In Rancho Cordova and San Rafael, California, we lease an aggregate of approximately 592,650 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, 2014, 2013, and 2012 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, 2011 and 2010 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 “
We are a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Our mission is to help people be healthy, secure and comfortable. We provide and administer health benefits to approximately 6.0 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as "Part D"), Medicaid, dual eligible, U.S. Department of Defense (“Department of Defense” or “DoD”), including TRICARE, and U.S. Department of Veterans Affairs ("VA") programs. We also offer behavioral health, substance abuse and employee assistance programs, managed health care products related to prescription drugs, managed health care product coordination for multi-region employers, and administrative services for medical groups and self-funded benefits programs.
Our Government Contracts segment includes our government-sponsored managed care contract with the DoD under the TRICARE program in the North Region and other health care related government contracts, including the Patient Centered Community Care program (“PC3 Program”) contract we have with VA. 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. In addition, we also provide behavioral health services to military families under the Department of Defense Military and Family Life Counseling, formerly Military and Family Life Consultant (“MFLC”) contract, which is also included in our Government Contracts segment. See Note 2 to our consolidated financial statements under the heading “Government Contracts” for additional information on the T-3, MFLC and PC3 Program contracts.
On November 2, 2014, we signed a definitive master services agreement with Cognizant Healthcare Services, LLC, a wholly owned subsidiary of Cognizant Technology Solutions Corporation ("Cognizant") to provide certain services to us. In connection with this agreement, we have also entered into an asset purchase agreement pursuant to which we have agreed to sell certain software assets and related intellectual property we own to Cognizant. The transaction, including the related asset sale (the "Cognizant Transaction"), is subject to receipt of required regulatory approvals. In connection with the Cognizant Transaction, we reviewed our reportable segments and determined that there were no changes to our reportable segments. See Note 3 to our consolidated financial statements under the heading “Assets Held for Sale” for additional information on the Cognizant Transaction.
Bermuda to United, and includes the acquisition by United of membership renewal rights for certain health care business conducted by our subsidiary, Health Net Life Insurance Company, in the states of Connecticut and New Jersey. As of December 31, 2012, we had substantially completed the transition and run-out of our divested businesses. See Note 2 to our consolidated financial statements under the heading “Divested Operations and Services” and Notes 3 and 14 to our consolidated financial statements for additional information regarding the Northeast Sale, the sale of our Medicare PDP business, and our reportable segments.
We measure our Western Region Operations reportable segment profitability based on pretax income, which is calculated as health plan services premiums and administrative services fees and other income less health plan services expense and G&A and other net expenses, including selling expenses. See “-Results of Operations-Western Region Operations Reportable Segment-Western Region Operations Segment Results” for a calculation of pretax income.
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. Medicare revenues 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 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."
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. 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
The ACA transformed the U.S. health care system through a series of complex initiatives. Due in part to the magnitude, scope and complexity of these initiatives, as well as their ongoing implementation, the ultimate impact of the ACA on us remains difficult to predict. The ACA has provided growth opportunities for health insurers, including us, but also introduces new risks and uncertainties, and required changes in the way products are designed, underwritten, priced, distributed and administered. While we have experienced significant growth in our revenues and membership in certain products as a result of the ACA, the measures initiated by the ACA and the associated preparation for and implementation of these measures have had, and will continue to have, an adverse impact on, among other things, the costs of operating our business, and could materially adversely affect our business, cash flows, financial condition and results of operations.
We believe the exchanges represent a significant commercial business opportunity for us as our individual commercial enrollment increased nearly 190 percent during 2014, driven in large part by enrollment in the exchanges through the first open enrollment period. However, as we complete our second enrollment period, 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, among other things, may alter the economics and structure of our participation in the exchanges, which remain a new marketplace with which we have limited experience. If we are not able to successfully adapt to any such changes in our markets, our financial condition, cash flows 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" 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, 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, "-Results of Operations-Consolidated Results" 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 will 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.
The individual and small group market represent a significant portion of our commercial business and the relevant amounts transferred under applicable premium stabilization provisions may be substantial. Calculating these premium stabilization provisions requires us to estimate receivables and payables. Until the final calculations are performed that determine the amounts collectible and payable, the estimates can vary and the final amounts may materially differ from those estimates. The final determination and settlement of amounts due or payable from these premium stabilization provisions for 2014 will not occur until at least June 2015. If we are required to make material adjustments from our prior estimates, our financial condition, cash flows and results of operations could be materially adversely affected.
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 are subject to risks inherent in untested initiatives, and the relevant regulatory framework for the exchanges remains subject to change and interpretation over time. Whether due to regulatory uncertainty or otherwise, if these premium stabilization programs prove ineffective in mitigating our financial risks, including adverse selection risk, or we are unable to successfully adapt our strategy to any future changes in our markets, our financial condition, cash flows 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 premiums annually. Certain of the states in which we operate include similar rebate provisions. For example, a medical loss ratio corridor for the California Department of Health Care Services ("DHCS") adult Medicaid expansion members under the Medicaid program in California ("Medi-Cal") requires rebate payments to or from DHCS depending on MLRs for this population. In addition, our Medicaid contract with the state of Arizona contains profit sharing or profit ceiling provisions under which we refund amounts to Arizona if our health plan generates profit above a certain specified percentage. During the year ended December 31, 2014, we accrued $200.6 million for a MLR rebate with respect to our adult Medicaid expansion population payable to DHCS and accrued $24.7 million, net of a $2.3 million receivable, for excess profit sharing payable to the state of Arizona under our Medicaid contract. Accordingly, for the year ended December 31, 2014, we reduced Medicaid premium revenue by $225.3 million. See Note 2 "Health Plan Services Revenue Recognition" section for further discussion on these MLR provisions.
We and other health insurance companies continue to face uncertainty and execution risk due to the multiple, complex ACA implementations that were and are required in abbreviated time frames in new markets. Additionally, in many cases, our operational and strategic initiatives must be implemented in evolving regulatory environments and without the benefit of established market data. In addition, the relative lack of operating experience in these new marketplaces for insurers and, in certain cases, providers and consumers, has fostered a dynamic marketplace that may require us to adjust our operating and strategic initiatives over time, and there is no assurance that insurers, including us, will be able to do so successfully. Our execution risk encapsulates, among other things, our simultaneous participation in the exchanges, Medicaid expansion and the 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.
On November 2, 2014, we entered into a Master Services Agreement (as subsequently amended and restated, the "Master Services Agreement") with Cognizant. Under the terms of the Master Services Agreement, Cognizant will, 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 an asset purchase agreement with Cognizant (the "Asset Purchase Agreement"), through which Cognizant will purchase certain software assets and related intellectual property from us for $50 million. See Note 3 to our consolidated financial statements under the heading “Assets Held for Sale” for additional information on the assets sold in this transaction.
sale in connection with the Cognizant Transaction. See Note 3 to our consolidated financial statements and "Item 1. Business-Additional Information Concerning Our Business-Cognizant Transaction" for additional information regarding assets held for sale and the Cognizant Transaction. In addition, our operating results in our Corporate/Other segment for the year ended December 31, 2014 were impacted by $74.8 million in pretax expenses related to the Cognizant Transaction. The Cognizant Transaction is subject to certain risks and uncertainties, including with respect to the receipt of required regulatory approvals, which are discussed in further detail in "Item 1A. Risk Factors."
Western Region Operations enrollment was approximately 3.2 million as of December 31, 2014, an increase of 29.1 percent compared with enrollment at December 31, 2013.
Total revenues for the year ended December 31, 2014 increased by approximately 26.7 percent to $14.0 billion from the same period in 2013.
Government Contracts segment pretax income decreased to $69.5 million in 2014 compared to $74.5 million in 2013.
Our operating results 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 and $96.8 million of pretax expenses primarily related to the Cognizant Transaction. See Note 3 to our consolidated financial statements under the heading “Assets Held for Sale” for additional information regarding the Cognizant Transaction.
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.
The table below and the discussion that follows summarize our results of operations for the years ended December 31, 2014, 2013 and 2012.
Our total revenues increased 26.7 percent in the year ended December 31, 2014 to $14.0 billion from $11.1 billion in the same period in 2013.
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 (see "-Cognizant Transaction" and Note 3 to our consolidated financial statements).
On April 1, 2012, we completed the sale of our Medicare PDP business to CVS Caremark. See Note 3 to our consolidated financial statements for more information. As a result of the sale, our results of operations for the year ended December 31, 2012 included loss from discontinued operation of $(18.5) million related to our Medicare PDP business. Additionally, as a result of this sale, we recorded a gain on sale of discontinued operation in the amount of $132.8 million pretax, or $114.8 million after-tax, in the year ended December 31, 2012. As of December 31, 2013 and 2012, respectively, we had no Medicare stand-alone prescription drug plan members.
In the year ended December 31, 2013, we reported net income of $170.1 million or $2.12 per diluted share as compared to net income of $122.1 million or $1.47 per diluted share for the same period in 2012. For the year ended December 31, 2013, we reported net income from continuing operations of $170.1 million or $2.12 per diluted share as compared to net income from continuing operations of $25.7 million or $0.31 per diluted share for the same period in 2012. Pretax margin from continuing operations was 2.4 percent for 2013 compared to 0.3 percent for 2012.
Our government contracts revenues decreased by 17.0 percent in 2013 to $0.6 billion from $0.7 billion in 2012. Our government contracts costs decreased by 16.9 percent in 2013 to $0.5 billion from $0.6 billion in 2012. The declines in our government contracts revenues and costs were primarily due to the terms and structure of the MFLC contract we entered into in August 2012, as compared to the prior MFLC contract.
Days claims payable ("DCP") for the year ended December 31, 2014 was 61.2 days compared with 40.4 days for the year ended December 31, 2013. Adjusted DCP, which we calculate in accordance with the paragraph below, for the year ended December 31, 2014 was 77.2 days compared with 58.7 days for the year ended December 31, 2013. The year over year increase was primarily due to the impact of the reinsurance recoverable that reduced commercial health plan services costs, as well as higher reserves that resulted from our significant enrollment growth during 2014.
Our income tax expense (benefit) and the effective income tax rate for the years ended December 31, 2014, 2013 and 2012 are as follows:
B - For the years ended December 31, 2014 and 2013, we had no sale of a discontinued operation; therefore, income tax expense from gain on sale of discontinued operation and the corresponding effective income tax rate are not applicable.
The effective income tax rate for continuing operations was 27.1% and 37.0% for the years ended December 31, 2014 and 2013, respectively. For the year ended December 31, 2014, our effective tax rate was adversely impacted by the health insurer fee required by the ACA. The $141.4 million that we paid in 2014 for the health insurer fee is not deductible for federal income tax purposes and in many state jurisdictions. The non-deductible health insurer fee increased our effective tax rate for the year ended December 31, 2014 by 24.8 percentage points. In addition, we incurred a Section 165(g) loss on the stock of one of our subsidiaries that created a tax benefit during the period of $73.7 million, net of adjustments to our reserve for uncertain tax benefits. This tax benefit was primarily responsible for reducing our effective tax rate below the statutory federal tax rate of 35% for the year ended December 31, 2014. Other items which caused our effective income tax rate to differ from the statutory federal tax rate of 35% for the year ended December 31, 2014 include state income taxes, tax-exempt interest, and non-deductible compensation. See Note 11 to our consolidated financial statements for additional information. The effective income tax rate was higher than the statutory federal tax rate of 35% for the year ended December 31, 2013 primarily due to state income taxes, tax-exempt investment income, and non-deductible compensation. Our tax rate for the year ended December 31, 2012 was lower than the statutory federal rate of 35% primarily due to the effect of tax-exempt income and reductions of valuation allowances against deferred assets, which resulted from the utilization of capital loss carryforwards against gains on sale of marketable securities. Such beneficial impacts were partially offset by the effect of certain compensation treated as non-deductible under the ACA. In all periods presented, our effective income tax rate has not been impacted by operations in foreign jurisdictions with varying statutory tax rates. Our health care operations are almost entirely domestic. In 2015, we expect our effective income tax rate will exceed 50% as a result of the non-deductibility of the health insurer fee under the ACA.
Also in connection with the sale of our Medicare PDP business, we classified the operating results of our Medicare PDP business as discontinued operation. We recorded tax benefits of $10.3 million against losses from discontinued operation for the year ended December 31, 2012. The effective income tax rate related to loss from discontinued operation for the year ended December 31, 2012 was slightly above the federal statutory tax rate of 35% due to state income taxes. The effective income tax rate on the gain on sale of discontinued operation varied from the statutory federal rate of 35% for
the year ended December 31, 2012 due to state income taxes and the release of a valuation allowance against deferred tax assets for capital loss carryforwards, which were utilized upon the gain on sale of the Medicare PDP business.
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 result of new individual members from the ACA exchanges in California and Arizona, partially offset by declines in large and small group membership.
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. For additional information on our tailored network products, see "Item 1. Business-Segment Information-Western Region Operations Segment-Managed Health Care Operations."
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. In addition, in October 2013, we began administering Medicaid benefits in Maricopa County, Arizona pursuant to our contract with the Arizona Health Care Cost Containment System ("AHCCCS"). As of December 31, 2014, we had approximately 81,000 Medicaid members in Arizona compared with approximately 4,000 members at December 31, 2013. On February 4, 2015, we received a notice from the AHCCCS Division of Health Care Management that stated that we were in violation of our Medicaid contract in Maricopa County. As a result, we are currently subject to sanctions that include a cap on member auto assignment under the contract effective as of February 13, 2015 until further notice. See "Item 1A. Risk Factors" for additional information on these sanctions.
We are the sole commercial plan contractor with DHCS to provide Medi-Cal services in Los Angeles County, California. 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. As part of our 2012 state settlement agreement with DHCS, DHCS agreed, among other things, to the extension of all of our existing Medi-Cal managed care contracts, including our contract with DHCS to provide Medi-Cal services in Los Angeles County, for an additional five years from their then existing expiration dates. Accordingly, our Medi-Cal contract for Los Angeles County is scheduled to expire in April 2019. For additional information on our settlement agreement with DHCS, see Note 2 to our consolidated financial statements under the heading "Health Plan Services Revenue Recognition."
As more fully described below, in 2012, the California legislature enacted the Coordinated Care Initiative, or “CCI.” The DHCS selected eight counties to participate in the CCI, including Los Angeles and San Diego counties. In participating counties, the CCI established a voluntary “dual eligibles demonstration,” and in April 2012, DHCS selected us to participate in the dual eligibles demonstration for both Los Angeles and San Diego counties. Active enrollment in Los Angeles and San Diego counties for the dual eligible demonstrations commenced on April 1, 2014. Passive enrollment in San Diego County began on May 1, 2014, and passive enrollment in Los Angeles County began on July 1, 2014. As of December 31, 2014, we had approximately 16,000 dual eligibles members. See "-California Coordinated Care Initiative," below for more information on the CCI and the dual eligibles.
Total Western Region Operations enrollment at December 31, 2013 was approximately 2.4 million members, a decrease of 4.1 percent compared with enrollment at December 31, 2012. Total enrollment in our California health plan decreased by 2.8 percent to approximately 2.2 million members from December 31, 2012 to December 31, 2013.
Western Region Operations commercial enrollment declined by 12.0 percent from December 31, 2012 to approximately 1.1 million members at December 31, 2013, primarily due to increasingly competitive markets and our efforts to reposition our commercial book of business away from unprofitable full network large group accounts towards smaller accounts and tailored network products. Enrollment in our large group accounts decreased by 19.0 percent or 153,000 members to 651,000 members, from December 31, 2012 to December 31, 2013. Enrollment in our small group business in our Western Region Operations segment decreased by 7.8 percent, from approximately 346,000 members at December 31, 2012 to approximately 319,000 members at December 31, 2013. Enrollment in our individual business in our Western Region Operations segment increased by 38.6 percent, from approximately 83,000 members at December 31, 2012 to approximately 115,000 members at December 31, 2013. As of December 31, 2013, tailored network products accounted for 37.5 percent of our Western Region Operations commercial enrollment compared with 35.0 percent at December 31, 2012.
Enrollment in our Medicare Advantage plans in our Western Region Operations at December 31, 2013 was 244,000 members, an increase of 4.3 percent compared with December 31, 2012. The increase in Medicare Advantage membership was due to gains of approximately 8,000 members in California and 2,000 members in the Northwest.
understanding of the passive enrollment methodology, we estimate that Health Net will receive approximately 47% and 20-25% of the passively enrolled dual eligibles in Los Angeles County and San Diego County, respectively.
Health Net’s participation in the CCI, and the dual eligibles demonstration in particular, represents a significant new 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, the CCI and the dual eligibles demonstration program in particular, is a model of providing health care that is new to 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 the demonstration since passive enrollment began in Los Angeles and San Diego counties on July 1, 2014 and May 1, 2014, respectively, which impacted our expected enrollment for 2014. If this opt out trend continues or significantly increases over the passive enrollment period, our profitability with respect to our participation in the CCI may be lower than originally anticipated. Due to these and other risks associated with the CCI, including, without limitation, that the dual eligibles demonstration is a pilot program, 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-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.”
Our Medicare premium revenue increased by $272.8 million, or 9.8 percent, in the year ended December 31, 2014 compared to the same period in 2013, primarily due to a 12.7 percent increase in Medicare Advantage enrollment since December 31, 2013.
Our Medicaid premium revenue increased by $2.3 billion, or 95.7 percent, in the year ended December 31, 2014 compared to the same period in 2013, primarily due to significant membership growth related to Medicaid expansion under the ACA during the year ended December 31, 2014. 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. (see Note 2 to our consolidated financial statements, under the heading "Health Plan Services Revenue Recognition" for more information).
Administrative services fees and other income decreased by $36.5 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to a settlement related to a pharmacy contract in 2013 and the change in the reimbursement methodology of Section 1202 of the ACA in 2014.
The Medicare Advantage MCR in our Western Region Operations segment was 91.5 percent for the year ended December 31, 2014 compared with 90.6 percent for the year ended December 31, 2013. The Medicare Advantage MCR increased by 90 basis points for the year ended December 31, 2014 compared to the same period in 2013, primarily due to higher utilization from Medicare Advantage members who changed health plans at year-end and from the impact of an earlier than expected flu season in this population.
The dual eligibles MCR in our Western Region Operations segment was 86.1 percent for the year ended December 31, 2014. Active enrollment under the Dual Eligibles program began for the first time in the second quarter of 2014.
In our Western Region Operations segment, commercial premium PMPM increased by 2.7 percent to approximately $385 for the year ended December 31, 2013 compared to an increase of 4.7 percent to approximately $375 in the same period of 2012. This percentage change decrease in the 2013 premium yield compared to that in 2012 was due to changes in geographic and product mix, including a higher percentage of members enrolled in our tailored network products.
Commercial MCR in our Western Region Operations segment was 85.6 percent for the year ended December 31, 2013 compared with 88.8 percent for the year ended December 31, 2012. The improvement of 320 basis points in commercial MCR for the year ended December 31, 2013 compared to the same period in 2012 is primarily due to the repositioning of our large group commercial business, lower utilization and changes in product and geographic mix as well as the absence of the adverse prior period development that was recorded in 2012.
The Medicaid MCR was 80.4 percent for the year ended December 31, 2013 compared with 89.4 percent for the year ended December 31, 2012. The improvement in the Medicaid MCR for the year ended December 31, 2013 compared to the same period in 2012 was primarily due to favorable California Medicaid rate adjustments primarily related to prior periods, the impact of the reinstated Medicaid premium taxes that increased our Medicaid premium revenues, and retrospective adjustments to premium revenues related to our state-sponsored health plans rate settlement agreement. For additional information on the reinstated Medicaid premium taxes and state-sponsored health plans rate settlement agreement, see Note 2 to our consolidated financial statements.
Total general and administrative expense in our Western Region Operations segment was $1.1 billion for the year ended December 31, 2013 compared with $903.1 million for the year ended December 31, 2012. The total G&A expense ratio was 10.3 percent for the year ended December 31, 2013 compared with 8.6 percent for the year ended December 31, 2012.
Increases in our total general and administrative expenses for the year ended December 31, 2013 were primarily due to increases in insurance, taxes and related fees, including reinstated Medicaid premium taxes of $92.8 million. See Note 2 to our consolidated financial statements for additional information regarding these premium taxes. Such increases in insurance, taxes and related fees impacted the total G&A expense ratio by 140 basis points for the year ended December 31, 2013. In addition, increases in our total general and administrative expenses for the year ended December 31, 2013 were impacted by costs related to the implementation of the CCI, including the dual eligibles demonstration, and the ACA, including the exchanges.
Selling expense in our Western Region Operations segment was $239.4 million for the year ended December 31, 2013 compared with $245.9 million for the year ended December 31, 2012. The selling costs ratio was 2.3 percent for the year ended December 31, 2013 compared with 2.4 percent for the year ended December 31, 2012.
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, 2014. 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.
On August 15, 2012, our wholly owned subsidiary, MHN Government Services, Inc. entered into a new contract to provide counseling services to military service members and their families under the MFLC program with a five-year term that includes a 12-month base period and four 12-month option periods. MHN Government Services, Inc. is one of three contractors selected to participate in the MFLC program under the MFLC contract. Revenues from the MFLC contracts were $119.7 million, $104.8 million and $221.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
In September 2013, VA awarded us a contract under its new PC3 Program. The PC3 Program provides eligible veterans coordinated, timely access to care through a comprehensive network of non-VA providers who meet VA quality standards when a local VA medical center cannot readily provide the care. We support VA in providing care to veterans in three of the six PC3 Program regions. These three regions, Regions 1, 2 and 4, encompass all or portions of 37 states,
the District of Columbia, Puerto Rico and the Virgin Islands. The PC3 Program contract term includes a base period of performance through September 30, 2014 and four one-year option periods that may be exercised by VA. On September 23, 2014, the VA exercised option period 1 which commenced on October 1, 2014 and is scheduled to end on September 30, 2015. In addition to the one-year option periods, VA will have the ability to extend the PC3 Program contract an additional two years and six months based on VA's need. In August 2014, VA expanded our PC3 Program contract to include primary care services for veterans who are unable to obtain primary care at a VA medical center in the three PC3 regions in which we operate. In addition, in November 2014, we modified our PC3 Program contract to further expand our services with 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. See Note 2 to our consolidated financial statements under the heading “Government Contracts” for additional information. For the year ended December 31, 2014, we had $24.7 million in revenues from the PC3 Program.
In addition, we administer contracts with VA to manage community-based outpatient clinics in one state covering approximately 3,696 enrollees.
Under the T-3 contract for the TRICARE North Region, we provide administrative services to approximately 2.8 million, 2.9 million and 2.9 million MHS eligible beneficiaries as of December 31, 2014, 2013 and 2012, respectively.
Our Divested Operations and Services reportable segment included operations of our businesses that provided administrative and run-out support services in connection with the Northeast Sale and the transition-related revenues and expenses of our Medicare PDP business that was sold on April 1, 2012. As of December 31, 2012, we had substantially completed the administration and run-out of both of our divested businesses. See Notes 3 and 14 to our consolidated financial statements for additional information regarding the sale of our Medicare PDP business and the Northeast Sale, and for more information regarding our reportable segments, respectively.
For the year ended December 31, 2012, we had total revenues of $40.5 million and net loss from continuing operations of $(27.6) million.
In connection with the sale of our Medicare PDP business, we provided Medicare PDP transition-related services to CVS Caremark during the year ended December 31, 2012. Revenues and expenses associated with providing transition-related services to CVS Caremark were $40.5 million and $33.4 million, respectively, for the year ended December 31, 2012.
On July 1, 2011, the United Administrative Services Agreements terminated and we entered into Claims Servicing Agreements pursuant to which we adjudicate run out claims and provide limited other administrative services to United and its affiliates. The revenues and expenses associated with providing services under the Claims Servicing Agreements were $0 and $52.4 million, respectively, for the year ended December 31, 2012. Our operating results for the year ended December 31, 2012 were impacted by $7.4 million in lease impairment costs related to our divested Northeast business and were included in the expenses associated with providing services under the Claims Servicing Agreements.
The following table summarizes the Corporate/Other segment for the years ended December 31, 2014, 2013 and 2012:
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. See Note 3 to our consolidated financial statements and "-Cognizant Transaction" for additional information regarding assets held for sale and the Cognizant Transaction. In addition, our operating results in our Corporate/Other segment for the year ended December 31, 2014 were impacted by $74.8 million in pretax expenses related to the Cognizant Transaction. Our operating results in our Corporate/Other segment for the year ended
In addition, we believe that our cash flow in 2014 was impacted, among other things, by the timing of payments related to the ACA. The largest of the ACA taxes and fees is the health insurer fee. Our allocable share of the 2014 health insurer fee, based upon 2013 premiums, was $141.4 million. We paid that amount in September 2014, which impacted our cash flow from operations for the year ended December 31, 2014. Our cash flow was also impacted by the determination and settlement of amounts related to the premium stabilization provisions in the ACA. Our receivable balance for the reinsurance program related to the premium stabilization provisions of the ACA was $234.0 million as of December 31, 2014. If the per capita premiums/contributions paid by all insurers, including self-funded plans, are insufficient to fund all recoverable amounts, then this will result in pro-rata reduction of recoverable amounts for insurers for the following year. Our net receivable balance for the risk corridor program related to the premium
As of December 31, 2014, the fair value of our investment securities available-for-sale was $1.8 billion, which includes both current and noncurrent investments. Noncurrent investments were $4.6 million as of December 31, 2014. We hold high-quality fixed income securities primarily comprised of corporate bonds, asset-backed securities, mortgaged-backed bonds, municipal bonds and bank loans. We evaluate and determine the classification of our investments based on management’s intent. We also closely monitor the fair values of our investment holdings and regularly evaluate them for other-than-temporary impairments.
Our total cash and cash equivalents as of December 31, 2014 and 2013 were $869.1 million and $433.2 million, respectively. The changes in cash and cash equivalents are summarized as follows:
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 which drove an increase in reserves for claims and other settlements.
Net cash provided by investing activities increased by $13.2 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. This increase was primarily due to a $260.7 million decrease in net purchases of investments in available-for-sale securities during the year ended December 31, 2013, partially offset by $248.2 million in proceeds received for the sale of our Medicare PDP business during the year ended December 31, 2012.
Net cash used in financing activities increased by $151.8 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily due to a $119.5 million decrease in cash from customer funds administered and a $74.7 million increase in share repurchases, partially offset by a $23.8 million increase in checks outstanding and a $17.0 million increase in proceeds from the exercise of stock options and employee stock purchases.
Net cash provided by financing activities decreased by $93.3 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily due to a $47.7 million decrease in checks outstanding and a $38.1 million decrease in cash from customer funds administered.
make dividends. In addition, we are required to be in compliance at the end of each fiscal quarter with a specified consolidated leverage ratio and consolidated fixed charge coverage ratio.
As of December 31, 2014, we were in compliance with all covenants under our revolving credit facility.
Pursuant to the terms of our revolving credit facility, we can obtain letters of credit in an aggregate amount of $400 million and the maximum amount available for borrowing is reduced by the dollar amount of any outstanding letters of credit. As of December 31, 2014 and February 23, 2015, we had outstanding letters of credit of $8.6 million and $6.7 million, respectively, resulting in a maximum amount available for borrowing of $491.4 million as of December 31, 2014 and $428.3 million as of February 23, 2015. As of December 31, 2014 and February 23, 2015, no amounts had been drawn on these letters of credit.
(A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50 million, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of
By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our regulated subsidiaries, are required to maintain minimum levels of statutory capital and surplus. The minimum statutory capital and surplus requirements differ by state and are generally based on balances established by statute, a percentage of annualized premium revenue, a percentage of annualized health care costs, or RBC or tangible net equity (“TNE”) requirements. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level (“ACL”), which represents the minimum amount of capital and surplus believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as 200% of the ACL, or the minimum statutory capital and surplus requirement calculated pursuant to pre-RBC guidelines. Because our regulated subsidiaries are also subject to their state regulators’ overall oversight authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of the RBC requirement, even though RBC has been adopted in their states of domicile.
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 relating to statutory surplus, statutory income and unassigned surplus.
We have entered into long-term agreements to receive services related to disease management, case management, wellness, pharmacy benefit management, pharmacy claims processing services and health quality/risk scoring enhancement services with external third-party service providers. The remaining terms are approximately from one to two years for each of these contracts. Termination of these agreements is subject to certain termination provisions. As of December 31, 2014, the total estimated future commitments under these agreements were $122.1 million and are included in the table above.
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 2014, we extended the agreement and as of December 31, 2014, the remaining term of this contract was approximately one year, and total estimated future commitments under the agreement were approximately $101.2 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. In 2014, we extended the agreement, and as of December 31, 2014, the remaining term of this contract was approximately four years, and the total estimated future commitments under the agreement were approximately $288.1 million.
We have excluded from the table above amounts already recorded in our current liabilities on our consolidated balance sheet as of December 31, 2014. 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.
Health plan services premium revenues generally include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, revenue under Medicare risk contracts to provide care to enrolled Medicare recipients, and revenue from the dual eligible pilot program. Revenue is recognized in the month in which the related enrollees are entitled to health care services. Premiums collected in advance of the month in which enrollees are entitled to health care services are recorded as unearned premiums.
Approximately 59%, 50%, and 45% in 2014, 2013 and 2012, respectively, of our health plan services premium revenues were generated under Medicare, Medicaid/Medi-Cal and Dual Eligibles contracts, as applicable. These revenues are subject to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these programs, including CMS' methodology with respect to risk adjustment data validation (“RADV”) audits, are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount.
We calculate our best estimate of the amount of our IBNR reserves in accordance with GAAP and using standard actuarial developmental methodologies. This method also is known as the chain-ladder or completion factor method. The developmental method estimates reserves for claims based upon the historical lag between the month when services are rendered and the month claims are paid while taking into consideration, among other things, expected medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key component of the developmental method is the completion factor, which is a measure of how complete the claims paid to date are relative to the estimate of the claims for services rendered for a given period. While the completion factors are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods since a large portion of health care claims are not submitted to us until several months after services have been rendered. Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member per month claims trends developed from the experience in preceding months. This method is applied consistently year-over-year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership, among other things.
Impact due to change in completion factor for the most recent three months. Completion factors indicate how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.
Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the most recent three months.
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. For the year ended December 31, 2013, we had $56.2 million in favorable reserve developments related to prior years. We believe this favorable development was primarily due to the absence of moderately adverse conditions. As part of our best estimate for IBNR, the provision for adverse deviation recorded as of December 31, 2014 and December 31, 2013 was $77.7 million and $53.4 million, respectively. The increase in the provision for adverse deviation from December 31, 2013 to December 31, 2014 was primarily driven by growth in our new products offered or programs administered under the ACA. The reserve developments related to prior years for the years ended December 31, 2014 and 2013, when considered together with the provision for adverse deviation recorded as of December 31, 2014 and 2013, respectively, did not have a material impact on our operating results or financial condition.
We assess the profitability of contracts for providing health care services when operating results or forecasts indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under a capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers. Contracts are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing
anticipated premiums to estimates for the total of health care related costs less reinsurance recoveries, if any, and the 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, 2014, and 2013 we held no premium deficiency reserves.
The ACA mandated significant reforms to various aspects of the U.S. health insurance industry. Among other things, the ACA imposes an annual premium-based fee on health insurers (the "health insurance industry fee") for each calendar year beginning on or after January 1, 2014 which is not deductible for federal income tax purposes and in many state jurisdictions. The health insurance industry fee is levied based on a ratio of an insurer's net health insurance premiums written for the previous calendar year compared to the U.S. health insurance industry total. We are required to estimate a liability for our portion of the health insurance industry fee and record it in full once qualifying insurance coverage is provided in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized ratably to expense over the calendar year that it is payable.
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
The final reconciliation and settlement with HHS of the premium and cost sharing subsidies and the amounts related to the 3Rs for the current year will be completed in the following year with HHS.
On November 2, 2014, we signed a definitive master services agreement with Cognizant to provide certain services to us. In connection with this agreement, we have agreed to sell certain software assets and related intellectual property ("software system assets") we own to Cognizant. The transaction, including the related asset sale, is subject to the receipt of required regulatory approvals. See "-Cognizant Transaction" and Note 3 to our consolidated financial statements for additional information regarding our agreements with Cognizant. Because the sale of these software system assets meets the definition of a sale of a business under GAAP, as of September 30, 2014, we re-allocated $7 million of goodwill based on relative fair values of the Western Region Operations reporting unit with and without the impact of the business to be sold. Our measurement of fair values is based on a combination of the discounted total consideration expected to be received in connection with the services and asset sale agreements, income approach based on a discounted cash flow methodology, and replacement cost methodology. After the reallocation of goodwill, we performed a two-step impairment test to determine the existence of any impairment and the amount of the impairment. In the first step, we compared the fair values to the related carrying value and concluded that the carrying value of the business to be sold was impaired; however, we determined that the carrying value of the Western Region Operations reporting unit was not impaired. In the second step, we measured the impairment amount by comparing the implied value of the allocated goodwill to the carrying amount of such goodwill. Based on the results of our Step 2 test, we concluded that the implied value of the goodwill allocated to the business to be sold was zero, which resulted in an impairment charge for the total carrying value of the allocated goodwill of $7 million. See Note 7 to our consolidated financial statements for additional goodwill fair value measurement information.
We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions is subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we believe that it is probable certain positions will be challenged by taxing authorities, and we may not prevail on all of the positions as filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities upon examination. We analyze the amount at which each tax position meets a “more likely than not” standard for sustainability upon examination by taxing authorities. Only tax benefit amounts meeting or exceeding this standard will be reflected in tax provision expense and deferred tax asset balances. Any difference between the amounts of tax benefits reported on tax returns and tax benefits reported in the financial statements is recorded as a liability for
unrecognized tax benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and liabilities and classified as current or noncurrent based upon the expected period of payment.