Our principal administrative, sales and marketing facilities are located at our leased corporate headquarters in Tampa, Florida. Our corporate headquarters is used in all of our lines of business. As of December 31, 2017, we also leased office space for the administration of our health plans in Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Missouri, Mississippi, Nebraska, New Jersey, New York, North Carolina, South Carolina, Tennessee, Texas, Washington D.C. and Wisconsin. These properties are all in good condition and are well maintained. We believe these facilities are suitable and provide the appropriate level of capacity for our current operations. Upon expiration of the terms of the leases, we believe we could renew these leases on acceptable terms, or find suitable space elsewhere.
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 2017 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 2017 Form 10-K.
WellCare Health Plans, Inc. (the "Company," "we," "us," "our") focuses exclusively on government-sponsored managed care services, primarily through Medicaid, Medicare Advantage ("MA") and Medicare Prescription Drug Plans ("PDP") to families, children, seniors and individuals with complex medical needs. As of December 31, 2017, we served approximately 4.4 million members. During the twelve months ended December 31, 2017, we operated Medicaid health plans in Arizona, Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, Nebraska, New Jersey, New York, South Carolina and Texas. 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.
Membership increased by 473,000 members or 12.1% in 2017 compared with 2016, as discussed below in "Results of Operations." The growth was primarily driven by an increase in Medicaid Health Plans organic membership in our Missouri and Nebraska markets; increased Medicare Health Plans membership reflecting the addition of approximately 119,000 MA members from the Universal American Corp. ("Universal American") acquisition discussed in Note 3- Acquisitions to the consolidated financial statements of this 2017 Form 10-K; and increased Medicare Health Plans and Medicare PDP organic membership due to our 2017 bid positioning. These increases were partially offset by the decline in Georgia Medicaid membership.
Premiums increased $2.7 billion, or 19.3%, in 2017 compared with 2016, primarily reflecting our acquisitions of Universal American and Care1st Arizona. The increase is also attributed to organic growth across all three lines of business. These increases were partially offset by the effect of the ACA industry fee moratorium for 2017 (discussed in Key Developments and Accomplishments below), which resulted in the elimination of any associated Medicaid ACA industry fee reimbursements from our state government partners.
Net Income increased $131.6 million, or 54.4%, in 2017 compared with 2016 driven by continued improvement in operational execution, primarily in the Medicaid Health Plans and Medicare Health Plans segments, as well as the acquisitions of Universal American and Care1st Arizona. The increase is also attributed to the effect of the ACA industry fee moratorium for 2017, and the effect of the Tax Cuts and Jobs Act of 2017 (discussed in Note 14- Income Taxes to the consolidated financial statements of this 2017 Form 10-K). These increases were partially offset by $37.5 million in one-time transaction and integration costs related to the acquisition of Universal American, and a $26.1 million loss on extinguishment of debt, primarily related to the early redemption, on April 7, 2017, of our $900.0 million of 5.75% senior notes otherwise due 2020 (the "2020 Notes").
As previously announced on October 19, 2017, the company signed a contract with the Illinois Department of Health Care and Family Services ("HFS") to administer the Health Choice Illinois Medicaid managed care program statewide. Services under the new contract began on January 1, 2018. The contract is for four years and may be renewed up to four additional years at the discretion of HFS. Considering the initial premium rate structure, estimated medical benefits and other costs to be incurred during the initial four-year contractual term of the Illinois Medicaid managed care program, we recorded a $45.6 million premium deficiency reserve ("PDR") in the fourth quarter of 2017.
Effective July 1, 2017, we commenced services under a new Medicaid contract with the State of Georgia serving Temporary Assistance for Needy Families ("TANF") and Children's Health Insurance Program ("CHIP") beneficiaries. As of December 31, 2017, we served approximately 513,000 Medicaid members in Georgia. Due to the addition of a fourth managed care organization to the program, our membership declined approximately 58,000 members as compared to December 31, 2016.
On May 1, 2017, we completed the acquisition of certain assets, including Arizona Medicaid membership and certain provider contracts, from Phoenix Health Plan ("PHP"). The transaction included the transfer of approximately 42,000 Medicaid members to Care1st Arizona, a wholly owned subsidiary of the Company. The transaction was funded with available cash on hand. As of December 31, 2017, we served approximately 153,000 Medicaid members in Arizona.
On March 22, 2017, we completed the offering and sale of our 5.25% senior notes due 2025 in the aggregate principal amount of $1,200.0 million (the “2025 Notes”) and increased the amount available under our credit agreement dated January 8, 2016 (the "Credit Agreement") from $850.0 million to $1.0 billion. A portion of the aggregate net proceeds were used to repay the $100.0 million outstanding under the Credit Agreement and to redeem the full $900.0 million aggregate principal amount of our 2020 Notes on April 7, 2017. In connection with the redemption and repurchase of the 2020 Notes, 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.
Medicaid Health Plans. Membership increased by 179,000, or 7.0%, to 2.7 million members as of December 31, 2017. The increase was primarily driven by our participation in Missouri's Medicaid program statewide expansion, our new Nebraska Medicaid plan, and membership acquired from PHP in our Arizona market. The increase was partially offset by declines in our Georgia health plan membership because the State added a fourth managed care organization, effective July 1, 2017.
Medicare PDPs. Membership increased by 143,000, or 14.2%, to 1.2 million members as of December 31, 2017. The increase was primarily the result of our 2017 bid positioning. Our 2017 PDP bids resulted in one of our basic plans being below the benchmarks in 30 of the 34 CMS regions, and within the de minimis range in three other regions. Our 2016 PDP bids resulted in one of our basic plans being below the benchmarks in 17 of the 34 CMS regions, and within the de minimis range in nine other regions.
Medicare PDPs. Membership decreased by 16,000 or 1.6%, compared with December 31, 2015. The decrease was primarily the result of our 2016 bid positioning. Our 2016 PDP bids resulted in one of our basic plans being below the benchmarks in 17 of the 34 CMS regions, and within the de minimis range in nine other regions, compared with our 2015 bids, in which our plans were below the benchmarks in 13 of the 33 CMS regions for which we submitted bids and in the de minimis range in nine regions.
For the year ended December 31, 2017, our net income increased by $131.6 million, or 54.4%, compared with the same period in 2016 driven by continued improvement in operational execution, primarily in the Medicaid Health Plans and Medicare Health Plans segments, as well as the acquisitions of Universal American and Care1st Arizona. The increase is also attributed to the effect of the ACA industry fee moratorium for 2017, the effect of the Tax Cuts and Jobs Act of 2017 (discussed in Note 14- Income Taxes of this 2017 Form 10-K), and the recognition of certain earnings related to unconsolidated subsidiaries. These increases are partially offset by $37.5 million in one-time transaction and integration costs related to the acquisition of Universal American, and a $26.1 million loss on extinguishment of debt, primarily related to the early redemption, on April 7, 2017, of our 2020 Notes. Refer to Segment Reporting below for a discussion of current developments, operating results and other key performance measures by reportable segment.
Premium revenue for the year ended December 31, 2017 increased approximately $2.7 billion, or 19.3%, 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 as discussed in "Key Developments and Accomplishments".
Premium revenue for the year ended December 31, 2016 increased approximately $346.1 million, or 2.5%, compared with the same period in 2015, reflecting organic membership growth in our Medicaid Health Plans segment, the 2016 Advicare acquisition and net rate increases in certain Medicaid markets. These increases were partially offset by the effect of lower membership in our Medicare PDPs segment and the divestiture of Sterling Life Insurance Company ("Sterling"), our former Medicare Supplement business in 2015.
Our SG&A expense for the year ended December 31, 2016 remained consistent compared with the same period in 2015. Our Adjusted SG&A expense for year ended December 31, 2016 increased approximately $34.8 million, or 3.3%, compared with the same period in 2015. The increase is primarily due to normal operating and ramp-up costs associated with growth in Medicaid membership and higher short-term and long-term management incentive compensation due to improved Company performance, partially offset by lower members in our Medicare Health Plans and Medicare PDP segments and continued improvements in operational efficiency.
We were assessed $228.4 million for the ACA industry fee for the year ended December 31, 2016, compared with $227.3 million for the same period in 2015, consistent year-over-year as the total fee levied on the industry remained at $11.3 billion in 2016. During both 2016 and 2015, we received amendments, written agreements or other documentation from all of our state Medicaid customers that commit them to reimburse us for the portion of the ACA industry fee attributable to our Medicaid programs, including its non-deductibility for income tax purposes.
Interest expense for the year ended December 31, 2016 increased approximately $4.9 million compared with the same period in 2015, primarily driven by the additional $300.0 million issuance of our 2020 Notes in June 2015.
The loss on extinguishment of debt of $26.1 million primarily related to the early redemption on April 7, 2017 of our 2020 Notes. As discussed in Note 10 - Debt to the consolidated financial statements in this 2017 Form 10-K, we redeemed the full $900.0 million in aggregate principal amount outstanding of our 2020 Notes. 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.
As discussed in Note 1 - Organization and Basis Of Presentation to the consolidated financial statements in this 2017 Form 10-K, we work with physicians and other health care professionals to operate Accountable Care Organizations (“ACOs”) under the Medicare Shared Saving Program ("MSSP") and Next Generation ACO Models. We account for our participation in the ACOs using the equity method. Gains and losses are reported as equity in earnings (losses) of unconsolidated subsidiaries in our consolidated statements of comprehensive income. For the year ended December 31, 2017, we recorded net gains of $18.7 million primarily associated with shared savings for the 2016 MSSP contract year.
Income tax expense for the year ended December 31, 2016 increased $69.9 million, or 32.1%, compared with the same period in 2015, while the effective tax rate for the year ended December 31, 2016 decreased to 54.3% compared with 64.7% for the same period in 2015. The increase in income tax expense and decrease in the effective tax rate were both attributable to higher income before income taxes, as well as the adoption of Accounting Standards Update ("ASU") 2016-09 "Compensation-Stock Compensation (Topic 718)" during 2016. Our effective tax rate for the year ended December 31, 2016 also includes the favorable effect of the recognition of certain previously unrecognized tax benefits.
Our primary measurements of profitability for our reportable segments are premium revenue, gross margin and MBR. Gross margin is defined as premium revenue less medical benefits expense and the ACA industry fee 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.
Our Medicaid Health Plans segment includes plans for beneficiaries of TANF, Supplemental Security Income ("SSI"), Aged Blind and Disabled ("ABD") and other state-based programs that are not part of the Medicaid program, such as CHIP and the Long-Term Services and Supports ("LTSS") program. As of December 31, 2017, we operated Medicaid health plans in Arizona, Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, Nebraska, New Jersey, New York, South Carolina and Texas.
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, 2017, 2016 and 2015:
"All other states" consists of Arizona, Hawaii, Illinois, Missouri, Nebraska, New Jersey, New York, South Carolina. and Texas.
Medical benefits expense increased by approximately $1.2 billion, or 15.0%, for the year ended December 31, 2017 compared with the same period in 2016, primarily resulting from the previously discussed net increase in membership, including growth from acquisitions and organic growth resulting from our new Nebraska market and Missouri's statewide expansion. The increase also includes the previously noted $45.6 million PDR recognized related to the Illinois Medicaid managed care program.
Our Medicaid Health Plans segment MBR increased by 160 basis points for the year ended December 31, 2017 compared with the same period in 2016. The increase is primarily a result of the effect of the ACA industry fee moratorium, and, as a result the elimination of associated Medicaid reimbursement revenue, the recognition of the previously noted PDR related to our Illinois Medicaid program, the addition of our new Medicaid businesses in Arizona and Nebraska, and new members from the statewide expansion of the Missouri Medicaid program. This increase was partially offset by continued operational execution and net rate increases in certain Medicaid markets.
In 2017, we operated our MA CCPs in 485 counties across 17 states, including Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Maine, Mississippi, New Jersey, New York, South Carolina, Tennessee and Texas. Effective January 1, 2018, we expanded our MA service area into the state of North Carolina. We cover a wide spectrum of medical services through our MA plans. For many of our plans, we provide additional benefits not covered by Original Medicare, such as vision, dental and hearing services. Through these enhanced benefits, out-of-pocket expenses incurred by our members are generally reduced, which better allows our members to manage their health care costs.
Improving Star Ratings, both in terms of execution on quality initiatives and our advocacy position to properly match the ratings, rules and economics with the prevalent data that demonstrates the connection between socio-economic status and lower quality ratings.
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.
Medicare Health Plans medical benefits expense decreased $123.2 million, or 3.6%, for the year ended December 31, 2016 compared with the same period in 2015, primarily due to the lower membership and the Sterling divestiture. The Medicare Health Plans MBR decreased by 260 basis points for the year ended December 31, 2016 compared with the same period in 2015, resulting from our 2016 bid strategy and continued clinical and operational improvement.
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. As of December 31, 2017, we offered PDPs in 50 states and the District of Columbia. 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 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 our 2017 bid strategy. The Medicare PDPs MBR increased by 870 basis points for the year ended December 31, 2017 compared with the same period in 2016 reflecting the effect of our 2017 bid strategy.
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 well being. We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our health plans try to control medical costs through our healthcare quality and affordability 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, federal regulation requires that our state Medicaid contracts maintain 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 Medicaid Health Plans MBR (GAAP) is expected to be in the range of 85.5% to 86.2% for 2018, compared with 87.8% for 2017. The Medicaid Health Plans Adjusted MBR is expected to be in the range of 88.4% to 89.2%, consistent with 88.8% reported in 2017.
Medicare Health Plans - We expect premium revenue for our Medicare Health Plans segment to be in the range of $6.15 billion to $6.3 billion for 2018, compared with $5.3 billion reported for 2017. Medicare Health Plans MBR is expected to be in the range of 84.6% to 85.6% for 2018, compared with 86.0% in 2017, reflecting our 2018 bid strategy and associated considerations due to the ACA industry fee return in 2018.
SG&A costs directly incurred or paid through a management services agreement to one of our non-regulated
We funded the acquisition of Universal American with unrestricted cash available on hand from both WellCare and Universal American. The transaction is valued at approximately $770.0 million, including the cash purchase price of $10.00 per outstanding share ("Per Share Merger Consideration") of Universal American's common stock, the assumption of $145.3 million fair value of Universal American's convertible debt, the cash settlement of Universal American's $40.0 million par value of Series A Mandatorily Redeemable Preferred Shares (the "Preferred Shares") and the cash settlement of outstanding vested and unvested stock-based compensation awards.
In 2016, Universal American completed the offering of $115.0 million of their 4.00% Convertible Notes due 2021. During the three months ended June 30, 2017, all of the holders of the Convertible Notes elected to convert their notes into the right to receive cash equal to the par value of the notes plus a make whole premium. We paid the noteholders the amounts due and all of the notes were cancelled prior to June 30, 2017. The fair value of the Convertible Notes was $145.3 million on the Effective Date and was included in the purchase consideration for the Universal American acquisition.
Refer to Note 3- Acquisitions to the consolidated financial statements in this 2017 Form 10-K for further discussion of the Universal American acquisition.
Cash provided by operating activities for 2016 was $748.3 million compared with $712.6 million for 2015, primarily due to improved year-over-year operating performance across all segments and the timing of certain pharmacy rebate receipts and claims payments. Cash flows from operating activities for the year ended December 31, 2016 included a $228.4 million ACA industry fee payment remitted to the IRS in September 2016, compared with $227.3 million remitted for such fee in September 2015.
Net cash provided by operating activities for the year ended December 31, 2015 was reduced by the $35.4 million final payment remitted to the Civil Division in March 2015. See further discussion in Government Investigation and Litigation above.
Net cash used in investing activities for 2017 was $1.6 billion compared with $27.0 million for the same period in 2016. The increase primarily resulted from higher purchases of investments in 2017 to improve investment income, as well as the acquisitions of Universal American and PHP during the second quarter of 2017. Net cash used in investing activities for 2016 included the acquisition of Care1st Arizona.
Net funds received for the benefit of members was approximately $1.0 billion in 2016, compared with $201.1 million during the same period in 2015. These funds represent the net amount of prescription drug benefits we paid 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 related subsidies received from CMS, as described above in "Medicare Part D Funding and Settlements."
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 "Indenture"), each between the Company and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”), as trustee. The 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 January 2016, we entered into the Credit Agreement, which provides for a senior unsecured revolving loan facility (the "Revolving Credit Facility"), which had an initial aggregate principal amount at any time outstanding not to exceed $850.0 million. On March 22, 2017, we increased the amount available under our Credit Agreement from $850.0 million to $1.0 billion. In March 2017, we also repaid the $100.0 million outstanding under our Revolving Credit Facility, and as a result, there were no borrowings outstanding under the Revolving Credit Facility as of December 31, 2017.
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. The “Applicable Rate” means a percentage ranging from 0.50% to 1.00% per annum for ABR Loans and a percentage ranging from 1.50% to 2.00% per annum for Eurodollar Loans, depending upon our ratio of total debt to cash flow, as calculated in accordance with the Credit Agreement.
As of December 31, 2017, we were in compliance with all covenants under both the 2025 Notes and the Credit Agreement. For additional information on our long-term debt, see Note 10 - Debt to the consolidated financial statements included in this 2017 Form 10-K.
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 $1.2 billion at December 31, 2017, and $871.8 million at December 31, 2016. The combined statutory capital and surplus of our HMO and insurance subsidiaries was $2.0 billion and $1.7 billion at December 31, 2017 and 2016. These increases were primarily the result of the Universal American 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, 2017 and 2016.
Such statues, regulations and capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. Dividend restrictions vary by state, but the maximum amount of dividends which can be paid without prior approval from the applicable state is subject to restrictions relating to statutory capital, surplus and net income for the previous year. Some states require prior approval of all dividends, regardless of amount. States may disapprove any dividend that, together with other dividends paid by a subsidiary in the prior 12 months, exceeds the regulatory maximum as computed for the subsidiary based on its statutory surplus and net income. We received $335.0 million, $241.0 million and $152.0 million in dividends from our regulated subsidiaries during the years ended December 31, 2017, 2016, and 2015, respectively. The 2017 amount included $150.0 million not requiring prior regulatory approval, and $185.0 million paid after obtaining prior regulatory approval. Under applicable regulatory requirements at December 31, 2017, the amount of dividends that may be paid through the end of 2018 by our HMO and insurance subsidiaries without prior approval by regulatory authorities is approximately $201.7 million in the aggregate. Actual dividends paid may vary due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.
For additional information on regulatory requirements, see Note 17 - Regulatory Capital and Dividend Restrictions to the consolidated financial statements in this 2017 Form 10-K.
The following table sets forth information regarding our contractual obligations as of December 31, 2017.
We earn supplemental premium payments for eligible obstetric deliveries and newborns for our Medicaid members in Arizona, Florida, Georgia, Illinois (through December 31, 2017), Missouri, Nebraska, New Jersey, New York and South Carolina. Each state Medicaid contract specifies how and when these supplemental payments are earned and paid. We also earn supplemental Medicaid premium payments in some states for high cost drugs and other eligible services. We recognize supplemental premium revenue in the period we provide related services to our members.
The ACA industry fee began in 2014. For 2015 and 2016, we received amendments, written agreements or other documentation from all of our state Medicaid customers that commit them to reimburse us for the portion of the ACA industry fee attributable to our Medicaid plans, including its non-deductibility for income tax purposes. Effective January 1, 2017, the Consolidated Appropriations Act, 2016 provided for a one-year moratorium on the ACA industry fee, and, as a result, eliminated the associated Medicaid ACA industry fee reimbursements from our state government partners for 2017. Accordingly, we did not recognize any Medicaid ACA industry fee reimbursement revenue for the year ended December 31, 2017. We recognized $244.9 million and $219.2 million of reimbursement for the ACA industry fee as premium revenue for the years ended December 31, 2016 and 2015, respectively.
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 standard coverage as defined by CMS, less rebates included in our submitted plan year bid. We receive additional premium from CMS if our actual experience is more than 5% above the target amount. We refund premiums to CMS if our actual experience is more than 5% below the target amount. Based on the risk corridor provision and PDP activity-to-date, an estimated risk-sharing receivable or payable is recorded as an adjustment to premium revenue. After the close of the annual plan year, CMS performs the risk corridor calculation and any differences are settled between CMS and our plans. Historically, we have not experienced material differences between the subsequent CMS settlement amount and our recorded estimates.
Beginning in 2014, the ACA required the establishment of a minimum medical loss ratio (“MLR”) for MA plans and Part D plans, requiring them to spend not less than 85% of premiums on medical benefits. The rules implementing the minimum MLR impose financial and other penalties for failing to achieve the minimum MLR, including requirements to refund to CMS shortfalls in amounts spent on medical benefits and termination of a plan’s MA contract for prolonged failure to achieve the minimum MLR. MLR is determined by adding a plan’s spending for clinical services, prescription drugs and other direct
A summary of other net payables to government partners is as follows (in millions):
CGDS advance payments are recorded within Funds receivable/held for the benefit of members in the consolidated balance sheets. Receivables are set up for manufacturer-invoiced amounts. Manufacturer payments reduce the receivable as payments are received. After the end of the contract year, during the Medicare Part D Payment reconciliation process for the CGD, CMS will perform a cost-based reconciliation to ensure the Medicare Part D sponsor is paid for gap discounts advanced at the point of sale, based on accepted prescription drug event data.
Funds payable for the benefit of members, net consisted of the following (in millions):
In developing our estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For the more recent months, which constitute the majority of the amount of the medical benefits payable, we estimate claims incurred by applying observed trend factors to the fixed fee PMPM costs for prior months, which costs have been estimated using completion factors in order to estimate the PMPM costs for the most recent months. We validate our estimates of the most recent PMPM costs by comparing the most recent months' utilization levels to the utilization levels in prior months and actuarial techniques that incorporate a historical analysis of claim payments, including trends in cost of care provided and timeliness of submission and processing of claims.
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, 2017 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, 2017 were decreased by 1%, our medical benefits expense would increase by approximately $192.5 million. If the completion factors were increased by 1%, our medical benefits expense would decrease by approximately $188.1 million.
•variations in claims processing speed and patterns, claims payment and the severity of claims; and
We evaluate our estimates of medical benefits payable as we obtain more complete claims information and medical expense trend data over time. We record differences between actual experience and estimates used to establish the liability, which we refer to as favorable and unfavorable prior year reserve developments, as increases or decreases to medical benefits expense in the period we identify the differences.
The following table provides a reconciliation of the beginning and ending balance of our consolidated medical benefits payable:
(1)-Incurred amounts for 2017 include the $45.6 million Illinois PDR discussed further in Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included in this 2017 Form 10-K.
Excluding the prior year development related to the release of the provision for moderately adverse conditions, our estimates of consolidated medical benefits expense recorded developed favorably by approximately $224.6 million, $154.3 million, and $78.1 million in 2017, 2016, and 2015, respectively. Such amounts are net of the development relating to refunds due to government customers in connection with minimum loss ratio provisions. The net favorable development recognized in both 2017 and 2016 was primarily in our Medicaid Health Plans segment and, to a lesser extent, in our Medicare Health Plans segment. The net favorable development resulted primarily from a number of operational and clinical initiatives planned and executed, throughout both 2015 and 2016, that contributed to lower than expected pharmacy and medical trends, and actual claim submission time being faster than we originally assumed (i.e. our completion factors were higher than we originally assumed) in establishing our medical benefits payable in the prior years. This development does not directly correspond to an increase in our current year operating results as these reductions were offset by estimated current period medical benefits expense when we established our estimate of the current year medical benefits payable. Both completion factor and medical trend assumptions are influenced by utilization levels, unit costs, mix of business, provider reimbursement levels, processing system conversions and changes, claim inventory levels, claim processing patterns, our ability and practices to manage medical and pharmaceutical costs, claim submission patterns and operational changes resulting from business combinations, among others. Our actual costs were ultimately less than expected. The favorable development recognized in 2015 was primarily due to lower than expected utilization in our Medicaid Health Plans segment.
Our acquisitions typically result in goodwill, which represents the excess of the acquisition cost over the fair value of net assets acquired. Goodwill is assigned to reporting units, which we determined to be the same as our operating segments. Goodwill recorded at December 31, 2017 was $660.7 million compared with $392.5 million at December 31, 2016. Goodwill attributable to our Medicaid reporting unit was $274.7 million and $282.1 million at December 31, 2017 and 2016, respectively. Goodwill attributable to our MA reporting unit was $386.0 million and $110.4 million at December 31, 2017 and 2016, respectively. The increase in goodwill for the MA reporting unit from December 31, 2016 resulted from our acquisition Universal American during 2017. Refer to Note 3 - Acquisitions, included in the consolidated financial statements in this 2017 Form 10-K for additional discussion.
Other intangible assets resulting from our acquisitions include provider networks, broker networks, trademarks, state contracts, non-compete agreements, licenses and permits. We amortize other intangible assets over their estimated useful lives ranging from approximately one to 15 years. These assets are allocated to reporting units for impairment testing purposes. We review our other intangible assets for impairment when events or changes in circumstances occur, which may potentially affect the estimated useful life or recoverability of the remaining balances of our intangible assets. Such events and changes in circumstances would include significant changes in membership, state funding, federal and state government contracts and provider networks. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities. If these assets are determined to be impaired, the amount of impairment recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. During 2017, 2016 and 2015, no events or circumstances have occurred, which may potentially affect the estimated useful life or recoverability of the remaining balances of our other intangible assets. Accordingly, there were no impairment losses recognized during these periods.