Our corporate headquarters are located in White Plains, New York. We also have offices in Lake Mary, Florida; 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 following discussion and analysis presents a review of our financial condition as of December 31, 2015 and our results of operations for the years ended December 31, 2015, 2014 and 2013. 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 Accountable Care Organizations: We believe there is a significant opportunity to address the high cost and lack of coordination of health care for the majority of the Medicare fee-for-service population and have joined with provider groups to operate Accountable Care Organizations, or ACOs, that participate in the Medicare Shared Saving Program, known as the MSSP. We currently operate twenty-one MSSP ACOs and one Next Generation ACO, including approximately 3,200 participating providers with approximately 236,000 assigned Medicare fee-for-service beneficiaries. In 2015, our Houston-based ACO was selected by CMS to participate in the Next Generation ACO model effective January 1, 2016.
• Medicaid: We also own and operate the Total Care Medicaid health plan, currently serving approximately 39,000 members in upstate New York.
We have developed a successful primary care physician alignment strategy that we have branded as The Healthy Collaboration®. We work in collaboration with healthcare providers, especially primary care physicians, to help them assume and manage risk, in order to achieve measurably better quality and lower cost. Primary care is among the least expensive part of the overall care continuum. We
• We align incentives through gain sharing arrangements so that providers are incented to assist members to achieve healthy outcomes;
We believe that attractive growth opportunities exist in providing health insurance to the growing senior market. At present, approximately 57 million Americans are eligible for Medicare, the Federal program that offers basic hospital and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the Pew Research Center, more than 3.5 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65 and continue for nearly 20 years. In addition, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. Medicare Advantage continues to grow its share of the overall Medicare market and we believe is likely to continue to gain positive acceptance with consumers.
• In connection with the HMOs, we operate separate Medicare Advantage Management Service Organizations that manage that business and affiliated Independent Physician Associations or IPAs through gain sharing arrangements. We participate in the net results derived from these affiliated IPAs.
• Our HMO and PPO plans are provided under the brand Today's Options® HMO and Today's Options® PPO, respectively. 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.
In June 2015, the MSSP rules were revised in several important ways that we believe demonstrates an ongoing commitment by CMS to maintain participation in the MSSP. For example, Medicare ACOs now have more options under the MSSP, such as:
• 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.
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;
• 8 ACOs were 2 percent or more above their benchmark; and
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 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. Similarly, we were not able to recognize revenue for the year ended December 31, 2015 in the 2015 financial statements. We expect that revenue, if any, for the program year ended December 31, 2015 will be reported in 2016 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.
Historically, children have represented the largest eligibility group. Due to the Medicaid expansion provisions under the Affordable Care Act, CMS projects that Medicaid expenditures will increase from approximately $544 billion in 2015 to approximately $890 billion by 2024.
Total Care NY Medicaid Plan-On December 1, 2013, we acquired the Total Care Medicaid health plan. Total Care provides Medicaid managed care services to approximately 39,000 members in three counties in upstate New York that overlap with our existing Medicare Advantage footprint. Roughly 80% of its members are located in Onondaga County. In addition to the Medicaid program, Total Care also participates in the Child Health Plus program for low-income, uninsured children.
• limitation on the federal tax deductibility of compensation earned by individuals for certain types of companies, beginning in 2013.
Medicare Advantage payment benchmarks have been cut over the last several years, with additional funding reductions to be phased in as noted above. On February 19, 2016, CMS issued its 2017 Advance Notice and Draft Call Letter (the "Advance Notice") detailing preliminary 2017 Medicare Advantage benchmark payment rates. As is customary, CMS has invited public comment on these preliminary rates before issuing its final rates for 2017 in April 2016. The Advance Notice proposes to provide a slight overall increase to Medicare rates for 2017, but also plans to make other changes that could negatively impact our business. At this time, CMS is not implementing any major proposed policy changes with respect to the exclusion of in-home health risk assessments for risk adjustment purposes. If implemented, such change would result in significant additional funding declines for the Company. We will continue to evaluate proposed changes detailed in the Advance Notice, some of which could adversely affect our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in the future.
Implementation of quality bonus for Star ratings-Beginning in 2012, Medicare Advantage plans with an overall "Star rating" of three or more stars (out of five) based on 2011 performance were eligible for a "quality bonus" in their basic premium rates. For 2015 and beyond, plans must achieve an overall star rating of at least 4 stars to receive the quality bonus. Plans receiving Star bonus payments are required to use the additional dollars to provide "extra benefits" for the plans' enrollees, to comply with required MLR, resulting in a competitive advantage for those plans rather than a direct financial impact. In addition, beginning in 2012, Medicare Advantage Star ratings affect the rebate percentage available for plans to provide additional member benefits (plans with quality ratings of 3.5 stars or above will have their rebate percentage increased from a base rate of 50% to 65% or 70%). In all cases, this rebate percentage is lower than the pre-ACA rebate percentage of 75%. Approximately 97% of our 2016 membership is in plans that received a 4-Star Medicare quality rating. The Company earned a 4-Star rating for its flagship TexanPlus® plan in Houston/Beaumont and for its largest plans in New York and Maine, Today's Options PPO plan and Today's Options Network PFFS plan. A summary of these ratings is presented below:
markets in which we compete. Lower quality scores compared to our competitors could have a material adverse effect on our rate of growth.
Non-deductible health insurance industry fee ("ACA Fee")-Beginning in 2014, the new healthcare reform legislation imposed an annual aggregate health insurance industry fee of $8.0 billion, increasing to $11.3 billion in 2015 (with increasing annual amounts thereafter) on health insurance premiums, including Medicare Advantage premiums, that is not deductible for income tax purposes. In 2017, the ACA Fee has been suspended for one year. Our effective income tax rate increased in 2014, and will remain at a higher level in future years in which the ACA fee is assessed. Our share of the ACA Fee is based on our pro rata percentage of premiums written during the preceding calendar year compared to the industry as a whole, calculated annually. The ACA Fee, first expensed and paid in 2014, adversely affects the profitability of our Medicare Advantage business and could have a material adverse effect on our results of operations. We paid a fee of $28.8 million in 2015 and $23.1 million in 2014, based on prior year net written premiums and estimate that the ACA Fee to be paid in 2016, based on 2015 net written premiums, will be approximately $25 million. Pursuant to GAAP, the liability for the ACA Fee will be estimated and recorded in full once the entity provides qualifying health insurance in the corresponding period with a corresponding deferred cost that is to be amortized to expense on a straight-line basis over the applicable calendar year. For statutory reporting purposes, the ACA Fee will be expensed on January 1 in the year of payment, rather than amortized to expense over the year. The ACA Fee is included in other operating costs; however, will be factored in when calculating the stipulated minimum MLR.
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 twenty-one MSSP ACOs and one Next Generation ACO in the Houston market. 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.
In addition, CMS, the US Office of Inspector General, the Internal Revenue Service, the Federal Trade Commission, the US Department of Justice, and various states have adopted or are considering adopting new legislation, rules, regulations and guidance relating to formation and operation of ACOs. Such laws may, among other things, require ACOs to become subject to financial regulation such as maintaining deposits of assets with the states in which they operate, the filing of periodic reports with the insurance department and/or department of health, or holding certain licenses or certifications in the jurisdictions in which the ACOs operate. Failure to comply with legal or regulatory restrictions may result in CMS terminating an ACOs agreement with CMS and/or subjecting an ACO to loss of the right to engage in some or all business in a state, payment of fines or penalties, or may implicate federal and state fraud and abuse laws relating to anti-trust, physician fee-sharing arrangements, anti-kickback prohibitions or prohibited referrals, any of which may adversely affect our operations and/or profitability.
(1)We evaluate the results of operations of our segments based on income (loss) before realized gains and losses and income taxes. We believe that realized gains and losses are not indicative of overall operating trends. This differs from U.S. GAAP, which reflects the effect of realized gains and losses and income taxes in the determination of net income (loss). The schedule above reconciles our segment income (loss), to net (loss) income in accordance with U.S. GAAP.
Our effective tax rate from continuing operations was a provision in excess of 100% for 2015, compared with a benefit of 17% for 2014. The effective rate in 2015 and 2014 differs from the expected benefit of the 35% federal rate due to permanent items, primarily the ACA fee and preferred dividends, as well as state income taxes, net of non-recurring tax benefits. Non recurring tax benefits included in income taxes amounted to $6.4 million and $5.8 million for the years ended December 31, 2015 and 2014, respectively. The 2015 benefit primarily relates to $4.3 million in foreign tax credit carryforwards created in connection with the February 2015 sale of APS Puerto Rico, net of valuation allowance and a $2.4 million net capital loss created in connection with the Traditional Insurance fair value adjustment, net of valuation allowance. Utilization of these tax benefits will be as a result of sufficient taxable income, of the appropriate character, from continuing sources; therefore, they are included in continuing operations. The 2014 benefit primarily relates to the reversal of executive compensation previously considered non-deductible under Code section 162(m)(6) that resulted in the recording of a $3.2 million benefit for amounts considered non-deductible in our prior year tax return, recording of $1.3 million of foreign tax credits and a $0.7 million reserve release related to items on which the statute of limitations has expired.
Our Medicare Advantage segment generated income before income taxes of $48.1 million for the year ended December 31, 2014; a decrease of $5.9 million compared to the year ended December 31, 2013. The decrease in earnings was primarily driven by the then new ACA fee of $22.9 million (effective in 2014), lower membership and lower net investment income; offset by an improved medical benefit ratio of 84.0% for the full year 2014 compared to 85.1% for 2013 and a decrease in our administrative expense ratio from 12.8% in 2013 to 12.1% in 2014. The year ended December 31, 2014, included $33.0 million of net favorable prior year items compared to $23.3 million for the year ended December 31, 2013.
Our Corporate & Other segment reported a loss of $49.4 million for the year ended December 31, 2014 compared to a loss of $42.4 million in 2013. This change was primarily related to higher legal costs, costs associated with our participation in the Exchange and higher interest expense, partially offset by savings from corporate expense reduction initiatives and increased distributions received from cost-method investments.
Our after-tax loss from discontinued operations was $4.5 million and $180.4 million for the years ended December 31, 2014 and 2013, respectively. The decrease is primarily due to asset impairment charges taken in 2013 related to APS Healthcare of $189.4 million, pre-tax.
Our Medicare Advantage segment includes the operations of our Medicare coordinated care HMO, PPO and Network PFFS Plans (collectively known as the Plans). Our HMOs offer coverage to Medicare members primarily in Southeastern Texas (primarily Houston/Beaumont), and the Dallas area. Our PPO and Network PFFS Plans offer coverage primarily in upstate New York and Maine.
In the Northeast markets, where we had a 35% increase in membership during 2015, and now have more than 45,000 members with a large concentration in upstate New York, we recorded an increased medical benefit ratio largely driven by higher utilization and a lag in adequate premium for new members.
Adjusting for the prior year items discussed above in premiums and medical expenses, for the year ended December 31, 2015, our medical benefit MBR, excluding quality initiative costs was 84.2%. Our medical benefit MBRs for the year ended December 31, 2015, as reported and revised to exclude prior year items, are summarized in the table below:
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.
administrative expense ratio from 12.8% in 2013 to 12.1% in 2014. The year ended December 31, 2014, included $33.0 million of net favorable prior year items compared to $23.3 million for the year ended December 31, 2013.
Net investment and other income. Net investment and other income decreased $3.1 million primarily due to lower invested asset levels resulting from the payment of dividends to the parent in 2014 and 2013.
Quality improvement initiative costs of $28.4 million in each of the years ended December 31, 2014 and 2013, respectively, 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, 2014 decreased $37.5 million compared to the year ended December 31, 2013, primarily due to cost reduction initiatives and lower membership. Our administrative expense ratio improved to 12.1% for the year ended December 31, 2014 from 12.8% in 2013 primarily as a result of our cost reduction efforts.
The following table presents the operating results of our MSO segment, consolidating the ACOs in which we participate with the operations of our Collaborative Health Systems, LLC (CHS) subsidiary:
Our MSO segment supports our physician partnerships in the development of value based healthcare models, such as ACOs, with a variety of capabilities and resources including technology, analytics, clinical care coordination, regulatory compliance and program administration. This segment includes our CHS subsidiary and affiliated ACOs. CHS works with physicians and other healthcare professionals to operate ACOs under the Medicare Shared Savings Program. CHS provides these ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care and lower healthcare costs for their Medicare fee-for-service beneficiaries. The Company provides funding to CHS to support the operating activities of CHS and the ACOs.
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 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. Similarly, we were not able to recognize revenue for the year ended December 31, 2015 in the 2015 financial statements. We expect that revenue, if any, for the program year ended December 31, 2015 will be reported in the second quarter of 2016 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.
• 8 additional ACOs achieved savings but did not exceed the Minimum Savings Rate, known as MSR. Of those eight, four missed the MSR by less than 1%; and
• Quality scores improved for all ACOs, which indicates improved healthcare management particularly for our chronically ill beneficiaries.
The following table presents the operating results of our Medicaid segment:
Net premiums. Net premiums increased by $11.9 million, or 7%, compared to the year ended December 31, 2014 primarily as a result of an increase in state capitation rates, higher member months and a change in mix of business. Net premium includes state reimbursement for premium tax and the ACA fee. The state reimbursement for the ACA fee increased significantly in 2015, consistent with the increase in ACA fee expense discussed below.
investment of $2.7 million compared to $2.0 million in 2015. In addition, in 2014, the segment received investment income on a loan to our APS Healthcare subsidiary which is reported in discontinued operations.
Fee and other income. Fee and other income increased by $2.0 million for the year ended December 31, 2015 compared to 2014 primarily due to revenues from transition services agreements entered into in connection with the sale of our APS Healthcare businesses. These additional revenues are offset by expenses included in commissions and general expenses. All transition services were complete by December 31, 2015.
Net premiums. Net premiums increased by $1.3 million for the year ended December 31, 2014 compared to 2013 as a result of the Company's participation in the Exchange.
Net investment income. Net investment income increased by $4.9 million for the year ended December 31, 2014 compared to 2013. In 2014, we received a distribution on a cost-method minority investment of $2.7 million. In addition, in 2014, the segment received investment income on a loan to our APS Healthcare subsidiary which is reported in discontinued operations.
Claims and other benefits. Claims and other benefits increased by $1.6 million for the year ended December 31, 2014 compared to 2013 as a result of the Company's participation in the Exchange.
Commissions and general expenses. Commissions and general expenses increased by $7.1 million for the year ended December 31, compared to the same period in 2013. This increase was driven by higher legal costs. These increases were partially offset by decreases in related to our corporate agencies and expense reduction initiatives.
The following table presents the primary components comprising the loss from discontinued operations:
APS Healthcare: On February 4, 2015, we sold our APS Healthcare Puerto Rico subsidiaries to an affiliate of the Metro Pavia Health System. The purchase price at closing was $26.5 million, which was settled in cash. The transaction resulted in a pre-tax realized loss of approximately $0.4 million. On May 1, 2015, we sold our remaining APS Healthcare operating subsidiaries to KEPRO, Inc., a company that provides quality improvement and care management services to both government clients and the private sector. The purchase price was $5.0 million, which was settled in cash at closing, subject to a working capital true up, which was finalized during the quarter ended September 30, 2015. In addition, the transaction includes a potential earn-out of up to an additional $19.0 million based on certain contract renewals. Due to the variability in the length of time over which the contract renewals may occur and the difficulty of estimating the success of such renewals, we consider the potential earn-out to be a contingent gain which will be recorded only if and when we determine it to be realizable. The transaction resulted in a pre-tax realized loss of $17.0 million, including the working capital true up.
Universal American reported a loss from discontinued operations of $188.5 million for the year ended December 31, 2015 compared with a loss of $3.8 million in 2014.
Traditional Insurance-Fair Value Adjustment: As of December 31, 2015, we determined that this business should be classified as held for sale and reported in discontinued operations. Consequently, the related assets and liabilities at December 31, 2015 were adjusted to fair value, resulting in a pre-tax loss of $149.2 million, including the write off of $60.4 million in deferred acquisition costs and other intangible assets.
APS Healthcare-Operating Results: APS Healthcare had an operating loss of less than $0.1 million for the year ended December 31, 2015 compared with a profit of $10.3 million for the same period in 2014. 2015 results only included 1 month of operating results for Puerto Rico and four months of results for the domestic business, which were both sold in 2015, compared to a full year of operations in 2014.
APS Healthcare-Loss on Sale: During 2015, we recorded losses on the sale of our APS Puerto Rico business of $0.4 million and on the sale of our APS domestic business of $17.0 million.
Universal American reported a loss from discontinued operations of $3.8 million for the year ended December 31, 2014 compared with a loss of $186.6 million in 2014.
Traditional Insurance-Operating Results: Traditional Insurance generated income before taxes of $2.5 million for 2014, a decrease of $8.4 million compared to 2013. The decrease in earnings is primarily driven by the reduction of business in-force combined with higher benefits ratios on our Specialty health lines which resulted in lower underwriting income. Additionally, operating expenses included higher consulting costs related to the transition and outsourcing of certain functions.
2014 compared with a loss of $4.1 million for the same period in 2013. The improvement in 2014 is related primarily to a change in the terms of APS Healthcare's Puerto Rico contract to provide managed behavioral health services under the Mi Salud program effective July 1, 2014, the termination of unprofitable contacts and expense reduction initiatives.
APS Healthcare-Asset Impairment Charge: During calendar year 2013, we recorded asset impairment charges related to APS Healthcare of $189.4 million, which included impairments to goodwill of $164.8 million, amortizing intangibles of $16.1 million and tangible assets of $8.5 million.
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 HMO, insurance, MSO and other subsidiaries, fund new business opportunities through acquisitions or otherwise and pay the operating expenses necessary to function as a holding company, as applicable insurance department regulations require us to bear our own expenses.
• the cash flows of our other subsidiaries, including our Medicare Advantage management service organization-Net cash flows available to our parent company amounted to approximately $23.9 million during the year ended December 31, 2015.
• payment of dividends to holders of our mandatorily redeemable preferred shares-Dividends paid to holders of our mandatorily redeemable preferred shares amount to $3.4 million during the year ended December 31, 2015. The $40 million face value of those shares cannot be redeemed prior to 2017, unless there is a change in control of the Company.
• payment of debt principal, interest and fees required under our 2012 Credit Facility-On October 14, 2015, we prepaid the balance of our term loan and terminated our 2012 Credit Facility-see below for discussion of 2015 activity.
• working capital loans to our Medicaid health plan-Periodically, our parent company lends cash to our Medicaid subsidiary, Today's Options of New York, Inc., known as TONY, to bridge the timing difference between claims payments and premium receipts from New York State Department of Health. These loans are immediately repaid upon receipt of premiums. As of December 31, 2015, TONY had no outstanding loan balance due to the parent company.
The National Association of Insurance Commissioners, known as the NAIC, imposes regulatory risk-based capital, known as RBC, requirements on insurance companies. The level of RBC is calculated and reported annually. A number of remedial actions could be enforced if a company's total adjusted capital is less than 200% of authorized control level RBC. However, we generally consider target surplus to be 350% of authorized control level RBC. At December 31, 2015, all of our insurance and HMO subsidiaries had total adjusted capital in excess of our target of 350% of authorized control level RBC except for SelectCare of Texas which has approximately 300%. Excess capital can be used by the insurance and HMO subsidiaries to make dividend payments to their respective holding companies, subject to certain restrictions, and from there to our parent company.
In the first quarter of 2015, we funded a total of $17.1 million in capital contributions to one of our Insurance subsidiaries, which was merged into Constitution, one of the entities included in the sale of our Traditional Insurance business. During 2015, we made a total of $8.3 million in capital contributions to our Medicaid health plan, Today's Options of New York, or Total Care; $3.2 million of which was done in the form of a surplus note, which bears interest at a rate of 5.0%. Interest and principal payments on the surplus note are subject to the approval of the plan's regulatory agency, the New York State Department of Health. Additionally, in the fourth quarter of 2015, we made a $3.5 million capital contribution to our Texas-based dSNP, Today's Options of Texas.
Medicare Advantage Management Service Organizations. The primary sources of liquidity for these subsidiaries are fees collected from affiliates for performing administrative, marketing and management services for our Medicare Advantage business. The primary uses of liquidity are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for these subsidiaries will exceed scheduled uses of cash and result in amounts available to dividend to our parent company.
Our net retained reserves for life insurance products were $28.6 million, or 6% of our direct and assumed reserves for life insurance products, as of December 31, 2015. Our net retained reserves for life insurance products were $26.5 million, or 5% of our direct and assumed reserves for life insurance products, as of December 31, 2014.
Reserves for future policy benefits-health represents the present value of estimated future benefits to be paid to or on behalf of policyholders, less the future value of net premiums. We calculate this amount based on actuarially recognized methods using morbidity and mortality tables.
For our fixed benefit accident and sickness and our long-term care products, we establish a reserve for future policy benefits at the time we issue each policy based on the present value of future benefit payments less the present value of future premiums. In June 2012, we have ceased issuing new long-term care policies and all other new Traditional business, although our current policies are renewable annually at the discretion of the policyholder, as evidenced by the policyholder continuing to make premium payments. At policy issuance, these reserves are recognized on a net level premium method based on interest rates, mortality, morbidity, and maintenance expense assumptions. Interest rates are based on our expected net investment returns on the investment portfolio supporting the reserves for these blocks of business. Mortality, a measure of expected death, and morbidity, a measure of health status, assumptions are based on published actuarial tables, modified based upon actual experience. The assumptions used to determine the liability for future policy benefits are established and locked in at the time each contract is issued and only change if our expected future experience deteriorates to the point that the level of the liability, together with the present value of future gross premiums, are not adequate to provide for future expected policy benefits and maintenance costs (i.e. the loss recognition date). Because these policies have long-term claim payout periods, there is a greater risk of significant variability in claims costs, either positive or negative. We perform loss recognition tests at least annually in the fourth quarter, and more frequently if adverse events or changes in circumstances indicate that the level of the liability, together with the present value of
future gross premiums, may not be adequate to provide for future expected policy benefits and maintenance costs.
The claim reserve balances at December 31, 2014 settled during 2015 for $4.5 million less than originally estimated. This prior year development represents 0.3% of the incurred claims recorded in 2014.
The claim reserve balances at December 31, 2013 settled during 2014 for $13.6 million less than originally estimated. This prior year development represents less than 1.0% of the incurred claims recorded in 2013.
In accordance with ASC 944-30, Financial Services-Insurance-Acquisition Costs, we defer costs of acquiring new business that are directly related to the successful acquisition or renewal of insurance contracts including the following:
• incremental direct costs of a successful contract acquisition, such as non-level commissions;
The determination of deferability must be made on a contract-level basis. We refer to these costs as DAC.
We test for the recoverability of DAC at least annually. To the extent that we determine that the present value of future policy premiums and investment income or the net present value of expected
Goodwill. Goodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not amortized, but is subject to an annual impairment test. ASC 350, Goodwill and Other Intangible Assets, requires that goodwill balances be reviewed for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event, as defined in ASC 350, has occurred. A reporting unit is defined as an operating segment or one level below an operating segment. Our reporting units are equivalent to our operating segments. We have goodwill assigned to our Medicare Advantage reporting unit.
We test goodwill for impairment annually, as of October 1 of the current year, or more frequently if circumstances suggest that impairment may exist. During each quarter, we perform a review of certain key components of our valuation of our reporting units, including the operating performance of the reporting units compared to plan (which is the primary basis for the prospective financial information included in our annual goodwill impairment test), our weighted average cost of capital and our stock price and market capitalization.
materially in the future. If our assumptions differ from actual, the estimates underlying our goodwill impairment tests could be adversely affected.
(1)Represents goodwill disposed of during 2014 in connection with the sale of TOOK and SCOK of $3.8 million and $0.4 million, respectively. See Note 20-Sales of Subsidiaries.
Valuation of acquired intangible assets. Business combinations accounted for as a purchase result in the allocation of the purchase consideration to the fair values of the assets and liabilities acquired, including the present value of future profits and other identified intangibles, establishing these fair values as the new accounting basis. We base the fair values on an estimate of the cash flows of the identified intangible, discounted to reflect the present value of those cash flows. The discount rate we select depends upon the general market conditions at the time of the acquisition and the inherent risk in the transaction. We allocate purchase consideration in excess of the fair value of net assets acquired, including the present value of future profits and other identified intangibles, for a specific acquisition, to goodwill. We perform the allocation of purchase price in the period in which we consummate the purchase.
pricing services may use matrix or model processes to develop a security price where the pricing services develop future cash flow expectations based upon collateral performance, discounted at an estimated market rate. The pricing for mortgage-backed and asset-backed securities reflects estimates of the rate of future prepayments of principal over the remaining life of the securities. The pricing services derive these estimates based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral.
The investment advisor uses their own rules-based pricing system to evaluate the prices it receives from various pricing vendors to ensure the data adheres to certain vendor-to-vendor and day-to-day variance tolerances. Exceptions to the rules are monitored, investigated and challenged, as needed. We review and test the security pricing procedures used to value our fixed maturity portfolio on an ongoing basis. Our procedures include review of the investment valuation policy and understanding of the procedures used to obtain investment valuations and review of pricing controls at our investment advisor, including their Statements on Standards for Attestation Engagements 16 controls review report. We also test the prices provided by the advisor monthly by comparing the data to another independent pricing source and monitoring the change in prices from month to month and upon sale of the security. Significant changes or variances are investigated and explained. During the year ended December 31, 2015, we did not modify any price provided by the advisor.
The evaluation of impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether we should recognize declines in the fair value of investments in current period earnings. The principal risks and uncertainties are:
• our intent and ability to retain the investment for a period of time sufficient to allow for recovery.
Premiums-Premiums received pursuant to Medicare contracts with CMS are recorded as revenue in the month in which members are entitled to receive benefits. Premiums collected in advance are deferred. Receivables from CMS and Plan members are recorded net of estimated uncollectible amounts and are reported as due and unpaid premiums in the consolidated balance sheets. We routinely monitor the collectability of specific accounts, the aging of member premium receivables, historical retroactivity trends and prevailing and anticipated economic conditions.
Revenue Adjustments-The monthly CMS Direct Premium Subsidy is based upon the members' health status, which is determined by CMS, as more fully described above under "Medicare Risk Adjustment Provisions." All health benefit organizations that contract with CMS must capture, collect, and submit the necessary diagnosis code information to CMS within prescribed deadlines. Accordingly, we collect, capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines for our Plans. We estimate changes in CMS premiums related to revenue adjustments based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. Risk scores are updated annually by CMS and reconciled to our estimated amounts by us with any adjustments recorded in premium revenue. Although such adjustments have not been considered to be material in the past, future adjustments could be material.
Catastrophic Reinsurance-We receive payments from CMS for catastrophic reinsurance for members of our Plans with Part D benefits.
In accordance with ASC Topic 740-10, Income Taxes (ASC 740), a valuation allowance is deemed necessary when, based on the weight of all the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized. The future realization of the tax benefit depends on the existence of sufficient taxable income within the carryback and carryforward periods.
In our consideration of all the available evidence, we provided more weight to evidence that was more objectively verifiable. In 2015, significant weight was given to our cumulative income/loss position. Our cumulative loss position at December 31, 2015 was due in large part to losses in our APS Healthcare businesses that were sold during 2015 and are reported in discontinued operations, the fair value adjustment on our Traditional Insurance business that is held for sale and reported in discontinued operations, the cumulative losses on our ACO business which include startup costs and a time lag in the recognition of revenue, the recognition of significant legal/settlement costs related to our non-core businesses and significant non-deductible expenses, particularly the ACA fee. While the Company is in a cumulative net loss position over the last three years from a financial reporting perspective, the Company has cumulative pre-tax income over the same period, after these adjustments are made.
U.S. tax losses in our separately filed life insurance company income tax returns can be carried back to 2012.
For the year ended December 31, 2015, 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, as well as our former subsidiaries domiciled in Puerto Rico, which were sold during 2015. 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.
We carried valuation allowances for our continuing and discontinued operations on our deferred tax assets of $36.9 million at December 31, 2015 and, $15.5 million at December 31, 2014, primarily related to foreign tax credit carryforwards that were created from the sale of our Puerto Rico subsidiaries and those we acquired in connection with our purchase of APS Healthcare in 2012, deferred tax assets of APS Healthcare's Puerto Rico subsidiaries, state net operating loss carryforwards, deferred income tax assets for various states and the deferred tax asset generated in connection with the fair value adjustment made as we determined that our Traditional Insurance business should be reported as held for sale at fair value.
We recognize interest and penalties related to unrecognized tax benefits in federal and state tax expense. During the years ended December 31, 2015 and 2014, we recognized no such interest expense and penalties. During the year ended December 31, 2013, we recognized $0.5 million, of interest expense and penalties.