In addition to the office space referenced above, we lease approximately 47 sites in 11 states, totaling approximately 735,625 square feet of space, which are used by our reportable segments for their respective operations. We also lease approximately 364,142 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.
We are a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Our mission is to help people be healthy, secure and comfortable. We provide and administer health benefits to approximately 6.1 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as "Part D"), Medicaid and dual eligible programs, as well as programs with the U.S. Department of Defense (“Department of Defense” or “DoD”), and U.S. Department of Veterans Affairs ("VA") programs. We also offer behavioral health, substance abuse and employee assistance programs and managed health care products related to prescription drugs.
We measure our Western Region Operations reportable segment profitability based on pretax income and net income. Pretax income is calculated as health plan services premiums and administrative services fees and other income less health plan services expense and G&A and other net expenses, including selling expenses. Net income is calculated as pretax income less income tax provision. See “-Results of Operations-Western Region Operations Reportable Segment-Western Region Operations Segment Results” for a calculation of pretax income and net income.
Health plan services expense generally includes medical and related costs for health services provided to our members, including physician services, hospital and related professional services, outpatient care, and pharmacy benefit costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care cost per visit, and the utilization rates represent the volume of health care consumption by our members.
We measure our Government Contracts segment profitability based on pretax income and net income. Pretax income is calculated as Government Contracts revenue less Government Contracts cost. Net income is calculated as pretax income less income tax provision. See “-Results of Operations-Government Contracts Reportable Segment-Government Contracts Segment Results” for a calculation of the government contracts pretax income and net income.
Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services including provider network management, referral management, medical management, disease management, enrollment, customer service, clinical support service, and claims processing. These services are structured as cost reimbursement arrangements for health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, and contingent fees and payments based on various incentives and penalties. We recognize revenue related to administrative services on a straight-line basis over the option period, when the fees become fixed and determinable. The TRICARE North Region members are served by our network and out-of-network providers in accordance with the T-3 contract. We pay health care costs related to these services to the providers and are later reimbursed by the DoD for such payments. Under the terms of the T-3 contract, we are not the primary obligor for health care services and accordingly, we do not include health care costs and related reimbursements in our consolidated statements of operations. The T-3 contract also includes various performance-based incentives and penalties. For each of the incentives or penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at each interim date and are legally entitled to in the event of a contract termination. See Note 2 to our consolidated financial statements under the heading "Government Contracts" and "-Results of Operations-Government Contracts Reportable Segment" for additional information on our T-3 contract.
At the effective time of the Merger, our then existing stockholders will receive per share merger consideration consisting of $28.25 in cash and 0.6220 of one share of Centene's common stock.
The completion of the Merger is not conditioned on receipt of financing by Centene. The Merger is expected to close in the first quarter of 2016, subject to the receipt of the remaining required regulatory approvals and satisfaction or waiver of other closing conditions. For additional discussion of the risks and uncertainties associated with the Merger, see Item 1A. "Risk Factors."
Due to the deferral of the Cognizant Transaction, the Master Services Agreement will not generate the expected $150 to $200 million in annual general and administrative and depreciation expense savings in the previously anticipated time frame. Our operating results in our Corporate/Other segment for the year ended December 31, 2015 were impacted by $118.2 million in pretax expenses. These pretax expenses were primarily related to the Cognizant Transaction. 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 sale in connection with the Cognizant Transaction. In addition, our operating results in our Corporate/Other segment for the year ended December
Our operating results for the year ended December 31, 2015 were impacted by fees imposed under the ACA, including $233.0 million of amortization of the deferred cost of the annual non-deductible health insurer fee calculated on 2014 net premiums written (the "health insurer fee"). In September 2015, we paid the federal government a lump sum of $233.0 million for our portion of the health insurer fee. Our operating results for the year ended December 31, 2014 were impacted by fees imposed under the ACA, including $141.4 million of amortization of the deferred cost of the health insurer fee calculated on 2013 net premiums written. In September 2014, we paid the federal government a lump sum of $141.4 million for our portion of the health insurer fee. While we are required to accrue for the health insurer fee on a pro rata basis throughout the year, we have experienced, and in the future could continue to experience, significant volatility in our cash flow from operations relative to our results of operations in a given period because the health insurer fee is payable in a single lump sum. For 2015 and 2014, respectively, due to the non-deductibility of the
health insurer fee for federal income tax purposes, our effective income tax rate was adversely affected by 17.9 percentage points and 24.8 percentage points, respectively. We expect to pay the health insurer fee in the second half of 2016 based on 2015 premiums, but do not expect to pay the health insurer fee in 2017 as a result of the one year suspension of the health insurer fee mandated by the Consolidated Appropriations Act for fiscal year 2016 (the “2016 Budget Act”). In future periods, we expect that the non-deductibility of the health insurer fee will continue to have a material impact on our effective income tax rate.
The individual and small group market represent a significant portion of our commercial business and the relevant amounts transferred under applicable premium stabilization provisions may be substantial. Estimating the amounts for the 3Rs involve complex calculations, assumptions and judgments. Our estimation process relies in part on data provided by participating insurers, including us, and also requires interpretation and application of existing laws, regulations and guidance, including, among others, those related to the treatment of income taxes in calculating risk corridors as well as the timing and source of program funding. The interpretation and application of certain laws, regulations and guidance may impact the estimation process, which impact may be material. Accordingly, 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 until we receive the final reconciliation and settlement amount from HHS. 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.
premiums annually. Certain of the states in which we operate include similar rebate provisions. For example, a medical loss ratio corridor for the California Department of Health Care Services ("DHCS") adult Medicaid expansion members under the Medicaid program in California ("Medi-Cal") requires rebate payments to or from DHCS depending on MLRs for this population. As of December 31, 2015 and December 31, 2014, respectively, we had accrued $345.0 million and $200.6 million, respectively, in accounts payable and other liabilities, and accrued $58.1 million and $0, respectively, in other noncurrent liabilities for an MLR rebate with respect to our adult Medicaid expansion population payable to DHCS. Accordingly, for 2015 and 2014, health plan services premium revenues were reduced by $202.5 million and $200.6 million, respectively. Our Medicaid contract with the state of Arizona contains profit-sharing provisions. Because our Arizona Medicaid profits were in excess of the amount we are allowed to fully retain, we reduced health plan services premium revenue by $63.7 million and $24.7 million for the years ended December 31, 2015 and December 31, 2014, respectively. With respect to our Arizona Medicaid contract, the profit corridor balance included in other noncurrent assets as of December 31, 2015 was $0 and the profit corridor payable balance included in accounts payable and other liabilities as of December 31, 2015 was $49.7 million. The profit corridor payable balance included in other noncurrent liabilities as of December 31, 2015 was $2.4 million. In 2015, the Arizona Health Care Cost Containment System ("AHCCCS") withheld $36.2 million in connection with the profit corridor payable from our capitation payment. See Note 2 to our consolidated financial statements under the heading "Health Plan Services Revenue Recognition," for further discussion on these MLR provisions.
Selected elements of our financial performance in 2015 are as follows:
Western Region Operations enrollment was approximately 3.3 million as of December 31, 2015, an increase of 4.5 percent compared with enrollment at December 31, 2014.
Government Contracts segment pretax income decreased to $25.4 million in 2015 compared to $69.5 million in 2014.
Our operating results for the year ended December 31, 2015 were impacted by:
In the year ended December 31, 2015, we reported net income of $185.7 million or $2.37 per diluted share as compared to net income of $145.6 million or $1.80 per diluted share for the same period in 2014. Pretax margin was 2.8 percent for 2015 compared to 1.4 percent for 2014.
Our total revenues increased 16.0 percent in the year ended December 31, 2015 to $16.2 billion from $14.0 billion in the same period in 2014.
Health plan services premiums revenues increased by 16.4 percent to $15.6 billion in the year ended December 31, 2015, compared with $13.4 billion in the year ended December 31, 2014. Health plan services expenses increased by 15.3 percent from $11.3 billion in the year ended December 31, 2014 to $13.0 billion in the year ended December 31, 2015. Net investment income increased to $55.5 million in the year ended December 31, 2015 compared with $45.2 million in the year ended December 31, 2014.
Our government contracts revenues increased by 4.1 percent in 2015 to $628.5 million from $604.0 million in 2014, driven primarily by increased revenues from the PC3 Program, partially offset by extension option year pricing on the T3 contract. Our government contracts costs increased by 12.5 percent in 2015 to $603.8 million from $536.6
million in 2014, primarily due to increased costs from ramp-up services during VA's expedited implementation of the VACAA modification of the PC3 Program, partially offset by reduced option year costs on the T3 contract. For additional information see “-Government Contracts Reportable Segment".
Health plan services premiums revenues increased to $13.4 billion in the year ended December 31, 2014, compared with $10.4 billion in the year ended December 31, 2013. Health plan services expenses increased by 27.2 percent from $8.9 billion in the year ended December 31, 2013 to $11.3 billion in the year ended December 31, 2014. Net investment income decreased to $45.2 million in the year ended December 31, 2014 compared with $69.6 million in the year ended December 31, 2013.
Days claims payable ("DCP") for the year ended December 31, 2015 was 41.8 days compared with 61.2 days for the year ended December 31, 2014. Adjusted DCP, which we calculate in accordance with the paragraph below, for the year ended December 31, 2015 was 57.7 days compared with 77.2 days for the year ended December 31, 2014. The decreases in our DCP and adjusted DCP were driven by better-than-expected experience for our Medicaid expansion population and a corresponding rebate liability increase coupled with more efficient claims processing following the completion of our migration to a single claims payment platform. Adjusted DCP of 57.7 days for the year ended December 31, 2015 is comparable to pre-ACA and system conversion historical levels of 58.7 days and 57.6 days for the years ended December 31, 2013 and 2012, respectively.
Set forth below is a reconciliation of adjusted DCP, a non-GAAP financial measure, to the comparable GAAP financial measure, DCP. DCP is calculated by dividing the amount of reserve for claims and other settlements ("Claims Reserve") by health plan services cost ("Health Plan Costs") during the year and multiplying that amount by the number of days in the year. In this Annual Report on Form 10-K, the following table presents an adjusted DCP metric that subtracts capitation and Medicare Advantage Prescription Drug ("MAPD") payables/costs from the Claims Reserve and Health Plan Costs. Management believes that adjusted DCP provides useful information to investors because the adjusted DCP calculation excludes from both Claims Reserve and Health Plan Costs amounts related to health care costs for which no or minimal reserves are maintained. Therefore, management believes that adjusted DCP may present a more accurate reflection of DCP than does GAAP DCP, which includes such amounts. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future. Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
In 2014, we incurred a Section 165(g) loss on the stock of one of our subsidiaries that created a tax benefit during the period of $73.7 million, net of adjustments to our reserve for uncertain tax benefits. This tax benefit was primarily responsible for reducing our effective tax rate below the statutory federal tax rate of 35% for the year ended December 31, 2014. Other items that caused our effective income tax rate to differ from the statutory federal tax rate of 35% for the year ended December 31, 2014 included state income taxes, tax-exempt interest, and non-deductible compensation. See Note 11 to our consolidated financial statements for additional information.
For the year ended December 31, 2013, the effective income tax rate was higher than the statutory federal tax rate of 35% primarily due to state income taxes, tax-exempt investment income, and non-deductible compensation. In all periods presented, our effective income tax rate has not been impacted by operations in foreign jurisdictions with varying statutory tax rates. Our health care operations are predominantly domestic.
Enrollment in our Medicare Advantage plans in our Western Region Operations at December 31, 2015 was 269,000 members, a decrease of 2.2 percent compared with December 31, 2014. The decrease in Medicare Advantage membership was due to losses of approximately 8,000 members in Arizona and 7,000 members in California, partially offset by a gain of 9,000 members in the Northwest. These decreases were driven by our exit from certain under-performing counties in our Medicare business.
Medicaid enrollment in California increased by 231,000 members or 14.5 percent to 1,826,000 members at December 31, 2015 compared with 1,595,000 members at December 31, 2014, primarily as a result of new members added from Medicaid expansion. Medicaid enrollment in Arizona decreased by 16,000 members or 19.8 percent to approximately 65,000 members at December 31, 2015 compared with approximately 81,000 members at December 31, 2014. On February 4, 2015, we received a notice from the AHCCCS Division of Health Care Management that stated that we were in violation of our Medicaid contract in Maricopa County. As a result, we are currently subject to sanctions that include a cap on member auto assignment under the contract effective as of February 13, 2015 until further notice. See "Item 1A. Risk Factors" for additional information on these sanctions.
We are the sole commercial plan contractor with DHCS to provide Medi-Cal services in Los Angeles County, California. As of December 31, 2015, approximately 996,000 of our Medi-Cal members resided in Los Angeles County, representing approximately 55 percent of our Medi-Cal membership. As part of our 2012 state settlement agreement with DHCS, DHCS agreed, among other things, to the extension of all of our existing Medi-Cal managed care contracts, including our contract with DHCS to provide Medi-Cal services in Los Angeles County, for an additional five years from their then existing expiration dates. Accordingly, our Medi-Cal contract for Los Angeles County is scheduled to expire in April 2019. For additional information on our settlement agreement with DHCS, see Note 2 to our consolidated financial statements under the heading "Health Plan Services Revenue Recognition."
Total Western Region Operations enrollment at December 31, 2014 was approximately 3.2 million members, an increase of 29.1 percent compared with enrollment at December 31, 2013. Total enrollment in our California health plan increased by 26.0 percent to approximately 2.7 million members from December 31, 2013 to December 31, 2014.
result of new individual members from the ACA exchanges in California and Arizona, partially offset by declines in large and small group membership.
In 2012, the California legislature enacted CCI. The stated purpose of 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.
Western Region Operations medical care ratio ("MCR") is calculated as health plan services cost divided by health plan services premiums revenue.
The selling costs ratio is computed as selling expenses divided by health plan services premiums revenue.
Health plan services premiums revenues in our Western Region Operations segment increased to $15.6 billion for the year ended December 31, 2015 compared to $13.4 billion in the same period in 2014, primarily due to enrollment growth from Medicaid expansion. Our health plan services premiums revenues were impacted by MLR rebates, which are payable to DHCS in connection with Medicaid adult expansion members. The impact was $202.5 million and $200.6 million for the years ended December 31, 2015 and 2014, respectively. Our premium revenues were also affected by $63.7 million and $24.7 million for the years ended December 31, 2015 and 2014, respectively, for excess profit sharing, which is payable to the state of Arizona under our Arizona Medicaid contract. Due to the combined impact of these MLR rebates and profit sharing provisions in Arizona, Medicaid premium revenue was reduced by $266.2 million for the year ended December 31, 2015, compared with a reduction to premium revenue of $225.3 million for the year ended December 31, 2014. During 2015, Medi-Cal retroactive premium adjustments for prior years increased premium revenue by $46.9 million. During the year ended December 31, 2014, our premium revenue was decreased by $62.9 million due to a change in deficit calculated under our state-sponsored health plans rate settlement agreement. No such adjustment was recorded during the year ended December 31, 2015. See Note 2 to our consolidated financial statements, under the heading "Health Plan Services Revenue Recognition" for more information.
Western Region Operations health care cost PMPM increased by 3.6 percent to $337 for the year ended December 31, 2015 compared to an increase of 8.5 percent to $325 for the same period in 2014.
The Western Region Operations health plan services MCR was 83.8 percent for the year ended December 31, 2015 compared with 84.6 percent for the year ended December 31, 2014. The improvement in the year ended December 31, 2015 compared to the same period in 2014 is primarily due to improved performance in our Medicaid expansion business, which was partially offset by increased health care costs in our off-exchange products.
Total general and administrative expense in our Western Region Operations segment was $1.7 billion for the year ended December 31, 2015 compared with $1.5 billion for the year ended December 31, 2014. The increase in our total general and administrative expenses for the year ended December 31, 2015 was primarily due to increases in the health
insurer fee and premium taxes. 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. The total G&A expense ratio was 10.9 percent for the year ended December 31, 2015 compared with 10.9 percent for the year ended December 31, 2014.
Selling expense in our Western Region Operations segment was $270.2 million for the year ended December 31, 2015 compared with $262.3 million for the year ended December 31, 2014. The selling costs ratio was 1.7 percent for the year ended December 31, 2015 compared with 2.0 percent for the year ended December 31, 2014.
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 an increase in our Medicaid premium revenues.
Our Western Region Operations premium PMPM increased by 9.8 percent to $384 for the year ended December 31, 2014 compared to an increase of 2.5 percent to $350 for the same period in 2013.
Western Region Operations health care cost PMPM increased by 8.5 percent to $325 for the year ended December 31, 2014 compared to a decrease of 1.4 percent to $300 for the same period in 2013.
On April 1, 2011, we began delivery of administrative services under our T-3 contract. The T-3 contract was awarded to us on May 13, 2010, and included five one-year option periods. In March 2015, the DoD modified our T-3 contract to add three additional one-year option periods and awarded us the first of the three option periods, which allows us to continue providing access to health care services to TRICARE beneficiaries through March 31, 2016. If all three one-year option periods are ultimately exercised, our T-3 contract would conclude on March 31, 2018. On February 1, 2016, we received preliminary written notice of the Government’s intent to exercise the second one-year option period concluding March 31, 2017. The T-3 contract services are currently structured as cost reimbursement arrangements for health care costs plus administrative fees received in the form of fixed prices, fixed unit prices, and contingent fees and payments based on various incentives and penalties. On April 24, 2015, the DoD issued its final request for proposal for the next generation TRICARE contract (the "T-2017 contracts"), which will reduce the three existing TRICARE regions to two. On July 23, 2015, we responded to the DoD's request for proposal, and on February 16, 2016, we submitted a revised response to the DoD’s request for proposal. The DoD has indicated that it expects to award the T-2017 contracts in the first half of 2016, with health care delivery expected to commence on April 1, 2017. If we are not successful in securing a contract on favorable terms during the rebidding process, our business, results of operations, cash flows and financial condition could be adversely impacted. See "Item 1A. Risk Factors" for additional discussion of this and certain other risks related to our participation in TRICARE and other government programs.
In September 2013, VA awarded us a contract under its new PC3 Program. The PC3 Program provides eligible veterans coordinated, timely access to care through a comprehensive network of non-VA providers who meet VA quality standards when a local VA medical center cannot readily provide the care. We support VA in providing care to veterans in three of the six PC3 Program regions. These three regions, Regions 1, 2 and 4, encompass all or portions of 37 states, the District of Columbia, Puerto Rico and the Virgin Islands. The PC3 Program contract term includes a base period of performance through September 30, 2014 and four one-year option periods that may be exercised by VA. In addition to the one-year option periods, VA will have the ability to extend the PC3 Program contract an additional two years and six months based on VA's needs. In August 2014, VA expanded our PC3 Program contract to include primary care services for veterans who are unable to obtain primary care at a VA medical center in the three PC3 regions in which we operate. In addition, in November 2014, we modified our PC3 Program contract to further expand our services with VA in support of the Veterans Access, Choice and Accountability Act of 2014 ("VACAA"). The VACAA modification to our PC3 contract expires no later than September 30, 2017. See Note 2 to our consolidated financial statements under the heading “Government Contracts” for additional information.
In addition, we administer contracts with VA to manage community-based outpatient clinics in one state covering approximately 4,083 enrollees.
The following table summarizes the Corporate/Other segment for the years ended December 31, 2015, 2014 and 2013:
Our Corporate/Other segment for the year ended December 31, 2015 primarily includes expenses related to the Cognizant Transaction, and also includes costs related to our pending Merger with Centene. See Note 3 to our consolidated financial statements and "-Overview-Cognizant Transaction" for additional information regarding the Cognizant Transaction, and "-Overview-Centene Transaction" for more information regarding our pending Merger with Centene.
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 sale in connection with the Cognizant Transaction. In addition, our operating results in our Corporate/Other segment for the year ended December 31, 2014 were impacted by $74.8 million in pretax expenses related to the Cognizant Transaction. Our operating results in our Corporate/Other segment for the year ended December 31, 2014 were also impacted by a loss on the stock of one of our subsidiaries that created a tax benefit of $73.7 million, net of adjustments to our reserve for uncertain tax benefits. 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 primary sources of cash include receipts of premiums, services revenue, and investment and other income, as well as proceeds from the sale or maturity of our investment securities and borrowings. We believe that expected cash flow from operating activities, existing cash reserves and other working capital and lines of credit are adequate to allow us to fund existing obligations, introduce new products and services, enter into new lines of business and continue to operate and develop health care-related businesses as we may determine to be appropriate at least for the next 12 months. We regularly evaluate cash requirements for, among other things, current operations and commitments, for
acquisitions and other strategic transactions, to address legislative or regulatory changes such as the ACA, and for business expansion opportunities, such as Medicaid expansion and exchange participation under the ACA. We may elect to raise additional funds for these and other purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. In addition, we may strategically pursue refinancing opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us. Based on the composition and quality of our investment portfolio, our expected ability to liquidate our investment portfolio as needed, and our expected operating and financing cash flows, we do not anticipate any liquidity constraints in the near term. However, turbulence in U.S. and international markets and certain costs associated with health care reform legislation and its implementation, Medicaid expansion under the ACA, information technology and systems improvements and our preparation for the Centene Transaction, among other things, could adversely affect our liquidity. In addition, as a holding company, our subsidiaries conduct substantially all of our consolidated operations and own substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends, in part, on the amount of cash that we receive from our subsidiaries. We are dependent upon dividends and management fees from our regulated subsidiaries, most of which are subject to regulatory restrictions. For a discussion of these and other risks that impact our liquidity, see "Item 1A. Risk Factors."
Our net receivable balance for the risk corridor program related to the premium stabilization provisions of the ACA was $214.3 million and $86.8 million as of December 31, 2015 and December 31, 2014, respectively. HHS has recognized that it is obligated to make the risk corridors program payments without regard to budget neutrality in both regulations and guidance. On October 1, 2015, HHS acknowledged a shortfall in the payments for program year 2014, and stated that it would be making payments to insurers of approximately 12.6 percent of their requested amounts at this time. HHS confirmed its previously stated intention to fulfill its remaining 2014 risk corridor obligations with funds collected for program year 2015 and, if necessary, 2016 collections. On October 13, 2015, HHS reiterated its continuing obligation to make full payment of its risk corridors liabilities and stated that HHS recognizes that the ACA requires the Secretary to make full payments to issuers. HHS further stated that it is recording those amounts that remain unpaid following its 12.6 percent prorated payment this winter as fiscal year 2015 obligations of the United States Government for which full payment is required. In the fourth quarter of 2015, we received substantially all of the originally estimated $12.4 million, which represented 12.6 percent of our 2014 risk corridor receivables.
As of December 31, 2015, the fair value of our investment securities available-for-sale was $2.2 billion, which includes both current and noncurrent investments. Noncurrent investments were $27.6 million as of December 31, 2015. We hold high-quality fixed income securities primarily comprised of corporate bonds, asset-backed securities, mortgaged-backed bonds, municipal bonds and bank loans. We evaluate and determine the classification of our investments based on management’s intent. We also closely monitor the fair values of our investment holdings and regularly evaluate them for other-than-temporary impairments.
Our total cash and cash equivalents as of December 31, 2015 and 2014 were $996.9 million and $869.1 million, respectively. The changes in cash and cash equivalents are summarized as follows:
Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by investing in a diversified mix of high-quality, fixed-income securities, which are largely investment grade, while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining an expected total return on invested funds.
Net cash used in investing activities increased by $185.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. This increase was primarily due to a $192.4 million decrease in sales and maturities of available-for-sale investments, net of purchases.
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-
During the year ended December 31, 2015, we repurchased 1.7 million shares of our common stock for aggregate consideration of $93.8 million under our stock repurchase program. We primarily funded these repurchases through our revolving credit facility. As of December 31, 2015, the remaining authorization under our stock repurchase program was $306.2 million.
Our stock repurchase program may be suspended or discontinued at any time, and we have suspended our stock repurchase program until further notice in connection with our pending Merger with Centene. For additional information on our stock repurchase program, see Note 9 to our consolidated financial statements.
Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by the Company or any of our subsidiaries with any material term or provision of the HMO
Regulations or Insurance Regulations (as each such term is defined in the credit facility) in a manner that could reasonably be expected to result in a material adverse effect; certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries that are not stayed within 60 days; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the revolving credit facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.
Pursuant to the terms of our revolving credit facility, we can obtain letters of credit in an aggregate amount of $400 million and the maximum amount available for borrowing is reduced by the dollar amount of any outstanding letters of credit. As of December 31, 2015, we had outstanding letters of credit of $7.1 million. As of February 23, 2016, we had no outstanding letters of credit under the revolving credit facility. All outstanding letters of credit under our revolving credit facility were transferred to a new uncommitted bi-lateral letter of credit facility, and as of February 23, 2016, we had letters of credit of $6.4 million outstanding under the bi-lateral facility. Accordingly, the maximum amount available for borrowing under our revolving credit facility was $307.9 million as of December 31, 2015 and $315.0 million as of February 23, 2016. As of December 31, 2015 and February 23, 2016, no amounts had been drawn on any of our outstanding letters of credit.
The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:
(A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50 million, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of 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
By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our regulated subsidiaries, are required to maintain minimum levels of statutory capital and surplus. The minimum statutory capital and surplus requirements differ by state and are generally based on balances established by statute, a percentage of annualized premium revenue, a percentage of annualized health care costs, or RBC or tangible net equity (“TNE”) requirements. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level (“ACL”), which represents the minimum amount of capital and surplus believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as 200% of the ACL, or the minimum statutory capital and surplus requirement calculated pursuant to pre-RBC guidelines. Because our regulated subsidiaries also are subject to their state regulators’ overall oversight authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of the RBC requirement, even though RBC has been adopted in their states of domicile.
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.
Legislation may be enacted in certain states in which our subsidiaries operate imposing substantially increased minimum capital and/or statutory deposit requirements for HMOs in such states. Such statutory deposits may only be drawn upon under limited circumstances relating to the protection of policyholders.
relating to statutory surplus, statutory income and unassigned surplus. As of December 31, 2015, the amount of capital and surplus or net worth that was unavailable for the payment of dividends or return of capital to us was approximately $467.3 million in the aggregate. As of December 31, 2015, the amount of restricted net assets of our regulated subsidiaries was approximately $135.8 million in the aggregate.
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, 2015.
We have entered into long-term agreements to receive services related to disease management, case management, wellness, pharmacy benefit management, pharmacy claims processing services and health quality/risk scoring enhancement services with external third-party service providers. As of December 31, 2015, the remaining terms are approximately from one to three years for each of these contracts and termination of these agreements is subject to certain termination provisions. As of December 31, 2015, the total estimated future commitments under these agreements were $142.8 million and are included in the table above.
the remaining term of this contract was approximately three years, and the total estimated future commitments under the agreement were approximately $225.5 million.
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, 2015, the remaining term of this contract was approximately one year, and the total estimated future commitments under the agreement were approximately $19.8 million.
As of December 31, 2015, 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.
Approximately 64%, 59%, and 50% in 2015, 2014 and 2013, respectively, of our health plan services premium revenues were generated under Medicare, Medicaid/Medi-Cal and Dual Eligibles contracts, as applicable. These revenues are subject to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these programs, including CMS' methodology with respect to risk adjustment data validation (“RADV”) audits, are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount.
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.
An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns and medical cost trends. As such, the completion factors and the claims per member per month trend factor are the most significant factors used in estimating our reserves for claims. Since a large portion of the reserves for claims is attributed to the most recent months, the estimated reserves for claims are highly sensitive to these factors. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by these factors:
We consistently apply our IBNR estimation methodology from period to period. Our IBNR best estimate is made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are included in the current period. 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, any favorable prior period reserve development would increase current period net income only to the extent that the current period provision for adverse deviation is less than the benefit recognized from the prior period favorable development. If moderately adverse conditions occur and are more acute than we estimated, then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease current period net income.
We assess the profitability of contracts for providing health care services when operating results or forecasts indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under a capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers. Contracts are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing anticipated premiums to estimates for the total of health care related costs less reinsurance recoveries, if any, and the
The ACA mandated significant reforms to various aspects of the U.S. health insurance industry. Among other things, the ACA imposes an annual premium-based fee on health insurers (the "health insurer fee") for each calendar year beginning on or after January 1, 2014 which is not deductible for federal income tax purposes and in many state jurisdictions. The health insurer fee is levied based on a ratio of an insurer's net health insurance premiums written for the previous calendar year compared to the U.S. health insurance industry total. We are required to estimate a liability for our portion of the health insurer fee and record it in full once qualifying insurance coverage is provided in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized ratably to expense over the calendar year that it is payable.
The ACA requires the establishment of state-based, state and federal partnership or federally facilitated health insurance exchanges ("exchanges") where individuals and small groups may purchase health insurance coverage under regulations established by U.S. Department of Health and Human Services ("HHS"). We currently participate in exchanges in Arizona and California. Effective January 1, 2014, the ACA includes permanent and temporary premium stabilization provisions for transitional reinsurance, permanent risk adjustment, and temporary risk corridors (collectively referred to as the "3Rs"), which are applicable to those insurers participating inside, and in some cases outside, of the exchanges.
Premium Subsidy-For qualifying low-income members, HHS will reimburse us, on the member’s behalf, some or all of the monthly member premium depending on the member’s income level in relation to the Federal Poverty Level. We recognize the premium subsidy evenly over the contract period and report it as part of health plan services premium revenue.
receive the final reconciliation and settlement amount from HHS. 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.
We estimate and recognize adjustments to our health plan services premium revenue for the risk adjustment 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. We record receivables and/or payables and classify the amounts as current or long-term in the consolidated balance sheets based on the timing of expected settlement.
Risk Corridor-The temporary risk corridor program will be in place for three years and applies to individual and small group business operating both inside and outside of the exchanges. The risk corridor provisions limit health insurers' gains and losses by comparing allowable medical costs to a target amount, each defined/prescribed by HHS, and sharing the risk for allowable costs with the federal government. Variances from the target exceeding certain thresholds may result in HHS making additional payments to us or require us to make payments to HHS.
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 and/or payables and classify the amounts as current or long-term in the consolidated balance sheets based on the timing of expected settlement.
HHS has recognized that it is obligated to make the risk corridors program payments without regard to budget neutrality in both regulations and guidance. On October 1, 2015, HHS acknowledged a shortfall in the payments for program year 2014, and stated that it would be making payments to insurers of approximately 12.6 percent of their requested amounts at this time. HHS confirmed its previously stated intention to fulfill its remaining 2014 risk corridor obligations with funds collected for program year 2015 and, if necessary, 2016 collections. This payment structure would be consistent with the Consolidated and Further Continuing Appropriations Act, 2015, which is also referred to as the “2015 Budget Act" or "Cromnibus." Additionally, HHS has stated that in the event of a shortfall between the amounts collected from issuers and the payments to issuers, HHS will use other sources of funding for the risk corridors payments, subject to the availability of appropriations. This use of alternative funding is consistent with general principles of federal program budgeting and appropriations. Notwithstanding any restrictions imposed by the 2015 Budget Act, which restrictions were repeated in identical language in the 2016 Budget Act, HHS has retained the right and ability to source risk corridors program payments from user fees under both the risk corridors program and other programs.
On October 13, 2015, HHS reiterated its continuing obligation to make full payment of its risk corridors liabilities and stated that HHS recognizes that the ACA requires the Secretary to make full payments to issuers. HHS
further stated that it is recording those amounts that remain unpaid following its 12.6 percent prorated payment this winter as fiscal year 2015 obligations of the United States Government for which full payment is required.
On April 1, 2011, we began delivery of administrative services under the T-3 contract for the TRICARE North Region. For additional information on our T-3 contract, see "-Government Contracts Reportable Segment."
Amounts receivable under government contracts are comprised primarily of contractually defined billings, accrued contract incentives under the terms of the contract and amounts related to change orders for services not originally specified in the contract. Pursuant to our T-3 contract, the government has the right to unilaterally modify the contract in certain respects by issuing change orders directing us to implement terms or services that were not originally included in the contract. Following receipt of a change order, we have a contractual right to negotiate an equitable adjustment to the contract terms to account for the impact of the change order. We start to perform under such change orders and begin to incur associated costs after we receive the government's unilateral modification, but before we have negotiated the final scope and/or value of the change order. In these situations, costs are expensed as incurred, and we estimate and record revenue when we have met all applicable revenue recognition criteria. These criteria include the requirements that change order amounts are determinable, that we have performed under the change orders, and that collectability of amounts payable to us is reasonably assured.
We recognize an estimated loss, which may represent damages, assessment of regulatory fines or penalties, settlement costs, future legal expenses or a combination of the foregoing, as appropriate, from such loss contingencies when it is both probable that a loss will be incurred and the amount of the loss can be reasonably estimated. Our loss estimates are based in part on an analysis of potential results, the stage of the proceedings, consultation with outside counsel and any other relevant information available.
On November 2, 2014, we signed a definitive master services agreement with Cognizant to provide certain services to us. In connection with this agreement, we agreed to sell certain software assets and related intellectual property ("software system assets") we own to Cognizant. The transaction, including the related asset sale, was subject to the receipt of required regulatory approvals. See Note 3 to our consolidated financial statements for additional information regarding our agreements with Cognizant. Because the sale of these software system assets met the definition of a sale of a business under GAAP, as of September 30, 2014, we re-allocated $7 million of goodwill based on relative fair values of the Western Region Operations reporting unit with and without the impact of the business to be sold. Our measurement of fair values was based on a combination of the discounted total consideration expected to be received in connection with the services and asset sale agreements, income approach based on a discounted cash flow methodology, and replacement cost methodology. After the reallocation of goodwill, we performed a two-step impairment test to determine the existence of any impairment and the amount of the impairment. In the first step, we compared the fair values to the related carrying value and concluded that the carrying value of the business to be sold was impaired; however, we determined that the carrying value of the Western Region Operations reporting unit was not impaired. In the second step, we measured the impairment amount by comparing the implied value of the allocated goodwill to the carrying amount of such goodwill. Based on the results of our Step 2 test, we concluded that the implied value of the goodwill allocated to the business to be sold was zero, which resulted in an impairment charge for the total carrying value of the allocated goodwill of $7 million. See Note 7 to our consolidated financial statements for additional goodwill fair value measurement information.
If we identify an indicator of impairment, we assess recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value.
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
We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions is subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we believe that it is probable certain positions will be challenged by taxing authorities, and we may not prevail on all of the positions as filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities upon examination. We analyze the amount at which each tax position meets a “more likely than not” standard for sustainability upon examination by taxing authorities. Only tax benefit amounts meeting or exceeding this standard will be reflected in tax provision expense and deferred tax asset balances. Any difference between the amounts of tax benefits reported on tax returns and tax benefits reported in the financial statements is recorded as a liability for unrecognized tax benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and liabilities and classified as current or noncurrent based upon the expected period of payment.