legislature enacted the 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.
In participating counties, the CCI established a voluntary “dual eligibles demonstration,” also referred to as the “Cal MediConnect” program, to coordinate medical, behavioral health, long-term institutional, and home- and community-based services for dual eligibles through a single health plan, and will require that all Medi-Cal beneficiaries in participating counties join a Medi-Cal managed care health plan to receive their Medi-Cal benefits, including LTSS. The DHCS selected eight counties to participate in the CCI, including Los Angeles and San Diego counties. On April 4, 2012, DHCS selected us to participate in the dual eligibles demonstration for both Los Angeles and San Diego counties. In December 2013, Health Net Community Solutions, Inc., our wholly owned subsidiary, entered into a three-way agreement with DHCS and CMS, which was subsequently amended on January 13, 2014 (the “Cal MediConnect Contract”). Among other things, under the Cal MediConnect Contract we have received and expect to continue to receive prospective blended capitated payments to provide coverage for dual eligibles in Los Angeles and San Diego counties. These blended capitated payments are determined based on our mix of membership.
In January 2014, CMS and DHCS informed us that based on its readiness assessments, we were able to enroll members beginning April 1, 2014, and could begin marketing for the dual eligibles demonstration in accordance with the guidelines and time frames for Los Angeles and San Diego counties. Active enrollment in Los Angeles and San Diego counties for the dual eligibles demonstrations commenced on April 1, 2014, and is scheduled to conclude at the end of 2017. During the active enrollment period, dual eligibles in Los Angeles County are able to either choose among us, the local health plan initiative, or one of three other health plans for benefits under the dual eligibles demonstration. On July 1, 2014, DHCS began automatically enrolling dual eligibles in Los Angeles County who have not selected a health plan, which we refer to as “passive enrollment.” Dual eligibles also may choose to “opt out” of the demonstration at any time. Such dual eligibles will then continue to receive fee-for-service Medicare benefits but will receive Medi-Cal benefits through a managed care health plan as required under the CCI. During the active enrollment period in San Diego County, dual eligibles are able to select to receive benefits from any one of four health plan options, including us, or “opt out” of the demonstration. Passive enrollment in San Diego County began on May 1, 2014. Based on our
Administrative expense and Total G&A expense ratios are computed as either administrative expenses or total general and administrative expenses divided by the sum of health plan services premiums and administrative services fees and other income.
Per member per month ("PMPM") is calculated based on commercial at-risk member months and excludes administrative services only ("ASO") member months.
Commercial, Medicare Advantage, Medicaid or Dual Eligibles MCR is calculated as commercial, Medicare, Medicaid or Dual Eligibles health care cost divided by commercial, Medicare, Medicaid or Dual Eligibles premiums, as applicable.
Total revenues in our Western Region Operations segment for the year ended December 31, 2014 increased 27.9 percent to $13.4 billion compared to the same period in 2013 primarily due to an increase in our premium revenues in our health plans. Health plan services premiums revenues in our Western Region Operations segment increased to $13.4 billion for the year ended December 31, 2014 compared to $10.4 billion in the same period in 2013, primarily due to increase in our Medicaid premium revenues.
Our commercial premium revenue increased by $267.7 million, or 5.2 percent, in the year ended December 31, 2014 compared to the same period in 2013, primarily due to a 9.9 percent increase in commercial enrollment since December 31, 2013. The net impact of amounts recorded under the ACA's premium stabilization provisions on our commercial premium revenue in 2014 was not material. See "-Liquidity and Capital Resources-Liquidity" and Note 2 to our consolidated financial statements under the heading "Accounting for Certain Provisions of the ACA" for more information.
Active enrollment in Los Angeles and San Diego counties for the dual eligibles demonstrations began on April 1, 2014, and passive enrollment began on July 1, 2014 and May 1, 2014 for Los Angeles County and San Diego County, respectively. As of December 31, 2014, we had approximately 16,000 dual eligible members and for the year ended December 31, 2014, our dual eligibles premium revenues were $117.9 million. See "-California Coordinated Care Initiative," above for more information on the CCI and the dual eligibles.
Investment income in our Western Region Operations segment decreased to $45.2 million for the year ended December 31, 2014 from $69.6 million for the same period in 2013 due to lower investment gains realized during the year ended December 31, 2014.
Health plan services expenses in our Western Region Operations segment increased 27.2 percent to approximately $11.3 billion for the year ended December 31, 2014 from approximately $8.9 billion for the year ended December 31, 2013, primarily due to new membership resulting from Medicaid expansion under the ACA, partially offset by $234.0 million of reinsurance recoverable included in commercial health plan services costs for the year ended December 31, 2014, as discussed in Note 2 to our consolidated financial statements under the heading "Accounting for Certain Provisions of the ACA."
In our Western Region Operations segment, commercial premium PMPM increased by 0.1 percent to approximately $385 for the year ended December 31, 2014 compared to an increase of 2.7 percent to approximately $385 in the same period of 2013.
Commercial health care costs PMPM in our Western Region Operations segment decreased by 3.0 percent to approximately $320 in the year ended December 31, 2014 compared to a decrease of 1.0 percent to approximately $330 in the year ended December 31, 2013. We believe that the decrease in our commercial health care cost trend for the year ended December 31, 2014 was primarily due to the mix shift in the makeup of our commercial membership with
significantly higher individual membership in 2014 compared to 2013, combined with moderate health care cost trends for the commercial market as a whole in 2014.
The health plan services MCR in our Western Region Operations segment was 84.6 percent for the year ended December 31, 2014 compared with 85.6 percent for the year ended December 31, 2013.
The commercial MCR in our Western Region Operations segment was 83.0 percent for the year ended December 31, 2014 compared with 85.6 percent for the year ended December 31, 2013. The improvement of 260 basis points in the commercial MCR for the year ended December 31, 2014 compared to the same period in 2013 was primarily due to better performance in our group accounts that allowed us to absorb the impact of the health insurer fee, a higher percentage of individual enrollment in our membership mix, and moderate health care cost trends.
Total general and administrative expense in our Western Region Operations segment was $1.5 billion for the year ended December 31, 2014 compared with $1.1 billion for the year ended December 31, 2013. The total G&A expense ratio was 10.9 percent for the year ended December 31, 2014 compared with 10.3 percent for the year ended December 31, 2013. The increase in our total general and administrative expenses for the year ended December 31, 2014 was primarily due to increases in premium taxes and ACA-related fees, including the health insurer fee. Such increases in premium taxes and ACA-related fees increased the total G&A expense ratio by approximately 200 basis points for the year ended December 31, 2014 as compared to the prior year. See Note 2 to our consolidated financial statements, under the heading "Accounting for Certain Provisions of the ACA" for more information regarding ACA-related fees.
Interest expense in our Western Region Operations segment decreased to $31.4 million for the year ended December 31, 2013 from $32.6 million for the year ended December 31, 2013 primarily due to lower interest rates.
Year Ended December 31, 2013 compared to Year Ended December 31, 2012
Total revenues in our Western Region Operations segment for the year ended December 31, 2013 decreased 0.7 percent to $10.5 billion compared to the same period in 2012 primarily due to a decrease in our premium revenues in our health plans. Health plan services premiums revenues in our Western Region Operations segment decreased to $10.4 billion for the year ended December 31, 2013 from $10.5 billion in the same period in 2012, primarily due to a decrease in commercial premium revenues, partially offset by an increase in Medicaid premium revenues.
Our Medicare premium revenue decreased by $19.1 million, or 0.7 percent, in the year ended December 31, 2013 compared to the same period in 2012, primarily due to federal rate decreases.
Commercial health care costs PMPM in our Western Region Operations segment decreased by 1.0 percent to approximately $330 in the year ended December 31, 2013 compared to an increase of 9.1 percent to approximately $333 in the year ended December 31, 2012. We believe that the decrease in our commercial health care cost trend for the year ended December 31, 2013 was due to the absence of adverse prior period development and our efforts to reposition our commercial book of business away from unprofitable full network large group accounts towards smaller accounts and tailored network products.
Our Divested Operations and Services reportable segment was closed out effective January 1, 2013 as discussed below.
Our Corporate/Other segment is not a business operating segment. It is added to our reportable segments to reconcile to our consolidated results. The Corporate/Other segment includes costs that are excluded from the calculation of segment pretax income because they are not managed within the reportable segments.
The operating results in our Corporate/Other segment for the year ended December 31, 2013 were impacted by $12.0 million in pretax costs, primarily severance expenses related to our continuing efforts to address scale issues.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from state and federal governments and agencies. For example, our receivable from DHCS and AHCCCS related to our California and Arizona Medicaid businesses totaled $801.7 million as of December 31, 2014 and $270.9 million as of December 31, 2013. The receivable from CMS related to our Medicare business was $119.1 million as of December 31, 2014 and $105.2 million as of December 31, 2013. Our Government Contracts receivable, including receivables from the DoD relating to our current and prior contracts for the TRICARE North Region, was $150.5 million and $194.0 million as of December 31, 2014 and December 31, 2013, respectively. The timing of collection of such receivables from the federal and state governments and agencies is impacted by government audits as well as government appropriations, allocation and funding processes, among other things, and can extend for periods beyond a year.
stabilization provisions of the ACA was $86.8 million as of December 31, 2014. HHS recognizes, in both final regulations and guidance, it is obligated to make the risk corridors program payments without regard to budget neutrality. Although HHS anticipates the program will be budget neutral, the ACA requires HHS to make full payments to those issuers with risk corridors ratios above 103 percent. Additionally, HHS states in final regulations and guidance that if the program’s collections, including any potential carryover from prior years, are insufficient to satisfy its payment obligations, the agency will use other sources of funding to meet its payment obligations, subject to the availability of appropriations. If corridor collections are insufficient in 2014, HHS explains that it shall fulfill its obligations for the 2014 benefit year by using funds collected for the 2015 benefit year prior to making payments on 2015 obligations. Our net payable balance for the risk adjustment program related to the premium stabilization provisions of the ACA was $72.4 million as of December 31, 2014. The final determination and settlement of amounts due or payable from these premium stabilization provisions for the year ended December 31, 2014 is not expected to occur until, at the earliest, the third or fourth quarter of 2015. See Note 2 to our consolidated financial statements, under the heading "Accounting for Certain Provisions of the ACA" for additional information regarding ACA-related fees and premium stabilization provisions. Depending on the amounts due or payable as a result of these provisions, our financial condition, cash flows and results of operations could be materially adversely affected.
Our investment holdings are currently primarily comprised of investment grade securities with an average rating of “A+” and “A1” as rated by S&P and/or Moody’s, respectively. At this time, there is no indication of default on interest and/or principal payments under our holdings. We have the ability and current intent to hold to recovery all securities with an unrealized loss position. As of December 31, 2014, our investment portfolio includes $438.5 million, or 24.4% of our portfolio holdings, of mortgage-backed and asset-backed securities. The majority of our mortgage-backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our entire asset-backed securities is AA+/Aa1. However, any failure by Fannie Mae or Freddie Mac to honor the obligations under the securities they have issued or guaranteed could cause a significant decline in the value or cash flow of our mortgage-backed securities. As of December 31, 2014, our investment portfolio also included $732.2 million, or 40.8% of our portfolio holdings, of obligations of state and other political subdivisions and $588.4 million, or 32.8% of our portfolio holdings, of corporate debt securities. We had gross unrealized losses of $9.8 million as of December 31, 2014, and $56.6 million as of December 31, 2013. Included in the gross unrealized losses as of December 31, 2014 and December 31, 2013 are $0.9 million and $8.1 million, respectively, related to noncurrent investments available-for-sale. We believe that these impairments are temporary and we do not intend to sell these investments. It is not likely that we will be required to sell any security in an unrealized loss position before recovery of its amortized cost basis. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional other-than-temporary impairments, which may be material, may be recorded in future periods. No impairment was recognized during the years ended December 31, 2014 or 2013.
Customer funds administered include pass-through items and items accounted for under deposit accounting and are comprised of health care cost payments and reimbursements for the T-3 contract, catastrophic reinsurance subsidy, low-income member cost sharing subsidy and the coverage gap discount under the Medicare Part D program, and pass-through items related to our Medicaid program, including inter-governmental transfers, and the ACA premium stabilization program. See Note 2 to our consolidated financial statements for more information.
Our debt-to-total capital ratio was 22.6 percent as of December 31, 2014 compared with 23.5 percent as of December 31, 2013. This decrease is due to an increase in stockholders' equity primarily resulting from net income, an increase in additional paid-in capital due to stock option exercises, the vesting of certain equity awards and share-based compensation expense, and a decrease in accumulated other comprehensive loss, partially offset by an increase in treasury stock due to shares repurchased under the Company’s stock repurchase program and shares withheld in connection with the exercise and vesting of equity awards.
On May 2, 2011, our Board of Directors authorized our stock repurchase program pursuant to which a total of $300 million of our outstanding common stock could be repurchased. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program. During the year ended December 31, 2014, we repurchased 3.0 million shares of our common stock for aggregate consideration of $137.8 million under our stock repurchase program.
On December 16, 2014, our Board of Directors approved another increase to our stock repurchase program, which, when taken together with the remaining authorization at that time, brought our total authorization up to $400.0 million. As of December 31, 2014, the remaining authorization under our stock repurchase program was $400.0 million.
In October 2011, we entered into a $600 million unsecured revolving credit facility due in October 2016, which includes a $400 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swing line loans (which sublimits may be increased in connection with any increase in the credit facility described below). In addition, we have the ability from time to time to increase the credit facility by up to an additional $200 million in the aggregate, subject to the receipt of additional commitments. As of December 31, 2014, $100.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $491.4 million (see "-Letters of Credit" below). As of February 23, 2015, we had $165 million in borrowings outstanding under our revolving credit facility. This increase in outstanding borrowings was primarily driven by draws on our revolving credit facility to fund repurchases of our common stock through our stock repurchase program.
Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements that restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and
We have issued $400 million in aggregate principal amount of 6.375% Senior Notes due 2017 (the “Senior Notes”). The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of December 31, 2014, we were in compliance with all of the covenants under the indenture governing the Senior Notes.
indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50 million, if that acceleration results from a default under the instrument giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; or
Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended (“Knox-Keene”), certain of our California subsidiaries must comply with TNE requirements. Under these Knox-Keene TNE requirements, actual net worth less unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on health care expenditures, excluding capitated amounts. In addition, certain of our California subsidiaries have made certain undertakings to the DMHC to restrict dividends and loans to affiliates, to the extent that the payment of such would reduce such entities' TNE below the minimum requirement or 130% of the minimum requirement. As of February 23, 2015, all of our subsidiaries subject to the TNE requirements and the undertakings to DMHC exceeded the minimum requirements.
The obligations shown above represent uncertain tax positions expected to be paid within the reporting periods presented. In addition to the obligations shown above, approximately $25.7 million of unrecognized tax benefits have been recorded as a liability, and we are uncertain as to if or when such amounts may be settled or paid.
We have entered into long-term agreements to purchase various services, which may contain certain termination provisions and have remaining terms in excess of one year as of December 31, 2014.
We have also entered into another agreement with Cognizant to outsource a substantial portion of our claims processing activities to Cognizant. Under the terms of the agreement, Cognizant will, among other things, provide us with claims adjudication, adjustment, audit and process improvement services. As of December 31, 2014, the remaining
term of this contract was approximately two years, and the total estimated future commitments under the agreement were approximately $25.4 million.
As of December 31, 2014, we had no off-balance sheet arrangements as defined under Regulation S-K Item 303(a)(4) and the instructions thereto. See Note 6 to our consolidated financial statements for a discussion of our letters of credit.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Principal areas requiring the use of estimates include revenue recognition, health care costs, including IBNR amounts, reserves for contingent liabilities, amounts receivable or payable under government contracts, goodwill and other intangible assets, recoverability of long-lived assets and investments, and income taxes. Furthermore, starting in 2014, our critical accounting estimates have been and will continue to be impacted as a result of the implementation of certain provisions of the ACA. Accordingly, we consider accounting policies on these areas to be critical in preparing our consolidated financial statements. A material change in any one of these amounts may have a material impact on our consolidated results of operations and financial condition. A more detailed description of the significant accounting policies that we use in preparing our financial statements is included in Note 2 to our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K.
Our Medicare Advantage contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model pays more for members whose medical history would indicate that they are expected to have higher medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. We and the health care providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS.
Under the ACA, commercial health plans with MLRs on fully insured products, as calculated as set forth in the ACA, that fall below certain targets are required to rebate ratable portions of their premiums annually. We estimate such
rebates based on calculation methodology set forth in the ACA. In addition to the rebates for the commercial health plans under the ACA, there is also a medical loss ratio corridor for the DHCS adult Medicaid expansion members under the state Medicaid program in California. If our MLR for this population is below 85%, then we would have to pay DHCS a rebate. If the MLR is above 95%, then DHCS would have to pay us additional premium. Our Medicaid contract with the state of Arizona contains profit-sharing or profit ceiling provisions. If our Arizona Medicaid profits were in excess of the amount we are allowed to fully retain, we record an estimated profit corridor payable balance.
Reserves for claims and other settlements include reserves for claims (IBNR claims and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Western Region Operations reporting segment. Because reserves for claims include various actuarially developed estimates, our actual health care services expenses may be more or less than our previously developed estimates. As of December 31, 2014, 63% of reserves for claims and other settlements were attributed to claims reserves. See Note 15 to our consolidated financial statements for a reconciliation of changes in the reserve for claims and material prior period reserve development.
Our IBNR best estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. This provision for adverse deviation is intended to capture the potential adverse development from known environmental factors such as our entry into new geographical markets, changes in our geographic or product mix, the introduction of new customer populations, variation in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment patterns, changes in technology that provide faster access to claims data or change the speed of adjudication and settlement of claims, variability in claim inventory levels, non-standard claim development, and/or exceptional situations that require judgmental adjustments in setting the reserves for claims.
Our accounting estimates are impacted as a result of the provisions of the ACA, including the 3Rs. The substantial influx of previously uninsured individuals into the new health insurance exchanges under the ACA could make it more difficult for health insurers, including us, to establish pricing accurately, at least during the early years of the exchanges. The 3Rs are intended to mitigate some of the risks around pricing and lack of information surrounding the previously uninsured. We will experience premium adjustments to our health plan services premium revenues and health plan services expenses based on changes to our estimated amounts related to the 3Rs. Such estimated amounts may differ materially from actual amounts ultimately received or paid under the provisions, which may have a material impact on our consolidated results of operations and financial condition.
covered member as determined by HHS. While all commercial medical plans, including self-funded plans, are required to fund the reinsurance entity, only fully-insured non-grandfathered plans in the individual commercial market will be eligible for recoveries if individual claims exceed a specified threshold. Accordingly, we account for transitional reinsurance contributions associated with all commercial medical health plans other than non-grandfathered individual plans as an assessment in general and administrative expenses in our consolidated statement of income. We account for contributions made by individual commercial plans which are subject to recoveries as contra-health plan services premium revenue, and we account for any recoveries as contra-health plan services expense in our consolidated statements of income with a corresponding current or long-term receivable or payable.
We estimate and recognize adjustments to our health plan services premium revenue for the risk corridor provision by projecting our ultimate premium for the calendar year. Such estimated calendar year amounts are recognized ratably during the year and are revised each period to reflect current experience, including changes in risk adjustment and reinsurance recoverables. We record receivables or payables and classify the amounts as current or long-term in the consolidated balance sheets based on the timing of expected settlement.
On April 1, 2011, we began delivery of administrative services under our T-3 contract. For additional information on our T-3 contract, see "-Government Contracts Reportable Segment."
The T-3 contract 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.
We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events or changes in circumstances indicate that we might not recover the carrying value of these assets for each of our reporting units. We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2014 for our Western Region Operations reporting unit, and no impairment was identified. We performed a two-step impairment test to determine the existence of impairment and the amount of the impairment. In the first step, we compared the fair values to the related carrying values and concluded that the carrying value of the Western Region Operations was not impaired. As a result, the second step was not performed. We also re-evaluated the useful lives of our other intangible assets and determined that the current estimated useful lives were properly reflected.
Due to the many variables inherent in the estimation of a business’s fair value and the relative size of recorded goodwill, changes in assumptions may have a material effect on the results of our impairment test. The discounted cash flows and market participant valuations (and the resulting fair value estimates of the Western Region Operations reporting unit) are sensitive to changes in assumptions including, among others, certain valuation and market assumptions. Changes to any of these assumptions could cause the fair value of our Western Region Operations reporting unit to be below its carrying value. The ratio of the fair value of our Western Region Operations reporting unit to its carrying value was approximately 224% and 149% as of September 30, 2014 and June 30, 2013, respectively.
In connection with the Cognizant Transaction, we classified certain software systems assets as held-for-sale. As of December 31, 2014, we had classified software systems assets with a total net book value of $130.2 million as assets held for sale. We assessed the recoverability of these assets held for sale and as a result, we recorded $80.2 million in asset impairments during the year ended December 31, 2014. See Note 3 for more information regarding assets held for sale and the Cognizant Transaction. In addition, we recorded an asset impairment of $1.3 million during the year ended December 31, 2014 for internally developed software.
In 2015, due to the non-deductibility of the health insurer fee for federal income tax purposes, we expect our full-year effective income tax rate will exceed 50%. See "Overview-Health Care Reform Legislation and Implementation" and "-Results of Operations-Income Tax Provision" above.