Historically, the commission payments we receive on individual and family, ancillary and small business health insurance plans we sold were a percentage of the premium on the policy and, to a much lesser extent, commission override payments that insurance carriers pay us for achieving sales volume thresholds or other objectives. Effective January 1, 2014, many carriers began paying our individual and family health insurance commissions at a flat amount per member per month. The commission payments that we receive for individual and family, ancillary and small business health insurance plans are typically made to us on a monthly basis for as long as the plans remain active with us.
Individual and Family Plans. Commission rates for individual and family health insurance plans may vary by carrier, by geography and by the type of plan purchased by a member. Additionally, commission rates commonly vary based upon the amount of time that the policy has been active, with commission rates typically being higher in the first twelve months of the policy. After the first twelve months, commission rates generally decline significantly. As a result, if we do not add a sufficient number of members on new policies, our revenue growth will be negatively impacted, as we experienced in 2014. Individuals and families purchasing health insurance through us typically pay their premiums on a monthly basis. Insurance carriers typically pay commissions to us on these policies monthly, after they receive the premium payment from the member. We
Historically, to calculate the estimated number of members active on individual and family plan health insurance policies, we have taken the sum of (i) the number of IFP members for whom we have received or applied a commission payment for the month that is six months prior to the date of estimation after reducing that number using historical experience (for which the experience for the period from July 1 to December 31, 2013 was used for the calculation of membership as of December 31, 2014) for assumed member cancellations over the six-month period and (ii) the number of approved members over the six-month period prior to the date of estimation after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate. Historically, the percentage of our members who did not accept their approved policy remained at a relatively constant rate. However, we observed an increase in the number of members who ultimately did not accept their approved policies, compared to our historical experience, beginning with policies that were submitted in the quarter ended March 31, 2014. This lower acceptance rate was used to estimate the assumed number of members who did not accept their approved policy for the six months ended December 31, 2014. As a result, for the purpose of estimating the number of members active on individual and family plan insurance policies as of December 31, 2014, we have assumed and applied a higher percentage of members who do not accept their approved policy as compared to the assumption used in prior years.
During the year ended December 31, 2014, there were no significant changes to our critical accounting policies and estimates.
The following table presents our commission, other revenue and total revenue for the years ended December 31, 2012, 2013 and 2014 and the dollar and percentage changes from the prior year (dollars in thousands):
2014 compared to 2013-Marketing and advertising expenses decreased $1.9 million, or 3%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to a decrease of $4.1 million in fees we pay to marketing partners for referrals that result in the submission of a health insurance application on our website and a decrease of $1.8 million in compensation, benefits, stock-based compensation and other personnel costs, partially offset by an increase of $2.5 million in online advertising costs and an increase of $0.4 million in other direct marketing costs.
We expect other income (expense), net to be flat in 2015 compared to 2014.
Description of Business-eHealth, Inc. (the “Company,” “eHealth,” “we” or “us”) is the leading online source of health insurance for individuals, families and small businesses in the United States. Through our website addresses (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, and apply for and purchase individual and family, Medicare-related, small business and ancillary health insurance plans. We actively market the availability of Medicare-related insurance plans and offer Medicare plan comparison tools and educational materials for Medicare-related insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans. Our ecommerce technology also enables us to deliver consumers’ health insurance applications electronically to health insurance carriers. As a result, we simplify and streamline the complex and traditionally paper-intensive health insurance sales and purchasing process. We are licensed to market and sell health insurance in all 50 states and the District of Columbia.
Use of Estimates-The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to, but not limited to, the useful lives of intangible assets, fair value of investments, fair value of our Medicare books-of-business, recoverability of intangible assets, estimates for commission forfeitures, valuation allowance for deferred income taxes, provision for income taxes, our assessment whether internal use software and website development costs will result in additional functionality and the assumptions used in determining stock-based compensation. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Actual results may differ from these estimates.
Cash Equivalents-We consider all investments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents are stated at fair value.
Our direct channel expenses primarily consist of costs for direct mail, e-mail marketing, retargeting campaigns and may also include costs for television, radio, and print advertising. Advertising costs for our direct channel are expensed the first time the related advertising takes place. Our marketing partner channel expenses primarily consist of fees paid to marketing partners with which we have a relationship. Our online advertising channel expenses primarily consist of paid keyword search advertising on search engines. Advertising costs for our marketing partner channel and our online advertising channel are expensed as incurred.
Research and Development Expenses-Research and development expenses consist primarily of compensation and related expenses incurred for employees on our engineering and technical teams. Research and development costs, which totaled $8.4 million, $10.1 million and $12.1 million for the years ended December 31, 2012, 2013 and 2014, respectively, are included in technology and content expense in the accompanying consolidated statements of comprehensive income (loss).
Accounts Receivable-We do not require collateral or other security for our accounts receivable. As of December 31, 2013, two customers represented 37% and 15%, respectively, for a combined total of 52% of our $4.6 million outstanding accounts receivable balance. As of December 31, 2014, three customers represented 30% , 17% and 14%, respectively, for a combined total of 61% of our $8.2 million outstanding accounts receivable balance. No other customers represented 10% or more of our total accounts receivable at December 31, 2013 and December 31, 2014. We believe the potential for collection issues with any of our customers was minimal as of December 31, 2014. Accordingly, our estimate for uncollectible amounts at December 31, 2014 was not material.
Total rent expense under all operating leases was approximately $4.3 million, $4.8 million and $5.3 million for the years ended December 31, 2012, 2013 and 2014, respectively.
On March 11, 2015, we announced an organizational restructuring and cost reduction plan. As part of the plan, we expect to eliminate approximately 160 full-time positions, representing approximately 15% of our workforce. We expect to incur pre-tax restructuring charges of between approximately $3.2 million and $3.8 million, for employee termination benefits and related costs as well as between $0.5 million and $0.9 million in other pre-tax restructuring charges, including facility costs. Substantially all of the restructuring charges are expected to result in cash expenditures. The majority of the restructuring charges are expected to be recorded in the first and second quarters of 2015, when the activities comprising the plan are expected to be substantially completed.