For GAAP reporting purposes, Medicaid premium taxes and Medicaid ACA industry fee reimbursements are included in premium revenue to measure our MBR. Our Medicaid Health Plans Adjusted MBR measures the ratio of our medical benefits expense to premium revenue, excluding Medicaid premium taxes and Medicaid ACA industry fee reimbursement revenue. Because reimbursements for Medicaid premium tax and ACA industry fee are both included in the premium rates or reimbursement established in certain of our Medicaid contracts and also recognized separately as a component of expense, we exclude these reimbursements from premium revenue when calculating key ratios as we believe that these components are not indicative of operating performance.
Effective January 1, 2018, the Company redefined our SG&A ratio (GAAP) to be a percentage of total revenues. Adjusted SG&A ratio was redefined to be a percentage of total revenues excluding Medicaid premium tax reimbursement and Medicaid ACA industry fee reimbursement. Accordingly, results for the years ended 2017, 2016, 2015 and 2014 were adjusted to conform to this presentation. Our SG&A ratio (GAAP)
decreased by 0.1% for the year ended December 31, 2017. Our SG&A ratio was unaffected for years ended 2016, 2015 and 2014. Our Adjusted SG&A ratio was unaffected for each period.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6 - Selected Financial Data and our consolidated financial statements and related notes appearing elsewhere in this 2018 Form 10-K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from management's expectations. Factors that could cause such differences include those set forth under Part I, Item 1 - Business and Part I, Item 1A - Risk Factors, as well as Forward-Looking Statements discussed earlier in this 2018 Form 10-K.
We began serving Medicaid and Medicare members in Arizona, effective December 31, 2016, in connection with the acquisition of Care1st Health Plan Arizona, Inc. and One Care by Care1st Health Plan of Arizona, Inc. (together "Care1st Arizona"). Effective January 1, 2017, we began serving Medicaid members statewide in Nebraska. In connection with the acquisition of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and MeridianRx, a pharmacy benefit manager ("PBM") (collectively, “Meridian”) we began serving Medicaid and Medicare members in Michigan, as well as MA members in Indiana and Ohio.
Membership increased by 1,167,000 members, or 26.7%, in 2018 compared with 2017, as discussed below in "Results of Operations." The growth was primarily driven by our September 2018 acquisition of Meridian, as well as organic growth in our Medicaid Health Plans and Medicare Health Plans segments. These increases were partially offset by decreased membership in our Medicare PDP segment resulting from our 2018 bid positioning.
Premiums increased $3.2 billion, or 18.8%, in 2018 compared with 2017, primarily reflecting our acquisitions of Meridian in September 2018 and Universal American in April 2017. The increase is also attributed to the assignment of additional members in our Illinois Medicaid health plan, effective January 1, 2018, participation in the Missouri Medicaid program expansion, effective May 1, 2017, organic growth in our Medicare Health Plans segment and the expiration of the 2017 ACA industry fee moratorium (discussed in Key Development and Accomplishments below), which reestablished the associated Medicaid ACA industry fee reimbursements from our state government partners for 2018. These increases were partially offset by the previously discussed membership declines in our PDP segment.
In February 2019, we received notice from the North Carolina Department of Health and Human Services (“DHHS”) that we were awarded a contract to administer the state’s Medicaid Prepaid Health Plans, which is subject to a protest process. DHHS has selected four health plans, including us, to serve North Carolina's Medicaid beneficiaries on a statewide basis. One additional health plan led by providers was selected to operate health plans in certain regions. The state is expected to implement the new managed care program, in two phases, for its 1.6 million Medicaid beneficiaries beginning November 1, 2019.
In November 2018, we completed the asset purchase of Aetna Inc.'s ("Aetna") entire standalone Medicare Part D prescription drug plan membership ("Aetna Part D membership"), which Aetna divested as part of CVS Health Corporation's acquisition of Aetna, for total approximate consideration of $107.2 million in cash, which is subject to certain true-up provisions. Per the terms of the agreements, Aetna will provide administrative services to, and retain financial risk of, the Aetna Part D membership through 2019. Therefore, the Aetna Part D membership will be excluded from our membership and results of operations until January 1, 2020.
In September 2018, we completed the acquisition of Meridian for approximately $2.5 billion in cash, subject to certain purchase price adjustments. As a result of this transaction, we expanded our Medicaid portfolio through the addition of Michigan, where Meridian has the leading market position; expanded our Medicaid presence in Illinois; and acquired an integrated PBM platform. Meridian also serves MA members in Illinois, Indiana, Michigan and Ohio, as well as Health Insurance Marketplace members in Michigan.
In August 2018, we completed the offering and sale of 5.375% unsecured senior notes due 2026 in the aggregate principal amount of $750.0 million (the “2026 Notes"). The aggregate net proceeds from the issuance of the 2026 Notes were $739.0 million, which were used to fund a portion of the cash consideration for our acquisition of Meridian.
In July 2018, we entered into an amended and restated Credit Agreement (“Amended and Restated Credit Agreement”), which increased the aggregate principle amount available under our Revolving Credit Facility from $1.0 billion to $1.3 billion. Additionally, we extended the maturity date under the Revolving Credit Facility from January 2021 to July 2023.
Medicaid Health Plans. Membership increased by 1,208,000, or 44.4%, to 3.9 million members as of December 31, 2018.The increase was primarily driven by the acquisition of Meridian, as well as organic membership growth primarily in our Illinois Medicaid health plan as a result of a new contract with the Illinois Department of Health Care and Family Services ("HFS") to administer the Health Choice Illinois Medicaid managed care program statewide, effective January 1, 2018.
Medicare Health Plans. Membership increased by 49,000, or 9.9%, to 545,000 members as of December 31, 2018. The increase is partially a result of the acquisition of Meridian, which expanded our membership through the addition of Michigan, Indiana and Ohio, as well as deepened our presence in Illinois. Additionally, the increase reflects our organic growth.
Premium revenue for the year ended December 31, 2017, increased $2.7 billion, or 19.3%, from 2016 compared with the same period in 2016, reflecting our acquisitions of Universal American and Care1st Arizona, our participation in the Missouri Medicaid program expansion, net rate increases in certain of our Medicaid markets, and organic growth across all three lines of business. These increases were partially offset by the effect of the ACA industry fee moratorium for 2017, which resulted in the elimination of any associated Medicaid ACA industry fee reimbursements from our state government partners.
Medical benefits expense for the year ended December 31, 2018, increased $2.4 billion, or 16.2%, from 2017 primarily driven by the previously noted 2018 and 2017 acquisitions, the assignment of additional members in our Illinois Medicaid health plan and additional organic membership growth in our Medicaid Health Plans and Medicare Health Plans segments. The increases were partially offset by the previously discussed membership declines in our Medicare PDP segment and the favorable result of continued performance in clinical and pharmacy execution.
SG&A expense also included certain costs associated with our 2018 acquisitions of Meridian and Aetna Part D membership as well as the 2017 acquisition of Universal American ("Transaction and integration costs"); certain activities relating to the divestiture of Sterling Life Insurance Company ("Sterling divestiture costs"), our prior Medicare Supplement business; transitory costs related to our decision to change our pharmacy benefit manager ("PBM") as of January 1, 2016 ("PBM transitory costs"); and certain non-recurring Iowa related SG&A expenses relating to readiness costs, certain wind-down costs of WellCare's Iowa operations and certain legal costs ("Iowa SG&A costs"). Although the above items may recur, we believe that by providing non-GAAP measurements exclusive of these items, we facilitate period-over-period comparisons and provide additional clarity about events and trends affecting our core operating performance, as well as providing comparability to competitor results. The Investigation costs are related to a discrete incident, which we do not expect to re-occur. The other costs mentioned above are related to specific events, which do not reflect the underlying ongoing performance of our business. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP. Below is a reconciliation of these non-GAAP measures with the most directly comparable financial measure calculated in accordance with GAAP.
The reconciliation of SG&A expense, including and excluding such costs, is as follows:
Our SG&A expense for the year ended December 31, 2018, increased approximately $216.3 million, or 14.6%, compared with the same period in 2017, primarily reflecting our 2018 acquisition of Meridian, staffing and infrastructure costs to support organic growth, our 2017 acquisition of Universal American and variable management incentive compensation due to improved company performance. Our SG&A ratio decreased by 40 basis points for the year ended December 31, 2018, compared with the same period in 2017, primarily reflecting the expiration of the 2017 ACA industry fee moratorium, which reestablished the associated Medicaid ACA industry fee reimbursements from our state government partners for 2018, continued improvements in operating efficiency, and lower year-over-year transaction and integration costs; partially offset by higher variable management incentive compensation in 2018.
Our Adjusted SG&A expense for the year ended December 31, 2017, increased approximately$334.0 million, or 30.2%, compared with the same period in 2016. Additionally, our Adjusted SG&A ratio increased by 50 basis points for the year ended December 31, 2017, compared with the same period in 2016. These increases were primarily the result of our acquisitions of Universal American and Care1st Arizona as well as variable management incentive compensation due to improved company performance.
Effective January 1, 2017, the Consolidated Appropriations Act, 2016 provided for a one-year moratorium on the ACA industry fee, which also eliminated the associated Medicaid ACA industry fee reimbursements from our state government partners. This 2017 moratorium expired effective January 1, 2018. Accordingly, we incurred $344.1 million for the ACA industry fee for the year ended December 31, 2018. We did not incur ACA industry fee expense for 2017.
The loss on extinguishment of debt of $26.1 million primarily related to the early redemption of our $900.0 million aggregate principal amount of our 5.75% senior notes due 2020 Notes (the "2020 Notes") on April 7, 2017 (discussed further in Note 10 - Debt to the consolidated financial statements in this 2018 Form 10-K). In connection with the redemption we incurred a one-time loss on extinguishment of debt related to the redemption premium, the write-off of associated deferred financing costs and the write-off of the unamortized portion of associated premiums paid on the 2020 Notes.
Income tax expense for the year ended December 31, 2017, decreased $199.5 million, or 69.4%, compared with the same period in 2016, while the effective tax rate for the year ended December 31, 2017, decreased to 19.0% compared with 54.3% for the same period in 2016. The decrease in income tax expense was primarily driven by the one-year moratorium on the non-deductible ACA industry fee for 2017, higher excess tax benefits resulting from the settlement of stock-compensation awards in 2017 and the favorable effect of the recognition of certain previously unrecognized tax benefits during 2017. The decrease is also related to the effect of revaluing the Company's deferred tax assets and liabilities as a result of the TCJA.
Reportable operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated on a regular basis by the enterprise's decision makers to determine how resources should be allocated to an individual segment and to assess performance of those segments. Accordingly, we have three reportable segments: Medicaid Health Plans, Medicare Health Plans and Medicare PDPs.
Our primary measurements of profitability for our reportable segments are premium revenue, gross margin and MBR. Gross margin is defined as total revenues less investment and other income, medical benefits expense, costs of products and services, the ACA industry fee expense, and Medicaid premium tax expense. MBR measures the ratio of medical benefits expense to premium revenue. Our Adjusted MBR (non-GAAP) measures the ratio of medical benefits expense to premium revenue, excluding Medicaid premium taxes reimbursement and Medicaid ACA industry fee reimbursement.
We use gross margin, MBR and, where applicable, Adjusted MBR, to monitor our management of medical benefits and medical benefits expense. These metrics are utilized to make various business decisions, including which health care plans to offer, which geographic areas to enter or exit and which health care providers to include in our networks.
Effective January 1, 2018, other expenses include SG&A expenses, depreciation, amortization and interest. Accordingly, results for the years ended December 31, 2017 and 2016 were adjusted to exclude Medicaid premium taxes, which decreased other expenses by $119.8 million and $110.0 million, respectively.
The following table sets forth the summarized results of operations and other relevant performance measures for our Medicaid Health Plans segment for the years ended December 31, 2018, 2017 and 2016:
For GAAP reporting purposes, Medicaid premium tax reimbursement and Medicaid ACA industry fee reimbursement are included in premium revenue to measure our MBR. Our Medicaid Health Plans Adjusted MBR measures the ratio of our medical benefits expense to premium revenue, excluding Medicaid premium tax reimbursement and Medicaid ACA industry fee reimbursement revenue. Because reimbursements for Medicaid premium tax and ACA industry fee are both included in the premium rates or reimbursement established in certain of our Medicaid contracts and also recognized separately as a component of expense, we exclude these reimbursements from premium revenue when calculating key ratios as we believe that these components are not indicative of operating performance.
Effective January 1, 2018, the Company redefined gross margin as total revenues less investment and other income, medical benefits expense, costs of products and services, the ACA industry fee expense, and Medicaid premium tax expense. Accordingly, results for the years ended December 31, 2017 and 2016 were adjusted to include Medicaid premium taxes, which decreased gross margin by $119.8 million and $110.0 million, respectively.
Excluding Medicaid premium taxes and Medicaid ACA industry fee reimbursements, Medicaid premium revenue increased $2.0 billion, or 18.5%, for the year ended December 31, 2018, compared with the same period in 2017. The increase is a result of our 2018 acquisition of Meridian, the assignment of additional members in our Illinois Medicaid health plan, effective January 1, 2018, and net premium rate increases in certain of our Medicaid markets. The increases were partially offset by the lower Georgia membership and net eligibility decreases in certain of our Medicaid markets noted above.
Our Medicaid Health Plans segment MBR decreased by 180 basis points for the year ended December 31, 2018, compared with the same period in 2017. The decrease is primarily a result of the expiration of the 2017 ACA industry fee moratorium, which reestablished the associated Medicaid ACA industry fee reimbursements from our state government partners for 2018, net premium rate increases in certain of our Medicaid markets and the favorable result of continued performance in clinical and pharmacy execution.
Excluding the effect of Medicaid premium taxes and Medicaid ACA industry fee reimbursements, our Medicaid Health Plans Adjusted MBR is consistent with the same period in 2017.
Excluding Medicaid premium taxes and Medicaid ACA industry fee reimbursements, Medicaid premium revenue increased $1.5 billion, or 16.0%, for the year ended December 31, 2017, compared with the same period in 2016. The increase is a result of our previously discussed 2017 and 2016 Medicaid acquisitions, our new Nebraska Medicaid program and our participation in the Missouri Medicaid program statewide expansion. The increase is also attributable to net increases in certain of our existing Medicaid markets.
Excluding the effect of Medicaid premium taxes and Medicaid ACA industry fee reimbursements, our Medicaid Health Plans Adjusted MBR decreased by 70 basis points for the year ended December 31, 2017, compared with the same period in 2016. The decrease is primarily the result of continued operational execution and net rate increases in certain Medicaid markets, partially offset by the addition of our new Medicaid businesses in Arizona and Nebraska, and new members from the statewide expansion of the Missouri Medicaid program.
Medicare Health Plans premium revenue increased by $1.4 billion, or 37.2%, for the year ended December 31, 2017, compared with the same period in 2016, primarily driven by our acquisition of Universal American, our 2017 bid strategy and organic growth.
Medicare Health Plans medical benefits expense increased $1.3 billion, or 39.6%, for the year ended December 31, 2017, compared with the same period in 2016, primarily due to increased membership acquired from the acquisition of Universal American and increased membership as a result of our 2017 bid positioning. The Medicare Health Plans MBR increased by 140 basis points for the year ended December 31, 2017, compared with the same period in 2016, primarily resulting from the acquisition of Universal American, bid considerations due to the ACA industry fee moratorium in 2017 and increased investments in quality program initiatives.
We have contracted with CMS to serve as a plan sponsor offering stand-alone Medicare Part D PDPs to Medicare eligible beneficiaries through our Medicare PDPs segment. The PDP benefit design generally results in our incurring a greater portion of the responsibility for total prescription drug costs in the early stages of a plan year and less in the latter stages of a plan year due to the members' share of cumulative out-of-pocket costs increasing throughout the plan year. As a result, the Medicare PDPs MBR is generally lower in the second half of the year as compared with the first half. In addition, the level and mix of members who are auto-assigned to us and those who actively choose our PDPs will affect the segment MBR pattern across periods.
The following table sets forth the summarized results of operations and other relevant performance measures for our Medicare PDPs segment for the years ended December 31, 2018, 2017 and 2016:
The Medicare PDPs premium revenue decreased $78.8 million, or 8.6%, for the year ended December 31, 2018, compared with the same period in 2017. Medical benefits expense decreased $148.6 million, or 19.7%, for the year ended December 31, 2018, compared with the same period in 2017. The decreases were primarily a result of our 2018 bid positioning and, related to the decrease in medical benefits, continued performance in pharmacy execution. The Medicare PDPs MBR decreased by 1,000 basis points for the year ended December 31, 2018, compared with the same period in 2017 reflecting the effect of our 2018 bid strategy.
The Medicare PDPs premium revenue increased $68.8 million, or 8.1%, for the year ended December 31, 2017, compared with the same period in 2016. Medical benefits expense increased $131.0 million, or 21.0%, for the year ended December 31, 2017, compared with the same period in 2016. The increases were primarily due to the increase in membership resulting from
Health care expenditures have grown consistently for many years, and we expect overall health care costs to continue to grow in the future due to inflation, evolving medical technology, pharmaceutical advancement, regulatory requirements, demographic trends in the U.S. population, and national interest in health and wellbeing. We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our health plans try to control medical and hospital costs through our state savings initiatives and contracts with independent providers of health care services. Through these contracted care providers, our health plans emphasize preventive health care and appropriate use of specialty and hospital services. Additionally, our contracts with states require actuarially sound premiums that include health care cost trend. While we currently believe our strategies to mitigate health care cost inflation will continue to be successful, competitive pressures, new health care and pharmaceutical product introductions, demands from health care providers and customers, applicable health care reform regulations, an increase in the expected rate of inflation for health care costs, or other factors may adversely affect our ability to control health care costs.
The guidance below does not reflect teh recently announced North Carolina award, as discussed in "Key Developments and Accomplishments."
Medicaid Health Plans - We expect premium revenue (GAAP) for our Medicaid Health Plans segment to be in the range of $17.1 billion to $17.6 billion for 2019, compared with $13.0 billion for 2018. We expect premium revenue for our Medicaid Health Plans, excluding $130.0 million to $135.0 million in Medicaid premium taxes to be in the range of $17.0 billion to $17.5 billion for 2019, compared with $12.6 billion reported for 2018, excluding $126.8 million in Medicaid premium taxes and $302.2 million Medicaid ACA industry fee reimbursements.
Consolidated SG&A - Our consolidated SG&A ratio (GAAP) is not estimable as we currently are not able to project future amounts associated with Transaction and Integration costs associated with our acquisitions, as defined earlier. We expect that our consolidated Adjusted SG&A ratio for 2019 will be approximately 7.65% to 7.80%, compared with 8.3% for 2018, resulting from improved operating leverage associated with premium revenue growth and continued synergies from our acquisitions.
payment of certain Part D benefits paid for members on behalf of CMS;
SG&A costs directly incurred or paid through a management services agreement to one of our non-regulated administrative and management services subsidiaries; and
We refer collectively to the cash, cash equivalents and investment balances maintained by our regulated subsidiaries as "regulated cash and investments." Our regulated subsidiaries generally receive premiums in advance of payments of claims for medical and other health care services; however, regulated cash, cash equivalents and investments can fluctuate significantly in a particular period depending on the timing of receipts for premiums from our government partners. Our unrestricted regulated cash, cash equivalents and investments was $4.8 billion at both December 31, 2018 and December 31, 2017, primarily due to cash and investments acquired with the Meridian acquisition, earnings from operations and contributions received from the parent and non-regulated subsidiaries, offset by $742.1 million paid to CMS in November 2018 for the 2017 Medicare Part D program plan year (see discussion in Medicare Part D Funding and Settlements below), the ACA industry fee payment remitted to the IRS in September 2018, cash on hand used to fund the acquisition of Aetna’s PDP membership and dividends paid to the parent and non-regulated subsidiaries.
Funding may be provided to certain regulated subsidiaries from our unregulated subsidiaries to cover any shortfall resulting from the amount of Part D benefits paid for members on behalf of CMS that exceeds the prospective subsidy payments that these regulated subsidiaries receive from CMS. We receive certain Part D prospective subsidy payments from CMS for our MA and PDP members as a fixed monthly per member amount, based on the estimated costs of providing prescription drug benefits over the plan year, as reflected in our bids. A discussion of the subsidy components under Part D is included in Note 2- Significant Accounting Policies to the consolidated financial statements included in this 2018 Form 10-K. The benefits include the catastrophic reinsurance, premium and cost sharing for low income Part D members ("LICS"), for which CMS will fully reimburse these subsidies, or recoup overpaid subsidies made during the plan year, as part of its annual settlement process that typically occurs in the fourth quarter of the subsequent year.
(1) Net cash used in investment activities and the increase in cash and cash equivalents have been retrospectively adjusted to reflect the adoption of ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" effective January 1, 2018. See Note 2 - Summary of Significant Accounting Policies for further discussion.
Net cash provided by operating activities for 2018 was $279.0 million, compared with $1.1 billion for 2017. The decrease is primarily due to the timing of Medicaid premium receivable receipts, the ACA industry fee payment made in September 2018; partially offset by the timing of the Medicaid ACA industry fee reimbursement payments and cash flows from operations.
Net cash provided by operating activities for 2017 was $1.1 billion, compared with $748.3 million for 2016. The increase is primarily due to improved operating earnings and the timing of claim payments, as well as the one-year moratorium on the ACA industry fee in 2017.
Cash flows from financing activities are primarily affected by debt-related activity, as well as net funds received or paid for the benefit of members of our MA and PDP plans. Cash provided by financing activities for 2018 was $1.7 billion, compared with $828.2 million for the same period in 2017, primarily driven by the following:
Net funds paid for the benefit of members was approximately $520.6 million for 2018, compared with net funds received of $671.6 million during 2017. These funds represent the net amounts we paid for related prescription drug benefits, described above in "Medicare Part D Funding and Settlements", net of the amounts of subsidies we received from CMS in connection with the low-income cost sharing, catastrophic reinsurance and coverage gap discount components of the Medicare Part D program related to the government's portion of financial responsibility. The increase in funds paid in 2018 compared with the same period in 2017 is due to $742.1 million paid to CMS in November 2018 to settle the 2017 Medicare Part D program plan year, compared with $92.8 million paid in 2017 to settle the 2016 plan year, as well as the effect of our 2018 bids, resulting in lower payments received for 2018 net subsidies.
Cash flows from financing activities are primarily affected by debt-related activity, as well as net funds received or paid for the benefit of members of our MA and PDP plans. Cash provided by financing activities for 2017 was $828.2 million, compared with $833.1 million for the same period in 2016, primarily driven by the following:
Net funds received for the benefit of members was approximately $671.6 million for 2017, compared with $1.0 billion during 2016. These funds represent the net amounts of subsidies we received from CMS in connection with the low-income cost sharing, catastrophic reinsurance and coverage gap discount components of the Medicare Part D program related to the government's portion of financial responsibility, net of the amounts we paid for related prescription drug benefits, described above in "Medicare Part D Funding and Settlements." The decrease in funds received in 2017
On August 13, 2018, we completed the offering and sale of our 2026 Notes. The aggregate net proceeds from the issuance of the 2026 Notes were $739.0 million, with the net proceeds from the offering being used to fund a portion of the cash consideration for our acquisition of Meridian.
The 2026 Notes were issued under an indenture, dated as of August 13, 2018 (the “2026 Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. The 2026 Indenture under which the notes were issued contains covenants that, among other things, limit our ability and the ability of our subsidiaries under certain circumstances to:
On March 22, 2017, we completed the offering and sale of our 2025 Notes in the aggregate principal amount of $1,200.0 million, resulting in aggregate net proceeds of $1,182.2 million. A portion of the net proceeds from the offering were used to repay the $100.0 million outstanding under our Credit Agreement, and to redeem the full $900.0 million aggregate principal amount of our 2020 Notes. The remaining net proceeds from the offering of the 2025 Notes were used for general corporate purposes, including organic growth and working capital.
The 2025 Notes were issued under an indenture, dated as of March 22, 2017 (the "Base Indenture"), as supplemented by the First Supplemental Indenture, dated as of March 22, 2017 (the "First Supplemental Indenture" and, together with the Base
Indenture, the "2025 Indenture"), each between the Company and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”), as trustee. The 2025 Indenture under which the notes were issued contains covenants that, among other things, limit our ability and the ability of our subsidiaries under certain circumstances to:
In April 2017, we redeemed the full $900.0 million in aggregate principal amount outstanding of our 2020 Notes at a redemption price of 102.875% of the principal amount, plus accrued and unpaid interest. Our obligations under the related base indenture, each dated as of November 14, 2013, by and among us and BNY Mellon, as trustee, were satisfied and discharged on April 7, 2017. In connection with the redemption of the 2020 Notes, we incurred a one-time loss on extinguishment of debt of approximately $25.9 million related to the redemption premium, the write-off of associated deferred financing costs and the write-off of the unamortized portion of associated premiums paid on the 2020 Notes. The loss on extinguishment of debt is reflected in our results of operations for 2017.
On July 23, 2018, we entered into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. The Amended and Restated Credit Agreement, among other things, modified the terms of our senior unsecured revolving loan facility (the "Revolving Credit Facility") to (i) increase the total commitments under the Revolving Credit Facility from $1.0 billion to $1.3 billion and (ii) extend the maturity date under the Revolving Credit Facility from January 2021 to July 2023.
Revolving Credit Loans designated by us at the time of borrowing as “ABR Loans” that are outstanding under the Credit Agreement bear interest at a rate per annum equal to (i) the greatest of (a) the Prime Rate (as defined in the Credit Agreement) in effect on such day; (b) the Federal Reserve Bank of New York Rate (as defined in the Credit Agreement) in effect on such day plus 1/2 of 1%; and (c) the Adjusted LIBO Rate (as defined in the Credit Agreement) for a one-month interest period on such day plus 1%; plus (ii) the Applicable Rate. Revolving Credit Loans designated by us at the time of borrowing as “Eurodollar Loans” that are outstanding under the Credit Agreement bear interest at a rate per annum equal to the Adjusted LIBO Rate (as defined in the Credit Agreement) for the interest period in effect for such borrowing plus the Applicable Rate. Pursuant to the Amended and Restated Credit Agreement, the “Applicable Rate” decreased to a range of (A) 0.375% to 1.00% per annum for ABR Loans and (B) 1.375% to 2.00% per annum for Eurodollar Loans, in each case depending on our ratio of
The Amended and Restated Credit Agreement also contains customary representations and warranties that must be accurate in order for us to borrow under the revolving credit facility. In addition, the Amended and Restated Credit Agreement contains customary events of default. If an event of default occurs and is continuing, we may be required immediately to repay all amounts outstanding under the Amended and Restated Credit Agreement. Lenders holding greater than 50% of the loans and commitments under the Amended and Restated Credit Agreement may elect to accelerate the maturity of the loans.
In November 2018, we filed a shelf registration statement on Form S-3 with the SEC that became automatically effective covering the registration, issuance and sale of an indeterminate amount of our securities, including common stock, preferred stock, senior or subordinated debt securities, depository shares, securities purchase contracts, units or warrants. We may publicly offer securities in the future at prices and terms to be determined at the time of the offering.
Each of our HMO and insurance subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulation. The minimum statutory capital requirements differ by state and are generally based on a percentage of annualized premium revenue, a percentage of annualized health care costs, a percentage of certain liabilities, a statutory minimum, risk-based capital ("RBC") requirements or other financial ratios. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners ("NAIC") and have been adopted by most states. The statutory framework for our regulated subsidiaries' minimum capital requirements could change over time. For instance, RBC requirements may be adopted by more of the states in which we operate. In addition, regulators could require our subsidiaries to maintain minimum levels of statutory net worth in excess of the amount required under the applicable state laws if the regulators determine that maintaining such additional statutory net worth is in the best interest of our members and other constituencies. Failure to maintain these requirements would trigger regulatory action by the state. To the extent our HMO and insurance subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus requirement, or net assets, for these subsidiaries that may not be transferable to us in the form of loans, advances, or cash dividends was approximately $1.6 billion at December 31, 2018, and $1.2 billion at December 31, 2017. The combined statutory capital and surplus of our HMO and insurance subsidiaries was $2.7 billion and $2.0 billion at December 31, 2018 and 2017. These increases were primarily the result of the Meridian acquisition, as well as organic growth in all of our lines of business. Our HMO and insurance subsidiaries were in compliance with and in excess of the minimum capital requirements as of both December 31, 2018 and 2017.
Represents the principal amount of the 2025 Notes and 2026 Notes and borrowings outstanding under our Revolving Credit Facility as of December 31, 2018. This amount excludes $23.6 million of unamortized debt issuance costs, which is reflected as a reduction to our long-term debt in our consolidated balance sheet.
We earn premium revenue through our participation in Medicaid, Medicaid-related and Medicare programs. Our Medicaid contracts with state agencies generally are multi-year contracts subject to annual renewal provisions, while our Medicare contracts with CMS renew annually. Our Medicare and Medicaid contracts establish fixed, monthly premium rates per member ("PMPM"), which are generally determined at the beginning of each new contract renewal period; however, premiums may be adjusted by CMS and state agencies throughout the terms of the contracts in certain cases. Premium rate changes are recognized in the period the change becomes effective, when the effect of the change in the rate is reasonably estimable and collection is assured. Our contracts also have additional provisions as described in the sections below.
We earn supplemental premium payments for eligible obstetric deliveries and/or newborns for our Medicaid members in several states. We also earn supplemental Medicaid premium payments in some states for high cost drugs and other eligible services. Each state Medicaid contract specifies how and when these supplemental payments are earned and paid. We recognize supplemental premium revenue in the period we provide related services to our members.
Certain of our Medicaid contracts require us to expend a minimum percentage of premiums on eligible medical benefits expense. To the extent that we expend less than the minimum percentage of the premiums on eligible medical benefits, we are required to refund to the state all or some portion of the difference between the minimum and our actual allowable medical benefits expense. Additionally, certain of our Medicaid contracts include other types of risk sharing arrangements (e.g., profit sharing arrangements) that require return of revenue to the state or receipt of revenue from the state, based on certain pre-tax earnings, net earnings or other results of operations-based calculations. In all arrangements, we estimate the amounts due from or to the state agencies based on the terms of our contracts with the applicable state agency and record the amounts as a change in premium. Historically, we have not experienced material differences between our recorded estimates and the subsequent state agencies settlement amounts.
Our MA and PDP premiums are subject to risk sharing through the CMS Medicare Part D risk corridor provisions. The risk corridor calculation compares our actual experience to the target amount of prescription drug costs, limited to costs under the
Low-Income Cost Sharing Subsidy ("LICS") - For qualifying low income members, CMS reimburses us for all or a portion of the low income member's deductible, coinsurance and co-payment amounts above the out-of-pocket threshold.
Catastrophic Reinsurance Subsidy - CMS reimburses plans for 80% of the drug costs after a member reaches his or her out-of-pocket catastrophic threshold through a catastrophic reinsurance subsidy.
We recognize the cost of medical benefits in the period in which services are provided, including an estimate of the cost of medical benefits incurred but not reported ("IBNR"). Medical benefits expense includes direct medical expenses and certain medically-related administrative costs. Direct medical expenses include amounts paid or payable to hospitals, physicians, pharmacy benefit managers and providers of ancillary services. Recorded direct medical expenses are reduced by the amount of pharmacy rebates earned, which are estimated based on historical utilization of specific pharmaceuticals, current utilization and contract terms. Pharmacy rebates earned but not yet received from pharmaceutical manufacturers are included in pharmacy rebates receivable in the accompanying consolidated balance sheets. Direct medical expenses may also include reserves for estimated referral claims related to health care providers under contract with us who are financially troubled or insolvent and who may not be able to honor their obligations for the costs of medical services provided by other providers. In these instances, we may be required to honor these obligations for legal or business reasons. Based on our current assessment of providers under contract with us, such losses have not been and are not expected to be significant. Also included in direct medical expense are our estimates for provider settlements due to clarification of contract terms, out-of-network reimbursement, claims payment differences and amounts due to contracted providers under risk-sharing and/or value-based arrangements.
The factors and assumptions that are used to develop our estimate of medical benefits expense and medical benefits payable inherently are subject to greater variability when there is more limited experience or information available to us. The ultimate claims payment amounts, patterns and trends for new products and geographic areas cannot be precisely predicted at their onset since we, the providers and the members do not have experience in these products or geographic areas. Standard accepted actuarial methodologies, discussed above, would allow for this inherent variability. This can result in larger differences between the originally estimated medical benefits payable and the actual claims amounts paid. Conversely, during periods where our products and geographies are more stable and mature, we have more reliable claims payment patterns and trend experience. With more reliable data, we should be able to more closely estimate the ultimate claims payment amounts; therefore, we may experience smaller differences between our original estimate of medical benefits payable and the actual claim amounts paid.
Many aspects of the managed care business are not predictable. Medical cost trends potentially are more volatile than other segments of the economy. Therefore, we must continually monitor our historical experience in determining our trend assumptions to reflect the ever-changing mix, needs and size of our membership. External factors such as government-mandated benefits or other regulatory changes, catastrophes and epidemics may affect medical cost trends. Other internal factors such as system conversions and claims processing changes may affect our ability to accurately predict estimates of historical completion factors or medical cost trends. We believe that the amount of medical benefits payable as of December 31, 2018 is adequate to cover our ultimate liability for unpaid claims as of that date; however, actual payments may differ from established estimates. If the completion factors we used in estimating our IBNR for the year ended December 31, 2018 were decreased by 1%, our medical benefits expense would increase by approximately $229.7 million. If the completion factors were increased by 1%, our medical benefits expense would decrease by approximately $224.4 million.
We test goodwill for impairment at the reporting unit level at least annually, or more frequently if events or circumstances indicate that it would be more likely than not that the fair value of a reporting unit is below its carrying value. Such events or circumstances could include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition and the testing for recoverability of a significant asset group within a reporting unit, among others. To determine whether goodwill is impaired, we compare an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds the estimated fair value, we compare the implied fair value of the applicable goodwill to its carrying value to measure the amount of goodwill impairment, if any. We perform our annual goodwill impairment test based on our financial position and results of operations as of June 30 of each year, which generally coincides with the finalization of federal and state contract negotiations and our initial budgeting and planning process. The annual impairment tests are based on an evaluation of estimated future discounted cash flows. The estimated discounted cash flows are based on the best information available to us at the time, including supportable assumptions and projections we believe are reasonable. Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of
capital consistent with a market-participant view. The discount rates are consistent with those used for investment decisions and take into account the operating plans and strategies of our operating segments. Certain other key assumptions utilized, including changes in membership, premium, health care costs, operating expenses, fees, assessments and taxes and effective tax rates, are based on estimates consistent with those utilized in our annual budgeting and planning process that we believe are reasonable. However, if we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion of our goodwill, which would adversely affect our operating results in the period of impairment. Impairments, if any, would be classified as an operating expense. Based on the results of our annual impairment testing in 2018, we determined that the fair value of each reporting unit substantially exceeded its carrying value and no further goodwill impairment assessment was necessary.