Year-end managed care membership of 5.1 million, an increase of over 1.0 million members, or 26% over 2014.
General and Administrative expense ratio of 8.6%, compared to 8.4% in 2014.
Total operating cash flows of $658 million, or 1.8 times net earnings.
Arizona. In October 2015, our subsidiary, Cenpatico Integrated Care, in partnership with University of Arizona Health Plan, began operating under a contract with the Arizona Department of Health Services/Division of Behavioral Health Services to be the Regional Behavioral Health Authority for the new southern geographic service area.
California. In January 2014, California Health and Wellness (CHW), began serving members under the state's Medicaid expansion program. In December 2014, the ABD membership of CHW increased as a result of the mandatory transition of the ABD population to managed care. The enrollment of this population to managed care was previously voluntary.
Illinois. In March 2014, our Illinois subsidiary, IlliniCare Health, began operating under a new contract as part of the Illinois Medicare-Medicaid Alignment Initiative serving dual-eligible members in Cook, DuPage, Lake, Kane, Kankakee and Will counties (Greater Chicago region).
In July 2014, IlliniCare Health began operating under a new contract with the Cook County Health and Hospitals System to perform third party administrative services to members enrolled in the CountyCare program, as well as care coordination, behavioral health, vision care and pharmacy benefit management services.
Indiana. In February 2015, our Indiana subsidiary, Managed Health Services, began operating under an expanded contract with the Indiana Family & Social Services Administration to provide Medicaid services under the state's Healthy Indiana Plan 2.0 (HIP 2.0) program.
In December 2015, Louisiana Healthcare Connections began operating under an expanded contract to include behavioral health benefits.
Mississippi. In July 2014, our Mississippi subsidiary, Magnolia Health, began operating as one of two contractors under a new statewide managed care contract serving members enrolled in the Mississippi Coordinated Access Network program. Program expansion began in December 2014 and continued through July 2015.
U.S. Medical Management. In January 2014, we acquired a majority interest in U.S. Medical Management, LLC, a management services organization and provider of in-home health services for high acuity populations.
Washington. In January 2014, our subsidiary, Coordinated Care, began serving additional Medicaid members under the state's Medicaid expansion program.
In addition, in July 2014, we completed an investment accounted for under the equity method for the purchase of a noncontrolling interest in Ribera Salud S.A. (Ribera Salud), a Spanish health management group. Centene is a joint shareholder with Ribera Salud's remaining investor, Banco Sabadell S.A.
In February 2016, our Nebraska subsidiary, Nebraska Total Care, was recommended by the Nebraska Department of Health and Human Services’ Division of Medicaid and Long-Term Care as one of three managed care organizations to administer its new Heritage Health program for Medicaid and CHIP enrollees. The contract is expected to commence in the first quarter of 2017, pending regulatory approvals.
In February 2016, Centurion of Florida, LLC reached a formal agreement to provide correctional healthcare services for the Florida Department of Corrections in Regions 1, 2 and 3. The contract is expected to commence in the second quarter of 2016.
In January 2016, the governor of Louisiana signed an executive order to expand Medicaid coverage under the Affordable Care Act (ACA) by July 1, 2016.
In July 2015, we entered into a definitive merger agreement with Health Net, Inc. (Health Net) under which we will acquire all of the issued and outstanding shares of Health Net. The transaction is valued at approximately $5.5 billion (based on Centene's closing stock price on February 17, 2016), including the assumption of debt. The transaction is expected to close in early 2016.
From December 31, 2013 to December 31, 2015, we increased our managed care membership by 2.2 million, or 77%. The following table sets forth our membership by state:
The reduction in ABD is the result of members transitioning to Medicaid / Medicare Duals.
product and geographic expansions in Arizona, Florida, Louisiana, Mississippi, South Carolina, and Texas;
Revenues are recorded based on membership and eligibility data provided by the states, which is adjusted on a monthly basis by the states for retroactive additions or deletions to membership data. These eligibility adjustments are estimated monthly and subsequently adjusted in the period known. We continuously review and update those estimates as new information becomes available. It is possible that new information could require us to make additional adjustments, which could be significant, to these estimates.
While we believe our IBNR estimate is appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. Accordingly, we cannot assure you that medical costs will not materially differ from our estimates.
The G&A expense ratio represents G&A expenses as a percentage of premium and service revenues, and reflects the relationship between revenues earned and the costs necessary to earn those revenues.
The Health Insurer Fee reflects the annual fee mandated by the ACA to health insurers. The fee is determined based on our premium revenues in the previous year. Each health insurer's fee is calculated by multiplying its market share by the annual fee. Market share is based on commercial, Medicare, and Medicaid premium revenue.
Results of operations depend on our ability to manage expenses associated with health benefits and to accurately estimate costs incurred. The Health Benefits Ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding Premium Tax and Health Insurer Fee revenues) and reflects the direct relationship between the premium received and the medical services provided. The table below depicts the HBR for our membership by member category for the year ended December 31,:
The consolidated HBR for the year ended December 31, 2015 of 88.9% was a decrease of 40 basis points over the comparable period in 2014. The decrease compared to last year is primarily attributable to improvement in medical expense in the high acuity populations (LTC/MMP) and membership growth in Medicaid expansion programs and Health Insurance Marketplace, which operate at a lower HBR than traditional Medicaid businesses.
General and administrative expenses, or G&A, increased by $512 million in the year ended December 31, 2015, compared to the corresponding period in 2014. This was primarily due to expenses for additional staff and facilities to support our membership growth. During the year ended December 31, 2015, we recorded approximately $27 million of Health Net merger related expenses, which reduced our diluted earnings per share by $0.14.
During the year ended December 31, 2015, we recorded $215 million of non-deductible expense for the Affordable Care Act (ACA) annual health insurer fee, compared to $126 million for the year ended December 31, 2014. As of December 31, 2015, we recorded $344 million in Premium Tax and Health Insurer Fee revenue associated with the accrual for the reimbursement of the fee, compared to $195 million in 2014.
Premium and service revenues increased 37% in the year ended December 31, 2015, primarily as a result of expansions or new programs in many of our states, particularly Florida, Illinois, Indiana, Louisiana, Mississippi, Ohio and Texas. Earnings from operations increased $160 million between years primarily reflecting growth in the business.
Cost of services increased by $953 million in the year ended December 31, 2014, compared to the corresponding period in 2013. This was primarily due to the acquisition of and growth in our AcariaHealth business as well as the acquisition of U.S. Medical Management. The cost of service ratio for the year ended December 31, 2014, was 87.1% compared to 87.7% in 2013.
Premium and service revenues increased 64% in the year ended December 31, 2014, resulting from growth in our AcariaHealth business, increased services associated with membership growth in the Managed Care segment, the addition of three Centurion contracts and the acquisition of U.S. Medical Management. Earnings from operations increased $32 million in the year ended December 31, 2014, primarily reflecting growth in the AcariaHealth business as well as favorable performance in our legacy individual health business.
Shown below is a condensed schedule of cash flows for the years ended December 31, 2015, 2014 and 2013, used in the discussion of liquidity and capital resources ($ in millions).
Cash flows from operations in each year were impacted by the timing of payments we received from our states. States may prepay the following month premium payment, which we record as unearned revenue, or they may delay our premium payment, which we record as a receivable. We typically receive capitation payments monthly, however the states in which we operate may decide to adjust their payment schedules which could positively or negatively impact our reported cash flows from operating activities in any given period.
Investing activities used cash of $813 million for the year ended December 31, 2015, and $848 million in the comparable period in 2014. Cash flows used in investing activities in 2015 primarily consisted of additions to the investment portfolio of our regulated subsidiaries, including transfers from cash and cash equivalents to long term investments and capital expenditures.
In January 2015, we sold a 25% ownership interest in Celtic Insurance Company. No gain or loss was recognized on the sale of the ownership interest. Celtic Insurance Company is included in the Managed Care segment. Under the terms of the agreement, we entered into a put agreement with the noncontrolling interest holder to purchase the noncontrolling interest at a later date.
Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets within our guidelines. Net cash provided by and used in investing activities will fluctuate from year to year due to the timing of investment purchases, sales and maturities. As of December 31, 2015, our investment portfolio consisted primarily of fixed-income securities with an average duration of 2.9 years. These securities generally are actively traded in secondary markets and the reported fair market value is determined based on recent trading activity, recent trading activity in similar securities and other observable inputs. Our investment guidelines comply with the regulatory restrictions enacted in each state. We had unregulated cash and investments of $78 million at December 31, 2015, compared to $85 million at December 31, 2014.
We spent $150 million, $103 million and $68 million in 2015, 2014 and 2013, respectively, on capital expenditures for system enhancements and market expansions.
At December 31, 2015, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 36.0%, compared to 33.5% at December 31, 2014. Excluding the $67 million non-recourse mortgage note, our debt to capital ratio was 34.7% as of December 31, 2015, compared to 31.7% at December 31, 2014. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.
During the year ended December 31, 2015, 2014 and 2013, we received dividends of $11 million, $50 million, and $18 million, respectively, from our regulated subsidiaries.
In early 2016, we expect to complete the merger with Health Net, a publicly traded managed care organization that delivers health care services through health plans and government-sponsored managed care plans, for approximately $5.5 billion. In connection with the upcoming closing of the merger, in February 2016, our wholly owned unrestricted subsidiary (Escrow Issuers) issued approximately $1.4 billion 5.625% Senior Notes due 2021 at par and $1.0 billion 6.125% Senior Notes due 2024 at par. The transaction will be financed through a combination of borrowings on our revolving credit facility, existing cash on hand, the $2.4 billion February debt issuance, and approximately $2.8 billion in shares of Centene common stock. The proceeds of the debt issuance will be held in escrow until the closing of the Health Net merger. If the Health Net merger is not consummated, the Escrow Issuer will be required to redeem each series of Notes at a redemption price equal to 100% of the principal amount of such series of Notes, plus accrued and unpaid interest to the redemption date.
Upon execution of the merger agreement, the Company negotiated the terms of a new unsecured $1,000 million revolving credit facility with its banking syndicate. The new $1,000 million revolving credit facility is effective upon the closing of the merger and the existing $500 million unsecured revolving credit facility will be terminated simultaneously.
Including the effects of potential contributions and expenditures related to Health Net, we expect to make net capital contributions to our insurance subsidiaries of approximately $250 million during 2016 associated with our growth and spend approximately $330 million in additional capital expenditures primarily associated with system enhancements, integration, and market expansions. These capital contributions are expected to be funded by unregulated cash flow generation in 2016 and borrowings on our revolving credit facility.
1 Our Consolidated Balance Sheet as of December 31, 2015, includes $170 million of other long term liabilities. This consists primarily of long term deferred income taxes, liabilities under our deferred compensation plan, and reserves for uncertain tax positions. These liabilities have been excluded from the table above as the timing and/or amount of any cash payment is uncertain.
The paid and received completion factors, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based on December 31, 2015 data:
We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. We generally do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. However, in certain circumstances, such as recent acquisitions, we may elect to perform a quantitative assessment without first assessing qualitative factors. The fair value of all reporting units with material amounts of goodwill was substantially in excess of the carrying value as of our annual impairment testing date, with the exception of reporting units that were recently acquired without excess fair value on the acquisition date.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centene Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
On February 2, 2015, the Board of Directors declared a two-for-one split of Centene's common stock in the form of a 100% stock dividend distributed February 19, 2015 to stockholders of record on February 12, 2015. All share and per share information presented in this Form 10-K has been adjusted for the two-for-one stock split.
Contingent consideration: Estimate based on expected membership retained at contract commencement and per member purchase price in the acquisition agreement.
The Company retains fully depreciated assets in property and accumulated depreciation accounts until it removes them from service. In the case of sale, retirement, or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of earnings from operations in the consolidated statements of operations.
The permanent risk adjustment program established by the ACA transfers funds from qualified individual and small group insurance plans with below average risk scores to those plans with above average risk scores within each state. The Company estimates the receivable or payable under the risk adjustment program based on its estimated risk score compared to the state average risk score. The Company may record a receivable or payable as an adjustment to Premium revenue to reflect the year to date impact of the risk adjustment based on its best estimate. The Company expects to refine its estimate as new information becomes available. As of December 31, 2015, the Company recorded a payable of $108 million associated with risk adjustment, and $44 million at December 31, 2014.
The ACA established a transitional three-year reinsurance program whereby the Company’s claims costs incurred for qualified members will be reimbursed when they exceed a specific threshold. For the 2015 benefit year, qualified member claims that exceeded $45,000 entitled the Company to reimbursement from the programs at 50% coinsurance. The Company accounts for reinsurance recoveries as a reduction of Medical Costs based on each individual case that exceeds the reinsurance threshold established by the program. As of December 31, 2015, the Company recorded a receivable of $24 million associated with reinsurance, and $11 million at December 31, 2014.
The temporary, three-year risk corridor program established by the ACA applies to qualified individual and small group health plans operating both inside and outside of the Health Insurance Marketplace. The risk corridor program limits the Company’s gains and losses in the Health Insurance Marketplace by comparing certain medical and administrative costs to a target amount and sharing the risk for allowable costs with the federal government. Allowable medical costs are adjusted for risk adjustment settlements, transitional reinsurance recoveries, and cost sharing reductions received from the federal government. The Company records a risk corridor receivable or payable as an adjustment to Premium Revenue on a year to date basis based on where its estimated annual costs fall within the risk corridor range. As of December 31, 2015, the Company recorded a payable of $4 million associated with risk corridor, and $9 million at December 31, 2014.
Additionally, the ACA established a minimum annual medical loss ratio for the Health Insurance Marketplace. Each of the three R programs described above are taken into consideration to determine if the Company’s estimated annual medical costs are less than the minimum loss ratio and require an adjustment to Premium revenue to meet the minimum medical loss ratio. As of December 31, 2015, the Company recorded a payable of $15 million associated with minimum medical loss ratio, and $6 million at December 31, 2014.
In May 2015, the FASB issued an ASU which expands the disclosure requirements for insurance companies that issue short-duration contracts. The new standard will increase the level of disclosure around the Company's Medical Claims Liability to include the following: claims development by year; claim frequency; a rollforward of the claims liability; and a description of methods and assumptions used for determining the liability. It is effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the effect of the new disclosure requirements.
The Company has determined that there are no other recently issued accounting pronouncements that will have a material impact on its consolidated financial position, results of operations and cash flows.
On July 2, 2015, the Company announced that the Company and two direct, newly formed subsidiaries of the Company had entered into a definitive merger agreement with Health Net, Inc. (Health Net) under which the Company will acquire all of the issued and outstanding shares of Health Net. Under the terms of the agreement, at the closing of the transaction, Health Net stockholders (with limited exceptions) would receive 0.622 of a validly issued, fully paid, non-assessable share of Centene common stock and $28.25 in cash for each share of Health Net common stock. The transaction is valued at approximately $5.5 billion (based on the Centene closing stock price on February 17, 2016), including the assumption of debt.
The transaction is expected to close in early 2016 and is subject to approvals by relevant state insurance and healthcare regulators and other customary closing conditions. In August 2015, the Company announced the early termination of the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In October 2015, the Company and Health Net announced the transaction was approved by both the Centene and Health Net stockholders. The Company expects to fund the cash portion of the acquisition through a combination of the debt financing completed in February 2016, borrowings on the Company's revolving credit facility and existing cash on hand.
The Company's allocation of fair value resulted in goodwill of $26 million and other identifiable intangible assets of $15 million. The goodwill is not deductible for income tax purposes. The acquisition is recorded in the Managed Care segment.
Upon closing, the Company executed letters of credit for $52 million (valued at the December 31, 2015 conversion rate), or €48 million, representing its proportional share of the letters of credit issued to support Ribera Salud’s outstanding debt. Refer to Note 11, Debt for outstanding balance as of December 31, 2015.
U.S. Medical Management. In January 2014, the Company acquired 68% of U.S. Medical Management, LLC (USMM), a management services organization and provider of in-home health services for high acuity populations, for $213 million in total consideration. The transaction consideration consisted of $133 million of Centene common stock and $80 million of cash.
Short term and long term investments and restricted deposits by investment type consist of the following ($ in millions):
The fair value of available-for-sale investments with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows ($ in millions):
As of December 31, 2015, the gross unrealized losses were generated from 429 positions out of a total of 733 positions. The change in fair value of fixed income securities is a result of movement in interest rates subsequent to the purchase of the security.
During the year ended December 31, 2015, the company recognized $8 million of income from equity method investments.
The following table summarizes fair value measurements by level at December 31, 2014, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
The Company periodically transfers U.S. Treasury securities and obligations of U.S. government corporations and agencies between Level I and Level II fair value measurements dependent upon the level of trading activity for the specific securities at the measurement date. The Company’s policy regarding the timing of transfers between Level I and Level II is to measure and record the transfers at the end of the reporting period. At December 31, 2015, there were $53 million of transfers from Level I to Level II and no transfers from Level II to Level I. The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date. The Company designates these securities as Level II fair value measurements. The aggregate carrying amount of the Company’s life insurance contracts and other non-majority owned investments, which approximates fair value, was $87 million and $84 million as of December 31, 2015 and December 31, 2014, respectively.
Goodwill acquisitions were related to the acquisitions and finalization of fair value allocations discussed in Note 4, Acquisitions and Noncontrolling Interest.
Amortization expense was $24 million, $16 million and $6 million for the years ended December 31, 2015, 2014 and 2013, respectively. Estimated total amortization expense related to intangible assets for each of the five succeeding fiscal years is as follows ($ in millions):
The Company had reinsurance recoverables related to medical claims liability of $31 million and $22 million at December 31, 2015 and 2014, respectively, included in premium and related receivables.
In June 2015, CMS released final results on reinsurance and risk-adjustment for the 2014 plan year. In September 2015, the results on risk corridor and the minimum medical loss ratio were finalized for the 2014 plan year. These final results had an insignificant impact to the Company for the 2014 plan year.
The Company uses interest rate swap agreements to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its cash equivalent and variable rate investment balances. The Company has $750 million of notional amount of interest rate swap agreements consisting of $250 million which are scheduled to expire on June 1, 2017 and $500 million that are scheduled to expire May 15, 2022. Under the Swap Agreements, the Company receives a fixed rate of interest and pays a variable rate of the three month LIBOR plus an average 2.85% adjusted quarterly. At December 31, 2015, the weighted average rate was 3.22%.
The fair values of the Swap Agreements as of December 31, 2015 were assets of $11 million and liabilities of $2 million, and are included in other long term assets and other long term liabilities, respectively in the Consolidated Balance Sheet. The fair value of the Swap Agreements as of December 31, 2014 were assets of $11 million and are included in other long term assets in the Consolidated Balance Sheet. The fair value of the Swap Agreements excludes accrued interest and takes into consideration current interest rates and current likelihood of the swap counterparties' compliance with its contractual obligations.
The Company has an unsecured $500 million revolving credit facility. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. The agreement has a maturity date of June 1, 2018, provided it will mature 90 days prior to the maturity date of the Company's 5.75% Senior Notes due 2017 if such notes are not refinanced (or extended), certain financial conditions are not met, or the Company does not carry $100 million of unrestricted cash. As of December 31, 2015, the Company had $225 million of borrowings outstanding under the agreement with a weighted average interest rate of 2.05%.
The Company has a non-recourse mortgage note of $67 million at December 31, 2015 collateralized by its corporate headquarters building. The mortgage note is due January 1, 2021 and bears a 5.14% interest rate. The collateralized property had a net book value of $151 million at December 31, 2015.
The Company had outstanding letters of credit of $47 million as of December 31, 2015, which were not part of the revolving credit facility. As discussed in Note 4, Acquisitions and Noncontrolling Interest, the Company also had letters of credit for $50 million (valued at December 31, 2015 conversion rate), or €46 million, representing its proportional share of the letters of credit issued to support Ribera Salud's outstanding debt which are a part of the revolving credit facility. Collectively, the letters of credit bore interest at 1.55% as of December 31, 2015. The Company had outstanding surety bonds of $305 million as of December 31, 2015.
The Company has 10,000,000 authorized shares of preferred stock at $.001 par value. At December 31, 2015, there were no preferred shares outstanding.
The Company's Board of Directors has authorized a stock repurchase program for up to 8,000,000 shares of the Company's common stock from time to time on the open market or through privately negotiated transactions. No duration has been placed on the repurchase program. The Company has 3,335,448 available shares remaining under the program for repurchases as of December 31, 2015. The Company reserves the right to discontinue the repurchase program at any time. During the year ended December 31, 2015, the Company did not repurchase any shares through this publicly announced program.
As a component of the employee stock compensation plan, employees can use shares of stock which have vested to satisfy minimum statutory tax withholding obligations. As part of this plan, the Company repurchased 918,628 shares at an aggregate cost of $53 million in 2015 and 626,234 shares at an aggregate cost of $29 million in 2014. These shares are included in the Company's treasury stock.
In January 2014, the Company completed the acquisition of 68% of USMM and as a result, issued 4,486,434 shares of Centene common stock to the selling stockholders. Additionally, in July 2014, the Company completed a transaction whereby CHS assigned its contract with the Louisiana Department of Health and Hospitals to Centene's wholly owned subsidiary, LHC. The closing resulted in the issuance of 1,492,738 shares of Centene common stock.
Various state laws require Centene's regulated subsidiaries to maintain minimum capital levels specified by each state and restrict the amount of dividends that may be paid without prior regulatory approval. At December 31, 2015 and 2014, Centene's subsidiaries, including Kentucky Spirit Health Plan, had aggregate statutory capital and surplus of $2,284 million and $1,699 million, respectively, compared with the required minimum aggregate statutory capital and surplus of $1,195 million and $851 million, respectively.
As of December 31, 2015 and 2014, the Company maintained reserves for uncertain tax positions that may be challenged by a tax authority of $4 million. The unrecognized federal tax benefits are related to returns open from 2012 to 2015. The Company files in numerous state jurisdictions with varying statutes of limitation. The unrecognized state tax benefits are related to returns open from 2010 to 2015.
In September 2014, the Internal Revenue Service issued final regulations related to the compensation deduction limitation applicable to certain health insurance issuers. The new regulations provided additional information regarding the definition of a health insurance issuer. Based on the final regulations, the Company believes it is not subject to the compensation deduction limitation. As a result of this change in regulation, tax benefits of $14 million related to 2013 were recorded during the 2014 period.
As of December 31, 2015, the Company had $8 million of undistributed earnings from non-U.S. subsidiaries that are intended to be reinvested in non-U.S. operations. Because these earnings are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. The amount of U.S. tax that would be payable on the eventual remittance of such earnings is not material to the Company’s financial statements.
For the year ended December 31, 2013, the Company used a projected expected life for each award granted based on historical experience of employees' exercise behavior. The expected volatility is primarily based on historical volatility levels. The risk-free interest rates are based on the implied yield currently available on U.S. Treasury instruments with a remaining term equal to the expected life.
A summary of the Company's non-vested restricted stock and restricted stock unit shares as of December 31, 2015, and changes during the year ended December 31, 2015, is presented below:
As of December 31, 2015, there was $191 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans; that cost is expected to be recognized over a weighted-average period of 1.3 years.
Centene and its subsidiaries lease office facilities and various equipment under non-cancelable operating leases which may contain escalation provisions. The rental expense related to these leases is recorded on a straight-line basis over the lease term, including rent holidays. Tenant improvement allowances are recorded as a liability and amortized against rent expense over the term of the lease. Rent expense was $64 million, $46 million and $31 million for the years ended December 31, 2015, 2014 and 2013, respectively. Annual non-cancelable minimum lease payments over the next five years and thereafter are as follows ($ in millions):
On March 9, 2015, the Secretary of the Kentucky Cabinet for Health and Family Services (CHFS) issued a determination letter finding that Kentucky Spirit owed the Commonwealth $40 million in actual damages plus prejudgment interest at 8 percent. On March 18, 2015, in a letter to the Kentucky Finance and Administration Cabinet (FAC), Kentucky Spirit contested CHFS' jurisdiction to make such a determination. The FAC did not issue a decision within the required 120 days. On August 13, 2015, Kentucky Spirit filed a declaratory judgment action against the Commonwealth in Franklin Circuit Court seeking a declaration that the Commonwealth may not purport to issue a decision against Kentucky Spirit awarding damages to itself when the matter is already before the Kentucky courts, and that the Commonwealth has waived its claims against Kentucky Spirit for damages arising out of the contract. The Commonwealth filed counterclaims seeking a Declaration of Rights and Entry of Judgment on its determination letter. On December 1, 2015 the Franklin Circuit Court consolidated this declaratory judgment action with Kentucky Spirit’s other litigation claims against the Commonwealth. On December 15, 2015, the Franklin Circuit Court denied Kentucky Spirit’s motion to dismiss the Commonwealth’s counterclaim for Declaration of Rights and Entry of Judgment. Discovery is proceeding in the consolidated litigation matters.
The calculation of diluted earnings per common share for 2015, 2014 and 2013 excludes the impact of 7,247 shares, 207,980 shares and 187,078 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
Factors used in determining the reportable business segments include the nature of operating activities, existence of separate senior management teams, and the type of information presented to the Company's chief operating decision maker to evaluate all results of operations.
Segment information as of and for the year ended December 31, 2013, follows ($ in millions):
The parent company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries. The parent company's share of net income of its unconsolidated subsidiaries is included in income using the equity method of accounting. Certain unrestricted subsidiaries receive monthly management fees from our restricted subsidiaries. The management and service fees received by our unrestricted subsidiaries are associated with all of the functions required to manage the restricted subsidiaries including but not limited to salaries and wages for all personnel, rent, utilities, medical management, provider contracting, compliance, member services, claims processing, information technology, cash management, finance and accounting, and other services. The management fees are based on a percentage of the restricted subsidiaries revenue.
Due to our centralized cash management function, all cash flows generated by our unrestricted subsidiaries, including management fees, are transferred to the parent company, primarily to repay borrowings on the parent company's revolving credit facility. The parent company may also utilize the cash flow to make acquisitions, fund capital contributions to subsidiaries and fund its operations. During the years ended December 31, 2015, 2014 and 2013, cash flows received by the parent from unrestricted subsidiaries was $445 million, $341 million, and $313 million and was included in cash flows from operating activities.
The parent company's other current assets include $686 million and $359 million of federal and state income tax receivables as of December 31, 2015 and 2014, respectively, primarily due to tax sharing agreements with its subsidiaries.