Our corporate headquarters are located in White Plains, New York. We also have offices in Houston, Texas; and Syracuse, New York. In addition, we maintain other smaller offices to support our businesses. Management considers its office facilities suitable and adequate for the current level of operations. Additional information regarding our lease obligations is included in Note 22-Commitments and Contingencies in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
The table below provides selected financial data and other operating information as of and for the five years ended December 31, 2016. We derived the selected financial data presented below from our audited financial statements. In 2016, we sold our Medicaid business, which is reported in discontinued operations. In addition, the Traditional Insurance business, which was reported as held for sale at December 31, 2015 and our APS Healthcare businesses, which were sold in 2015 were reported as discontinued operations as of December 31, 2015. Our Consolidated Financial Statements and the selected financial data presented below have been restated for all periods to reflect these businesses as discontinued operations. See Note 21-Discontinued Operations for additional information on the
above transactions. We have prepared the following data, other than statutory data, in conformity with U.S. generally accepted accounting principles, known as GAAP. You should read this selected financial data together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements as well as the discussion under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(1)2015 and prior periods include capital and surplus for Constitution Life Insurance Company (Constitution) and The Pyramid Life Insurance Company (Pyramid) which was transferred to Nassau Reinsurance Group Holdings, L.P. in connection with the August 3, 2016 sale of our Traditional Insurance business and Today's Options of New York which was transferred to Molina Healthcare, Inc. (Molina) in connection with the August 1, 2016 sale of our Medicaid business. 2014 and prior also include capital and surplus of Marquette National Life Insurance Company (Marquette) and American Pioneer Life Insurance Company which were merged into Constitution during 2015. In addition, 2012 includes capital and surplus of Union Bankers Insurance Company which was merged into Constitution during 2013. At December 31, 2015, Constitution and Pyramid had combined capital and surplus of $82.7 million and combined asset valuation reserve of $1.9 million.
The following discussion and analysis presents a review of our financial condition as of December 31, 2016 and our results of operations for the years ended December 31, 2016, 2015 and 2014. As used in this report, except as otherwise indicated, references to the "Company," "Universal American," "we," "our," and "us" are to Universal American Corp., a Delaware corporation and its subsidiaries.
•Medicare Advantage: We currently serve the growing Medicare population by providing Medicare Advantage products to approximately 119,500 members. Approximately 31% of the Medicare population in the United States is currently enrolled in Medicare Advantage plans; a type of Medicare health plan offered by private companies that contract with the federal government to provide enrollees with health insurance. Our current focus is to grow our Medicare Advantage business in Texas (especially Houston/Beaumont), upstate New York and Maine, regions in which we have meaningful market positions.
On November 17, 2016, we entered into a definitive agreement with WellCare Health Plans, Inc. ("WellCare") under which WellCare will acquire Universal American in an all cash transaction valued at $10.00 per share of common stock. We refer to this transaction throughout this Form 10-K as the "Sale Transaction". On December 30, 2016, the request for early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) was approved. In addition, on February 16, 2017, our stockholders approved the Sale Transaction. WellCare and the Company are pursuing the remaining regulatory approvals from regulatory agencies in Texas and New York. The Sale Transaction is expected to close in the second quarter of 2017, subject to the receipt of regulatory approvals and other customary closing conditions.
For 2017, the Company earned a 4.5-Star rating for its flagship TexanPlus® plan in Houston/Beaumont, which accounts for 57% of our December 31, 2016 membership, and maintained a 4-Star rating for our Today's Options PPO plan in New York and Maine. Collectively, over 70% of our members are in Plans with a Star rating of 4.0 or greater. Plans that achieve a 4-Star rating or better are entitled to additional bonus payments and higher rebate percentages from CMS which enables the plans to enhance their product offering to members and prospective members through reduced premiums, reduced member cost sharing amounts, and/or additional benefits.
• Our PPO plans are provided under the brand Today's Options® PPO. They are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. This coordinated care product is built around contracted networks of providers who, in cooperation with the health plan, coordinate an active care management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members enrolled in specified products.
•MSSP Track 1: One-sided risk (upside only); up to 50% shared savings; retrospective attribution
•MSSP Track 3: Two-sided risk; up to 75% shared savings; prospective attribution
Additionally, the CMS Center for Medicare and Medicaid Innovation, or CMMI, launched the Next Generation ACO Model, a new value-based payment model that encourages providers to assume greater risk and reward in coordinating the healthcare of Medicare fee-for-service beneficiaries. The Next Generation ACO Model provides ACOs with additional tools not found in the MSSP but used in the Medicare Advantage program to improve quality and lower cost, including preferred networks, negotiated discounts and beneficiary incentives. The Next Generation ACO Model offers two risk arrangements with prospectively assigned beneficiaries under which a Next Generation ACO can share up to 80% or 100% of savings (losses) generated in each performance year depending on the financial arrangement selected by the ACO.
Universal American currently sponsors sixteen MSSP ACOs in ten States and two Next Generation ACOs which include approximately 5,200 participating providers and approximately 221,800 Medicare FFS beneficiaries covering more than $2.4 billion of medical spend. Certain of our ACOs overlap a portion of our Medicare Advantage footprint (Houston, Dallas and New York) which capitalizes on our existing relationship with providers. The other ACOs have no overlap with existing operations, offering an opportunity for expansion into other products and services.
On July 30, 2015, CMS informed us that our 23 MSSP ACOs which were active in 2014, generated $80 million in gross savings for program year 2014. This compares to $66 million in gross savings for 2012/2013, the first program period of the MSSP, which comprised up to 21 months and which we reported in the third quarter of 2014. For these 23 ACOs, the program year 2014 results showed that:
• 9 ACOs, serving more than 105,000 Medicare beneficiaries, including our flagship ACO in Houston, qualified for shared savings totaling $26.9 million. Our share of these payments, recorded in the second quarter of 2015, after payments to our physician partners of $6.0 million, increased to $20.9 million, which is reflected in equity in losses of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments during October 2015;
The MSSP is relatively new and therefore has limited historical experience. This impacts our ability to accurately accumulate and interpret the data available for calculating the ACOs' shared savings. Therefore, during 2016, 2015 and 2014, we recognized our portion of ACO shared savings revenue when notified by CMS. Such notification lags the Program Year to which the revenue relates by six to nine months. Revenue from the initial 2012/2013 Program Year, which ended on December 31, 2013, was recorded in the quarter ended September 30, 2014 and revenue for the 2014 Program Year, which ended on December 31, 2014, was recorded in the quarter ended June 30, 2015. Revenue for the 2015 Program Year, which ended on December 31, 2015, was recorded in the quarter ended June 30, 2016. Similarly, we were not able to recognize revenue for the year ended December 31, 2016 in the 2016 financial statements. We expect that revenue, if any, for the program year ended December 31, 2016 will be reported in 2017 when the MSSP revenue is either known or estimable with reasonable certainty. Based on the ACO operating agreements, we bear all costs of the ACO operations until revenue is recognized. At that point, we share in up to 100% of the revenue to recover our costs incurred. Any remaining revenue is generally shared equally with our ACO provider partners.
The ACA was signed into law in March 2010 and legislated broad based changes to the U.S. health care system which continue to have a material impact on our business. There is considerable discussion within the new Presidential administration and Congress about repealing and replacing the ACA. At this time, it is uncertain whether, when, and what changes will be made to the ACA, and what impact such changes could have on our business. However, any changes to the ACA, including through any repeal and replacement to the ACA, could have a material adverse effect on our business, financial position and results of operations.
which could adversely affect our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in the future.
Limitation on the federal tax deductibility of compensation earned by individuals-Beginning in 2013, with respect to services performed during and afterward, for health insurance companies, the federal tax deductibility of compensation is limited under Section 162(m)(6) of the Code to $500,000 per individual and does not contain an exception for "performance-based compensation." In September 2014, the Internal Revenue Service issued final regulations on this compensation deduction limitation which provided additional information regarding the definition of a health insurance issuer. Based on our analysis of the final regulations, we believe we are not subject to the limitation. As a result, during the fourth quarter of 2014, we recorded a tax benefit of $3.2 million related to prior years and $1.7 million related to the first nine months of 2014. Prior to receiving the final regulations, our application of this limitation had increased our effective tax rate by approximately 60 basis points for the year ended December 31, 2013 and 200 basis points for the year ended December 31, 2012. However, there is a risk that the Internal Revenue Service or other regulators may disagree with our interpretation, which could result in higher taxes.
Accountable Care Organizations-The ACA established Medicare ACOs, as a tool to improve quality and lower costs through increased care coordination in the FFS program. CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs. To date, we have partnered with numerous groups of healthcare providers and currently participate in sixteen MSSP ACOs and two Next Generation ACOs. ACOs are entities that contract with CMS to serve the FFS population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. We provide a variety of services to the ACOs, including care coordination, analytics and reporting, technology and other administrative services to enable these physicians and their associated healthcare providers to deliver better quality care, improved health and lower healthcare costs for their Medicare FFS patients.
Under the MSSP, CMS will not make any payments to ACOs for a measurement year until the second half of the following year, which will negatively impact our cash flows. In order to receive revenues from CMS under the MSSP, the ACO must meet certain minimum savings rates (i.e. save the federal government money) and meet certain quality measures. More specifically, an ACOs medical expenses for its assigned beneficiaries during a relevant measurement year must be below the benchmark established by CMS for such ACO. On the quality side, for 2017, the MSSP requires ACOs to meet thirty-one quality measures, which CMS may vary from time to time. Notwithstanding our efforts, our ACOs may be unable to meet the required savings rates or may not satisfy the quality measures, which may result in our receiving no revenues and losing our substantial investment. In addition, as the MSSP is a new program, it presents challenges and risks associated with the timeliness and accuracy of data and interpretation of complex rules, which may impact the timing and amount of revenue we can recognize and could have a material adverse effect on our ability to recoup any of our investment in this new business. Further, there can be no assurance that we will maintain positive relations with our ACO partners which may result in certain of the ACOs terminating our relationship, which will result in a potential loss of our investment.
Our remaining segment, Corporate & Other, reflects the activities of our holding company, our prior participation in the New York Health Benefits Exchange, known as the Exchange, and other ancillary operations. Effective January 1, 2015, we are no longer participating in the Exchange. See Note 23-Business Segment Information in the Notes to Consolidated Financial Statements for a description of our segments.
We report intersegment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These intersegment revenues and expenses affect the amounts reported on the individual financial statement line items, but we eliminate them in consolidation and they do not change income before taxes. The most significant items eliminated relate to interest on intercompany loans which cross segments.
Loss from continuing operations for the year ended December 31, 2016 was $6.3 million, or $0.09 per diluted share, compared to a loss from continuing operations of $3.7 million, or $0.04 per diluted share, for the year ended December 31, 2015. These amounts include realized gains, net of taxes, of $1.5 million, or $0.02 per diluted share, and $25.3 million, or $0.31per diluted share in 2016 and 2015, respectively.
Our MSO segment generated loss before income taxes of $9.5 million for the year ended December 31, 2016 compared to a loss of $20.1 million for the year ended December 31, 2015, an improvement of $10.6 million. During the year ended December 31, 2016, we recognized $29.2 million
of net shared savings revenue from our MSSP ACOs. This compares with $20.9 million of program year 2014 net shared savings revenue recognized from 9 of our MSSP ACOs during the year ended December 31, 2015. We also recorded an estimated loss of $1.7 million in 2016 related to our Next Generation ACO, which began operations on January 1, 2016. Operating expenses for the year ended December 31, 2016 were $37.0 million compared to $40.9 million for the year ended December 31, 2015, reflecting fewer active ACOs in 2016.
Our after-tax income from discontinued operations was $61.7 million compared with a loss of $160.3 million for the years ended December 31, 2016 and 2015, respectively. Discontinued Operations includes the results of our Total Care Medicaid Plan and Traditional Insurance business, which were sold in August 2016 and APS Healthcare, which was sold during 2015. For further information on these businesses see Note 21-Discontinued Operations in the Notes to Consolidated Financial Statements.
Net premiums. Net premiums for the Medicare Advantage segment increased by $121.1 million for the year ended December 31, 2016 compared with the same period in 2015, due to membership growth and an increase in premium per member driven by the 2016 change in our revenue recognition policy described above; partially offset by a $2.4 million reduction in favorable prior period items. The year ended December 31, 2016 included $13.3 million of net favorable prior period items recognized in net premiums as compared to $15.7 million of net favorable prior period items recognized for the year ended December 31, 2015.
Medical expenses. Medical expenses increased by $79.2 million for the year ended December 31, 2016 compared to the same period ended in 2015. The increase was driven by membership growth and increased utilization; partially offset by lower unfavorable prior period items. Medical expenses for the year ended December 31, 2016 included $5.7 million of net unfavorable items related to prior periods, compared to $11.7 million of net unfavorable items related to prior periods for the year ended December 31, 2015.
Quality improvement initiative costs are included in medical expenses in connection with the reporting of minimum medical loss ratios under the ACA. The following table provides a breakdown of medical expenses and the related medical benefits ratios:
ACA fee. The ACA fee for the year ended December 31, 2016 amounted to $21.7 million or 1.6% of 2016 net premiums compared to $25.5 million or 2.0% of 2015 net premiums. The ACA fee is based on prior year premiums and is included in the calculation of minimum medical loss ratios under the ACA. The $3.7 million decrease in the ACA fee is due to lower full year premiums in 2015 compared to 2014, which was the result of lower membership in 2015 due to service area reductions effective January 1, 2015.
Net investment and other income. Net investment and other income decreased by $5.6 million to $10.4 million for the year ended December 31, 2015 primarily due to lower invested asset levels resulting from the payment of dividends to the parent in 2015 and 2014.
Medical expenses. Medical expenses decreased by $96.3 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was primarily driven by our exit of non-core markets, offset by growth in our core markets, unfavorable prior period items and an increase in utilization in the Northeast markets, resulting in a Medicare Advantage medical benefit ratio of 86.3% for the year ended December 31, 2015 compared with 84.0% for the year ended December 31, 2014. Medical expenses for the year ended December 31, 2015 included $11.7 million of net unfavorable items related to prior periods, compared to $18.4 million of net favorable items related to prior periods for the year ended December 31, 2014.
Quality improvement initiative costs of $25.3 million in the year ended December 31, 2015 and $28.4 million in the year ended December 31, 2014 are included in medical expenses in connection with the reporting of minimum medical loss ratios under the ACA. The following table provides a breakdown of medical expenses and the related medical benefit ratios:
Commissions and general expenses. Commissions and general expenses for the year ended December 31, 2015 decreased $33.4 million compared to the year ended December 31, 2014, primarily
due to cost reduction initiatives and lower membership due to our exit of non-core markets. Our administrative expense ratio improved to 10.8% for the year ended December 31, 2015 from 12.1% in 2014 primarily as a result of our cost reduction efforts.
(1)Amounts represent shared savings revenues recorded in the current year related to the prior program year.
Our MSO segment generated loss before income taxes of $9.5 million for the year ended December 31, 2016 compared to a loss of $20.1 million for the year ended December 31, 2015, an improvement of $10.6 million. During the year ended December 31, 2016, we recognized $29.2 million of net shared savings revenue from our MSSP ACOs. $28.5 million related to program year 2015 shared savings from 10 of our MSSP ACOs. 2016 revenue also includes additional program year 2014 revenue of $0.7 million recognized in the first quarter of 2016 as a result of the restructuring of the program year 2014 shared savings distribution for two MSSP ACOs during the first quarter of 2016. This compares with $20.9 million of program year 2014 net shared savings revenue recognized from 9 of our MSSP ACOs during the year ended December 31, 2015. We also recorded an estimated loss of $1.7 million in 2016 related to our Next Generation ACO, which began operations on January 1, 2016. Operating expenses for the year ended December 31, 2016 were $37.0 million compared to $40.9 million for the year ended December 31, 2015, reflecting fewer active ACOs in 2016.
Claims and other benefits. Claims and other benefits in 2015 represented recoveries from the Federal transitional reinsurance program related to the Exchange business in 2014.
The following table presents the primary components comprising income (loss) from discontinued operations:
Traditional Insurance-Operating Results: Traditional Insurance had operating income of $10.9 million for the year ended December 31, 2016 compared with a loss of $16.3 million for the same period in 2015. Earnings in 2016 were driven by the absence of DAC amortization in 2016, since all DAC was written off at December 31, 2015 in connection with the Traditional Insurance fair value adjustment as well as lower levels of operating expenses, partially offset by lower earnings from a smaller block of in force business. The 2015 loss was primarily driven by an increase in claim reserves on our Disability Income line of business as a result of an updated claim termination study, as well as recording additional amortization of our deferred acquisition costs (DAC) asset as a result of loss recognition testing deficiencies.
Universal American reported a loss from discontinued operations of $188.4 million for the year ended December 31, 2015 compared with a loss of $1.2 million in 2014.
Medicaid-Operating Results: Our Medicaid segment generated income before income taxes of $0.1 million for the year ended December 31, 2015 compared to income of $2.6 million for the year ended December 31, 2014. This decrease was as a result of higher medical benefits primarily related to increased inpatient utilization and unfavorable claims run-out from prior periods as well as an increase in operating expenses, partially offset by an increase in net premiums due to higher state capitation rates.
Traditional Insurance-Operating Results: Traditional Insurance had an operating loss of $16.3 million for the year ended December 31, 2015 compared with a gain of $2.5 million for the same period in 2014. The 2015 loss was primarily driven by an increase in claim reserves on our Disability Income line of business as a result of an updated claim termination study, as well as recording additional amortization of our deferred acquisition costs (DAC) asset as a result of loss recognition testing deficiencies.
(1)These obligations include preferred dividends and the final payment of principal of $40 million in April 2017.
Sources and Uses of Liquidity to the Parent Company, Universal American Corp. We require cash at our parent company to support the operations and growth of our subsidiaries, fund new business opportunities through acquisitions or otherwise, fund debt service and pay the operating expenses necessary to function as a holding company, as applicable insurance department regulations require us to bear our own expenses.
• dividends from and capital contributions to our Insurance and HMO subsidiaries-During the year ended December 31, 2016, SelectCare of Texas, Inc. ("SCOT") paid a $9.6 million dividend on July 21, 2016. No other dividends were declared or paid during 2016. In the third quarter of 2016, we made a capital contribution of $0.6 million to our Medicaid subsidiary, TONY, prior to its sale to Molina, and a $0.1 million of capital contribution to our Texas-based dual-eligible special needs plan ("dSNP"), Today's Options of Texas, Inc. ("TOTX").
• loans from and interest payments to our Insurance subsidiaries to support investments in our ACO business-During 2013, our Insurance subsidiaries loaned $22.0 million to our parent company. The parent company repaid $9.0 million of this loan in April 2015. The remaining $13.0 million loan payable was paid in August 2016. During the year ended December 31, 2016, the parent company paid interest totaling $0.3 million to our Insurance subsidiaries on such loans.
• payment of dividends to holders of our mandatorily redeemable preferred shares-In the year ended December 31, 2016, we paid $3.4 million of dividends to holders of our mandatorily redeemable preferred shares. The $40 million face value of those shares will be redeemed at their maturity date in the second quarter of 2017, or earlier as part of the WellCare transaction.
• issuance of convertible senior notes-On June 27, 2016, we completed an offering of $115.0 million of our 4.00% Convertible Senior Notes due 2021 (the "Convertible Notes"). The Convertible Notes are senior unsecured obligations of the Company. Interest on the Convertible Notes is payable on June 15 and December 15 of each year, commencing on December 15, 2016 until their maturity date of June 15, 2021. We may not redeem the Convertible Notes prior to the maturity date. The notes are convertible, subject to certain conditions, into cash, shares of Universal American's common stock or a combination of cash and shares of Universal American's common stock, at Universal American's option. The initial conversion rate per $1,000 principal amount of notes is equivalent to 105.8890 shares of common stock, which is equivalent to a conversion price of approximately $9.44 per share, subject to adjustment in certain circumstances.
• proceeds from the sale of subsidiaries-On August 3, 2016 we completed the sale of our Traditional Insurance business to Nassau Re. At closing, we received $30.5 million in cash which, under the terms of the agreement, is subject to post-closing price adjustments based on actual capital and surplus of Constitution and Pyramid compared to the target statutory capital and surplus of $68.5 million. In October 2016, we received $11.4 million representing final settlement of potential earn-out payments from this sale and in January 2017 we received an additional $2.7 million in cash in final settlement of the post-closing balance sheet adjustments. On August 1, 2016, we completed the sale of all the outstanding equity interests of TONY, which
• proceeds from the sale of and distributions received on investments-In August 2015, we sold our interest in our cost-basis investment in naviHealth for $35.6 million and received cash proceeds of $33.1 million, with the balance of $2.5 million held in escrow, which was received in December 2016, and recorded a pre-tax realized gain of $29.6 million. In November 2015, we sold our interest in our cost-basis investment in DDDS for $6.6 million and received cash proceeds of $3.1 million, with the balance of $3.4 million representing the discounted fair value of a put option, exercisable in November 2018, and recorded a pre-tax realized gain of $6.1 million. In October 2016, we negotiated and received final settlement of this put option for $3.3 million. In addition, in 2015, we received a total of $2.0 million in cash distributions from DDDS.
Any such use is dependent upon a variety of factors and there can be no assurance that any one or more of these uses will occur.
Insurance and HMO subsidiaries. We require cash at our insurance and HMO subsidiaries to meet our plan-related obligations and to pay operating expenses, including the cost of administration of the policies, and to maintain adequate capital levels. The primary sources of liquidity are premiums received from CMS and members and investment income generated by our invested assets.
During the twelve months ended December 31, 2016, SCOT paid a $9.6 million dividend on July 21, 2016. No other dividends were declared or paid during 2016. During 2015, our Insurance subsidiaries, Pyramid, Constitution, and Marquette (which was merged into Constitution in May 2015)
At December 31, 2016, cash and cash equivalents represent approximately 29% of our total cash and invested assets. The increase from 19% at December 31, 2015 is primarily driven by additional cash at the parent holding company. Approximately 50% of cash and invested assets were held in securities backed by the U.S. government or its agencies. The increase from 18% at December 31, 2015, is primarily due to the conversion of our "prime" money market fund holdings to U.S. government money market funds, which was driven by the money market fund reforms that went into effect in October 2016. The average credit quality of our total investment portfolio was AA- at December 31, 2016 and 2015.
The average book yield of our investment portfolio decreased to 2.2% at December 31, 2016 from 2.9% December 31, 2015, which was driven by the increase in our lower yielding cash balances at December 31, 2016 vs. 2015, continued lower reinvestment rates on our maturing fixed income portfolio and transfer of the higher yielding fixed maturity investments to discontinued operations in connection with the reinsurance of our Traditional Insurance business at American Progressive as we repositioned our portfolio after closing the transaction.
• changes in the utilization of hospital facilities, physician services, prescription drugs, and new medical technologies, and
The claim reserve balances at December 31, 2014 settled during 2015 for $5.3 million less than originally estimated. This prior year development represents 0.5% of the incurred claims recorded in 2014.
The following table illustrates the sensitivity of our health IBNR payable at December 31, 2016 to identified reasonably possible changes to the estimated weighted average completion factors and healthcare cost trend rates. However, it is possible that the actual completion factors and healthcare
We use a range of discount rates that correspond to a market-based weighted average cost of capital. Discount rates are determined for each reporting unit based on the implied risk inherent in their forecasts. This risk is evaluated using comparisons to market information such as peer company weighted average costs of capital and peer company stock prices in the form of revenue and earnings multiples. The most significant estimates in the discount rate determinations include the risk free rates and equity risk premium. Company specific adjustments to discount rates are subjective and thus are difficult to measure with certainty.
Negative changes in one or more of these factors, among others, could result in additional impairment charges.
Amortizing intangible assets. We must estimate and make assumptions regarding the useful life we assign to our amortizing intangible assets. Set forth below are our annual amortization policies for each of the main categories of amortizing intangible assets which have an unamortized balance at December 31, 2016. All are being amortized over the estimated weighted average life of the related asset on a straight line basis.
• the length of time and the extent to which the fair value has been or is expected to be less than cost or amortized cost;
Membership-We analyze the membership for our Medicare Advantage plans (collectively, the "Plans") in our administrative system and reconcile to the enrollment provided by CMS. There are timing differences between the addition of a member to our administrative system and the approval, or accretion, of the member by CMS. Additionally, the monthly payments from CMS include adjustments to reflect changes in the status of membership as a result of retroactive terminations, additions, whether CMS is secondary to other insurance coverage or other changes. Current period membership, net premium, CMS subsidies and claims expense are adjusted to reflect retroactive changes in membership.
Medicare Risk Adjustment Provisions-CMS uses risk-adjusted rates per member to determine the monthly payments to Medicare plans. CMS has implemented a risk adjustment model which apportions premiums paid to all health Plans according to health diagnoses. The risk adjustment model uses health status indicators, or risk scores, to improve the accuracy of payment. The CMS risk adjustment model pays more for members with increasing health severity. Under this risk adjustment methodology, diagnosis data from inpatient and ambulatory treatment settings are used by CMS to calculate the risk adjusted premium payment to Medicare Plans. The monthly risk-adjusted premium per member is determined by CMS based on normalized risk scores of each member from the prior year. Annually, CMS provides the updated risk scores to the Plans and revises premium rates prospectively, beginning with the July remittance for current Plan year members. CMS will also calculate the retroactive adjustments to premium related to the revised risk scores for the current year for current Plan year members and for the prior year for prior Plan year members.
Member Premium-We receive a monthly premium from members based on the Plan year bid we submitted to CMS. The member premium, which is fixed for the entire Plan year, is recognized over the contract period and reported as premium revenue. We establish a reserve for member premium that is past due that reflects our estimate of the collectability of the member premium.
For the year ended December 31, 2016, we will file a consolidated federal income tax return that includes most corporate subsidiaries but excludes any subsidiary that qualifies as a life insurance company or is taxed as a partnership under the Internal Revenue Code Subsidiaries that qualify as life insurance companies and partnerships will file separate federal income tax returns. We will include the taxable income or loss from a subsidiary taxed as a partnership in the tax return of its corporate owner.