We lease office space for our principal executive offices in Woodland Hills, California, which is used by each of our reportable segments. The operating lease for our executive offices expires on December 31, 2017 and relates to approximately 115,488 square feet. We also lease a separate 339,417 square foot facility in Woodland Hills primarily to house the operations for a significant portion of our Western Region Operations reportable segment. The lease for this two-building facility expires December 31, 2021.
In Rancho Cordova and San Rafael, California, we lease an aggregate of approximately 611,445 square feet of office space that is used for operations in our Western Region Operations and Government Contracts reportable segments. The related leases expire at various dates ranging from February 2016 to June 2022.
The following selected financial and operating data as of and for the years ended December 31, 2015, 2014, and 2013 are derived from our audited consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K. The selected financial and operating data as of and for the years ended December 31, 2012 and 2011 are derived from our audited consolidated financial statements which are not included herein. The selected financial and operating data should be read in conjunction with “
On July 2, 2015, the Company entered into the Merger Agreement with Centene. The completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including, without limitation, certain approval, notice or similar requirements with applicable regulatory authorities. The Merger is expected to close in the first quarter of 2016, subject to the receipt of the remaining required regulatory approvals and satisfaction or waiver of other closing conditions. On November 2, 2014, we entered into a master services agreement (as subsequently amended and restated, the "Master Services Agreement") with Cognizant Healthcare Services, LLC to provide certain services to us. However, in connection with the announcement of the Merger with Centene, we agreed with Cognizant to suspend efforts toward, and defer the commencement of services under the master services agreement. See Notes 1 and 3 to our consolidated financial statements for additional information.
Our reportable segments are comprised of Western Region Operations and Government Contracts, each of which is described below. See Note 14 to our consolidated financial statements for more information regarding our reportable segments.
Our health plan services are provided under our Western Region Operations reportable segment, which includes the operations primarily conducted in California, Arizona, Oregon and Washington for our commercial, Medicare, Medicaid and dual eligibles health plans, our health and life insurance companies, our pharmaceutical services subsidiary and certain operations of our behavioral health subsidiaries. As of December 31, 2015, we had approximately 3.3 million medical members in our Western Region Operations reportable segment.
Our Government Contracts segment includes our government-sponsored managed care contract with the DoD under the TRICARE program in the North Region, our Military and Family Life Counseling, formerly Military and Family Life Consultant (“MFLC”) contract with DoD and other health care related government contracts, including the Patient Centered Community Care program (“PC3 Program”) contract we have with VA. Our PC3 Program contract has been expanded further to provide additional services for the VA in support of the Veterans Access, Choice and Accountability Act of 2014 ("VACAA"). The VACAA modification to our PC3 contract expires no later than September 30, 2017. On April 1, 2011, we began delivery of administrative services under a new Managed Care Support Contract (“T-3 contract”) for the TRICARE North Region. Under the T-3 contract for the TRICARE North Region, we provide administrative services to approximately 2.8 million Military Health System (“MHS”) eligible beneficiaries. For additional information on our T-3, MFLC and PC3 Program contracts, see Note 2 to our consolidated financial statements under the heading "Government Contracts" and "-Results of Operations-Government Contracts Reportable Segment."
Health plan services premiums generally include health maintenance organization (“HMO”), point of service (“POS”) and preferred provider organization (“PPO”) premiums from employer groups and individuals, and from Medicare recipients who have purchased supplemental benefit coverage (which premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients (which includes retroactive and retrospective premium adjustments), and revenue under Medicare risk contracts to provide care to enrolled Medicare recipients. Health plan services premiums also can include amounts for risk factor adjustments and additional premiums that we charge in some places to members who purchase our Medicare risk plans. Health plan services premiums are also impacted by the provisions of ACA, including the premium stabilization provisions and rebates associated with medical loss ratio targets. In addition to the medical loss ratio rebates, health plan services premiums are also impacted by medical loss ratio corridors and profit sharing provisions. See Note 2 to the consolidated financial statements for further information on these and other items that may impact health plan services premiums. Health plan services premiums also includes our revenues from the California Coordinated Care Initiative (the "CCI") program. For additional information on the CCI, see "-Results of Operations-Western Region Operations Reportable Segment-California Coordinated Care Initiative."
The amount of premiums we earn in a given period is driven by the rates we charge and enrollment levels. Administrative services fees and other income primarily includes revenue for administrative services such as claims processing, customer service, medical management, provider network access and other administrative services.
Other government contracts revenues, including those related to PC3 and VACAA, are recognized in the month in which the eligible beneficiaries are entitled to health care services or in the month in which the administrative services are performed or the period that coverage for services is provided. See Note 2 to our consolidated financial statements under the heading "Government Contracts" and "-Results of Operations-Government Contracts Reportable Segment" for additional information on our other government contracts such as the MFLC contract and the PC3 Program, including the VACAA.
On July 2, 2015, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Centene Corporation, a Delaware corporation ("Centene"), together with Chopin Merger Sub I, Inc. ("Merger Sub I") and Chopin Merger Sub II, Inc. ("Merger Sub II"), each a Delaware corporation and a direct, wholly-owned subsidiary of Centene. Upon the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub I will merge with and into the Company (the "Merger"), with the Company as the surviving corporation (the "Surviving Corporation") and (ii) subject to delivery of a legal opinion from counsel to the Surviving Corporation regarding certain aspects of the tax treatment of the transactions, immediately after the consummation of the Merger, the Surviving Corporation will merge with and into Merger Sub II, with Merger Sub II continuing as the surviving company.
On November 2, 2014, we entered into the Master Services Agreement with Cognizant. Under the terms of the Master Services Agreement, Cognizant agreed to, among other things, provide us with certain consulting, technology and administrative services in the following areas: claims management, membership and benefits configuration, customer contact center services, information technology, quality assurance, appeals and grievance services, and non-clinical medical management support (collectively, the "BP and IT Services"). Concurrent with executing the Master Services Agreement, we entered into the Asset Purchase Agreement with Cognizant, through which Cognizant agreed to purchase certain software assets and related intellectual property from us for $50 million (the "Asset Sale"). See Note 3 to our consolidated financial statements for additional information. However, in connection with the announcement of the Merger with Centene, the parties agreed to suspend efforts towards, and defer the occurrence of, the BPaaS Services Commencement Date. Accordingly, on July 1, 2015, the parties entered into an amendment to the Master Services Agreement (the “Cognizant Amendment”) which, among other things, extended the Pre-BPaaS Services Commencement Date Termination period, or the period of time during which the Company may terminate the Cognizant Agreement for a break-up fee of $10 million, until after the closing of the Merger. Cognizant continues to provide certain application and business processing services pursuant to existing agreements it has with the Company.
The closing of the Asset Sale was scheduled for the BPaaS Services Commencement Date. As a result, the parties’ aforementioned decision to suspend efforts towards the BPaaS Services Commencement Date has similarly deferred the Asset Sale.
31, 2014 were impacted by $74.8 million in pretax expenses related to the Cognizant Transaction. See Note 3 to our consolidated financial statements for additional information regarding the Cognizant Transaction.
In connection with the ACA, the federal government extended funds to those states that opted to expand Medicaid eligibility from a pool that included residents with incomes up to 100% of the federal poverty level ("FPL") to an expanded pool of residents with incomes up to 133% of the FPL. Both Arizona and California are amongst the states that have opted into this "Medicaid expansion." In 2015, our total Medicaid membership increased by 12.8% primarily as a result of Medicaid expansion. For additional information on our Medicaid program, see "Item 1. Business-Segment Information-Western Region Operations Segment-Medicaid and Related Products."
The ACA also required the establishment of state-run or federally facilitated "exchanges" where individuals and small groups may purchase health coverage. We currently participate as Qualified Health Plans ("QHPs") in the exchanges in California and Arizona. We currently operate in 16 of 19 exchange rating regions in California in the individual market and in all 19 exchange rating regions in Covered California for Small Business ("CCSB"). Open enrollment for the coverage year beginning January 1, 2015 began on October 1, 2014 and ended on February 15, 2015.
We have experienced significant growth in our individual commercial enrollment since open enrollment for the exchanges commenced in October 2013. However, as we move past our second enrollment period, the exchanges remain a relatively new marketplace with which we have limited experience, and a variety of factors could alter the economics and structure of our participation in the exchanges. These factors include, among others, changing economic conditions, the dynamic competitive environment on the exchanges, various legislative and legal developments and the ongoing evolution of the regulatory framework for the exchanges. If we fail to effectively adapt our business strategy and operations to these evolving regulations and markets, our financial condition and results of operations may be adversely affected. For more information on the exchanges, including the attendant risks and enrollment information, see Note 2 to our consolidated financial statements, "-Western Region Operations Reportable Segment-Western Region Operations Segment Membership," "Item 1. Business-Segment Information-Western Region Exchanges" and "Item 1A. Risk Factors."
While certain types of entities and benefits are fully or partially exempt from the health insurer fee, including, among others, government entities, certain non-profit insurers and self-funded plans, we are unable to take advantage of any significant exemptions due to our current mix of plans and product offerings. Consequently, our portion of the health insurer fee represents a higher percentage of our premium revenues than those of our competitors who have business lines that are exempt from the health insurer fee or whose non-profit status results in a reduced health insurer fee. We generally are also unable to match those competitors’ ability to support reduced premiums by virtue of making changes to distribution arrangements, decreasing spending on non-medical product features and services, or otherwise adjusting operating costs and reducing general and administrative expenses, which may have an adverse effect on our profitability and our ability to compete effectively with these competitors. For more information on this and other ACA related fees, including the associated risks, see Note 2 to our consolidated financial statements under the heading "Accounting for Certain Provisions of the ACA" and "Item 1A. Risk Factors."
The permanent risk adjustment program is applicable to plans in the individual and small group markets that are subject to the ACA's market reforms. This risk adjustment program became effective at the beginning of 2014 and has and will continue to shape the economics of health care coverage both within and outside the exchanges. These risk adjustment provisions are intended to effectively transfer funds from health plans with relatively lower risk enrollees to plans with relatively higher risk enrollees to help protect against the consequences of adverse selection. In addition to these permanent risk adjustment provisions, the ACA implements temporary reinsurance and risk corridors programs, which seek to ease the transition into the post-ACA market by helping to stabilize rates and protect against rate uncertainty in the initial years of the ACA.
We have made and are continuing to make significant efforts to design and implement a cohesive strategy with respect to the exchanges and these premium stabilization programs, but these programs, among other things, are subject to risks inherent in estimated calculations, untested initiatives and government programs, and the relevant legislative and regulatory framework for the exchanges and the 3Rs remains subject to change and interpretation over time. Whether due to legislative or regulatory uncertainty or otherwise, if these premium stabilization programs prove ineffective in mitigating our financial risks, including but not limited to adverse selection risk, if we experience significant payment delays with respect to any 3R receivables, including without limitation, our risk corridor receivables, or we are unable to successfully adapt our strategy to these or any other future changes in our markets, our financial condition, cash flows, liquidity and results of operations may be materially adversely affected. See Note 2 to our consolidated financial statements, "-Critical Accounting Estimates-Accounting for Certain Provisions of the ACA" and "Item 1A. Risk Factors" for additional information on these premium stabilization programs or "3Rs".
Under the ACA, commercial health plans with medical loss ratios ("MLR") on fully insured products, as calculated as set forth in the ACA, that fall below certain targets are required to rebate ratable portions of their
We and other health insurance companies continue to face uncertainty and execution risk due to the multiple, complex ACA implementations that were and continue to be required in abbreviated time frames in new markets. Additionally, in many cases, our operational and strategic initiatives have been implemented in evolving regulatory environments and without the benefit of established market data. In addition, the limited operating experience in these relatively new marketplaces for insurers and, in certain cases, providers and consumers, has fostered a dynamic marketplace that may require us to continuously adjust our operating and strategic initiatives over time, and there is no assurance that insurers, including us, will be able to successfully make these adjustments on an ongoing basis. Our execution risk encapsulates, among other things, our simultaneous participation in the exchanges, Medicaid expansion and CCI. These initiatives involved the incorporation of new and expanded populations and, among other things, have required that we restructure our provider network in response, and will require us to remain diligent in monitoring the market to, among other things, effectively and efficiently adapt to our dynamic environment. Any delay or failure by us to successfully execute our operational and strategic initiatives with respect to health care reform or otherwise appropriately react to the legislation, implementing regulations, actions of our competitors and the changing marketplace could result in operational disruptions, disputes with our providers or members, increased exposure to litigation, regulatory issues, damage to our existing or potential member relationships or other adverse consequences that could have an adverse impact on our business, financial condition, cash flows and results of operations.
In the year ended December 31, 2015, we reported net income of $185.7 million or $2.37 per diluted share as compared to net income of $145.6 million or $1.80 per diluted share, for the same period in 2014.
Total revenues for the year ended December 31, 2015 increased by approximately 16.0 percent to $16.2 billion from the same period in 2014.
Western Region Operations segment pretax income increased to $547.4 million in 2015 compared to $315.6 million in 2014.
Net cash provided by operating activities totaled $431.1 million for the year ended December 31, 2015 compared to $776.0 million for the same period in 2014.
Fees imposed under the ACA, including $233.0 million for the health insurer fee and $85.5 million in other ACA fees. See Note 2 to our consolidated financial statements under the heading "Accounting for Certain Provisions of the ACA" for additional information.
$118.2 million in pretax expenses primarily related to the Cognizant Transaction. This amount includes $12.2 million in costs related to our pending Merger with Centene. See "Overview-Cognizant Transaction" for additional information regarding the Cognizant Transaction.
The table below and the discussion that follows summarize our results of operations for the years ended December 31, 2015, 2014 and 2013.
Our G&A expenses increased by $263.8 million, or 17.0%, in the year ended December 31, 2015, primarily due to increases in premium taxes and increases in the health insurer fee which is based on the prior calendar year premiums. The G&A expenses for the year ended December 31, 2015 were also impacted by expenses related to the Cognizant Transaction as well as our pending Merger with Centene (see "-Overview-Cognizant Transaction," and Note 3 to our consolidated financial statements for additional information about the Cognizant Transaction and "-Overview-Centene Transaction" for additional information about our pending Merger). See "-Overview-Health Care Reform Legislation and Implementation" for more information regarding the health insurer fee.
Our government contracts revenues increased by 5.5 percent in 2014 to $604.0 million from $572.3 million in 2013. Our government contracts costs increased by 6.7 percent in 2014 to $536.6 million from $502.9 million in 2013. The increases in our government contracts revenues and costs were primarily due to services provided for the PC3 Program.
Our general and administrative (G&A) expenses increased by $468.7 million, or 43 percent, in the year ended December 31, 2014, primarily due to ACA related fees of $97.6 million and the $141.4 million health insurer fee. Our G&A expenses in 2014 also included $96.8 million of expenses primarily related to the Cognizant Transaction.
Our income tax expense and the effective income tax rate for the years ended December 31, 2015, 2014 and 2013 are as follows:
Our Western Region Operations segment includes the operations of our commercial, Medicare, Medicaid and dual eligibles health plans, the operations of our health and life insurance companies primarily in California, Arizona, Oregon and Washington, and our pharmaceutical services subsidiary and certain operations of our behavioral health subsidiaries in several states including Arizona, California, Oregon and Washington.
Total Western Region Operations enrollment at December 31, 2015 was approximately 3.3 million members, an increase of 4.5 percent compared with enrollment at December 31, 2014. Total enrollment in our California health plan increased by 8.0 percent to approximately 3.0 million members from December 31, 2014 to December 31, 2015.
Western Region Operations commercial enrollment decreased by 6.0 percent from December 31, 2014 to approximately 1.1 million members at December 31, 2015, primarily due to membership decreases in our Arizona and Northwest individual lines of businesses.
Enrollment in our large group accounts decreased by 6.8 percent or 37,000 members to 510,000 members, from December 31, 2014 to December 31, 2015, primarily due to competitive pricing in California. Enrollment in our small group business in our Western Region Operations segment decreased by 4.2 percent, from approximately 313,000 members at December 31, 2014 to approximately 300,000 members at December 31, 2015. Enrollment in our individual business in our Western Region Operations segment decreased by 6.6 percent, from approximately 332,000 members at December 31, 2014 to approximately 310,000 members at December 31, 2015 primarily due to declines in Arizona as a result of competitive pricing on the individual exchange. As of December 31, 2015, tailored network products accounted for 50.5 percent of our Western Region Operations commercial enrollment compared with 49.8 percent at December 31, 2014. For additional information on our tailored network products, see "Item 1. Business-Segment Information-Western Region Operations Segment-Managed Health Care Operations."
Western Region Operations commercial enrollment increased by 9.9 percent from December 31, 2013 to approximately 1.2 million members at December 31, 2014, primarily due to an increase in our individual business as a
Enrollment in our large group accounts decreased by 16.0 percent or 104,000 members to 547,000 members, from December 31, 2013 to December 31, 2014, primarily due to increasingly competitive markets in California. Enrollment in our small group business in our Western Region Operations segment decreased by 1.9 percent, from approximately 319,000 members at December 31, 2013 to approximately 313,000 members at December 31, 2014. Enrollment in our individual business in our Western Region Operations segment increased by 188.7 percent, from approximately 115,000 members at December 31, 2013 to approximately 332,000 members at December 31, 2014. This increase was primarily due to an increase in our individual business as a result of new individual members from the ACA exchanges in California and Arizona. As of December 31, 2014, tailored network products accounted for 49.8 percent of our Western Region Operations commercial enrollment compared with 37.5 percent at December 31, 2013.
Enrollment in our Medicare Advantage plans in our Western Region Operations at December 31, 2014 was 275,000 members, an increase of 12.7 percent compared with December 31, 2013. The increase in Medicare Advantage membership was due to gains of approximately 20,000 members in California, 8,000 members in the Northwest, and 3,000 members in Arizona.
Medicaid enrollment in California increased by 482,000 members or 43.3 percent to 1,595,000 members at December 31, 2014 compared with 1,113,000 members at December 31, 2013, primarily as a result of new members added from the expansion of Medicaid eligibility under the ACA to all individuals with incomes up to 133 percent of the Federal Poverty Level. As of December 31, 2014, we had approximately 81,000 Medicaid members in Arizona compared with approximately 4,000 members at December 31, 2013.
As of December 31, 2014, approximately 849,000 of our Medi-Cal members resided in Los Angeles County, representing approximately 53 percent of our Medi-Cal membership.
In participating counties, CCI established a voluntary “dual eligibles demonstration,” also referred to as the “Cal MediConnect” program, to coordinate medical, behavioral health, long-term institutional, and home- and community-based services for dual eligibles through a single health plan, and will require that all Medi-Cal beneficiaries in participating counties join a Medi-Cal managed care health plan to receive their Medi-Cal benefits, including LTSS. CCI is being implemented in seven counties, including Los Angeles and San Diego counties. On April 4, 2012, DHCS selected us to participate in the dual eligibles demonstration for both Los Angeles and San Diego counties. In December 2013, Health Net Community Solutions, Inc., our wholly owned subsidiary, entered into a three-way agreement with DHCS and CMS, which was subsequently amended on January 13, 2014 (the “Cal MediConnect Contract”). Among other things, under the Cal MediConnect Contract we receive prospective blended capitated payments to provide coverage for dual eligibles in Los Angeles and San Diego counties. These blended capitated payments are determined based on our mix of membership.
Active enrollment in Los Angeles and San Diego counties for the dual eligibles demonstrations commenced on April 1, 2014, and is scheduled to continue through the duration of the demonstration, currently expected to conclude at the end of 2017. During the active enrollment period, dual eligibles in Los Angeles County are able to either choose among us, the local health plan initiative, or one of three other health plans for benefits under the dual eligibles demonstration. Similarly, dual eligibles in San Diego County are able to enroll in one of four health plan options, including us. Beginning on May 1, 2014 in San Diego County and on July 1, 2014 in Los Angeles County, dual eligibles who had not selected a health plan were automatically enrolled in a health plan during a 12 month period that we referred to as “passive enrollment.” Dual eligibles also may choose to “opt out” of the demonstration at any time. Dual eligibles that opt out of the demonstration can receive their Medicare benefits through fee-for-service Medicare or a Medicare Advantage plan, but will receive Medi-Cal benefits through a managed care health plan as required under CCI. For the remainder of the demonstration, all dual eligibles, including newly eligible individuals, individuals who have previously selected or been passively enrolled in a health plan and individuals who have previously opted out of the demonstration, have the continuing option to select from the Cal MediConnect health plans available in their county
or "opt out" of the demonstration. As of December 31, 2015, we were administering benefits to 42% of the Cal MediConnect enrollment in Los Angeles County and 19% of the enrollment in San Diego County.
The financial performance of the Cal MediConnect Contract is included in the calculation of the settlement account that was established pursuant to the terms of the settlement agreement entered into by DHCS, HNCS and Health Net of California, Inc. on November 2, 2012, which is further discussed in Note 2 to our consolidated financial statements under the heading "Health Plan Services Revenue Recognition.”
Health Net’s participation in CCI, and the dual eligibles demonstration in particular, continues to represent a business opportunity for us, but is subject to a number of risks inherent in untested health care initiatives, particularly those that involve new populations with limited cost experience. Moreover, CCI and the dual eligibles demonstration program in particular, is a model of providing health care that is new to beneficiaries, providers, regulatory authorities and health plans in the state of California, and involves risks generally associated with government programs. For example, larger than expected numbers of dual eligibles have opted out of, and continue to dis-enroll from, the demonstration, which has impacted and continues to impact our expected total enrollment for the demonstration. We have worked with DHCS and others to implement outreach and other programs designed to increase our Cal MediConnect enrollment, but if enrollment continues below expectations over the course of the demonstration, our overall profitability with respect to our participation in CCI may be lower than originally anticipated. Due to these and other risks associated with CCI, including, without limitation, that the dual eligibles demonstration is a pilot program subject to changing legislation and state budgetary concerns, there can be no assurance that the business opportunity presented by the CCI, including the dual eligibles demonstration, will prove to be successful. Our failure to successfully adapt to the requirements of the CCI could have an adverse effect on our business, financial condition and results of operation. For additional information regarding our participation in the duals program see “Item 1. Business-Segment Information-Western Region Operations Segment-Dual Eligibles and the California Coordinated Care Initiative" and for a discussion of additional risks related to the duals program, see “Item 1A. Risk Factors-Our participation in the dual eligibles demonstration portion of the California Coordinated Care Initiative in Los Angeles and San Diego Counties may prove to be unsuccessful for a number of reasons.”
Per member per month ("PMPM") is calculated based on member months.
Total revenues in our Western Region Operations segment for the year ended December 31, 2015 increased 16.5 percent to $15.6 billion compared to the same period in 2014 primarily due to an increase in our premium revenues in our health plans.
Investment income in our Western Region Operations segment increased to $55.5 million for the year ended December 31, 2015 from $45.2 million for the same period in 2014 due to higher investments-available-for-sale balances and higher interest rate environment. Investment income for 2015 reflects $2.0 million of other-than-temporary impairment of certain energy and oil sector investments.
Administrative services fees and other income in our Western Region Operations segment increased by $8.0 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The administrative services fees and other income for the year ended December 31, 2014 was negative due to the reversal of certain ACA administrative fee income booked in the first quarter of 2014 and the fourth quarter of 2013 as discussed in Note 2 to the consolidated financial statements under the heading "Accounting for Certain Provisions of the ACA-Section 1202 of the ACA."
Health plan services expenses in our Western Region Operations segment increased 15.3 percent to approximately $13.0 billion for the year ended December 31, 2015 from approximately $11.3 billion for the year ended December 31, 2014, primarily due to enrollment growth from Medicaid expansion.
Our Western Region Operations premium PMPM increased by 4.6 percent to $402 for the year ended December 31, 2015 compared to an increase of 9.8 percent to $384 for the same period in 2014.
The change in the premium yields and health care cost trends reflect the ongoing product mix change associated with our membership growth.
Interest expense in our Western Region Operations segment increased to $33.3 million for the year ended December 31, 2015 from $31.4 million for the year ended December 31, 2014 primarily due to higher outstanding revolving credit facility balances.
As of December 31, 2014, we accrued $200.6 million for an MLR rebate payable to DHCS in connection with Medicaid adult expansion members and accrued $24.7 million, net of $2.3 million receivable, for excess profit sharing payable to the state of Arizona under our Arizona Medicaid contract. Accordingly, Medicaid premium revenue was reduced by $225.3 million for the year ended December 31, 2014 related to MLR rebates.
The Western Region Operations health plan services MCR was 84.6 percent for the year ended December 31, 2014 compared with 85.6 percent for the year ended December 31, 2013.
Total general and administrative expense in our Western Region Operations segment was $1.5 billion for the year ended December 31, 2014 compared with $1.1 billion for the year ended December 31, 2013. The total G&A expense ratio was 10.9 percent for the year ended December 31, 2014 compared with 10.3 percent for the year ended December 31, 2013. The increase in our total general and administrative expenses for the year ended December 31,
2014 was primarily due to increases in premium taxes and ACA-related fees, including the health insurer fee. Such increases in premium taxes and ACA-related fees increased the total G&A expense ratio by approximately 200 basis points for the year ended December 31, 2014 as compared to the prior year.
Selling expense in our Western Region Operations segment was $262.3 million for the year ended December 31, 2014 compared with $239.4 million for the year ended December 31, 2013. The selling costs ratio was 2.0 percent for the year ended December 31, 2014 compared with 2.3 percent for the year ended December 31, 2013. This decrease in our selling costs ratio was primarily due to the change in the mix of our business from the impact of ACA and state exchanges.
Under the T-3 contract for the TRICARE North Region, we provided administrative services to approximately 2.8 million MHS eligible beneficiaries as of December 31, 2015. For a description of the T-3 contract, see "-Overview-How We Measure Our Profitability,” and Note 2 to our consolidated financial statements under the heading “Government Contracts” for additional information.
Government contracts revenues increased by $24.5 million, or 4.1 percent, for the year ended December 31, 2015 as compared to the same period in 2014. Government contracts costs increased by $68.6 million or 12.8 percent for the year ended December 31, 2015 as compared to the same period in 2014. The decrease in government contract segment income for the year ended December 31, 2015 was primarily due to the increased costs from ramp-up services during VA's expedited implementation of the VACAA modification of the PC3 Program combined with extension option year pricing and costs on the T-3 contract.
Our operating results in our Corporate/Other segment for the year ended December 31, 2014 were impacted by an $88.5 million pretax asset impairment primarily related to our assets held for sale in connection with the Cognizant Transaction. Our operating results in our Corporate/Other segment for the year ended December 31, 2014 were also impacted by a loss on the stock of one of our subsidiaries that created a tax benefit of $73.7 million, net of adjustments to our reserve for uncertain tax benefits. See Note 11 to our consolidated financial statements for additional information regarding this tax benefit.
Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from and amounts payable to state and federal governments and agencies. For example, our receivables from DHCS and AHCCCS related to our California and Arizona Medicaid businesses totaled $754.5 million as of December 31, 2015 and $801.7 million as of December 31, 2014. As of December 31, 2015, we had amounts payable to DHCS of $607 million related to premium overpayments that we received for the California Medi-Cal business. The receivable from CMS related to our Medicare business was $124.8 million as of December 31, 2015 and $119.1 million as of December 31, 2014. Our Government Contracts receivable, including receivables from the DoD relating to our current and prior contracts for the TRICARE North Region, was $267.7 million and $150.5 million as of December 31, 2015 and December 31, 2014, respectively. The timing of collection of such receivables from the federal and state governments and agencies is impacted by government audits as well as government appropriations, allocation and funding processes, among other things, and can extend for periods beyond a year. Our cash flow from operating activities is also impacted by the timing of payments on our amounts payable to state governments and agencies as a result of the Medicaid expansion. For example, our payable to DHCS related to medical loss ratio rebates was $403 million as of December 31, 2015.
This payment structure would be consistent with the Consolidated and Further Continuing Appropriations Act, 2015, which is also referred to as the “2015 Budget Act" or "Cromnibus." Additionally, HHS has stated that in the event of a shortfall between the amounts collected from issuers and the payments to issuers, HHS will use other sources of funding for the risk corridors payments, subject to the availability of appropriations. This use of alternative funding is consistent with general principles of federal program budgeting and appropriations. Notwithstanding any restrictions imposed by the 2015 Budget Act, which restrictions were repeated in identical language in the 2016 Budget Act, HHS
has retained the right and ability to source risk corridors program payments from user fees under both the risk corridors program and other programs.
We have made and are continuing to make significant efforts to design and implement a cohesive strategy with respect to the exchanges and these premium stabilization programs, but these programs, among other things, are subject to risks inherent in untested initiatives and government programs, and the relevant legislative and regulatory framework for the exchanges and the 3Rs remains subject to change and interpretation over time. Whether due to legislative or regulatory uncertainty or otherwise, if these premium stabilization programs prove ineffective in mitigating our financial risks, including but not limited to adverse selection risk, if we experience significant payment delays with respect to any 3R receivables, including without limitation, our risk corridor receivables, or if we are unable to successfully adapt our strategy to these or any other future changes in our markets, our financial condition, cash flows, liquidity and results of operations may be materially adversely affected.
Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by investing in a diversified mix of high-quality fixed-income securities, which are largely investment grade, while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining an expected total return on invested funds.
Our investment holdings are currently primarily comprised of investment grade securities with an average rating of “A+” and “A1” as rated by S&P and/or Moody’s, respectively. At this time, there is no indication of default on interest and/or principal payments under our holdings. We have the ability and current intent to hold to recovery all securities with an unrealized loss position. As of December 31, 2015, our investment portfolio includes $555.6 million, or 24.7% of our portfolio holdings, of asset-backed (including mortgage-backed) securities. The majority of our mortgage-backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our entire asset-backed securities is AA+/Aa1. However, any failure by Fannie Mae or Freddie Mac to honor the obligations under the securities they have issued or guaranteed could cause a significant decline in the value or cash flow of our mortgage-backed securities. As of December 31, 2015, our investment portfolio also included $936.5 million, or 41.7% of our portfolio holdings, of obligations of state and other political subdivisions and $722 million, or 32.1% of our portfolio holdings, of corporate debt securities. We had gross unrealized losses of $24.2 million as of December 31, 2015, and $9.8 million as of December 31, 2014. Included in the gross unrealized losses as of December 31, 2015 and December 31, 2014 are $6.6 million and $0.9 million, respectively, related to noncurrent investments available-for-sale. We believe that these impairments are temporary and do not believe that it is likely that we will be required to further impair any other securities in an unrealized loss position before recovery of its amortized cost basis. Given the current market conditions with historic low oil prices and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional other-than-temporary impairments, which may be material, may be recorded in future periods. Impairment of $2.0 million was recognized during the year ended December 31, 2015 (see Note 4 to the consolidated audited financial statements). No impairment was recognized during the years ended December 31, 2014 or 2013.
Net cash provided by operating activities decreased by $344.9 million for the year ended December 31, 2015 compared to the same period in 2014. This decrease was primarily due to more efficient claims processing following the completion of our migration to a single claims payment platform.
Net cash provided by operating activities increased by $680.2 million for the year ended December 31, 2014 compared to the same period in 2013. This increase was primarily due to the growth in our business related to the ACA and state exchange programs and Medicaid expansion, all of which drove an increase in reserves for claims and other settlements.
Net cash used in investing activities increased by $361.8 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. This increase was primarily due to a $356.1 million increase in net purchases of available-for-sale investments.
through items related to our Medicaid program, including inter-governmental transfers, and the ACA premium stabilization program. See Note 2 to our consolidated financial statements for more information.
Our debt-to-total capital ratio was 27.2 percent as of December 31, 2015 compared with 22.6 percent as of December 31, 2014. This increase is primarily due to an increase in borrowings under our revolving credit facility.
On May 2, 2011, our Board of Directors authorized our stock repurchase program pursuant to which a total of $300 million of our outstanding common stock could be repurchased. On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program and on December 16, 2014, our Board of Directors approved another increase to our stock repurchase program. This latest increase, when taken together with the remaining authorization at that time, brought our total authorization up to $400.0 million.
In October 2011, we entered into a $600 million unsecured revolving credit facility due in October 2016, which includes a $400 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swing line loans (which sublimits may be increased in connection with any increase in the credit facility described below). In addition, we have the ability from time to time to increase the credit facility by up to an additional $200 million in the aggregate, subject to the receipt of additional commitments. As of December 31, 2015, $285.0 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $307.9 million (see "-Letters of Credit" below). As of February 23, 2016, we had $285.0 million in borrowings outstanding under our revolving credit facility.
The pending Merger with Centene, if completed, would constitute a change of control under the terms of our revolving credit facility, which would constitute an event of default thereunder. Accordingly, if the pending Merger with Centene is completed prior to the due date of the facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all outstanding amounts thereunder and replace the existing letters of credit discussed below. See "-Overview-Centene Transaction" for additional information regarding our pending Merger with Centene.
As of December 31, 2015, we were in compliance with all covenants under our revolving credit facility.
We have issued $400 million in aggregate principal amount of 6.375% Senior Notes due 2017 (the “Senior Notes”). The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of December 31, 2015, we were in compliance with all of the covenants under the indenture governing the Senior Notes.
the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points
On August 3, 2015, we commenced a solicitation with respect to the Senior Notes to amend the defined term "Change of Control" in the Senior Notes to provide that the pending Merger with Centene will not constitute a "Change of Control." The required consents were received by August 12, 2015, and we executed a supplement to the indenture governing the Senior Notes effectuating the amendment. Accordingly, no Change of Control Offer (as defined in the Senior Notes) to repurchase the Senior Notes will be effectuated in connection with the completion of the Merger. A cash payment of $2.50 per $1,000 in aggregate principal amount of Senior Notes was offered for a validly delivered consent. We conducted the consent solicitation at the request of Centene pursuant to a covenant contained in the Merger Agreement. Centene was responsible for all liabilities we incurred in connection with the consent solicitation, including but not limited to all consent fees payable to holders of the Senior Notes. See "-Overview-Centene Transaction" for additional information regarding our pending Merger with Centene.
Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable state laws and regulations, and must have adequate reserves for claims. As necessary, we make contributions to our subsidiaries to meet risk-based capital ("RBC") or other statutory capital requirements under state laws and regulations. Our regulated subsidiaries had estimated aggregate statutory capital and surplus or net worth of approximately $1.8 billion as of December 31, 2015. The estimated statutory capital and surplus necessary to satisfy regulatory requirements was approximately $467.3 million in the aggregate.
As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions
Our significant contractual obligations as of December 31, 2015 are summarized below for the years ending December 31:
We lease office space under various operating leases. Certain leases may be canceled with substantial penalties. See “Item 2. Properties” for additional information regarding our leases.
We have entered into an agreement with International Business Machines Corporation (“IBM”) to outsource our IT infrastructure management services including data center services, IT security management and help desk support. In 2015, we extended the agreement, and as of December 31, 2015, the remaining term of this contract was less than one year, and total estimated future commitments under the agreement were approximately $50.6 million. We have entered into an agreement with Cognizant to outsource our software applications development and management activities to Cognizant. Under the terms of the agreement, Cognizant will, among other things, provide us with application development, testing and monitoring services, application maintenance and support services, project management services and cross functional services. This agreement has subsequently been extended, and as of December 31, 2015,
We have excluded from the table above amounts already recorded in our current liabilities on our consolidated balance sheet as of December 31, 2015. We have also excluded from the table above various contracts we have entered into with our health care providers, health care facilities, the federal government and other contracts that we have entered into for the purpose of providing health care services. We have excluded those contracts that allow for cancellation without significant penalty, obligations that are contingent upon achieving certain goals and contracts for goods and services that are fulfilled by vendors within a short time horizon and within the normal course of business.
The future contractual obligations in the contractual obligations table are estimated based on information currently available. The timing of and the actual payment amounts may differ based on actual events.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Principal areas requiring the use of estimates include revenue recognition, health care costs, including IBNR amounts, reserves for contingent liabilities, amounts receivable or payable under government contracts, goodwill and other intangible assets, recoverability of long-lived assets and investments, income taxes and accounting for certain provisions of the ACA. Accordingly, we consider accounting policies on these areas to be critical in preparing our consolidated financial statements. A material change in any one of these amounts may have a material impact on our consolidated results of operations and financial condition. A more detailed description of the significant accounting policies that we use in preparing our financial statements is included in Note 2 to our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K.
Under the ACA, commercial health plans with MLRs on fully insured products, as calculated as set forth in the ACA, that fall below certain targets are required to rebate ratable portions of their premiums annually. We estimate such rebates based on calculation methodology set forth in the ACA. In addition to the rebates for the commercial health plans under the ACA, there is also a medical loss ratio corridor for the DHCS adult Medicaid expansion members under the state Medicaid program in California. If our MLR for this population is below 85%, then we would have to pay DHCS a rebate. If the MLR is above 95%, then DHCS would have to pay us additional premium. Our Medicaid contract with the state of Arizona contains profit-sharing or profit ceiling provisions. If our Arizona Medicaid profits were in excess of the amount we are allowed to fully retain, we record an estimated profit corridor payable balance.
Reserves for claims and other settlements include reserves for claims (IBNR claims and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Western Region Operations reporting segment. Because reserves for claims include various actuarially developed estimates, our actual health care services expenses may be more or less than our previously developed estimates. As of December 31, 2015, 75% of reserves for claims and other settlements were attributed to claims reserves. See Note 15 to our consolidated financial statements for a reconciliation of changes in the reserve for claims and material prior period reserve development.
For the year ended December 31, 2015, we had $107.4 million in favorable reserve developments related to prior years. This reserve development for the year ended December 31, 2015 consisted of $29.7 million in favorable prior year development and a release of $77.7 million of the provision for adverse deviation held at December 31, 2014. We believe that the $29.7 million favorable development for the year ended December 31, 2015 was primarily due to the growth of the new Medicaid expansion population in 2014. For the year ended December 31, 2014, we had $14.6 million in net favorable reserve developments related to prior years. This reserve development for the year ended December 31, 2014 consisted of $36.6 million in unfavorable prior year development primarily due to the existence of moderately adverse conditions and a release of $51.2 million of the provision for adverse deviation held at December 31, 2013. We believe that the $36.6 million unfavorable development for the year ended December 31, 2014 was primarily due to unanticipated benefit utilization in our commercial business arising from dates of service in the fourth quarter of 2013 as a result of an uncertain environment related to the ACA. The reserve developments related to prior years for the years ended December 31, 2015 and 2014, when considered together with the provision for adverse deviation recorded as of December 31, 2015 and 2014, respectively, did not have a material impact on our operating results or financial condition.
cost of maintaining the contracts. Losses, if any, are recognized in the period the losses are determined and are classified as health plan services. As of December 31, 2015, and 2014 we held no premium deficiency reserves.
Starting in 2014, our critical accounting estimates have been and will continue to be impacted as a result of the implementation of certain provisions of the ACA, including three premium stabilization provisions ("3Rs"): permanent risk adjustment, temporary risk corridor and transitional reinsurance as described below. See Note 2, under the heading "Accounting for Certain Provisions of the ACA," to our consolidated financial statements for additional information.
Member Premium-We receive a monthly premium from members. The member premium, which is fixed for the entire plan year, is recognized evenly over the contract period and reported as part of health plan services premium revenue.
Cost Sharing Subsidy-For qualifying low-income members, HHS will reimburse us, on the member’s behalf, some or all of a member’s cost sharing amounts (e.g., deductible, co-pay/coinsurance). The amount paid for the member by HHS is dependent on the member’s income level in relation to the Federal Poverty Level. The Cost Sharing Subsidy offsets health care costs when incurred. We record a liability if the Cost Sharing Subsidy is paid in advance or a receivable if incurred health care costs exceed the Cost Sharing Subsidy received to date.
Our accounting estimates are impacted as a result of the provisions of the ACA, including the 3Rs. The substantial influx of previously uninsured individuals into the new health insurance exchanges under the ACA could make it more difficult for health insurers, including us, to establish pricing accurately, at least during the early years of the exchanges. The 3Rs are intended to mitigate some of the risks around pricing and lack of information surrounding the previously uninsured. Estimating the amounts for the 3Rs involve complex calculations, assumptions and judgments. Our estimation process relies in part on data provided by participating insurers, including us, and also requires interpretation and application of existing laws, regulations and guidance, including, among others, those related to the treatment of income taxes in calculating risk corridors as well as the timing and source of program funding. The interpretation and application of certain laws, regulations and guidance may impact the estimation process, which impact may be material. Accordingly, we will experience premium adjustments to our health plan services premium revenues and health plan services expenses based on changes to our estimated amounts related to the 3Rs until we
Reinsurance-The transitional reinsurance program requires us to make reinsurance contributions for calendar years 2014 through 2016 to a state or HHS established reinsurance entity based on a national contribution rate per covered member as determined by HHS. While all commercial medical plans, including self-funded plans, are required to fund the reinsurance entity, only fully-insured non-grandfathered plans in the individual commercial market will be eligible for recoveries if individual claims exceed a specified threshold. Accordingly, we account for transitional reinsurance contributions associated with all commercial medical health plans other than non-grandfathered individual plans as an assessment in general and administrative expenses in our consolidated statement of income. We account for contributions made by individual commercial plans which are subject to recoveries as contra-health plan services premium revenue, and we account for any recoveries as contra-health plan services expense in our consolidated statements of income. Reinsurance assessments and recoveries are classified as current or long-term receivable or payable based on the timing of expected settlement.
Risk Adjustment-The risk adjustment provision applies to individual and small group business both within and outside the exchange and requires measurement of the relative health status risk of each insurer’s pool of insured enrollees in a given market. The risk adjustment provision then operates to transfer funds from insurers whose pools of insured enrollees have a lower-than-average risk scores to those insurers whose pools have greater-than-average risk scores. Our estimate for the risk adjustment incorporates our risk scores by state and market relative to the market average using data provided by the participating insurers and available information about the HHS model. This information is consistent with our knowledge and understanding of market conditions.
As part of our ongoing estimation process, we consider information as it becomes available at interim dates along with our actuarially determined expectations, and we update our estimates incorporating such information as appropriate.
Under the T-3 contract for the TRICARE North Region, we provide various types of administrative services, including: provider network management, referral management, medical management, disease management, enrollment, customer service, clinical support service, and claims processing. We also provided assistance in the transition into the T-3 contract, and will provide assistance in any transition out of the T-3 contract. These services are structured as cost reimbursement arrangements for health care costs plus administrative fees earned in the form of fixed prices, fixed unit prices, and contingent fees and payments based on various incentives and penalties.
Goodwill and other intangible assets arise primarily as a result of various business acquisitions. Goodwill consists of the excess of the cost of acquisitions over the tangible and intangible assets acquired and liabilities assumed. Other
We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events or changes in circumstances indicate that we might not recover the carrying value of these assets for each of our reporting units. We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2015 for our Western Region Operations reporting unit, and no impairment was identified. We performed a two-step impairment test to determine the existence of impairment and the amount of the impairment. In the first step, we compared the fair values to the related carrying values and concluded that the carrying value of the Western Region Operations was not impaired. As a result, the second step was not performed. We also re-evaluated the useful lives of our other intangible assets and determined that the current estimated useful lives were properly reflected.
Due to the many variables inherent in the estimation of a business’s fair value and the relative size of recorded goodwill, changes in assumptions may have a material effect on the results of our impairment test. The discounted cash flows and market participant valuations (and the resulting fair value estimates of the Western Region Operations reporting unit) are sensitive to changes in assumptions including, among others, certain valuation and market assumptions. Changes to any of these assumptions could cause the fair value of our Western Region Operations reporting unit to be below its carrying value.
sale and the Cognizant Transaction. In addition, we recorded an asset impairment of $1.3 million during the year ended December 31, 2014 for internally developed software. In the year ended December 31, 2015, we recorded $1.9 million in asset impairments for additional property and equipment classified as assets held for sale.
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. We establish a valuation allowance in accordance with the provisions of the Income Taxes Topic of the Financial Accounting Standards Board ("FASB") codification. We continually review the adequacy of the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of both positive and negative factors indicate that it is more likely than not that the benefits will be realized.