(1)2010 and 2009 include capital and surplus for Pennsylvania Life Insurance Company which was transferred to CVS Caremark in April 2011 in connection with the Medicare Part D sale. At the time of the transfer on April 29, 2011, Pennsylvania Life had capital and surplus of $231.4 million of which $184.4 million was included in the amount distributed to Universal American shareholders in connection with the sale.
•Continue to build our Medicare Advantage business and expand our Healthy Collaboration® model in our core markets.
We believe that attractive growth opportunities exist in providing products, particularly health insurance, to the growing senior market. At present, approximately 51 million Americans are eligible for Medicare, the Federal program that offers basic hospital and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the U.S. Census Bureau, more than 2 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65. In addition, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. Medicare Advantage continues to grow its share of the overall Medicare market and we believe is likely to continue to gain positive acceptance with consumers.
In March 2010, President Obama signed into law The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the Affordable Care Act. The Affordable Care Act established ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare Fee-for-Service, or FFS, program, which covers approximately 70% of the Medicare recipients, approximately 36 million eligible Medicare beneficiaries. CMS established the Shared Savings Program to facilitate coordination and cooperation among providers to improve the quality of care for FFS beneficiaries and reduce unnecessary costs. Eligible providers, hospitals, and suppliers may participate in the Shared Savings Program by creating or participating in an ACO.
The Shared Savings Program is designed to improve beneficiary outcomes and increase value of care by (1) promoting accountability for the care of Medicare FFS beneficiaries; (2) requiring coordinated care for all services provided under Medicare FFS; and (3) encouraging investment in infrastructure and redesigned care processes. The Shared Savings Program will reward ACOs that lower their health care costs while meeting performance standards on quality of care and putting patients first. Under the final Shared Savings Program rules, Medicare will continue to pay individual providers and suppliers for specific items and services as it currently does under the FFS payment methodologies. The Shared Savings Program rules require CMS to develop a benchmark for savings to be achieved by each ACO if the ACO is to receive shared savings. An ACO that meets the program's quality performance standards will be eligible to receive a share of the savings to the extent its assigned beneficiary medical expenditures are below the medical expenditure benchmark provided by CMS. A minimum savings rate must be achieved before the ACO can receive a share of the savings. Once the minimum savings rate is surpassed, all the savings below the benchmark provided by CMS will be shared 50% with the ACOs. The minimum savings rate varies depending on the number of patients assigned to the ACO, starting at 3.9% for ACOs with patients totaling 5,000 and grading to 2% for ACOs with patients totaling 10,000 or more.
Established in 1965, Medicaid is the largest publicly funded program in the United States, and provides health insurance to low-income families and individuals with disabilities. Authorized by Title XIX of the Social Security Act, Medicaid is an entitlement program funded jointly by the federal and state governments and administered by the states. The majority of funding is provided at the federal level. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within federal standards. Eligibility is based on a combination of household income and assets, often determined by an income level relative to the federal poverty level. Historically, children have represented the largest eligibility group. Our APS Healthcare segment provides a variety of healthcare services to Medicaid beneficiaries in numerous states.
administered by managed care organizations. Dual eligibles tend to consume more healthcare services due to their tendency to have more chronic health issues.
We provide medical management services, information and analysis, and other support services to enable our health care partners to serve their patients better. We rely heavily on the strong physician leadership of each network to help us achieve the clinical goals that support the mission of the organization.
Medicare Advantage payment benchmarks have been cut over the last several years, with additional funding reductions to be phased in as noted above. In April 2013, CMS released its "Final Notice for Methodological Changes for Calendar Year (CY) 2014 for Medicare Advantage (MA) Capitation Rates, and Part C and Part D Payment Policies and 2014 Call Letter" (the "Final Notice") regarding 2014 Medicare Advantage benchmark rates and payment policies. The Final Notice included significant reductions to 2014 Medicare Advantage payments, including the benchmark reductions described above. These reductions and the Health Reform legislation insurance industry fee described below result in revenue reductions and incremental assessments totaling approximately 4.7% for 2014, against a typical industry forward medical cost trend outlook of 3% and limit the ability of plans to reduce benefits. As a result of these factors, we elected not to rebid our Medicare Advantage rural private fee-for-service contract covering approximately 10,700 beneficiaries in 2014. In addition, these factors will likely affect our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in the future. In February 2014, CMS released its proposal for 2015 Medicare rates (the "45 Day Call Letter") which is expected to reduce Medicare rates between 3%- 6%. These expected rate reductions do not include the increase in the non-deductible health insurance industry fee, known as the ACA fee. In addition, CMS has proposed excluding the diagnosis codes obtained from in-home health risk assessments for risk adjustment purposes, unless such codes are subsequently validated by a subsequent clinical encounter with a qualified provider. CMS will release its final action on 2015 rates in April 2014.
plans rated 4 stars, which ratings are considered when preparing our bids to be submitted for 2015. A summary of these ratings is presented below:
(1)Membership as of December 31, 2013. Excludes 13,200 members in areas subject to 2014 Service Area Reductions. This includes 10,700 rural members whose plans were not renewed for 2014.
Notwithstanding continued efforts to improve or maintain our STAR ratings and other quality measures, there can be no assurances that we will be successful in doing so. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.
In addition, CMS has indicated that plans with a STAR rating of less than 3.0 for three consecutive years may be subject to termination. While we do not currently have any plans with a rating below 3.0, our inability to maintain STAR ratings of 3.0 or better for a sustained period of time could ultimately result in plan termination by CMS which could have a material adverse impact on our business, cash flows and results of operations. Also, the CMS STAR ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage plans that enable those plans to offer improved benefits and/or better pricing. Furthermore, lower quality scores compared to our competitors may result in us losing potential new business in new markets or dissuading potential members from choosing our plan in markets in which we compete. Lower quality scores compared to our competitors could have a material adverse effect on our rate of growth.
Non-deductible health insurance industry fee ("ACA Fee")-Beginning in 2014, the new healthcare reform legislation will impose an annual aggregate health insurance industry fee of $8.0 billion (with increasing annual amounts thereafter) on health insurance premiums, including Medicare Advantage premiums, that is not deductible for income tax purposes. As a result, our effective income tax rate will increase in 2014 and future years. Our share of the new fee will be based on our pro rata percentage of premiums written during the preceding calendar year compared to the industry as a whole, calculated
Coding intensity adjustments-Under the new healthcare reform legislation, the coding intensity adjustment instituted in 2010 became permanent, resulting in mandated minimum reductions in risk scores of 4.91% in 2014 increasing each year to 5.91% in 2018. These coding adjustments may adversely affect the level of payments from CMS to our Medicare Advantage plans.
Accountable Care Organizations-The Affordable Care Act established Accountable Care Organizations, or ACOs, as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service program. CMS established the Medicare Shared Savings Program, or MSSP, to facilitate coordination and cooperation among providers to improve the quality of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs. To date, we have partnered with numerous groups of healthcare providers to form thirty-four ACOs that have been approved to participate in the MSSP. ACOs are entities that contract with CMS to serve the Medicare fee-for-service population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. We provide a variety of services to the ACOs, including care coordination, analytics and reporting, technology and other administrative services to enable these physicians and their associated healthcare providers to deliver better quality care, improved health and lower healthcare costs for their Medicare fee-for-service patients. As of December 31, 2013, we have incurred inception-to-date expenses of approximately $63 million, pre-tax, related to our ACO business, including our equity in the losses of our unconsolidated ACOs and have recognized no revenues to date. We also expect to incur significant costs during 2014. Under the MSSP, CMS will not make any payments to ACO's for the first measurement year ended December 31, 2013 until the second half of 2014, which will negatively impact our cash flows. In order to receive revenues from CMS under the MSSP, the ACO must meet certain minimum savings rates (i.e. save the federal government money) and meet certain quality measures. More specifically, an ACO's medical expenses for its assigned beneficiaries during a relevant measurement year must be below the benchmark established by CMS for such ACO. On the quality side, the MSSP requires ACOs to meet thirty-three quality measures, which CMS may vary from time to time. Notwithstanding our efforts, our ACOs may be unable to meet the required savings rates or may not satisfy the quality measures, which may result in our receiving no revenues and losing our substantial investment. In addition, as the MSSP is a new program, it presents challenges and risks associated with the timeliness and accuracy of data and interpretation of complex rules, which may impact the timing and amount of revenue we can recognize and could have a material
adverse effect on our ability to recoup any of our investment in this new business. Further, there can be no assurance that we will maintain positive relations with each of our thirty-four ACO partners which may result in certain of the ACOs terminating our relationship, which will result in a potential loss of our investment.
On November 1, 2012, our Board of Directors approved the payment of a special cash dividend of $1.00 per share to each holder of the Company's outstanding common stock. This special cash dividend was paid on November 19, 2012 to the stockholders of record as of the close of business on November 12, 2012. The cumulative dividend payment was $88.2 million.
On August 1, 2013, our Board of Directors authorized the repurchase of up to $40 million of our outstanding common stock. Purchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise as market conditions permit. No repurchases have been made to date.
(2)Excludes 3,300 members in areas subject to 2013 Service Area Reductions.
Our remaining segment, Corporate & Other, reflects the activities of our holding company, along with start-up and operating costs associated with our ACO business, the operations of APS Healthcare since its acquisition on March 2, 2012, the operations of Total Care acquired on December 1, 2013 and other ancillary operations. See Note 25-Business Segment Information in the Notes to consolidated financial statements for a description of our segments.
(2)Includes after-tax transaction costs of $10.7 million or $0.13 per diluted share in 2011 (see Note 23-Discontinued Operations in the Notes to consolidated financial statements).
Loss from continuing operations for the year ended December 31, 2013 was $192.3 million, or ($2.20) per diluted share, compared to income from continuing operations of $53.0 million, or $0.61 per diluted share, for the year ended December 31, 2012. These amounts include asset impairment charges, net of taxes, of $178.1 million, or $2.04 per diluted share, in 2013 as well as realized investment gains, net of taxes, of $9.0 million, or $0.10 per diluted share, and $10.8 million, or $0.12 per diluted share in 2013 and 2012, respectively.
The loss before income taxes from our Corporate & Other segment increased by $231.7 million for the year ended December 31, 2013 compared to 2012. This was due primarily to asset impairment charges related to APS Healthcare totaling $189.4 million, with $97.7 million taken in the fourth quarter of 2013 and $91.7 million taken in the second quarter of 2013, as well as an increase in total ACO costs, an increase in business development costs, and lower profitability of our APS Healthcare business.
Income taxes include non-recurring tax (expenses) benefits of ($1.2) million and $7.3 million for the years ended December 31, 2013 and 2012, respectively. The 2013 expense primarily related to the establishment of a valuation allowance against deferred tax assets. The 2012 benefit primarily relates to acceptance of amended returns for prior years that removed certain revenues from revenue-based state taxes that resulted in a reserve release of $2.6 million and the recording of a receivable of $3.6 million. In addition, the 2012 benefit includes a $1.2 million reserve release related to items on which the statute of limitations has expired.
Income taxes include non-recurring tax benefits (expenses) of $7.3 million and ($0.4) million for the years ended December 31, 2012 and 2011, respectively. The 2012 benefit primarily relates to acceptance of amended returns for prior years that removed certain revenues from revenue-based state taxes that resulted in a reserve release of $2.6 million and the recording of a receivable of $3.6 million. In addition, the 2012 benefit includes a $1.2 million reserve release related to items on which the statute of limitations has expired. 2011 includes $0.9 million of state tax refunds, partially offset by the write-off of a $1.3 million deferred tax asset for net operating loss carryforwards that were terminated by the Section 338(h)(10) election.
Discontinued operations include the results of operations related to our Medicare Part D business and related corporate items that were transferred to CVS Caremark in connection with the closing of the Medicare Part D sale on April 29, 2011. See Note 23-Discontinued Operations in the Notes to consolidated financial statements for further information. We had a loss from discontinued operations of $50.9 million or $0.63 per diluted share for the year ended December 31, 2011, which represented the four months of operations prior to closing of the Medicare Part D sale as well as $10.7 million after-tax of transaction expenses. The benefits design of the Medicare Part D business results in significant seasonality in financial results, resulting in losses in the early part of the year, followed by profits in the latter part of the year.
Net premiums. Net premiums for the Senior Managed Care-Medicare Advantage segment decreased by $2.2 million compared to the year ended December 31, 2012. In 2013, net premiums included $33.2 million of favorable prior period items compared to $34.4 million of favorable prior period adjustments in 2012.
Medical expenses. Medical expenses increased by $43.8 million compared to the year ended December 31, 2012, increasing the medical expense ratio to 83.4% for 2013 from 80.6% for 2012. During 2013, medical expenses included $9.9 million of net unfavorable items related to prior periods, compared to $7.0 million of net unfavorable items related to prior periods in 2012. 2013 medical expenses were also unfavorably impacted by an increase in inpatient and emergent care utilization in our non-HMO lines of business and an increase in the volume of large dollar claims in our HMO lines of business. In addition, $7.4 million, or 0.4% of the medical expense ratio, is related to the results of sequestration from the April-December period of 2013. Adjusting for the prior year items discussed above, our medical expense ratio was 84.5% for 2013.
Our Senior Managed Care-Medicare Advantage segment generated income before income taxes of $92.8 million for the year ended December 31, 2012, an increase of $20.1 million compared to the year ended December 31, 2011. The increase in earnings was driven by the medical benefit ratio improving to 80.6% for the full year 2012 compared to 82.0% for 2011 and a decrease in our administrative expense ratio from 15.5% in 2011 to 15.0% in 2012. This was partially offset by lower membership in all products resulting in an expected 22% decrease in member months for the full year 2012 compared to 2011. For the year ended December 31, 2012, there was $27.4 million of net favorable prior year development compared to $22.8 million for the year ended December 31, 2011. The current year also included $7.9 million of investment in STARS rating improvement programs.
Commissions and general expenses. Commissions and general expenses for the year ended December 31, 2012 decreased $61.3 million compared to the year ended December 31, 2011, primarily as the result of the decreased level of membership. Our administrative expense ratio decreased to 15.0% for the year ended December 31, 2012 from 15.5% in 2011 primarily as a result of our cost reduction efforts partially offset by our investment in STARS related programs.
Our Traditional Insurance segment generated income before taxes of $10.9 million for 2013, a decrease of $7.1 million compared to 2012. The decrease in earnings is driven by the reduction of business in-force which resulted in lower underwriting income as well as higher operating expenses, primarily consulting and outside services.
Policyholder benefits. Policyholder benefits incurred declined by $25.5 million, or 13.7%, compared to 2012. This decline was principally due to the overall decline of insurance in-force in the Senior Market and Specialty Health lines of business and a lower medical trend on Medicare supplement. For 2013, the policyholder benefit ratio for senior market health was 67.2% compared with 71.0% in 2012, and for specialty health was 107.4% in 2013, compared with 107.2% in 2012.
Commissions and general expenses, net of allowances. Commissions and general expenses, net of allowances, decreased by $11.8 million from 2011. This decrease is primarily attributed to the decision to stop marketing Traditional insurance products and lower costs required to run a smaller book of business in-force.
Corporate & Other includes the results of APS Healthcare since it was acquired on March 2, 2012 and Total Care since it was acquired on December 1, 2013.
Net premiums. Net premiums increased by $41.6 million for the year ended December 31, 2013 compared to 2012 primarily due to including a full year of APS Healthcare results compared with ten months in 2012 as APS Healthcare was acquired on March 2, 2012 and one month of Total Care revenue in 2013, amounting to $12.8 million.
Amortization of intangible assets. This represents the amortization of APS Healthcare and Total Care intangible assets. The increase is primarily due to 2013 including a full year of APS Healthcare results compared to ten months in 2012.
Asset impairment charges. During calendar year 2013, we recorded asset impairment charges related to APS Healthcare of $189.4 million, which included impairments to goodwill of $164.8 million, amortizing intangibles of $16.1 million and tangible assets of $8.5 million. For additional information, see Note 5-Business Combinations and Note 8-Goodwill And Other Intangible Assets in the Notes to consolidated financial statements.
recognized. At that point, we share in 100% of the revenue up to our costs incurred. Any remaining profit is generally shared equally with our ACO provider partners.
The loss before income taxes from our Corporate & Other segment decreased by $29.5 million for the year ended December 31, 2012 compared to 2011. This was primarily due to 2011 charges of $22.0 million for restructuring costs, $15.6 million related to impairment of an intangible asset related to our Career distribution channels that were closed in the fourth quarter of 2011 and an $8.6 million charge to stock-based compensation expense related to accelerated vesting of equity awards in connection with the Medicare Part D sale, partially offset by $21.7 million of start-up and operating costs relating to the development of our ACO business and higher debt service costs incurred in 2012.
Net premiums. Net premiums increased by $128.6 million for the year ended December 31, 2012 due to ten months of results related to APS Healthcare, acquired on March 2, 2012.
Claims and other benefits. Claims and other benefits increased by $106.3 million for the year ended December 31, 2012 due to ten months of results related to APS Healthcare, acquired on March 2, 2012.
Amortization of intangible assets. This represents the amortization of APS Healthcare intangible assets. The increase is due to ten months of results related to APS Healthcare, acquired on March 2, 2012.
the settlement of the HHS-OIG Wisconsin investigation and $1.8 million of transaction costs incurred in connection with the APS Healthcare acquisition.
Our contractual obligations as of December 31, 2013, are shown below.
(1)These obligations include contractual interest, unused commitment fees and annual administrative fees and the table reflects scheduled maturities for contractual obligations existing as of December 31, 2013.
meet its obligations under the reinsurance agreements. However, as of December 31, 2013, all of our primary reinsurers were rated "A-"(Excellent) or better by A.M. Best with the exception of one reinsurer. For that reinsurer, which is not rated, a trust containing assets at 106% of policy reserve levels is maintained. We are not aware of any instances where any of our reinsurers have been unable to pay any policy claims on reinsured business. Therefore, we have presented our obligations in the table above net of amounts recoverable from reinsurers. Our obligations for policy related liabilities before amounts recovered from reinsurers amount to $1.6 billion.
Sources and Uses of Liquidity to the Parent Company, Universal American Corp. We require cash at our parent company to support the operations and growth of our insurance, HMO and other subsidiaries, fund new business opportunities through acquisitions or otherwise and pay the operating expenses necessary to function as a holding company, as applicable insurance department regulations require us to bear our own expenses.
The parent company's sources and uses of liquidity are derived primarily from the following:
•dividends from and capital contributions to our Insurance and HMO subsidiaries-During 2013, our Insurance and HMO subsidiaries paid $58.9 million of ordinary dividends and $184.5 million of extraordinary dividends to our parent company. Based on current estimates, we expect the aggregate amount of dividends that may be paid to our parent company in 2014 without prior approval by state regulatory authorities is approximately $57 million.
•the cash flows of our ACO business and other growth initiatives-For the year ended December 31, 2013, we incurred expenses of approximately $41.6 million, pre-tax, related to our ACO business, including our equity in the losses of our unconsolidated ACOs and have recognized no revenues to date. We expect to recognize ACO revenue beginning in 2014.
As of December 31, 2013, we had approximately $96 million of cash and investments in our parent company and unregulated subsidiaries.
Capital contributions to and dividends from our Insurance and HMO subsidiaries are made through their respective holding companies. In the fourth quarter of 2013, we capitalized our Today's Options of New York HMO with $11.5 million to fund the asset purchase of Total Care in December 2013 and provide initial working capital.
During the second quarter of 2013, we evaluated capital levels at our insurance and HMO subsidiaries. In addition to ordinary dividends based on prior year earnings, we also requested extraordinary dividends at certain subsidiaries to reduce excess capital. Additionally, in the fourth quarter of 2013 we requested an extraordinary dividend from American Progressive, in part to fund our acquisition of Total Care, and also requested a return of capital (liquidating dividend) from Union Bankers, in conjunction with the approval of its merger with Constitution Life on December 31, 2013. Collectively, our insurance and HMO subsidiaries paid $243.4 million to their holding companies, with
Management service organizations. The primary sources of liquidity for these subsidiaries are fees collected from affiliates for performing administrative, marketing and management services. The primary uses of liquidity are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for these subsidiaries will exceed scheduled uses of cash and result in amounts available to dividend to our parent company.
APS Healthcare. The primary sources of liquidity for APS Healthcare are fees from its customers, including health plans, state agencies and related organizations for performing a range of healthcare services. The primary uses of liquidity are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for APS Healthcare will not cover scheduled uses of cash and therefore APS Healthcare will continue to need to borrow funds from our parent company, to the extent such funding continues to be made available. APS Healthcare's Puerto Rico subsidiary is required to maintain minimum statutory equity as required by contract with the Commonwealth of Puerto Rico and currently exceeds its minimum requirement at levels we believe are sufficient to support its current level of operations.
mortgage-backed securities and corporate fixed maturity securities with investment grade ratings of BBB- or higher by S&P or Baa3 or higher by Moody's Investor Service. As of December 31, 2013, approximately 99% of our fixed maturity investments had investment grade ratings from S&P or Moody's.
behalf of policyholders, less the future value of net premiums. We calculate this amount based on actuarially recognized methods using morbidity and mortality tables, which we modify to reflect our actual experience when appropriate. The liability for unpaid claims, which also reflects IBNR, reflects estimates of amounts to fully settle known reported claims as well as claims related to insured events that we estimate have been incurred, but have not yet been reported to us.
Our net retained reserves for life insurance products were $23.3 million, or 4% of our direct and assumed reserves for life insurance products, as of December 31, 2013. Our net retained reserves for life insurance products were $19.8 million, or 4% of our direct and assumed reserves for life insurance products, as of December 31, 2012.
We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim payment and claim receipt patterns, as well as historical medical cost trends. Depending on the period for which we are estimating incurred claims, we apply a different method in determining our estimate. For aged service months (more than two or three months prior to the valuation date, depending on type of business), the key assumption we use in estimating our IBNR is that the completion factor pattern, adjusted for known changes in claim inventory levels and claim payment processes, remains consistent over a specified rolling period. This period, ranging from 3 to 12 months, is dependent on the type of business with respect to which we are estimating reserves or liabilities. Completion factors result from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For recent service months (either two or three months, depending on type of business), we estimate the incurred claims primarily from a trend analysis based upon per member per month, known as PMPM, claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, product mix, and seasonality.
The liability for policy and contract claims-health increased from $156.6 million to $166.5 million during the year ended December 31, 2013. The increase in the liability was primarily due to amounts from Total Care, which was acquired on December 1, 2013.
The medical cost amount, noted as "prior year development" in the table above, represents (favorable) or unfavorable adjustments as a result of prior year claim estimates being settled for
amounts that are different than originally anticipated. This prior year development occurs due to differences between the actual medical utilization and other components of medical cost trends, and actual claim processing and payment patterns compared to the assumptions for claims trend and completion factors used to estimate our claim liabilities.
In accordance with ASU 2010-26, we defer costs of acquiring new business that are directly related to the successful acquisition or renewal of insurance contracts including the following:
•portions of employee salaries and benefits directly related to time spent performing specified acquisition activities for a contract that has been acquired,
We use a range of discount rates that correspond to a market based weighted average cost of capital. Discount rates are determined for each reporting unit based on the implied risk inherent in
their forecasts. This risk is evaluated using comparisons to market information such as peer company weighted average costs of capital and peer company stock prices in the form of revenue and earnings multiples. The most significant estimates in the discount rate determinations include the risk free rates and equity risk premium. Company specific adjustments to discount rates are subjective and thus are difficult to measure with certainty.
•increases in the amount of required capital for a reporting unit.
To determine whether goodwill is impaired, we perform a multi-step impairment test. We 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 measure the fair values of the reporting units and compare them to their carrying values, including goodwill. If the fair value is less than the carrying value of the reporting unit, the second step of the impairment test is performed for the purposes of measuring the impairment. In this step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss shall be recognized in an amount equal to that excess.
(2)The goodwill in our Corporate & Other segment is associated with our APS Healthcare and Total Care reporting units. The entire balance remaining at December 31, 2013 is related to Total Care.
(3)Represents goodwill recorded in connection with our December 1, 2013 acquisition of the assets of Total Care. See Note 5-Business Combinations of Notes to consolidated financial statements.
•Certain of APS Healthcare's existing contracts were terminated, not renewed or we learned that they were likely to terminate in the next several months; and
•We learned that the APS Puerto Rico Contract, which represents a significant portion of APS Healthcare's historical revenue, would terminate effective June 30, 2014 as a result of a new request for proposal, or RFP, being issued that would integrate behavioral health services and physical health services into one managed care contract. Additionally, the Commonwealth of Puerto Rico continues to experience deterioration in its economic environment and certain of the major rating agencies cut Puerto Rico's credit rating to junk status. In addition, we have begun to experience an increase in the cost of care of our Puerto Rico managed behavioral health business, which has reduced the profitability of that business. We are evaluating opportunities to participate in the new RFP but there can be no assurance that we will be successful, which, if we were not successful would end our participation in the Mi Salud program.
•We learned that APS Healthcare was not going to be awarded a previously anticipated contract.
•We learned that the anticipated membership to be serviced in another contract was significantly reduced, thereby lowering the future expected cash flows of that contract.
•Substantially all of the services APS Healthcare had provided to UAM affiliates were discontinued. The affiliates replaced those services with their own direct staff.
We incorporated the impact of the above items into our projections for APS Healthcare for our annual assessment of goodwill as of October 1, 2013, that included lowered expectations for future revenue growth and new business development. Based on the results of the step one impairment test, we determined that as of October 1, 2013 the carrying value of APS Healthcare exceeded its fair value. We then proceeded to the second step of the impairment test to estimate the implied fair value of the APS Healthcare goodwill. Based on the October 1, 2013 step two analysis, the carrying amount of the APS Healthcare goodwill exceeded its implied fair value, resulting in a pre-tax impairment charge of $73.0 million, representing the remaining goodwill for APS Healthcare. A portion of the goodwill was taxable, resulting in a tax benefit of approximately $0.9 million. Separately, we determined that the identified amortizing intangibles and other fixed assets were not fully recoverable and recorded additional impairments of $16.1 million and $8.5 million, respectively.
In accordance with ASC 350, Intangibles and Other, we periodically review amortizing intangible assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. If these estimates or their related assumptions change in the future, we may be required to record impairment losses for these assets.
During our review of recoverability of amortizing intangible assets in the fourth quarter of 2013, we determined that undiscounted cash flows from our APS Healthcare reporting unit were less than the carrying value of our related APS Healthcare amortizing intangible assets, indicating that they were no longer fully recoverable and recorded an impairment charge. During our review of recoverability in the fourth quarter of 2011, we determined that the undiscounted cash flows from our acquired agency intangible asset were less than its carrying value, indicating that it was no longer fully recoverable and recorded an impairment. There were no other impairments of our amortizing intangible assets during 2013, 2012 or 2011. See additional discussion at Note 8-Goodwill and Other Intangible Assets in the Notes to consolidated financial statements.
The investment advisor uses their own rules-based pricing system to evaluate the prices it receives from various pricing vendors to ensure the data adheres to certain vendor-to-vendor and day-to-day variance tolerances. Exceptions to the rules are monitored, investigated and challenged, as needed. We review and test the security pricing procedures used to value our fixed maturity portfolio on an ongoing basis. Our procedures include review of the investment valuation policy and understanding of the procedures used to obtain investment valuations and review of pricing controls at our investment advisor, including their Statements on Standards for Attestation Engagements 16 controls review report. We also test the prices provided by the advisor monthly by comparing the data to another independent
Medicare is a federal health insurance program that provides Americans age 65 and over, and some disabled persons under the age of 65, certain hospital, medical and prescription drug benefits. The Medicare program consists of four parts, labeled Parts A - D.
Premiums received pursuant to Medicare contracts with CMS are recorded as revenue in the month in which members are entitled to receive benefits. Premiums collected in advance are deferred. Receivables from CMS and Plan members are recorded net of estimated uncollectible amounts and are reported as due and unpaid premiums in the consolidated balance sheets. We routinely monitor the collectability of specific accounts, the aging of member premium receivables, historical retroactivity trends and prevailing and anticipated economic conditions. Certain commissions are deferred and amortized over the program year in relation to the corresponding revenues.
CMS Direct Premium Subsidy. We receive a monthly premium from CMS based on the Plan year bid we submitted to CMS. The monthly payment is a risk-adjusted amount per member and is based upon the member's risk score status, as determined by CMS. The CMS premium is recognized over the contract period and reported as premium revenue. In addition, under Medicare Secondary Payer, or MSP provisions, the premium will be reduced by CMS if CMS has determined that it is secondary to other insurance coverage. STAR rating quality bonus revenues are included in the CMS Direct Premium subsidy which is reported as premium revenue and recognized over the contract period.
Revenue Adjustments. The monthly CMS Direct Premium Subsidy is based upon the members' health status, which is determined by CMS, as more fully described above under "Medicare Risk Adjustment Provisions." All health benefit organizations that contract with CMS must capture, collect, and submit the necessary diagnosis code information to CMS within prescribed deadlines. Accordingly, we collect, capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines for our Plans. We estimate changes in CMS premiums related to revenue adjustments based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. Risk scores are updated annually by CMS and reconciled to our estimated amounts by us with any adjustments recorded in premium revenue. Although such adjustments have not been considered to be material in the past, future adjustments could be material.
CMS Risk Corridor Provisions for the Part D benefits of our HMO and PPO Plans. Premiums from CMS for members of our HMO and PPO Plans with Part D benefits are subject to risk corridor provisions. The CMS risk corridor calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual Plan bid (target amount) to actual experience. Variances of more than 5% above the target amount will result in CMS making additional payments to us, and variances of more than 5% below the target amount will require us to refund to CMS a portion of the premiums we received. Risk corridor payments due to or from CMS are estimated throughout the year and are recognized as adjustments to premium revenues and due and unpaid premiums. This estimate requires us to consider factors that may not be certain, including: membership, risk scores, prescription drug events, or PDEs, and rebates. After the close of the annual Plan year, CMS reconciles actual experience to the target amount and any differences are settled between CMS and the Plan.
We establish valuation allowances based on the consideration of both positive and negative evidence. We weigh such evidence through an analysis of future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards,
taxable income in prior carryback years, and our ability to implement prudent and feasible tax planning strategies.
In our consideration of the available evidence, we provided more weight to evidence that was more objectively verifiable. In 2013, significant weight was given to our cumulative income/loss position. Our cumulative loss position at December 31, 2013 was due in large part to the discontinued operations in 2011 related to the timing of the CVS transaction, the recognition of ACO expenditures without offsetting revenues, and the recognition of the APS Healthcare goodwill impairment in 2013. While the Company is in a cumulative net loss position over the last three years from a financial reporting perspective, the Company has cumulative pre-tax income over the same period, after these adjustments are made, as shown in the following table:
On April 29, 2011 we sold our Medicare Part D business to CVS Caremark. For tax purposes, the sale was treated as a sale of the entire company followed by the repurchase of the non-Part D businesses. For tax purposes, the repurchase of the stock of the non-Part D companies was treated as an asset purchase under Internal Revenue Code section 338(h)(10). We recognized a current tax benefit of $20.4 million in 2011 primarily as a result of the significant tax losses that were recognized during the short period tax return for the period ended April 29, 2011. This resulted in the recognition of a significant portion of our gross deferred tax assets in 2011 and a corresponding deferred tax expense. For further discussion of this transaction, see Note 23-Discontinued Operations in Notes to consolidated financial statements.
We carried valuation allowances on deferred tax assets of $7.3 million at December 31, 2013 and $5.8 million at December 31, 2012, primarily related to foreign tax credit carryforwards that we acquired in connection with our purchase of APS Healthcare in 2012, deferred tax assets of APS Healthcare's Puerto Rico subsidiaries, state net operating loss carryforwards of APS Healthcare and deferred income tax assets for various states.