Universal American, through our family of healthcare companies, provides health benefits to people covered by Medicare. Our core strength is our ability to partner with providers, especially primary care physicians to improve health outcomes while reducing cost in the Medicare population. We currently are focused on two main businesses:
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 believe that if given the right tools and incentives, primary care physicians can have significant leverage in improving the cost and quality of health care. Below are the key elements of the strategy:
• We provide actionable data and analytics to providers and employ enabling technology to ensure that the right care is delivered at the right time in the right setting; and
Over the past several years, we made a strategic decision to offer Medicare Advantage plans only in markets where we believe we can positively impact the cost and quality of healthcare through collaboration with providers. Accordingly, we now offer plans in only three states (Texas, New York and Maine). In the Houston/Beaumont region, we currently maintain the leading market position with strong brand awareness and committed and aligned physician groups with whom we share risk. In upstate New York, we are in the process of converting this historically fee-for-service market into a more value-based system by introducing pay for performance to the primary care physicians in the region.
• Our HMO plans 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. We built this coordinated care product 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. For 2017, these HMO plans are offered with a $0 member premium, except for the dSNP, which offers a subsidized premium.
The products provided in our Northeast market include PPO and Network PFFS.
The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the ACA established Medicare Shared Savings ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service, or FFS, program, which covers the majority of the Medicare-eligible population. The MSSP covers nearly eight million FFS beneficiaries comprising approximately 430 ACOs. CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for FFS beneficiaries and reduce unnecessary costs. The MSSP is designed to improve beneficiary outcomes and increase value of care by:
The MSSP will reward ACOs that lower their health care costs while surpassing a minimum savings rate and meeting quality of care performance standards. Cost savings below the benchmark provided by CMS will be shared at least 50% with the ACOs. The minimum savings rate set by CMS varies depending on the number of beneficiaries assigned to the ACO, starting at 3.9% for ACOs with assigned beneficiaries totaling 5,000 and grading to 2.0% for ACOs with assigned beneficiaries totaling 60,000 or more.
•MSSP Track 2: Two-sided risk; up to 60% shared savings; retrospective attribution
In 2017, three of our MSSP ACOs elected Track 2 with the balance of MSSP ACOs remaining on Track 1. In addition, we formed a new ACO comprised of many of our providers who participated in our Maryland and Virginia ACOs which was selected by CMS to participate in the Next Generation ACO model effective January 1, 2017. Our other Next Generation ACO operates in Houston, Texas.
We provide our 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 FFS beneficiaries. We employ local market staff (operations and clinical) to drive physician and their staff engagement and care coordination improvements. Over the past few years, we have reduced the number of our active ACOs based on a variety of factors, including the level of engagement by the physicians in the ACO and the likelihood of the ACO achieving shared savings. We may make further reductions in the future.
On July 29, 2016, CMS informed us that our MSSP ACOs generated $97 million in gross savings for program year 2015. This compares to $80 million in gross savings for program year 2014, which we reported in the second quarter of 2015. 10 of our ACO's qualified for shared savings payments, compared to 9 in program year 2014, and received payments of $39.8 million, compared to $26.9 million in program year 2014. Our share of these payments for 2016, after payments to our physician partners of $11.3 million, is $28.5 million, compared to $20.9 million in 2015, and is reflected in equity in earnings (losses) of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments during the third quarter of 2016.
• 11 ACOs, serving more than 120,000 Medicare beneficiaries, generated savings but fell below their Minimum Savings Rate required to share savings with CMS;
The three ACOs qualifying for savings received payments of $20.4 million, part to be shared between the physicians of those ACOs and us and part to be used by us to reimburse a portion of the costs that we had incurred. Our share of these savings, including expense recovery, amounted to $13.4 million, which is reflected in equity in losses of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments in October 2014. We did not recognize any shared savings revenue in 2013.
During 2016, we operated one ACO under the new Next Generation ACO Model. This Next Generation ACO Model has different provisions than the MSSP ACOs, and receives different beneficiary information from CMS during the year. During 2016, we were able to use this beneficiary information to estimate Program Year 2016 revenue for this Next Generation ACO, but determined, based on the information available, that this ACO would not generate any shared savings. Based on our analysis, we accrued a $1.7 million estimated loss for 2016.
• coding intensity adjustments, with mandatory minimums, beginning in 2014; and
Reduced Medicare Advantage reimbursement rates-The ACA made several changes to Medicare Advantage. Beginning in 2012, the Medicare Advantage "benchmark" rates began the transition to target Medicare fee-for-service cost benchmarks of 95%, 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period is 2, 4 or 6 years depending upon the applicable county and 2017 will be the final transition year. The counties are divided into quartiles based on each county's fee-for-service Medicare costs. We estimate that approximately 61%, 32% and 6%, respectively, of our January 1, 2017 membership resides in counties where the Medicare Advantage benchmark rate will equal 95%, 115%, and 107.5%, respectively, of the calculated Medicare fee-for-service costs.
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 1 2017, CMS issued its 2018 Advance Notice and Draft Call Letter (the "Advance Notice") detailing preliminary 2018 Medicare Advantage benchmark payment rates. As is customary, CMS has invited public comment on these preliminary rates before issuing its final rates for 2018 in April 2017. The Advance Notice proposes to provide a slight overall increase to Medicare rates for 2018 and we are continuing to evaluate the overall impact in our markets. 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
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 historical performance were eligible for a "quality bonus" in their basic premium rates. Plans receiving Star bonus payments are required to use the additional dollars to provide "extra benefits" for the plans' enrollees, to the extent necessary to maintain compliance with minimum loss ratio requirements, 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%. Beginning in 2015, in order to qualify for bonus payments, plans must have a 4 STAR rating or higher. For 2017, the Company earned a 4.5-Star rating for its flagship TexanPlus® plan in Houston/Beaumont, which accounts for 57% of our December 31, 2016 membership, and maintained a 4-Star rating for our Today's Options PPO plan in New York and Maine. Collectively, over 70% of our members are in Plans with a Star rating of 4.0 or greater. A summary of these ratings is presented below:
Notwithstanding continued efforts to improve or maintain our Star ratings and other quality measures, there can be no assurances that we will be successful. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.
In addition, CMS has indicated that plans with a Star rating of less than 3.0 for three consecutive years may be subject to termination. While we do not currently have any plans with a rating below 3.0, our inability to maintain Star ratings of 3.0 or better for a sustained period of time could ultimately result in plan termination by CMS which could have a material adverse impact on our business, cash flows and results of operations. Also, the CMS Star ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage plans that enable those plans to offer improved benefits and/or better pricing. Furthermore, lower quality scores compared to our competitors may result in us losing potential new business in new markets or dissuading potential members from choosing our plan in 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 2016 (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 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. For our continuing operations, we paid fees of $21.7 million, $25.5 million and $22.9 million in the years ended December 31, 2016, 2015 and 2014, respectively, based on prior year net written premiums. We do not expect to pay any fees in 2017, due to the one year suspension of the ACA fee. 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. 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.
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 offers enhanced rewards for 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.
(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 income (loss) in accordance with U.S. GAAP.
Net realized gains for the year ended December 31, 2016 was $1.4 million compared to $39.0 million for the year ended December 31, 2015. The decrease is primarily due to 2015 realized gains of $29.6 million and $6.1 million on our cost-method minority investments in naviHealth and Data Driven Delivery Systems, Inc. (DDDS), respectively.
Loss from continuing operations for the year ended December 31, 2015 was $3.7 million, or $0.04 per diluted share, compared to a loss from continuing operations of $26.6 million, or $0.32 per diluted share, for the year ended December 31, 2014. These amounts include realized gains (losses), net of taxes, of $25.3 million, or $0.31 per diluted share, and $(1.8) million, or $(0.02) per diluted share in 2015 and 2014, respectively.
Our MSO segment generated a loss before income taxes of $20.1 million for the year ended December 31, 2015, compared to a loss of $30.8 million for the year ended December 31, 2014, an improvement of $10.7 million. This improvement was primarily driven by a $7.5 million increase in shared savings revenue, as nine of our ACOs qualified for shared savings in program year 2014, compared with three ACOs in program year 2012/2013. Operating expenses for the year ended December 31, 2015 were $40.9 million compared to $44.2 million for the year ended December 31, 2014, reflecting fewer active ACOs in 2015.
Net realized gains for the year ended December 31, 2015 included gains of $29.6 million and $6.1 million on our cost-method minority investments in naviHealth and Data Driven Delivery Systems, Inc. (DDDS), respectively.
Our effective tax rate from continuing operations was a provision in excess of 100% for 2015, compared with a benefit of 19% 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 $6.5 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 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.
Our Medicare Advantage segment generated income before income taxes of $48.4 million for the year ended December 31, 2016; an increase of $27.0 million compared to the year ended December 31, 2015. The increase in earnings was driven primarily by membership growth, lower MBR, particularly in the Northeast, and a decrease in ACA fee expense; partially offset by lower net investment income, and a membership-driven increase in medical expenses, commissions and general expenses. The year ended December 31, 2016 included $7.6 million of net favorable prior period items compared to $4.0 million of net favorable items for the year ended December 31, 2015. Effective January 1, 2016, we changed the way we estimate changes in risk-adjusted premiums receivable from CMS, which resulted in the accelerated recognition of approximately $9.2 million of additional current year premium revenue for the year ended December 31, 2016.
Adjusting for the prior year items discussed above in net premiums and medical expenses, for the year ended December 31, 2016, our medical benefit ratio MBR, excluding quality initiative costs, was 83.0%. Our medical benefit MBRs for the year ended December 31, 2016, as reported and recast 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, 2016 increased $19.2 million compared to the same period in 2015, primarily due to higher membership, sales and marketing costs, medical management evaluations and higher compensation costs. Our administrative expense ratio increased to 11.2% for the year ended December 31, 2016 compared to 10.8% for the year ended December 31, 2015.
Net premiums. Net premiums for the Medicare Advantage segment decreased by $147.8 million for the year ended December 31, 2015 compared to 2014, primarily as a result of exiting non-core markets. In the Northeast markets, where we had a 35% increase in membership during 2015, we had a lag in adequate premium for new members, as discussed above. Net premiums for the year ended December 31, 2015 included $15.7 million of favorable prior period items compared to $14.6 million of favorable prior period items for the year ended December 31, 2014.
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 84.3%. 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:
ACA fee. The ACA fee for the year ended December 31, 2015 amounted to $25.5 million, or 2.0% of 2015 net premiums compared to $22.9 million or 1.6% of net premiums for the year ended December 31, 2014. The ACA fee is included in the calculation of minimum medical loss ratios under the ACA. The increase in the ACA fee is due to the industry-wide total fee increasing from $8 billion in 2014 to $11.4 billion in 2015.
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 MSSP. 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 2016 and 2015, 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 for the 2015 Program Year, which ended on December 31, 2015, was recorded in the quarter ended June 30, 2016, and trued up in the quarter ended September 30, 2016. Revenue for the 2014 Program Year, which ended on December 31, 2014, was recorded in the quarter ended June 30, 2015. Based on the ACO operating agreements, we bear all costs of the ACO operations until revenue is recognized. At that point, we generally 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.
During 2016, we operated one ACO under the new Next Generation ACO Model. This Next Generation ACO receives different beneficiary information from CMS during the year than the MSSP
ACOs. During 2016, we were able to use this information to estimate Program Year 2016 revenue for this Next Generation ACO, but determined, based on the information available, that this ACO would not generate any shared savings. Based on our analysis, we accrued a $1.7 million estimated loss for 2016.
• 9 ACOs, serving more than 105,000 Medicare beneficiaries, including our flagship ACO in Houston, qualified for shared savings totaling $26.9 million. This compares to $20.4 million in shared savings paid to ACOs for the first program year 2012/2013, which was longer. Our share of these payments, recorded in the second quarter of 2015, after payments to our physician partners of $6.0 million, increased to $20.9 million, which is reflected in equity in losses of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments during October 2015;
The following table presents the primary components comprising the loss for the segment:
Our Corporate & Other segment reported a loss of $37.3 million for the year ended December 31, 2016 compared to a loss of $40.3 million in 2015. This improvement was primarily due to lower legal and general corporate expenses partially offset by increased debt service costs as a result of our issuance of $115 million of Convertible Notes in June 2016.
Net premiums. Net premiums in 2015 represented a larger than anticipated risk score adjustment, net of risk corridor related to the Exchange business, which we exited at the end of 2014.
Net investment income. Net investment income decreased by $2.9 million for the year ended December 31, 2015 compared to 2014. In 2015, we received a distribution on a cost method minority investment of $2.0 million.
Fee and other income. Fee and other income decreased by $1.8 million for the year ended December 31, 2016 compared to 2015 primarily due to lower revenues from transition services agreements entered into in connection with the sale of our Traditional Insurance and Total Care Medicaid businesses in 2016 compared with the APS Healthcare businesses in 2015. These additional revenues are offset by expenses included in commissions and general expenses.
Interest expense. Interest expense increased by $2.9 million for the year ended December 31, 2016 compared to 2015 due to the convertible notes issued in June 2016.
Commissions and general expenses. Commissions and general expenses decreased by $10.9 million for the year ended December 31, compared to 2015. This decrease was driven by reductions in general corporate expenses related to our expense reduction initiatives and lower legal costs as well as lower costs associated with the transition services agreements, totaling $9.1 million. In addition, 2015 included costs associated with accelerated vesting of stock compensation expense for terminated employees, and accelerated amortization of debt issuance costs in connection with our loan repayments and amendment to our revolving credit facility totaling $3.6 million. These reductions were partially offset by increased corporate development costs related to our various sales processes and lower recoveries of agents balances.
Net premiums. Net premiums decreased by $1.0 million for the year ended December 31, 2015 compared to 2014 as a result of the Company no longer participating in the Exchange. However, in 2015 we received a larger than anticipated risk score adjustment, net of risk corridor related to the Exchange business in 2014.
Net investment income. Net investment income decreased by $2.3 million for the year ended December 31, 2015 compared to 2014. In 2014, we received a distribution on a cost method minority 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.
Interest expense. Interest expense decreased by $1.7 million for the year ended December 31, 2015 compared to 2014 due to the term loan prepayments made on March 31, 2015 and October 14, 2015.
Commissions and general expenses. Commissions and general expenses decreased by $7.0 million for the year ended December 31, compared to 2014. This decrease was driven by reductions in general corporate expenses related to our expense reduction initiatives and lower legal costs which totaled $23.8 million. These reductions were partially offset by costs associated with the transition services agreements, accelerated vesting of stock compensation expense for terminated employees, lower recoveries of agents balances previously written off and accelerated amortization of debt issuance costs in connection with our loan repayments and amendment to our revolving credit facility totaling $16.8 million.
Universal American reported income from discontinued operations of $67.7 million for the year ended December 31, 2016 compared with a loss of $188.4 million in 2015.
Medicaid-Operating Results: Medicaid had an operating loss of $4.3 million for the year ended December 31, 2016 compared to income of $0.1 million for the same period in 2015. This decrease was primarily due to higher claims costs, including unfavorable prior period items and higher expenses during 2016.
Medicaid-Gain on Sale: On August 1, 2016, we completed the sale of TONY, which operates the Total Care Medicaid plan, to Molina for an adjusted purchase price of $38.0 million, resulting in a pre-tax gain of $20.4 million.
Traditional Insurance-Gain (Loss) on Sale: The gain recorded in 2016 includes the reclassification of $4.8 million of accumulated other comprehensive income (AOCI) related to the sale of the Traditional Insurance business to adjust the cumulative loss on the transaction. This was partially offset by a $1.6 million adjustment to reflect the early cash settlement of the earn out and a
$2.3 million reduction of sale procceds related to the final balance sheet true up with the buyer. 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: 2016 amounts include earn-out revenues and litigation settlement, while 2015 amounts represent 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, as well as a restructure charge of $5.6 million related to the sale of the domestic business See Note 22-Commitments and Contingencies for additional information.
Traditional Insurance-Gain (Loss) on Sale: 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.
Our contractual obligations as of December 31, 2016, are shown below.
• 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 $17.8 million during the year ended December 31, 2016.
• the cash flows of our ACO business and other growth initiatives-For the year ended December 31, 2016, we funded expenses of approximately $36.4 million, pre-tax, related to our ACO business. Additionally, in September 2016, we received $39.8 million of gross proceeds from CMS for the 2015 program year. We made distributions from these proceeds to our physician partners totaling $6.4 million in the fourth quarter of 2016 with an additional $4.9 million to be paid in the first quarter of 2017.
• payment of debt principal, interest and fees related to our convertible senior notes.-in December 2016, we made our first interest payment of $2.1 million on our convertible notes.
• payment of certain corporate overhead costs and public company expenses, net of revenues, which amounted to $25.2 million for the year ended December 31, 2016.
• repurchases of our common stock-We used the net proceeds from the Convertible Notes, together with cash on hand, to (i) repurchase all (a)11,011,515 shares of our common stock held by certain affiliates of Perry Capital ("Perry") and (b) 7,098,775 shares of our common stock held by certain affiliates of Welsh, Carson, Anderson & Stowe ("WCAS"), at a purchase price of $6.80 per share, for an aggregate purchase price of approximately $123.0 million, and (ii) repurchase 2,082,800 shares of our common stock for an aggregate purchase price of approximately $15.1 million from purchasers of the convertible notes in privately negotiated transactions.
operates the Total Care Medicaid plan to Molina for an adjusted purchase price of $38.0 million. During 2015, we completed the sale of our APS Healthcare subsidiaries for $31.5 million in cash.
• As of December 31, 2016, we had approximately $102.9 million of cash and investments in our parent company and unregulated subsidiaries.
• return to shareholders through share repurchase, dividend or other means;
At December 31, 2016, we held cash and invested assets of approximately $256 million at our insurance and HMO subsidiaries that could readily be converted to cash. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.
declared and paid dividends totaling approximately $92 million. These subsidiaries were sold as part of the sale of our Traditional Insurance subsidiaries to Nassau. See Note 12-Discontinued Operations in the Notes to Consolidated Financial Statements. In July 2015, SCOT paid a $9.0 million ordinary dividend. No other dividends were declared or paid by our other Insurance and HMO subsidiaries in 2015.
In the third quarter of 2016, we made a capital contribution of $0.6 million to our Medicaid subsidiary, TONY, and a $0.1 million of capital contribution to TOTX, in order to maintain its $5.0 million minimum capital requirement. No other capital contributions were made to our Insurance or HMO subsidiaries. In 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 TONY in support of our Total Care Medicaid health plan; $3.2 million of which was done in the form of a surplus note, bearing interest at a rate of 5.0%. This note was converted to capital effective June 30, 2016 and all accrued and unpaid interest was settled in cash in July 2016. Additionally, in the fourth quarter of 2015, we made a $3.5 million capital contribution to TOTX.
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, 2016, approximately 99% of our fixed income investment portfolio had investment grade ratings from S&P or Moody's.
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. Depending on the period for which we are estimating incurred claims, we apply a different method in determining our estimate. For aged service months (more than two or three months prior to the valuation date, depending on type of business), the key assumption we use in estimating our IBNR is that the completion factor pattern, adjusted for known changes in claim inventory levels and claim payment processes, remains consistent over a specified rolling period. This period, ranging from three to twelve months, is dependent on the type of business with respect to which we are estimating reserves or liabilities. Completion factors result from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For recent service months (either two or three months, depending on type of business), we estimate the incurred claims primarily from a trend analysis based upon per member per month, known as PMPM, claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, product mix, and seasonality.
Factors internal to our company may also affect our ability to accurately predict estimates of historical completion factors or medical cost trends, such as:
We consider all of these factors in estimating IBNR and in estimating the PMPM claims trend for purposes of determining the reserve for the most recent three months. Additionally, we continually prepare and review follow-up studies to assess the reasonableness of the estimates generated by our
process and methods over time. We also consider the results of these studies in determining the reserve for the most recent three months. Each of these factors requires significant judgment by management.
The liability for policy and contract claims decreased from $87.0 million to $82.9 million during the year ended December 31, 2016. The decrease in the liability was primarily attributable to the decrease in IBNR for our Medicare Advantage business due to lower inventory levels.
We estimate the fair values of our reporting units using discounted cash flows or other indications of fair value, which include assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of cash flow (including significant assumptions about operations and target capital requirements), long term growth rates for determining terminal value, and discount rates. Forecasts and long term growth rates used for our reporting units are consistent with, and use inputs from, our internal long term business plan and strategy. During our forecasting process, we assess revenue trends, medical cost trends, operating cost levels and target capital levels. Significant factors affecting these trends include changes in membership, premium yield, medical cost trends, contract renewal expectations and the impact and expectations of regulatory environments.
Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services may use matrix or model processes to develop a security price where the pricing
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, 2016, we did not modify any price provided by the advisor.
We regularly evaluate the amortized cost of our investments compared to the fair value of those investments. We generally recognize impairments of securities when we consider a decline in fair value below the amortized cost basis to be other-than-temporary. The evaluation includes the intent and ability to hold the security to recovery, and we consider it on an individual security basis, not on a portfolio basis. We generally recognize impairment losses for mortgage-backed and asset-backed securities when an adverse change in the amount or timing of estimated cash flows occurs, unless the adverse change is solely a result of changes in estimated market interest rates. We also recognized impairment losses when we determine declines in fair values based on quoted prices to be other-than-temporary.
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, which include Part A and Part B, are provided through private Medicare Advantage plans.
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. Effective January 1, 2016, we changed the way we estimate changes in risk adjusted premiums receivable from CMS, based on health diagnoses for our Medicare Advantage business. See Note 2-Basis of Presentation for additional information.
Low-Income Premium Subsidy-For qualifying low-income status, or LIS, members of our Plans with Part D benefits, CMS pays us for some or all of the LIS member's monthly premium. The CMS payment is dependent upon a member's income level which is determined by the Social Security Administration. Low-income premium is recognized over the contract period and reported as premium revenue.
Low-Income Cost Sharing Subsidy-For qualifying LIS members of our Plans with Part D benefits, CMS will reimburse the Plans for all or a portion of the LIS member's deductible, coinsurance and co-payment amounts above the out of pocket threshold for low income beneficiaries. Low-income cost sharing subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the Plan year bid we submitted to CMS. After the close of the annual Plan year, CMS reconciles actual experience to low-income cost sharing subsidies paid to the Plan and any differences are settled between CMS and the Plan. The low-income subsidy is accounted for as deposit accounting and therefore not recognized in operations.
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. The Medicare Coverage Gap Discount Program, or CGDP, makes manufacturer discounts available to eligible Medicare members 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.
Stipulated minimum MLRs-Beginning in 2014, the ACA stipulates MLR of 85% for Medicare Advantage plans. This MLR, which is calculated at a plan level, takes into account benefit costs, quality initiative expenses, the ACA fee and taxes. Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the years ended December 31, 2016, 2015 and 2014 our Medicare Advantage plans exceeded the minimum MLR, as defined by CMS.
We believe that the negative evidence of our cumulative loss is not indicative of future projected income or our ability to realize the deferred tax assets existing as of December 31, 2016. The remaining deferred tax assets, for which a valuation allowance was not established, relate to amounts that can be realized through future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies and the Company's estimates of future taxable income. Any 2016 U.S. tax losses in our consolidated income tax return can be carried back to 2014 for ordinary losses and 2013 for capital losses subject to certain limitations.
We carried valuation allowances for our continuing and discontinued operations on our deferred tax assets of $20.3 million at December 31, 2016 and, $36.9 million at December 31, 2015, 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, state net operating loss carryforwards, deferred income tax assets for various states and the deferred tax asset generated by the capital loss on the sale of the Traditional Insurance business.
Prior to the sale of our Traditional Insurance business, some of our U.S. insurance company subsidiaries were taxed as life insurance companies as provided in the Internal Revenue Code. The Omnibus Budget Reconciliation Act of 1990 amended the Internal Revenue Code to require a portion of the expenses incurred in selling insurance products be capitalized and amortized over a period of years, as opposed to an immediate deduction in the year incurred. Instead of measuring actual selling expenses, the amount capitalized for tax purposes is based on a percentage of premiums. In general, the capitalized amounts are subject to amortization over a ten-year period. Since this change only affects the timing of the deductions, it does not, assuming stability of income tax rates, affect the provisions for taxes reflected in our financial statements prepared in accordance with GAAP. However, by deferring deductions, the change has the effect of increasing our current tax expense and reducing statutory surplus.
We recognize interest and penalties related to unrecognized tax benefits in federal and state tax expense. During the years ended December 31, 2016, 2015 and 2014, we recognized no such interest expense and penalties.