•Other-in connection with the restatement, to record adjustments in their proper period for items that are not considered material but were previously corrected out-of-period.
The effects of the above adjustments on our financial data for 2009 and 2008 are as follows:
2009-Net income from continuing operations for the year ended December 31, 2009 decreased by $1.0 million, or $0.01 per diluted share; including an increase of $4.6 million related to the implementation of ASU 2010-26 and a decrease of $5.6 million related to other adjustments. Net
income from discontinued operations increased by $12.7 million from other adjustments. Stockholders' equity at December 31, 2009 decreased by $38.3 million, with decreases of $34.0 million related to the implementation of ASU 2010-26 and $11.4 million related to the correction and an increase of $7.1 million related to other adjustments.
Through our health insurance, and managed care subsidiaries, we primarily serve the growing Medicare population by providing Medicare Advantage and Medicare Supplement insurance products. In addition, with the acquisition of APS Healthcare, we now provide a variety of healthcare services, including case management and care coordination, clinical quality and utilization review and behavioral health services to Medicaid agencies and other third parties. Approximately 25% of the over 65 year old population in the United States is currently enrolled in Medicare Advantage plans. In addition, we believe there is an opportunity to address the high cost of healthcare for the remaining 75% of the Medicare population enrolled in traditional fee-for-service Medicare and have joined with primary-care provider groups, hospitals, integrated delivery systems, and a variety of other health care providers to form thirty-one Accountable Care Organizations, or ACOs, pursuant to the Medicare Shared Saving Program, or Shared Savings Program All payers of healthcare costs, from the Federal and state governments to corporations and individuals, are incurring rising healthcare costs and we believe we can apply our capabilities and experience in controlling these costs while improving health outcomes.
On March 2, 2012, we acquired APS Healthcare, Inc., known as APS Healthcare, for $222.3 million. APS Healthcare provides specialty healthcare solutions primarily to Medicaid agencies. APS Healthcare offers a broad range of healthcare solutions, including case management and care coordination, clinical quality and utilization review, and behavioral health services that enable its customers to improve the quality of care and reduce healthcare costs. We are now actively pursuing opportunities in the growing Medicaid market, including dual eligibles and people who need long-term care.
•Work in collaboration with healthcare providers to help them assume and manage risk, in order to achieve measurably better quality and lower cost.
In March 2010, President Obama signed into law The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the Affordable Care Act. The Affordable Care Act established Accountable Care Organizations as a tool to improve quality and lower costs through increased care coordination in the Medicare Fee-for-Service program, which covers approximately 75% of the Medicare recipients, approximately 36 million eligible Medicare beneficiaries. In January 2012, one of our subsidiaries participated in the filing of multiple applications to participate in the ACO program, including one covering our Southeast Texas physicians and other markets outside our existing Medicare Advantage footprint.
participation in the Shared Savings Program. We estimate that these 31 ACOs currently include approximately 3,000 participating providers with approximately 324,000 assigned Medicare fee-for-service beneficiaries covering portions of thirteen States both within and outside our current Medicare Advantage footprint, including Southeast Texas and upstate New York. We will provide these ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care, improved health and lower healthcare costs for their Medicare fee-for-service beneficiaries.
Established in 1965, Medicaid is the largest publicly funded program in the United States, and provides health insurance to low-income families and individuals with disabilities. Authorized by Title XIX of the Social Security Act, Medicaid is an entitlement program funded jointly by the federal and state governments and administered by the states. The majority of funding is provided at the federal level. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within federal standards. Eligibility is based on a combination of household income and assets, often determined by an income level relative to the federal poverty level. Historically, children have represented the largest eligibility group.
A portion of Medicaid beneficiaries are dual eligibles, low-income seniors and people with disabilities who are enrolled in both Medicaid and Medicare. Based on CMS and Kaiser Family Foundation data, we estimate there are approximately 9 million dual eligible enrollees with annual spending of approximately $320 billion. Only a small portion of the total spending on dual eligibles is administered by managed care organizations. Dual eligibles tend to consume more healthcare services due to their tendency to have more chronic health issues. We believe this represents a significant opportunity for companies like ours that have the capabilities to effectively manage this difficult population.
In June 2012, the United States Supreme Court upheld the constitutionality of the Affordable Care Act, with one limited exception relating to its Medicaid expansion provision. The Supreme Court held that States could not be required to expand Medicaid or risk the loss of federal funding for existing Medicaid programs. Beginning in January 2014, Medicaid coverage will be expanded to all individuals under age 65 with incomes up to 133% of the federal poverty level, subject to the States' elections. The federal government will pay the entire costs for Medicaid coverage for newly eligible beneficiaries for three years, from 2014 through 2016. The federal share declines to 95% in 2017, 94% in 2018, 93% in 2019, and 90% in 2020 and subsequent years.
Medicare Advantage membership decreased 26,300 compared to December 31, 2011 principally as a result of service area reductions and our decision to focus our efforts in core markets.
Our remaining segment, Corporate & Other, includes the activities of our holding company, along with our remaining senior administrative services operations, start-up and operating costs associated with our ACOs and the operations of APS Healthcare since its acquisition on March 2, 2012. See Note 25-Business Segment Information in the Notes to consolidated financial statements for a description of our segments.
We report intersegment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These intersegment revenues and expenses affect the amounts reported on the individual financial statement line items, but we eliminate them in consolidation and they do not change income before taxes. The most significant items eliminated are intersegment revenue and expense relating to commissions earned by agency subsidiaries in our Corporate & Other segment from insurance subsidiaries in our Traditional segment and for services provided by APS Healthcare to our Senior Managed Care-Medicare Advantage segment.
(1)The financial data for 2010 and 2011 has been adjusted for the following items:
•Correction-to correct the accounting related to our recording of certain reserves and deferred acquisition costs in our Traditional Insurance segment along with the related deferred income tax impact; and
(3)Includes after-tax transaction costs of $10.7 million or $0.13 per diluted share and $2.6 million or $0.03 per diluted share in 2011 and 2010, respectively. (See Note 23-Discontinued Operations in the Notes to consolidated financial statements).
Income from continuing operations for the year ended December 31, 2012 was $53.0 million, or $0.61 per diluted share, compared to $2.7 million, or $0.03 per diluted share for the year ended December 31, 2011. These amounts include realized investment gains, net of taxes, of $10.8 million, or $0.12 per diluted share and $0.5 million, or $0.01 per diluted share in 2012 and 2011, respectively.
Our Senior Managed Care-Medicare Advantage segment generated income before income taxes of $92.8 million for the year ended December 31, 2012, an increase of $20.1 million compared to the year ended December 31, 2011. The increase in earnings was driven by the medical benefit ratio improving to 80.6% for the full year 2012 compared to 82.0% for 2011 and a decrease in our administrative expense ratio from 15.5% in 2011 to 15.0% in 2012. This was partially offset by lower membership in all products resulting in an expected 22% decrease in member months for the full year 2012 compared to 2011. For the year ended December 31, 2012, there was $27.4 million of net favorable prior year development compared to $22.8 million for the year ended December 31, 2011. The current year also included $7.9 million of investment in STARs rating improvement programs.
Our effective tax rate on continuing operations was 31.7% for 2012, compared with 72.6% for 2011. The effective tax rate in 2012 was favorably impacted by the recognition of certain state tax benefits, partially offset by the limitation on the deductibility of executive compensation for health insurers enacted in the Affordable Care Act. The high effective tax rate in 2011 was driven by our low pre-tax income that magnified the effective rate impact of revenue based state taxes on lines of business for which revenues were relatively constant year-over-year and permanent non-deductible
items. Excluding non-recurring tax benefits (discussed below), revenue-based state taxes and certain items that arose in connection with the 338(h)(10) election, the effective tax rate was 41.1% in 2012, compared with 44.0% in 2011, with permanent items of $1.2 million contributing 11.9% to the rate in 2011.
Our Senior Managed Care-Medicare Advantage segment generated income before income taxes of $72.7 million for the year ended December 31, 2011, a decrease of $73.2 million compared to the year ended December 31, 2010. The decrease in earnings was driven by lower membership in all products resulting in an expected 41% decrease in member months for the full year 2011 compared to 2010 as a result of our service area reduction due to MIPAA legislation and a resulting increase in our administrative expense ratio from 12.4% in 2010 to 15.5% in 2011. This decrease was partially offset by the medical benefit ratio improving to 82.0% for the full year 2011 compared to 83.7% for 2010. For the year ended December 31, 2011, there was $22.8 million of net favorable prior year development compared to $38.2 million for the year ended December 31, 2010.
Our effective tax rate on continuing operations was 72.6% for 2011, compared with 30.6% for 2010. The high effective tax rate in 2011 was driven by our low pre-tax income that magnified the effective rate impact of revenue based state taxes on lines of business for which revenues were relatively constant year-over-year and permanent non-deductible items. Excluding non-recurring tax benefits (discussed below), revenue-based state taxes and certain items that arose in connection with the 338(h)(10) election, the effective tax rate was 44.0% in 2011 compared with 35.9% in 2010, with permanent items of $1.2 million contributing 11.9% to the rate in 2011.
Income taxes include non-recurring tax (expenses) benefits of ($0.4) million and $9.4 million for the years ended December 31, 2011 and 2010, respectively. 2011 includes $0.9 million of state tax refunds, partially offset by the write-off of a $1.3 million deferred tax asset for net operating loss carryforwards that were terminated by the Section 338(h)(10) election. The 2010 benefit was primarily related to the release of a deferred tax liability associated with the Phase III tax on policyholder surplus and $2.1 million related to the sale of our previously owned administrative services company, CHCS.
Discontinued operations include the results of operations related to our Medicare Part D business and related corporate items that were transferred to CVS Caremark in connection with the closing of the Part D Transaction on April 29, 2011. See Note 1-Organization and Company Background and 23-Discontinued Operations in the Notes to consolidated financial statements for further information. We had a loss from discontinued operations of $50.9 million or $0.63 per diluted share for the year ended December 31, 2011, compared to income from discontinued operations of $101.6 million or $1.29 per diluted share. 2011 includes the four months of operations prior to closing as well as $10.7 million after-tax of transaction expenses compared to a full year of operations and $2.6 million after-tax of transaction expenses in 2010. The benefits design of the Part D business results in significant seasonality in financial results, resulting in losses in the early part of the year, followed by profits in the latter part of the year.
Our Senior Managed Care-Medicare Advantage segment includes the operations of our Medicare coordinated care HMO, PPO, network-based PFFS and non-network (Rural) PFFS Plans (collectively, the "Plans"), which provides coverage to Medicare beneficiaries in 36 states. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas, the area surrounding Dallas/Ft. Worth, 9 counties in Oklahoma and 3 counties in Indiana.
Net investment and other income. Net investment and other income decreased $4.8 million primarily due to the maturity of higher yielding assets with the proceeds being reinvested in lower yielding securities in this low interest rate environment.
Medical expenses. Medical expenses decreased by $303.6 million compared to the year ended December 31, 2011, as a result of the decrease in member months from 2011 and an improvement in the medical expense levels for retained members. The medical expense ratio improved to 80.6% for the year ended December 31, 2012 from 82.0% for the year ended December 31, 2011. Adjusting for the prior year items discussed above, our medical expense ratio was 81.9% for 2012.
Medical expenses. Medical expenses decreased by $1,033.5 million compared to the year ended December 31, 2010, as a result of the lower level of net premiums resulting from the decrease in member months over 2010 and the improved medical expense ratio for the year. The medical expense ratio improved to 82.0% for the year ended December 31, 2011 from 83.7% for the year ended December 31, 2010.
Commissions and general expenses. Commissions and general expenses for the year ended December 31, 2011 decreased $87.1 million compared to the year ended December 31, 2010, primarily as the result of the decreased level of membership. Our administrative expense ratio increased to 15.5% for the year ended December 31, 2011 from 12.4% in 2010 primarily as a result of reduced scale from lower membership, expenses incurred to address the issues raised by the CMS sanctions and expenses incurred to complete the activities resulting from the 2010 consolidation of the claims payment system for all plans to one system.
Our Traditional Insurance segment consists of three major lines of business. Senior Market includes Medicare supplement, senior dental and hospital indemnity products. Specialty Health includes disability, specified disease, hospital, surgical and long-term care products. Life Insurance and Annuities includes whole life, universal life and annuity products. We discontinued marketing and selling Traditional insurance products after June 1, 2012.
Net premiums. Net premium declined by $19.0 million, or 7.3%. This is primarily the result of the continued effect of lapsation on our Medicare supplement and specialty health in-force business. The following tables detail premium for the segment by major lines of business:
Change in deferred acquisition costs. The change in deferred acquisition costs increased $1.1 million compared to 2011. This was primarily caused by the lower capitalization in 2012 due to the decision to discontinue marketing and selling Traditional insurance products in mid-2012.
Net premiums. Net premium declined by $27.4 million, or 9.5%. This is primarily the result of the continued effect of lapsation on our Medicare supplement and specialty health in-force business, partially offset by the growth in our retained senior life block of business. The following tables detail premium for the segment by major lines of business:
In conjunction with the Part D Transaction in 2011, the traditional business of our former insurance company subsidiary, Pennsylvania Life Insurance Company, was reinsured by one of our subsidiaries in order to retain that business at Universal American. Under the reinsurance agreement, the net premium of Pennsylvania Life is recorded as gross premium on Universal American, resulting in a decrease in both direct and ceded premium as compared to prior periods.
Net investment income. Net investment income increased $6.1 million, primarily due to a change in the mix of assets caused by the sale of our Part D business and the investing of our cash and cash equivalents into higher yielding fixed maturity securities.
Policyholder benefits. Policyholder benefits incurred declined by $22.2 million, or 10.1%, compared to 2010. This decline was principally due to the overall decline of insurance in-force in the Senior Market and Specialty Health lines of business. For 2011, the policyholder benefit ratio for senior market health was 72.3% compared with 72.9% in 2010, and for specialty health was 99.9% in 2011, compared with 97.4% in 2010.
Commissions and general expenses, net of allowances. Commissions and general expenses, net of allowances, decreased by $11.4 million from 2010. This decrease is primarily attributed to lower costs required to run a smaller book of business in-force.
Corporate & Other includes the results of APS Healthcare since it was acquired on March 2, 2012.
Restructuring costs incurred in 2011 represent charges we took in connection with several initiatives to realign our organization and consolidate certain functions to increase efficiency and responsiveness to customers and reduce costs. These charges include the write-off of $11.8 million invested in the development of a commission administration system for our Career agents, charges of $5.8 million to reduce agent balances to the amount we expect to recover, $4.2 million for severance and other benefits related to a workforce reduction plan and $0.2 million related to lease termination.
The loss before income taxes from our Corporate & Other segment increased by $51.1 million for the year ended December 31, 2011 compared to 2010. This was primarily due to restructuring costs of $22.0 million, $15.6 million related to impairment of an intangible asset related to our Career distribution channels that were closed in the fourth quarter of 2011 and an $8.6 million charge to stock-based compensation expense related to accelerated vesting of equity awards in connection with the Part D Transaction.
Other parent company expenses, net of revenues, increased $3.1 million as compared to 2010. This increase in expenses is driven by the Corporate segment's absorption of $7.6 million of expenses that would have been allocated to the Medicare Part D segment prior to the closing of the Part D Transaction, $4.8 million related to the settlement of the HHS-OIG Wisconsin investigation and $1.8 million of transaction costs incurred in connection with the APS Healthcare acquisition, partially offset by a $9.7 million charge in 2010 related to realignment of our distribution channels in response
Net income-Senior Administrative Services declined by $0.9 million, primarily as a result of the April 1, 2010 sale of CHCS. 2010 includes three months of profitability prior to the sale.
(1)These obligations include contractual interest, unused commitment fees and annual administrative fees and the table reflects scheduled maturities for contractual obligations existing as of December 31, 2012.
•dividends from and capital contributions to our insurance and HMO subsidiaries;
•the cash flows of our other subsidiaries, including our management service organization and APS Healthcare;
Our insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities and each currently exceeds its respective minimum requirement at levels we believe are sufficient to support their current levels of operation. Our HMO subsidiaries are also required by regulatory authorities to maintain minimum amounts of capital and surplus and each currently is at or exceeds this minimum requirement. 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.
At December 31, 2012, we held cash, cash equivalents and short term investments totaling $77 million and fixed maturity securities that could readily be converted to cash with carrying values of $1.2 billion at our insurance and HMO subsidiaries. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.
Management service organizations. The primary sources of liquidity for these subsidiaries are fees collected from clients for performing administrative, marketing and management services. 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.
mortgage-backed securities and corporate fixed maturity securities with investment grade ratings of BBB- or higher by S&P or Baa3 or higher by Moody's Investor Service. As of December 31, 2012, approximately 99% of our fixed maturity investments had investment grade ratings from S&P or Moody's.
2012 Credit Facility. In connection with the acquisition of APS Healthcare, on March 2, 2012, we entered into a new credit facility (the "2012 Credit Facility") consisting of a five-year $150 million senior secured term loan and a $75 million senior secured revolving credit facility.
The 2012 Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants. Negative covenants include, among others, limitations on the incurrence of indebtedness, limitations on the incurrence of liens and limitations on acquisition, dispositions, investments and restricted payments. In addition, the 2012 Credit Facility contains certain financial covenants relating to minimum risk-based capital, consolidated leverage ratio, and consolidated debt service ratio. As of December 31, 2012, we were in compliance with all financial covenants. The 2012 Credit Facility also contains customary events of default. Upon the occurrence and during the continuance of an event of default, the Lenders may declare the outstanding advances and all other obligations under the 2012 Credit Facility immediately due and payable. The Company's obligations under the Credit Agreement are secured by a first priority security interest in 100% of the
The 2012 Credit Facility bears interest at rates equal to, at the Company's election, LIBOR or the base rate, plus an applicable margin that varies based on the Company's consolidated leverage ratio from 1.75% to 2.50%, in the case of LIBOR loans, and from 0.75% to 1.50% in the case of base rate loans. Effective December 31, 2012, the interest rate on the term loan portion of the 2012 Credit Facility was 2.21%, based on a spread of 200 basis points above LIBOR.
The Company is required to pay a commitment fee on unused availability under the Revolving Facility that varies based on the Company's consolidated leverage ratio, from 0.40% to 0.50% per year. As of the date of this report, we had not drawn on the Revolving Facility.
Our net retained reserves for life insurance products were $19.8 million, or 4% of our direct and assumed reserves for life insurance products, as of December 31, 2012. Our net retained reserves for life insurance products were $15.2 million, or 4% of our direct and assumed reserves for life insurance products, as of December 31, 2011.
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. We have ceased issuing new long-term care
We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim payment and claim receipt patterns, as well as historical medical cost trends.
The liability for policy and contract claims-health decreased by $17.1 million during the year ended December 31, 2012. The ending liability includes $8.8 million for newly acquired APS Healthcare. The decrease in the liability was primarily attributable to lower reserves for our Medicare Advantage business due to the decline in membership, partially offset by the acquired claim reserves of APS Healthcare.
•other costs directly related to the specified acquisition activities that would not have been incurred had that contract acquisition transaction not occurred, and
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 gross profits would not be adequate to recover the unamortized costs, we would write off the excess deferred policy acquisition costs. Based on our review of DAC recoverability as of October 1, 2012, we determined that DAC was recoverable.
recorded an impairment of $15.6 million based on the estimated fair value at December 31, 2011. There were no other impairments of our amortizing intangible assets during 2012, 2011 or 2010.
Although we believe that the financial projections used are reasonable and appropriate for all of our reporting units, due to the long-term nature of the forecasts there is significant uncertainty inherent in those projections. That uncertainty is increased by the impact of healthcare reforms as discussed in Item 1, "Business-Regulation". For additional discussions regarding how the enactment or implementation of healthcare reforms and how other factors could affect our business and the related long-term forecasts, see Item 1A, "Risk Factors" in Part I and "Healthcare Reform" above.
We use a range of discount rates that correspond to a market-based weighted average cost of capital. Discount rates are determined for each reporting unit based on the implied risk inherent in their forecasts. This risk is evaluated using comparisons to market information such as peer company weighted average costs of capital and peer company stock prices in the form of revenue and earnings multiples. The most significant estimates in the discount rate determinations include the risk-free rates and equity risk premium. Company- specific adjustments to discount rates are subjective and thus are difficult to measure with certainty.
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
The following table presents the fair value of fixed maturity securities that are carried at fair value by ASC 820 hierarchy levels, as of December 31, 2012 (in thousands):
Part C-Under the Medicare Advantage program, private plans provide Medicare-covered healthcare benefits to enrollees and can include prescription drug coverage. Part C benefits are
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. Certain commissions are deferred and amortized in relation to the corresponding revenues which is no longer than a one-year period.
Policy and contract claims include actual claims reported but not paid and estimates of healthcare services and prescription drug claims incurred but not reported. The estimated claims incurred but not reported are based upon current enrollment, historical claim receipt and payment patterns, historical medical cost trends and health service utilization statistics. These estimates and assumptions are derived from and are continually evaluated using per member per month trend analysis, claims trends developed from our historical experience in the preceding month (adjusted for known changes in estimates of recent hospital and drug utilization data), provider contracting changes, benefit level changes, product mix and seasonality. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results.
Medicare Risk Adjustment Provisions. CMS uses risk-adjusted rates per member to determine the monthly payments to Medicare Plans. CMS has implemented a risk adjustment model which apportions premiums paid to all health Plans according to health diagnoses. The risk adjustment model uses health status indicators, or risk scores, to improve the accuracy of payment. The CMS risk adjustment model pays more for members with increasing health severity. Under this risk adjustment methodology, diagnosis data from inpatient and ambulatory treatment settings are used by CMS to calculate the risk adjusted premium payment to Medicare Plans. The monthly risk-adjusted premium per member is determined by CMS based on normalized risk scores of each member from the prior year. Annually, CMS provides the updated risk scores to the Plans and revises premium rates prospectively, beginning
with the July remittance for current Plan year members. CMS will also calculate the retroactive adjustments to premium related to the revised risk scores for the current year for current Plan year members and for the prior year for prior Plan year members.
Recognition of Premium Revenues and Policy Benefits-Medicare Plans. We receive monthly payments from CMS related to members in our Medicare coordinated care Plans, which include PPOs and HMOs and network-based PFFS and rural (non-network) PFFS Plans (collectively, the "Plans"). The recognition of the premium and cost reimbursement components under these Plans is described below:
Coverage Gap Discount Program. We receive advance payments from CMS as subsidies for members of our Plans with Part D coverage who reach the coverage gap. Effective January 1, 2011, CMS instituted the Medicare Coverage Gap Discount Program, or CGDP. CGDP makes manufacturer discounts available to eligible Medicare beneficiaries receiving applicable, covered Part D drugs, while in the coverage gap. In general, the discount on each applicable covered Part D drug is fifty percent of
an amount equal to the negotiated price. Members will continue to receive these discounts and they will grow until the coverage gap is closed in 2020.
We use the liability method of accounting for income taxes. Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates that we expect to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We
recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date of a change in tax rates.
For the year ended December 31, 2012 we will file a consolidated tax return that includes most corporate subsidiaries but excludes any subsidiary that qualifies as a life insurance company or is taxed as a partnership under the Internal Revenue Code. Subsidiaries that qualify as life insurance companies and partnerships will file separate federal income tax returns. We will include any income or loss from a subsidiary taxed as a partnership in the tax return of its corporate owner.
On April 29, 2011 we sold our Part D business to CVS. For tax purposes, the sale was treated as a sale of Old Universal American followed by the repurchase of the non-Part D businesses. For tax purposes, the repurchase of the stock of the non-Part D companies was treated as an asset purchase under Internal Revenue Code section 338(h)(10). We recognized a current tax benefit of $21.3 million in 2011 primarily as a result of the significant tax losses that were recognized during the short period tax return for the period ending April 29, 2011. This resulted in the recognition of a significant portion of our gross deferred tax assets in 2011 and a corresponding deferred tax expense. For further discussion of the Part D Transaction, see Note 1-Organization and Company Background and Note 23-Discontinued Operations.
The Jobs Creation Tax Act of 2004, known as the Jobs Act, contains a provision that placed a two year moratorium on the imposition of tax on distributions from Policyholder Surplus Accounts ("PSAs"), the Phase III tax. Additionally, the ordering rules were changed to allow for the first dollar of any distribution to reduce the PSA. In accordance with the Jobs Act, distributions during 2005 and
A summary of recent and pending accounting pronouncements is provided in Note 4-Recent and Pending Accounting Pronouncements in the Notes to consolidated financial statements in our Annual Report on Form 10-K.