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, 2013, we also leased office space for the administration of our health plans in California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Missouri, New Jersey, New York, Ohio, South Carolina, Tennessee and Texas. 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 table sets forth our summary financial data. This information should be read in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this 2013 Form 10-K. The data for the years ended December 31, 2013, 2012 and 2011, and as of December 31, 2013 and 2012, is derived from consolidated financial statements and related notes included elsewhere in this 2013 Form 10-K.
Medicaid medical benefits ratio measures medical benefits expense as a percentage of premium revenue, excluding premium taxes.
We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund our business, and we do not anticipate paying any cash dividends in the foreseeable future.
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 2013 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 2013 Form 10-K.
We are a leading managed care company for government-sponsored health care coverage with a focus on Medicaid and Medicare programs. Headquartered in Tampa, Florida, we offer a variety of managed care health plans for families, children, and the aged, blind and disabled, as well as prescription drug plans. As of December 31, 2013, we served approximately 2.8 million members in 49 states and the District of Columbia. We believe that our broad range of experience and exclusive government focus allows us to effectively serve our members, partner with our providers and government clients, and efficiently manage our ongoing operations.
Summarized below are the key financial highlights for the year ended December 31, 2013. For additional information, refer to the "Results of Operations" section which discusses both consolidated and segment results in more detail.
Premiums increased 28% compared to the same period in 2012, primarily reflecting the impact of both acquisitions and organic membership growth in our Medicaid and MA segments, as well as rate increases in certain of our Medicaid markets, mainly Kentucky, partially offset by the impact of lower PDP membership.
In September 2013, we entered into an agreement to acquire certain assets of Healthfirst Health Plan of New Jersey, Inc. ("Healthfirst NJ"). As of December 2013, Healthfirst NJ serves approximately 47,000 Medicaid members in 12 counties in the state. The acquisition is expected to close during the second quarter of 2014, subject to customary regulatory approvals. Upon closure of the transaction, Healthfirst NJ’s member and physician rosters will be acquired by us and Healthfirst NJ will wind down operations. In addition, we began offering Medicaid managed care in Essex, Hudson, Middlesex, Passaic and Union counties in New Jersey beginning January 1, 2014.
Effective January 1, 2013, we received a premium rate increase of approximately 7.0% for the Kentucky Medicaid program. The Commonwealth also accelerated to July 1, 2013 our 3.0% rate increase previously scheduled for October 1, 2013. These rate increases apply to all Medicaid geographic regions of the Commonwealth, other than Region 3. We believe that these activities will make our Kentucky Medicaid program more stable from a financial standpoint. Also, effective January 1, 2013, we began serving Medicaid beneficiaries in the Commonwealth's Medicaid Managed Care Region 3.
In March 2013, we acquired Missouri Care, Incorporated ("Missouri Care"), from Aetna, Inc. As of December 31, 2013, Missouri Care served more than 104,000 Missouri HealthNet Medicaid program members in 54 counties across the state. Missouri Care has an extensive provider network that includes more than 50 hospitals and 9,500 physicians.
("WCSC") served approximately 50,000 Medicaid members in 39 of the state’s 46 counties, including the Columbia and Greenville metropolitan areas, through the South Carolina Healthy Connections Choices program. It has a network that includes more than 30 hospitals, 1,800 primary care physicians, and 2,000 specialists.
The following table sets forth condensed data from our consolidated statements of operations data, as well as other key data used in our results of operations discussions for the years ended December 31, 2013, 2012 and 2011. The historical results are not necessarily indicative of results to be expected for any future period.
Medicaid - membership increased approximately 172,000 compared to December 31, 2012, primarily driven by our acquisitions of plans in South Carolina and Missouri in 2013, which contributed 50,000 and 104,000 members to the year-over-year increase, respectively, as well as membership growth in our Florida and Kentucky Medicaid programs. Kentucky Medicaid membership increased 85,000 compared to 2012, including approximately 57,000 members that were transferred to us following Centene's exit from Kentucky in July 2013 and 13,000 beneficiaries from Region 3 which we began serving effective January 1, 2013. These increases were partially offset by a decline of approximately 97,000 members resulting from our exit from Ohio, which was effective July 1, 2013.
MA - membership increased approximately 77,000 compared to December 31, 2012, due mainly to the results of the 2013 annual election period, which resulted in an increase of approximately 37,000 members effective January 1, 2013 due to our geographic expansion into 53 new counties in Florida, Georgia, Illinois, Kentucky, New York, and Texas, as well as our continued focus on dually-eligible beneficiaries.
At December 31, 2012, we served approximately 2,669,000 members; an increase of approximately 107,000 members from December 31, 2011. We experienced membership growth in both our Medicaid and MA segments when compared to December 31, 2011, which was offset by a decline in PDP membership. By segment, membership changed as follows:
For the year ended December 31, 2013, our net income was $175.3 million compared to $184.7 million for the same period in 2012. The 5% decrease was mainly driven by the impact of lower net favorable development in prior year medical benefits payable, lower results in our PDP segment, consistent with lower membership, and increased interest expense and other costs resulting from higher average debt levels in 2013 associated with additional borrowings in February 2013 and November 2013, partially offset by increased premium revenue in our Medicaid and MA segments resulting from the membership increases noted above. Refer to Segment Reporting below for a discussion of current developments, operating results and other key performance measures by reportable segment.
We expect our PDP segment will have a much more meaningful effect on our financial results in 2014 compared to 2013. Consequently, the seasonal pattern of PDP segment results will have a more pronounced effect on the aggregate company results, particularly in the first quarter. In addition, revenue recognition for the health insurance industry fee reimbursement from our state customers may not match the recognition of the fee expense until later in the year, and expenditures associated with our Florida MMA implementation will occur primarily in the first half, before we begin serving members and earning revenue. The combination of these factors will pressure first and second quarter earnings, and may result in a net loss in the first quarter.
Premium revenue for the year ended December 31, 2013 increased approximately $2.1 billion, or 28%, compared to the same period in 2012. The increase is primarily attributable to our 2012 and 2013 acquisitions, which collectively contributed $913.4 million, or 12%, to the year-over-year increase, organic membership growth in our Medicaid and MA segments and rate increases in certain of our Medicaid markets, including the 7% increase in Kentucky that was effective January 1, 2013. Additionally, the increase was partially attributable to Medicaid revenue from payment arrangements with certain states associated with primary care enhanced payments, as mandated by the Affordable Care Act. These increases were partially offset by the impact of lower membership in our PDP segment. Premium revenue includes $75.7 million and $82.2 million of Medicaid premium taxes for the years ended December 31, 2013 and 2012, respectively.
Premium revenue for the year ended December 31, 2012 increased by approximately $1.3 billion, or 21%, compared to the same period in 2011. The increase is primarily attributable to membership growth in our Medicaid and MA segments and rate increases in certain of our Medicaid markets, offset by a $21.4 million reduction to premium revenue related to a reconciliation of duplicate member records in the Georgia Medicaid program dating back to the beginning of the program in 2006. Premium revenue includes $82.2 million and $76.2 million of Medicaid premium taxes for the years ended December 31, 2012 and 2011, respectively.
Total medical benefits expense for the year ended December 31, 2013 increased $2.0 billion, or 31% compared to the same period in 2012. The increase is due mainly to the increased membership in the Medicaid and MA segments, including acquisitions, the impact of lower net favorable development in prior year medical benefits payable, increased medical expense in the first quarter of 2013 associated with the flu and Medicaid primary care enhanced payments, as mandated by the Affordable Care Act, partially offset by a decrease in the PDP segment due to lower membership. For the year ended December 31, 2013, medical benefits expense was impacted by approximately $3.0 million of net favorable development related to prior periods compared to $76.7 million of such development recognized in 2012.
Total medical benefits expense for the year ended December 31, 2012 increased $1.4 billion, or 27%, compared to the same period in 2011. The increase is due mainly to increased membership in the Medicaid and MA segments, higher overall utilization in the Medicaid and MA segments in the first half of 2012, the impact of higher net favorable development of prior period medical benefits payable experienced in 2011 compared to 2012 and the relatively higher medical benefits ratio ("MBR") in the Kentucky Medicaid program, partially offset by lower medical benefits expense in the PDP segment consistent with the decline in membership. For the year ended December 31, 2012, medical benefits expense was impacted by approximately $76.7 million of net favorable development related to prior periods compared to $191.2 million of such development recognized in 2011.
investigation-related litigation and other resolution costs. We believe it is appropriate to evaluate SG&A expense exclusive of these investigation-related litigation and other resolution costs because we do not consider them to be indicative of long-term business operations.
(1) SG&A expense, as a percentage of total premium revenue, excluding premium taxes.
We currently estimate that we will incur between approximately $125 and $135 million for the health insurance industry fees imposed by the Affordable Care Act in 2014, based on our estimated share of industry premiums. However, the final fee amount will not be determined until August 2014. Additionally, we currently expect spending for our 2014 growth initiatives and investments in our operational infrastructure will have a meaningful impact on 2014 results of operations. The investments in infrastructure are being made to better align our capabilities with the growth we have experienced and expect to achieve over the coming years. In particular, spending on 2014 growth initiatives will include the Florida MMA implementation and a significant amount of that spending will occur during the first half of 2014 before we begin serving members and earning revenue.
Excluding investigation-related litigation and other resolution costs, our SG&A expense for the year ended December 31, 2012 increased approximately $44.2 million, or 7%, to $639.3 million. The increase was due to technology investments,
Medicaid premium taxes incurred for the year ended December 31, 2013 were $75.7 million compared to $82.2 million for the same period in 2012. The year-over-year decline of approximately $6.5 million, or 8%, was primarily driven by our exit from the Ohio Medicaid market, which was effective July 1, 2013. As of December 31, 2013, only our Medicaid contracts with Georgia, Hawaii and New York included tax assessments on Medicaid premiums.
Medicaid premium taxes incurred in the year ended December 31, 2012 were $82.2 million compared to $76.2 million for the same period in 2011. The $6.0 million, or 8%, increase was primarily driven by premium growth in New York and Hawaii.
Depreciation and amortization expense increased approximately $12.5 million, or 40%, to $44.1 million in 2013 from $31.6 million in 2012, which includes approximately $5.9 million of incremental amortization recorded during 2013 relating to the intangible assets acquired in conjunction with the Desert Canyon, Easy Choice, Missouri Care and WCSC acquisitions. The remaining increase is primarily attributable to incremental infrastructure related investments made during 2013.
Interest expense for the year ended December 31, 2013 was $11.9 million compared to $4.1 million for the same period in 2012. The $7.8 million increase was primarily driven by higher average debt levels during 2013, as we borrowed an additional $230 million in term loans under the 2011 credit agreement in February 2013 and, additionally, issued $600 million of 5.75% senior notes in November 2013. A portion of the net proceeds from the issuance of the senior notes was used to payoff the remaining term loan balance under the 2011 credit agreement.
Interest expense for the year ended December 31, 2012 was $4.1 million compared to $6.5 million for the same period in 2011. The decrease in interest expense from 2011 is mainly from debt incurred in 2011 to settle investigation-related litigation that was later redeemed in the fourth quarter of 2011, as discussed below, partially offset by interest on the $150.0 million borrowed under a term loan on August 1, 2011 under the 2011 Credit Agreement.
On December 15, 2011, we repurchased at 90% of face value all of the $112.5 million of subordinated notes issued in September 2011. The notes had an original maturity date of December 31, 2016. We recorded a gain on the repurchase of subordinated notes in the amount of $10.8 million. For further information regarding the subordinated notes, refer to Note 12 -Debt within the Consolidated Financial Statements.
Membership within the Kentucky membership program grew approximately 85,000, or 41%, during 2013 as we began serving approximately 13,000 beneficiaries in Region 3 for the Kentucky Medicaid program effective January 1, 2013, as well as approximately 57,000 beneficiaries transferred from Centene upon their exit from the program effective in July 2013.
The following table sets forth the summarized results of operations and other relevant performance measures for our Medicaid segment for the years ended December 31, 2013, 2012 and 2011:
MBR measures the ratio of our medical benefits expense to premium revenue excluding Medicaid premium taxes. Because Medicaid premium taxes are included in the premium rates established in certain of our Medicaid contracts and also recognized separately as a component of expense, we exclude these taxes from premium revenue when calculating key ratios as we believe that their impact is not indicative of operating performance. For GAAP reporting purposes, Medicaid premium taxes are included in premium revenue.
Excluding Medicaid premium taxes, Medicaid premium revenue for the year ended December 31, 2013 increased $1.2 billion, or 27%, when compared to the same period in 2012. The South Carolina and Missouri acquisitions increased premium revenue by $380.2 million, or 9%, to the year-over-year increase, while the remaining $816.3 million, or 18% increase, was driven primarily by increased membership in our Kentucky and Florida programs, a 7% rate increase in Kentucky that was effective on January 1, 2013, rate increases in certain other markets in late 2012, changes in geographic and demographic mix of members and Medicaid revenue from payment arrangements with certain states associated with primary care enhanced payments, as mandated by the Affordable Care Act. The increase in Kentucky Medicaid membership and premiums also reflect the commencement of services provided to beneficiaries in Region 3, which began on January 1, 2013, as well as the additional members received from Centene in July 2013.
Medicaid medical benefits expense for the year ended December 31, 2012 increased 35% when compared to the same period in 2011. The increase was due mainly to the increase in membership and the relatively higher MBR in the Kentucky Medicaid program and less net favorable development of prior year's medical benefits payable in 2012 than we recognized in 2011, partially offset by the impact of medical cost initiatives that we have implemented. Our Medicaid MBR for the year ended December 31, 2012 increased by 630 basis points when compared to the same period in 2011. The increase was mainly
driven by the relatively higher MBR in the Kentucky Medicaid program, which was adversely impacted by certain transitional medical benefit expenses for the program, the $21.4 million reduction of premium revenue for duplicate member record reconciliation adjustments and the impact of less net favorable development of prior year's medical benefits payable in 2012 than we recognized in 2011.
We currently expect our Medicaid segment MBR in 2014 to be in the range of approximately 87.25% to 88.25%, compared to 88.2% percent in 2013. Our expected reimbursement by states of the ACA fee is impacting our 2014 MBR guidance by approximately 150 basis points. If the ACA reimbursement were not included in our guidance, our MBR guidance range would be higher by approximately 150 basis points, or between 88.75% and 89.75%. The expected increase in 2014 compared to 2013 results principally from the implementation of the Florida MMA program, which we expect to operate at an MBR that is higher than our 2013 performance in the state. Our anticipated Florida MMA premium also is higher than our historical experience to compensate us for the enhanced benefits and services required in the MMA program.
As a result of approval received from SCDHHS during November 2013, we began offering Medicaid services in 45 out of 46 counties in South Carolina effective January 1, 2014, an expansion of six counties from the 39 served at December 31, 2013. Additionally, effective January 1, 2014, membership from CMH transitioned to us as a result of changes SCDHHS is making to its Healthy Connections Choices Medicaid managed care program as well as WellCare's purchase of certain assets from CMH.
We entered the New Jersey Medicaid program in January 2014 as a result of recent approval from the state to offer Medicaid managed care in certain counties. Our service area and presence in the New Jersey Medicaid program is anticipated to expand significantly upon closure of our pending acquisition of Healthfirst NJ, which is currently anticipated to close within the second quarter of 2014.
We currently expect to be reimbursed by our state customers for the impact of the industry fee on our Medicaid plans, including its non-deductibility for income tax purposes. However, the timing of revenue recognition for such reimbursement may be delayed and not match the expense recognition of the fee, depending on the timing of contractual agreements. MA and PDP premium rates will not be adjusted to offset the impact of the fee.
Effective April 1, 2013, premium payments to MA plans were reduced by 2% pursuant to the sequestration provisions of the Budget Control Act of 2011. We have been able to partially offset this impact by a reduction in reimbursements to health care providers; however, our 2013 results of operations have been negatively impacted.
MA segment MBR increased by 320 basis points for the year ended December 31, 2012 compared to the same period in 2011. The changes in the MBR were primarily due to increased quality improvement costs and less net favorable development of prior year's medical benefits payable in 2012 than we recognized in 2011.
Our MA business will continue to be subjected to substantial margin compression in 2014. As a result of legislation passed in December 2013 (see Part I, Item 1 - Business, General Economic and Political Environment Impacting our Business for additional discussion), the 2% sequestration reduction to Medicare provider and plan payments will continue in 2014 and extend through 2023, so our results of operations will continue to be negatively impacted. In addition, our MA premium rates have not been adjusted to offset the impact of the health insurance industry fee assessment imposed by the Affordable Care Act.
Excluding Windsor, MA membership as of January 1, 2014, was approximately 303,000, a growth of 13,000, or 5%, compared to December 31, 2013. In 2014, we plan to serve Medicare eligibles in 210 counties, up from 204 counties in 2013. We anticipate membership will continue to grow organically during the remaining months of 2014, though at a much slower pace than during 2013.
Effective January 1, 2014, as a result of the Windsor acquisition, we began serving approximately 39,000 MA beneficiaries across 192 additional counties, primarily within the states of Arkansas, Mississippi, South Carolina and Tennessee. Including the membership gained from Windsor, as of January 1, 2014 we served a total of 342,000 MA beneficiaries in a total of 402 counties across 18 states. We expect to report the Medicare Supplement insurance business we acquired as part of the Windsor acquisition with our MA segment results.
CMS 2014 MA quality ratings, also known as “Star Ratings," reflected improvement for several of our plans. Based on the Star Ratings, 84% of our December 31, 2013 MA membership will be served in a plan rated three stars or better on an overall basis for 2014. Our MA plans that operate at 3 stars on a weighted, overall basis will earn a 3% quality bonus demonstration percentage, compared to the 5% available to 4, 4.5 and 5 star plans.
The following table sets forth the summarized results of operations and other relevant performance measures for our PDP segment for the years ended December 31, 2013, 2012 and 2011:
PDP premium revenue decreased 4% for the year ended December 31, 2012 when compared to the same period in 2011, primarily due to the decline in membership. Membership decreased by approximately 107,000 members from December 31, 2011 due to the reassignment to other plans, effective January 1, 2012, of members who were auto-assigned to us in 2011 or
We currently anticipate our PDP segment MBR for 2014 will be in the range of approximately 83.25% to 84.25%, down from 86.5% in 2013. The year-over-year decrease results mainly from the realignment of our benefit plans and cost structure, including the launch of our preferred pharmacy network. In particular, for our 2014 bids we were able to modify our enhanced plan through increased premium rates and cost sharing, as well as other changes.
We have also launched a new PDP product that we believe is well positioned as a low-cost enhanced plan targeted to value-focused beneficiaries that actively choose their plan and as of January 1, 2014, approximately 70% of our membership is comprised of beneficiaries that actively chose us for their current plan. New members will be assigned monthly into our PDPs in 16 of our 18 2014 MA states, enabling cross selling opportunities for both our MA and PDP plans.
Each of our existing and anticipated sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. Additionally, we operate as a holding company in a highly regulated industry. The parent and other non-regulated companies ("non-regulated subsidiaries") are dependent upon dividends and management fees from our regulated subsidiaries, most of which are subject to regulatory restrictions. For a further discussion of risks that can affect our liquidity, see Part I - Item 1A - Risk Factors included in this 2013 Form 10-K.
We refer collectively to the cash, cash equivalents and investment balances maintained by our regulated subsidiaries as "regulated cash and investments." Our regulated subsidiaries generally receive premiums in advance of payments of claims for medical and other health care services; however, regulated cash and cash equivalents can fluctuate significantly in a particular period depending on the timing of receipts for premiums from our government partners. Our unrestricted regulated cash and investments (which represent our regulated cash and investments not on deposit with a state in which we operate) was $1.4 billion as of December 31, 2013, an increase of $200 million from $1.2 billion at December 31, 2012. The increase is due mainly to cash flows from operating activities as well as $55.0 million of contributions received from our non-regulated subsidiaries, partially offset by $147.0 million in dividends distributed to our non-regulated subsidiaries.
Our non-regulated parent and subsidiaries normally meet their liquidity requirements by:
As of December 31, 2013, $31.8 million of our long-term investments were comprised of municipal note securities with an auction reset feature ("auction rate securities"), which are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities. Two auction rate securities with an aggregate fair value of $21.1 million have investment grade security credit ratings and one auction rate security with a fair value of $10.7 million has a credit rating below investment grade. Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every seven or 35
Net cash used in investing activities was $290.5 million, $222.8 million, and $111.6 million for 2013, 2012 and 2011. The increase in cash used in 2013 compared to 2012 resulted principally from the $133.6 million advanced in December 2013
Net cash provided by financing activities was $493.6 million and $28.9 million in 2013 and 2012, respectively, compared to a use of $84.9 million for 2011, which was impacted by the following:
Under the terms of settlement agreements entered into on April 26, 2011, and finalized on March 23, 2012, to resolve matters under investigation by the Civil Division and certain other federal and state enforcement agencies (the "Settlement"), WellCare agreed to pay the Civil Division a total of $137.5 million in four equal annual principal payments, plus interest accrued at 3.125%. The estimated fair value of the discounted remaining liability was $70.3 million at December 31, 2013.
The indenture under which the Senior Notes were issued contain covenants that, among other things, limit the ability of our company and its restricted subsidiaries to:
We may pursue alternatives to raise additional unregulated cash. Some of these initiatives may include, but are not limited to, obtaining dividends from certain of our regulated subsidiaries, provided sufficient capital in excess of regulatory requirements exists in these subsidiaries, and/or accessing the debt and equity capital markets. However, we cannot provide any assurances that we will obtain applicable state regulatory approvals for additional dividends to our non-regulated subsidiaries by our regulated subsidiaries or be successful in accessing the capital markets if we determine to do so.
At December 31, 2013, we did not have any off-balance sheet financing arrangements except for operating leases as described in the table above.
We recognize premium revenue in the period in which we are obligated to provide services to our members. We are generally paid by CMS and state agencies in the month in which we provide services. On a monthly basis, we bill members for any premiums for which they are responsible according to their respective plan. We record premiums earned but not received as premiums receivable, and record premiums received in advance of the period of service as unearned premiums in the consolidated balance sheets. Unearned premiums are recognized as revenue when we provide the related service. Member premiums are recognized as revenue in the period of service. We estimate, on an ongoing basis, the amount of member billings that may not be fully collectible based on our evaluation of historical trends. An allowance is established for the estimated amount that may not be collectible. In addition, we routinely monitor the collectability of specific premiums receivable, including Medicaid receivables for obstetric deliveries and newborns (see "Medicaid" below) and net receivables for member retroactivity as described below, and reflect any required adjustments in current operations. Historically, the allowance for member premiums receivable has not been significant relative to premium revenue.
Premium payments are based upon eligibility lists produced by CMS and state agencies. We verify these lists to determine whether we have been paid for the correct premium category and program. From time to time, CMS and state agencies require us to reimburse them for premiums that we received for individuals who were subsequently determined by us, or by CMS or state agencies, to be ineligible for any government-sponsored program or to belong to a plan other than ours. Additionally, the verification of membership may result in additional premiums due to us from CMS and state agencies for individuals who were
We earn supplemental premium payments for eligible obstetric deliveries and newborns of our Medicaid members in
Georgia, Illinois, Missouri, New York, South Carolina and, until June 30, 2013, Ohio. Each state Medicaid contract specifies how and when these supplemental payments are earned and paid.
Premiums received from CMS are subject to risk sharing through the Medicare Part D risk corridor provisions. The CMS 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 claims experience is more than 5% above the target amount. We refund premiums to CMS if our actual claims experience is less than 5% below the target amount. We estimate the risk corridor receivable or payable throughout the year as if the annual contract were to terminate at the end of the reporting period and reflect any adjustments to premium in current operations. This estimate provides no consideration of future pharmacy claims experience, but does require us to consider factors that may not be certain, including membership, risk scores, prescription drug events, and rebates. Approximately nine months after the close of the annual plan year, CMS reconciles actual experience to the target amount and any differences are settled between CMS and our plans. Historically, we have not experienced material adjustments related to the CMS settlement of prior years' risk corridor estimates.
Many aspects of the managed care business are not predictable. These aspects include the incidences of illness or disease (such as congestive heart failure cases, cases of upper respiratory illness, the length and severity of the flu season, diabetes cases, the number of full-term versus premature births and the number of neonatal intensive care babies). 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. Among the factors considered by management are changes in the level of benefits provided to members, seasonal variations in utilization, identified industry trends and changes in provider reimbursement arrangements, including changes in the percentage of reimbursements made on a capitation as opposed to a fee-for-service basis. These considerations are reflected in the trends in our medical benefits expense. Other external factors such as government-mandated benefits or other regulatory changes, catastrophes and epidemics may impact medical cost trends. Other internal factors such as system conversions and claims processing interruptions may impact our ability to accurately predict estimates of historical completion factors or medical cost trends. Medical cost trends potentially are more volatile than other segments of the economy. Management uses considerable judgment in determining medical benefits expense trends and other actuarial model inputs. We believe that the amount of medical benefits payable as of December 31, 2013 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, 2013 were decreased by 1%, our net income would decrease by approximately $92.8 million. If the completion factors were increased by 1%, our net income would increase by approximately $94.9 million.
Other intangible assets 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 segments for impairment testing purposes.
We review goodwill and intangible assets for impairment at least annually, or more frequently if events or changes in our business climate occur that may potentially affect the estimated useful life or the recoverability of the remaining balance of goodwill or intangible assets. Such events or changes in circumstances would include significant changes in membership, state funding, federal and state government contracts and provider networks. To determine whether goodwill is impaired, we perform a multi-step impairment test. First, we can elect to perform a qualitative assessment of each reporting unit to determine whether facts and circumstances support a determination that their fair values are greater than their carrying values. If the qualitative analysis is not conclusive, or if we elect to proceed directly with quantitative testing, we will then measure the fair values of the reporting units using a two-step approach. In the first step, we determine the fair value of the reporting unit using both income and market approaches. We calculate fair value based on our assumptions of key factors such as projected revenues and the discount factor. While we believe these assumptions and estimates are appropriate, other assumptions and estimates could be applied and may produce significantly different results. If the fair value of the reporting unit is less than its carrying value, we measure and record the amount of the goodwill impairment, if any, by comparing the implied fair value of the reporting unit's goodwill to the carrying value. We perform our annual goodwill impairment test based on our financial position and results of operations through the second quarter of each year, which generally coincides with the finalization of federal and state contract negotiations and our initial budgeting process.
In 2013, we elected to bypass the optional qualitative fair value assessment and conducted our annual quantitative test for goodwill impairment during the third quarter of 2013. Based on the results of our quantitative test, we determined that the fair values of our reporting units exceeded their carrying values and therefore no further testing was required, and we believe that such assets are not impaired as of December 31, 2013.