Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to             
Commission file number: 001-32209
WELLCARE HEALTH PLANS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
47-0937650
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

8735 Henderson Road, Renaissance One
Tampa, Florida
 
33634
 
 
(Zip Code)
(813) 290-6200
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 1, 2016, there were 44,268,205 shares of the registrant's common stock, par value $.01 per share, outstanding.



WELLCARE HEALTH PLANS, INC.

TABLE OF CONTENTS

 
Page
Part I — FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 (unaudited)
 
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)
 
Condensed Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 2016 and 2015 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
Part II — OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 
 
Exhibit Index




Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions, except per share and share data) 

 
For the Three Months Ended
June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Premium
$
3,590.6

 
$
3,478.5

 
$
7,126.6

 
$
6,944.6

Investment and other income
3.8

 
4.0

 
8.3

 
7.8

Total revenues
3,594.4

 
3,482.5

 
7,134.9

 
6,952.4

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Medical benefits
2,988.9

 
2,977.1

 
6,050.8

 
6,029.3

Selling, general and administrative
278.0

 
255.5

 
546.9

 
512.4

ACA industry fee
56.9

 
58.3

 
113.9

 
116.6

Medicaid premium taxes
27.6

 
20.3

 
54.8

 
40.2

Depreciation and amortization
21.7

 
18.1

 
42.5

 
34.9

Interest
14.6

 
12.5

 
30.4

 
23.9

Total expenses
3,387.7

 
3,341.8

 
6,839.3

 
6,757.3

Income before income taxes
206.7

 
140.7

 
295.6

 
195.1

Income tax expense
115.9

 
89.0

 
167.0

 
125.9

Net income
90.8

 
51.7

 
128.6

 
69.2

 
 
 
 
 
 
 
 
Other comprehensive income, before tax:
 
 
 
 
 
 
 
Change in net unrealized gains and losses on
available-for-sale securities
0.1

 
(1.2
)
 
0.1

 
(0.8
)
Income tax expense related to other
comprehensive income

 
(0.4
)
 

 
(0.3
)
Other comprehensive income, net of tax
0.1

 
(0.8
)
 
0.1

 
(0.5
)
Comprehensive income
$
90.9

 
$
50.9

 
$
128.7

 
$
68.7

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
2.05

 
$
1.17

 
$
2.91

 
$
1.57

Diluted
$
2.04

 
$
1.17

 
$
2.89

 
$
1.56

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
       Basic
44,260,767

 
44,054,778

 
44,212,984

 
44,018,377

       Diluted
44,549,955

 
44,358,313

 
44,521,855

 
44,331,159


See notes to unaudited condensed consolidated financial statements.

2



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except share data)

 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
2,524.1

 
$
2,407.0

Short-term investments
188.8

 
204.4

Premiums receivable, net
1,027.2

 
603.9

Pharmacy rebates receivable, net
339.3

 
252.5

Funds receivable for the benefit of members
259.3

 
577.6

Deferred ACA industry fee
113.1

 

Income taxes receivable

 
50.6

Prepaid expenses and other current assets, net
183.0

 
133.6

Total current assets
4,634.8

 
4,229.6

 
 
 
 
Property, equipment and capitalized software, net
243.6

 
244.8

Goodwill
290.4

 
263.2

Other intangible assets, net
81.7

 
80.0

Long-term investments
109.0

 
131.8

Restricted investments
202.5

 
196.0

Other assets
0.4

 
0.4

Total Assets
$
5,562.4

 
$
5,145.8

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current Liabilities:
 

 
 

Medical benefits payable
$
1,618.7

 
$
1,536.0

Unearned premiums
3.7

 
27.7

ACA industry fee liability
227.0

 

Accounts payable and accrued expenses
411.1

 
405.2

Current portion of long-term debt, net

 
299.5

Income taxes payable
42.9

 

Other payables to government partners
212.7

 
172.7

Total current liabilities
2,516.1

 
2,441.1

 
 
 
 
Deferred income tax liability, net
57.6

 
52.6

Long-term debt, net
1,097.2

 
899.6

Other liabilities
25.1

 
24.2

Total Liabilities
3,696.0

 
3,417.5

 
 
 
 
Commitments and contingencies (see Note 11)


 


 
 
 
 

3



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except share data) - Continued
 
June 30,
2016
 
December 31, 2015
Stockholders' Equity:
 
 
 
Preferred stock, $0.01 par value (20,000,000 authorized, no shares
issued or outstanding)

 

Common stock, $0.01 par value (100,000,000 authorized, 44,267,882 and 44,113,328 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively)
0.4

 
0.4

Paid-in capital
527.8

 
518.4

Retained earnings
1,340.3

 
1,211.7

Accumulated other comprehensive loss
(2.1
)
 
(2.2
)
Total Stockholders' Equity
1,866.4

 
1,728.3

Total Liabilities and Stockholders' Equity
$
5,562.4

 
$
5,145.8


See notes to unaudited condensed consolidated financial statements.

4



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited, in millions, except share data)

 
Common Stock
 
Paid in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Total
Stockholders' Equity
Shares
 
Amount
Balance at January 1, 2016
44,113,328

 
$
0.4

 
$
518.4

 
$
1,211.7

 
$
(2.2
)
 
$
1,728.3

Common stock issued for vested restricted stock units, performance stock units and market stock units
217,179

 

 

 

 

 

Repurchase and retirement of shares to satisfy tax withholding requirements
(62,625
)
 

 
(5.6
)
 

 

 
(5.6
)
Stock-based compensation expense, net of forfeitures

 

 
15.0

 

 

 
15.0

Comprehensive income

 

 

 
128.6

 
0.1

 
128.7

Balance at June 30, 2016
44,267,882

 
$
0.4

 
$
527.8

 
$
1,340.3

 
$
(2.1
)
 
$
1,866.4

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
43,914,106

 
$
0.4

 
$
503.0

 
$
1,093.1

 
$
(0.6
)
 
$
1,595.9

Common stock issued for exercised stock options
8,020

 

 
0.3

 

 

 
0.3

Common stock issued for vested restricted stock units, performance stock units and market stock units
215,623

 

 

 

 

 

Repurchase and retirement of shares to satisfy tax withholding requirements
(66,613
)
 

 
(5.9
)
 

 

 
(5.9
)
Stock-based compensation expense, net of forfeitures

 

 
8.7

 

 

 
8.7

Incremental tax benefit from stock-based compensation

 

 
1.4

 

 

 
1.4

Comprehensive income

 

 

 
69.2

 
(0.5
)
 
68.7

Balance at June 30, 2015
44,071,136

 
$
0.4

 
$
507.5

 
$
1,162.3

 
$
(1.1
)
 
$
1,669.1


See notes to unaudited condensed consolidated financial statements.


5



WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)

 
For the Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
128.6

 
$
69.2

Adjustments to reconcile net income to cash flows from operating activities:
 

 
 

Depreciation and amortization
42.5

 
34.9

Stock-based compensation expense
15.0

 
8.7

Deferred taxes, net
5.0

 
33.6

Provision for doubtful receivables
4.5

 
7.2

Other, net
4.4

 
(1.4
)
Changes in operating accounts, net of effects from acquisitions and divestitures:
 

 
 

Premiums receivable, net
(427.8
)
 
(371.2
)
Pharmacy rebates receivable, net
(86.8
)
 
43.8

Medical benefits payable
82.7

 
(71.4
)
Unearned premiums
(24.0
)
 
(79.1
)
Other payables to government partners
40.0

 
50.5

Amount payable related to investigation resolution

 
(35.2
)
Accrued liabilities and other, net

155.7

 
235.7

Net cash used in operating activities
(60.2
)
 
(74.7
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Acquisitions and acquisition-related settlements
(21.1
)
 
(17.2
)
Purchases of investments
(194.1
)
 
(86.3
)
Proceeds from sales and maturities of investments
223.7

 
90.3

Additions to property, equipment and capitalized software, net
(37.6
)
 
(63.6
)
Net cash used in investing activities
(29.1
)
 
(76.8
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of debt, net of financing costs paid
196.9

 
308.9

Payments on debt
(300.0
)
 

Repurchase and retirement of shares to satisfy employee tax withholding requirements
(5.6
)
 
(5.9
)
Funds received (paid) for the benefit of members, net
318.3

 
(127.1
)
Other, net
(3.2
)
 
1.6

Net cash provided by financing activities
206.4

 
177.5

 
 
 
 
Increase in cash and cash equivalents
117.1

 
26.0

Balance at beginning of period
2,407.0

 
1,313.5

Balance at end of period
$
2,524.1

 
$
1,339.5

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

  Cash paid for taxes
$
69.6

 
$
69.9

  Cash paid for interest
$
28.7

 
$
21.4

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
 

 
 

Non-cash additions to property, equipment, and capitalized software
$
4.6

 
$
11.2

See notes to unaudited condensed consolidated financial statements.

6



WELLCARE HEALTH PLANS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in millions, except member, per share and share data)

1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
WellCare Health Plans, Inc. (the "Company," "we," "us," or "our"), focuses exclusively on government-sponsored managed care services, primarily through Medicaid, Medicare Advantage ("MA") and Medicare Prescription Drug Plans ("PDPs") to families, children, seniors and individuals with complex medical needs. As of June 30, 2016, we served approximately 3.8 million members. During the six months ended June 30, 2016, we operated Medicaid health plans in Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, New Jersey, New York and South Carolina. As of June 30, 2016, we also operated MA coordinated care plans ("CCPs") in Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Mississippi, New Jersey, New York, South Carolina, Tennessee and Texas, as well as stand-alone Medicare prescription drug plans ("PDP") in all 50 states and the District of Columbia.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated balance sheets and statements of comprehensive income, changes in stockholders' equity, and cash flows include the accounts of the Company and all of its majority-owned subsidiaries. We eliminated all intercompany accounts and transactions.

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Accordingly, certain financial information and footnote disclosures normally included in financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, for the fiscal year ended December 31, 2015, included in our Annual Report on Form 10-K ("2015 Form 10-K"), which was filed with the U.S. Securities and Exchange Commission ("SEC") in February 2016. Results for the interim periods presented are not necessarily indicative of results that may be expected for the entire year or any other interim period.

In the opinion of management, the interim financial statements reflect all normal recurring adjustments that we consider necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. In accordance with GAAP, we make certain estimates and assumptions that affect the amounts reported in the condensed consolidated interim financial statements and accompanying notes. We base these estimates, including assumptions as to the annualized tax rate, on our knowledge of current events and anticipated future events and evaluate and update our assumptions and estimates on an ongoing basis; however, actual results may differ from our estimates. We evaluated all material events subsequent to the date of these condensed consolidated interim financial statements. Certain reclassifications were made to 2015 financial information to conform to the 2016 presentation.

Significant Accounting Policies

Medical Benefits and Medical Benefits Payable

We recognize the cost of medical benefits in the period in which services are provided, including an estimate of the cost of medical benefits incurred but not reported ("IBNR"). Medical benefits expense includes direct medical expenses and certain medically-related administrative costs. We evaluate our estimates of medical benefits payable as we obtain more complete claims information and medical expense trend data over time. We record differences between actual experience and estimates used to establish the liability, which we refer to as favorable and unfavorable prior year reserve developments, as increases or decreases to medical benefits expense in the period we identify the differences.

Favorable prior year reserve development for the six months ended June 30, 2016 was approximately $99.1 million, primarily related to the Medicaid Health Plans segment, compared with favorable prior year reserve development of $44.5 million recognized during the corresponding period in 2015. Such amounts are net of the development relating to refunds due to government customers associated with minimum medical loss ratio provisions.


7


Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, "Compensation—Stock Compensation (Topic 718)," which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The new standard would have been effective for us beginning January 1, 2017, with early adoption permitted.

We elected to early adopt the new guidance in the second quarter of fiscal year 2016 which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary effect of adoption was the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital for all periods in fiscal year 2016. The ASU amendments related to the minimum statutory withholding tax requirements had no effect to retained earnings as of January 1, 2016, where the cumulative effect of these changes is required to be recorded. We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.

We elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively as of January 1, 2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no effect to any of the periods presented in our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.

Adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital of $0.8 million and $1.5 million for the three and six months ended June 30, 2016, respectively, and affected our previously reported first quarter of 2016 results as follows:

 
For the Three Months Ended
March 31, 2016
 
As reported
 
As adjusted
Income Statement:
(in millions, except per share data)
Income tax expense
$
51.8

 
$
51.1

Net income
$
37.1

 
$
37.8

Basic earnings per share
$
0.84

 
$
0.86

Diluted earnings per share
$
0.83

 
$
0.85

 
 
 
 
Cash Flow Statement:
 
 
 
Net cash used in operating activities
$
(112.1
)
 
$
(111.4
)
Net cash provided by financing activities
$
88.3

 
$
87.6

 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
As reported
 
As adjusted
Balance Sheet:
(in millions)
Paid-in capital
$
520.1

 
$
519.4

Retained Earnings
$
1,248.8

 
$
1,249.5






8



In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires an entity to classify all deferred tax assets and liabilities as noncurrent. We adopted this standard effective January 1, 2016 and applied it retrospectively to all prior periods. Accordingly, amounts for deferred income tax assets of $34.8 million previously recorded as current are reflected as a reduction to deferred income tax liabilities recorded as noncurrent in the accompanying condensed consolidated balance sheet as of December 31, 2015. These reclassifications have no effect on results of operations or stockholders' equity, as previously reported.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. The amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We adopted this standard effective January 1, 2016. The adoption of this guidance did not have a material effect on our consolidated results of operations, financial position or cash flows.

In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs," to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements." ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted these standards effective January 1, 2016 and applied it retrospectively to all prior periods. These reclassifications did not have a material effect on our consolidated results of operations, financial position or cash flows.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)," which requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The entity's estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses upon loan origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. We are currently assessing the effect this guidance will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, "Simplifying the Transition to the Equity Method of Accounting," which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interest in the investee (if any) to the current basis of their previously held interest. The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. This guidance is effective for all entities for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments in its balance sheet. This standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This guidance is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the effect this guidance will have on our consolidated financial statements.


9


In January 2016, the FASB issued ASU 2016-01, "Financial Instrument - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which requires entities to measure equity securities that are not consolidated or accounted for under the equity method at fair value through net income. This amendment also simplifies the impairment test of equity investments without readily determinable fair values. This guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. We are currently assessing the effect this guidance will have on our consolidated financial statements.

In May 2015, the FASB issued ASU 2015-09, "Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts," which addresses enhanced disclosure requirements for short-duration insurance contracts. The disclosures required by this update are aimed at providing users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, as well as the timing, frequency and severity of claims. For public business entities, this guidance will be effective for annual periods beginning after December 15, 2015 and interim periods within annual reporting periods beginning after December 15, 2016. We do not believe the adoption of this standard will have a material effect on our consolidated results of operations, financial position or cash flows.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date", which deferred the effective dates of ASU 2014-09 by one year. As such, the standard becomes effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption at the original effective date, interim and annual periods beginning after December 15, 2016 will be permitted. We are currently evaluating the effect of the new revenue recognition principle.

2. ACQUISITIONS AND DIVESTITURES

Advicare Acquisition

On June 1, 2016, we completed the acquisition of certain assets of Advicare Corp. ("Advicare"), a managed care organization that provides Medicaid benefits in South Carolina. The acquired assets primarily relate to approximately 30,000 Advicare members who were transferred to our Medicaid plan in South Carolina, as well as certain provider agreements.

Based on the preliminary purchase price allocation, we allocated $6.8 million of the purchase price to identified intangible assets and recorded the excess of purchase price over the aggregate fair value of net assets acquired of $27.2 million as goodwill. The recorded goodwill and other intangible assets related to the Advicare acquisition are deductible for income tax purposes. It is possible that further adjustments could be made to the purchase price and allocations depending on the resolution of certain matters related to the purchase price, although we are unable to estimate the effect at this time.

Sterling Life Insurance Company Divestiture

In March 2015, we entered into an agreement to divest Sterling Life Insurance Company ("Sterling"), our Medicare Supplement business that we acquired as part of the Windsor transaction in January 2014. The transaction closed on July 1, 2015 and did not have a material effect on our results of operations, financial position or cash flows.

3. SEGMENT REPORTING

On a regular basis, we evaluate discrete financial information and assess the performance of our three reportable segments, Medicaid Health Plans, Medicare Health Plans and Medicare PDPs, to determine the most appropriate use and allocation of Company resources.
  

10



Medicaid Health Plans

Our Medicaid Health Plans segment includes plans for beneficiaries of Temporary Assistance for Needy Families ("TANF"), Supplemental Security Income ("SSI"), Aged Blind and Disabled ("ABD") and other state-based programs that are not part of the Medicaid program, such as Children's Health Insurance Program ("CHIP") and Managed Long-Term Care ("MLTC") programs, including long-term services and supports. TANF generally provides assistance to low-income families with children. ABD and SSI generally provide assistance to low-income aged, blind or disabled individuals. CHIP provides assistance to qualifying families who are not eligible for Medicaid because their income exceeds the applicable income thresholds. The MLTC program is designed to help people with chronic illnesses or who have disabilities and need health and long-term care services, such as home care or adult day care, to enable them to stay in their homes and communities as long as possible.

Our Medicaid operations in certain states individually account for 10% or more of our consolidated premium revenue. Those states and the respective Medicaid premium revenue as a percentage of total consolidated premium revenue are as follows: 
 
For the Three Months Ended
June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Kentucky
18%
 
19%
 
18%
 
19%
Florida
17%
 
16%
 
17%
 
16%
Georgia
11%
 
11%
 
11%
 
12%

In 2016, the Georgia Department of Community Health (“Georgia DCH”) announced its intention to exercise its option (through two six-month renewal terms) to extend our current contract through June 30, 2017. We have received from Georgia DCH a notice of intent to award a new contract and anticipate services under that contract would commence on July 1, 2017, with an initial one-year term and three additional one-year renewal options at Georgia DCH's discretion.

In May 2016, we entered into a contract amendment with the Kentucky Department of Medicaid Services that renewed our participation in the Kentucky Medicaid program through December 31, 2016, and included one additional six-month or three additional one-year renewal periods upon mutual agreement.

Medicare Health Plans

Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical and prescription drug benefits. MA is Medicare's managed care alternative to the original Medicare program, which provides individuals standard Medicare benefits directly through the Centers for Medicare & Medicaid Services ("CMS"). Our MA CCPs generally require members to seek health care services and select a primary care physician from a network of health care providers. In addition, we offer coverage of prescription drug benefits under the Medicare Part D program as a component of most of our MA plans. Prior to July 1, 2015, our Medicare Health Plans reportable segment included the combined operations of both the MA and Medicare Supplement operating segments. On July 1, 2015, we completed the sale of our Medicare Supplement business through the Sterling divestiture and as a result, the Medicare Health Plans reportable segment only reflects MA operations for the three and six months ended June 30, 2016.

Medicare PDPs

We offer stand-alone Medicare Part D coverage to Medicare-eligible beneficiaries in our Medicare PDPs segment. The Medicare Part D prescription drug benefit is supported by risk sharing with the federal government through risk corridors designed to limit the losses and gains of the participating drug plans and by reinsurance for catastrophic drug costs. The government subsidy is based on the national weighted average monthly bid for this coverage, adjusted for risk factor payments. Additional subsidies are provided for dually-eligible beneficiaries and specified low-income beneficiaries. The Part D program offers national in-network prescription drug coverage that is subject to limitations in certain circumstances.


11



Summary of Financial Information

We allocate goodwill and other intangible assets, as well as the ACA industry fee, to our reportable segments. We do not allocate to our reportable segments any other assets and liabilities, investment and other income, selling, general and administrative expenses, depreciation and amortization, or interest expense to our reportable segments. The Company's decision makers primarily use premium revenue, medical benefits expense and gross margin to evaluate the performance of our reportable segments.

A summary of financial information for our reportable segments through the gross margin level and a reconciliation to income before income taxes is presented in the table below.
 
For the Three Months Ended
June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Premium revenue:
 
Medicaid Health Plans
$
2,378.4

 
2,250.9

 
$
4,690.1

 
$
4,454.1

Medicare Health Plans
987.5

 
992.6

 
1,961.6

 
1,976.0

Medicare PDPs
224.7

 
235.0

 
474.9

 
514.5

Total premium revenue
3,590.6

 
3,478.5

 
7,126.6

 
6,944.6

Medical benefits expense:
 

 
 
 
 
 
 

Medicaid Health Plans
1,988.1

 
1,933.3

 
3,990.0

 
3,850.9

Medicare Health Plans
831.9

 
857.6

 
1,656.1

 
1,714.0

Medicare PDPs
168.9

 
186.2

 
404.7

 
464.4

Total medical benefits expense
2,988.9

 
2,977.1

 
6,050.8

 
6,029.3

ACA industry fee expense:
 
 
 
 
 
 
 
Medicaid Health Plans
36.7

 
34.4

 
73.3

 
69.2

Medicare Health Plans
16.1

 
18.1

 
32.3

 
35.8

Medicare PDPs
4.1

 
5.8

 
8.3

 
11.6

Total ACA industry fee expense
56.9

 
58.3

 
113.9

 
116.6

Gross margin
 

 
 
 
 
 
 
Medicaid Health Plans
353.6

 
283.2

 
626.8

 
534.0

Medicare Health Plans
139.5

 
116.9

 
273.2

 
226.2

Medicare PDPs
51.7

 
43.0

 
61.9

 
38.5

Total gross margin
544.8

 
443.1

 
961.9

 
798.7

Investment and other income
3.8

 
4.0

 
8.3

 
7.8

Other expenses (1)
(341.9
)
 
(306.4
)
 
(674.6
)
 
(611.4
)
Income before income taxes
$
206.7

 
$
140.7

 
$
295.6

 
$
195.1

 
 
 
 
 
 
 
 

(1)
Other expenses includes selling, general and administrative expenses, Medicaid premium taxes, depreciation and amortization, and interest.

4. EARNINGS PER COMMON SHARE

We compute basic earnings per common share on the basis of the weighted-average number of unrestricted common shares outstanding. We compute diluted earnings per common share on the basis of the weighted-average number of unrestricted common shares outstanding plus the dilutive effect of our stock-based compensation awards using the treasury stock method.


12



The calculation of the weighted-average common shares outstanding — diluted is as follows:
 
For the Three Months Ended
June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding — basic
44,260,767

 
44,054,778

 
44,212,984

 
44,018,377

Dilutive effect of outstanding stock-based compensation awards

289,188

 
303,535

 
308,871

 
312,782

Weighted-average common shares outstanding — diluted
44,549,955

 
44,358,313

 
44,521,855

 
44,331,159

Anti-dilutive stock-based compensation awards excluded from computation
851

 
139,514

 
29,126

 
71,517

 
 
 
 
 
 
 
 

5. INVESTMENTS

The Company considers all of its investments as available-for-sale securities. Excluding Restricted Investments, the amortized cost, gross unrealized gains or losses and estimated fair value of short-term and long-term investments by security type are summarized in the following tables.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2016
 
 
 
 
 
 
 
Auction rate securities
$
34.0

 
$

 
$
(3.4
)
 
$
30.6

Corporate debt and other securities
89.6

 
0.3

 
(0.1
)
 
89.8

Money market funds
47.6

 

 

 
47.6

Municipal securities
42.1

 
0.7

 

 
42.8

U.S. government securities
2.9

 

 

 
2.9

Variable rate bond fund
85.1

 

 
(1.0
)
 
84.1

 
$
301.3

 
$
1.0

 
$
(4.5
)
 
$
297.8

December 31, 2015
 

 
 

 
 

 
 

Auction rate securities
$
34.0

 
$

 
$
(2.3
)
 
$
31.7

Corporate debt and other securities
121.4

 

 
(0.4
)
 
121.0

Money market funds
45.9

 

 

 
45.9

Municipal securities
46.0

 
0.4

 
(0.1
)
 
46.3

U.S. government securities
7.1

 

 

 
7.1

Variable rate bond fund
85.1

 

 
(0.9
)
 
84.2

 
$
339.5

 
$
0.4

 
$
(3.7
)
 
$
336.2

 
 
 
 
 
 
 
 

Realized gains and losses on sales and redemptions of investments were not material for the three and six months ended June 30, 2016 and 2015.


13



Contractual maturities of available-for-sale securities at June 30, 2016 are as follows:
 
 
Total
 
Within
1 Year
 
1 Through 5
Years
 
5 Through 10
Years
 
Thereafter
Auction rate securities
$
30.6

 
$

 
$

 
$

 
$
30.6

Corporate debt and other securities
89.8

 
39.9

 
49.9

 

 

Money market funds
47.6

 
47.6

 

 

 

Municipal securities
42.8

 
14.9

 
21.5

 
6.4

 

U.S. government securities
2.9

 
2.3

 
0.6

 

 

Variable rate bond fund
84.1

 
84.1

 

 

 

 
$
297.8

 
$
188.8

 
$
72.0

 
$
6.4

 
$
30.6

 
 
 
 
 
 
 
 
 
 

Actual maturities may differ from contractual maturities due to the exercise of pre-payment options.

Excluding investments in U.S. government securities, we are not exposed to any significant concentration of credit risk in our fixed maturities portfolio. Our long-term investments include $30.6 million estimated fair value of municipal note securities with an auction reset feature ("auction rate securities"), which were issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities. Liquidity for these auction rate securities is typically provided by an auction process, which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every seven or 35 days. We consider our auction rate securities to be in an inactive market as auctions have continued to fail. Our auction rate securities have been in an unrealized loss position for more than twelve months. Two auction rate securities with an aggregate par value of $22.4 million have investment grade security credit ratings and one auction rate security with a par value of $11.6 million has a credit rating below investment grade. Our auction rate securities are covered by government guarantees or municipal bond insurance and we have the ability and intent to hold these securities until maturity or market stability is restored. Accordingly, we do not believe our auction rate securities are impaired and we have not recorded an other-than-temporary impairment as of June 30, 2016.

There were no redemptions or sales of our auction rate securities during the six months ended June 30, 2016 and 2015.


14



6. RESTRICTED INVESTMENTS

As a condition for licensure, we are required to maintain certain funds on deposit or pledged to various state agencies. Certain of our state contracts require the issuance of surety bonds. We classify restricted investments as long-term regardless of the contractual maturity date of the securities held, due to the nature of the states' requirements. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of our restricted investment securities are as follows: 

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2016
 
 
 
 
 
 
 
Cash
$
60.7

 
$

 
$

 
$
60.7

Certificates of deposit
0.1

 

 

 
0.1

Money market funds
66.9

 

 

 
66.9

U.S. government securities
74.7

 
0.1

 

 
74.8

 
$
202.4

 
$
0.1

 
$

 
$
202.5

December 31, 2015
 

 
 

 
 

 
 

Cash
$
3.2

 
$

 
$

 
$
3.2

Certificates of deposit
1.1

 

 

 
1.1

Money market funds
67.5

 

 

 
67.5

U.S. government securities
124.3

 

 
(0.1
)
 
124.2

 
$
196.1

 
$

 
$
(0.1
)
 
$
196.0

 
 
 
 
 
 
 
 
 
Realized gains and losses on restricted investments were not material for the three and six months ended June 30, 2016 and 2015.

7. STOCK-BASED COMPENSATION

Compensation expense related to our stock-based compensation awards was $8.5 million and $4.6 million for the three months ended June 30, 2016 and 2015, respectively, and $15.0 million and $8.7 million for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, there was $45.9 million of unrecognized compensation cost related to non-vested stock-based compensation arrangements that is expected to be recognized over a weighted-average period of 2.1 years. The unrecognized compensation cost for certain of our performance stock units ("PSUs"), which are subject to variable accounting, was determined based on our closing common stock price of $107.28 as of June 30, 2016 and amounted to approximately $16.3 million of the total unrecognized compensation cost. Due to the nature of the accounting for these awards, future compensation cost will fluctuate based on changes in our common stock price.

As discussed in our 2015 Form 10-K, the Compensation Committee awards certain equity-based compensation under our stock plans, including stock options, restricted stock units ("RSUs"), PSUs and market stock units ("MSUs"), each of which is described below:

RSUs
For each RSU granted employees receive one share of common stock, net of taxes withheld at the statutory minimum, at the end of the vesting period. RSUs typically vest one to three years from the date of grant.

We estimate compensation cost for RSUs based on the grant date fair value and recognize the expense ratably over the vesting period of the award. For RSUs, the grant date fair value is based on the closing price of our common stock on the date of grant.

PSUs
The actual number of common stock shares earned upon vesting will range from zero shares up to 200% of the target award, depending on the award date, the target award amounts for the PSU awards and our achievement of certain targets set by the Compensation Committee at its sole discretion. PSUs generally cliff-vest 3 years from the grant date based on

15



the achievement of the performance goals and conditioned on the employee's continued service through the vesting date. The number of shares earned by the participant is generally paid net of taxes withheld at the statutory minimum.

The Compensation Committee has awarded two variations of PSUs, including:

Financial and Quality Performance Goals: Certain of our PSUs are subject to variable accounting as they do not have a grant date fair value for accounting purposes due to the subjective nature of the terms of the PSUs, which precludes a mutual understanding of the key terms and conditions. We recognize expense for PSUs ultimately expected to vest over the requisite service period based on our estimates of progress made towards the achievement of the predetermined performance measures and changes in the market price of our common stock. In March 2016, we issued certain PSUs whereby a mutual understanding of key terms and conditions exist; therefore, for these awards we estimate compensation cost based on the grant date fair value, as well as our estimate of the performance outcome, and recognize the expense ratably over the vesting period of the award.

Market Based Goals: Beginning in March 2016, we issued certain PSUs which are subject to a market condition (total shareholder return relative to industry peer companies) and we estimate compensation cost based on the grant date fair value and recognize the expense ratably over the vesting period of the award. For these PSUs, the grant date fair value is measured using a Monte Carlo simulation approach, which estimates the fair value of awards based on randomly generated simulated stock-price paths through a lattice-type structure. PSUs expected to vest are recognized as expense on a straight-line basis over the vesting period, which is generally three years.

MSUs
The number of shares of common stock earned upon vesting is determined based on the ratio of our average common stock price during the last 30 market trading days of the calendar year immediately preceding the vesting date to the comparable average common stock price in the year immediately preceding the grant date, applied to the base units granted. The performance ratio is capped at 150% or 200%, depending on the grant date. If our common stock price declines by more than 50% over the performance period, no shares are earned by the recipient. The number of shares earned by the participant is generally paid net of taxes withheld at the statutory minimum.

We estimate compensation cost for MSUs based on the grant date fair value and recognize the expense ratably over the vesting period of the award. For MSUs, the grant date fair value is measured using a Monte Carlo simulation approach, which estimates the fair value of awards based on randomly generated simulated stock-price paths through a lattice-type structure. MSUs expected to vest are recognized as expense on a straight-line basis over the vesting period, which is generally three years.

A summary of RSU, PSU and MSU award activity for the six months ended June 30, 2016 at target is presented in the table below.
 

 RSUs
 
PSUs
 
MSUs
 
Total
Outstanding as of January 1, 2016
290,619

 
395,899

 
133,290

 
819,808

Granted
139,109

 
235,981

 
15,879

 
390,969

Vested
(111,052
)
 
(63,729
)
 
(39,808
)
 
(214,589
)
Forfeited and expired
(24,551
)
 
(92,306
)
 
(14,727
)
 
(131,584
)
Outstanding as of June 30, 2016
294,125

 
475,845

 
94,634

 
864,604

 
 
 
 
 
 
 
 

The weighted-average grant-date fair value of all equity awards granted during the six months ended June 30, 2016 was $99.11.


16



8. DEBT

The following table summarizes our outstanding debt obligations and their classification in the accompanying Condensed Consolidated Balance Sheets (in millions):

 
June 30, 2016
 
December 31, 2015
Current portion of long-term debt:
 
 
 
Term loan
$

 
$
300.0

Debt issuance costs

 
(0.5
)
     Total current portion of long-term debt
$

 
$
299.5

Long-term debt:
 
 
 
5.75% Senior Notes, net of unamortized debt premium
$
910.8

 
$
912.1

2016 Revolving Credit Facility
200.0

 

Debt issuance costs
(13.6
)
 
(12.5
)
     Total long-term debt
$
1,097.2

 
$
899.6

Total debt
$
1,097.2

 
$
1,199.1

 
 
 
 

Senior Notes

On June 1, 2015, we completed the offering and sale of $300.0 million aggregate principal amount of our 5.75% unsecured senior notes due 2020 (the "Senior Notes") pursuant to a reopening of our existing series of such notes. The offering was completed at an issue price of 104.50%, plus accrued interest, and resulted in a debt premium of $13.5 million, which is being amortized over the remaining term of the Senior Notes. Interest is payable on May 15 and November 15 each year. As of June 30, 2016, our outstanding Senior Notes totaled $910.8 million, including $10.8 million of unamortized debt premium, inclusive of our Senior Notes described above as well as $600.0 million issued in November 2013. The Senior Notes were classified as long-term debt in our condensed consolidated balance sheet based on their November 2020 maturity date.

Credit Agreements

On January 8, 2016, we entered into the 2016 Credit Agreement, which provides for a senior unsecured revolving loan facility (the "2016 Revolving Credit Facility"), with an initial aggregate principal amount at any time outstanding not to exceed $850.0 million. The 2016 Credit Agreement provides for the 2016 Revolving Credit Facility of up to $850.0 million (the loans thereunder, the “Revolving Credit Loans”), of which up to $150.0 million is available for letters of credit. The 2016 Credit Agreement also provides that we may, at our option, increase the aggregate amount of the 2016 Revolving Credit Facility and/or obtain incremental term loans in an amount up to $200.0 million without the consent of any lenders not participating in such increase, subject to certain customary conditions and lenders committing to provide the increase in funding. Unutilized commitments under the 2016 Credit Agreement are subject to a fee of 0.25% to 0.35% depending upon our ratio of total net debt to cash flow.

At the closing of the 2016 Credit Agreement, $200.0 million of the 2016 Revolving Credit Facility was drawn upon and, along with $100.0 million in cash, used to repay our $300.0 million term loan under our prior credit agreement, which was terminated. Borrowings under the Revolving Credit Loans may be used for general corporate purposes, including, but not limited to, working capital, organic growth and acquisitions. Commitments under the 2016 Revolving Credit Facility expire on January 8, 2021 and any amounts outstanding under the 2016 Revolving Credit Facility will be payable in full at that time. As of June 30, 2016, our long-term debt included the $200.0 million drawn on the 2016 Credit Facility. The interest rate on the outstanding amount of the 2016 Credit Facility was 2.06% as of June 30, 2016.
  
Revolving Credit Loans designated by us at the time of borrowing as “ABR Loans” that are outstanding under the 2016 Credit Agreement bear interest at a rate per annum equal to (i) the greatest of (a) the Prime Rate (as defined in the 2016 Credit Agreement) in effect on such day; (b) the Federal Reserve Bank of New York Rate (as defined in the 2016 Credit Agreement) in effect on such day plus 1/2 of 1%; and (c) the Adjusted LIBO Rate (as defined in the 2016 Credit Agreement) for a one month interest period on such day plus 1%; plus (ii) the Applicable Rate. Revolving Credit Loans designated by us at the time of borrowing as “Eurodollar Loans” that are outstanding under the 2016 Credit Agreement bear interest at a rate per annum equal to the Adjusted LIBO Rate (as defined in the 2016 Credit Agreement) for the interest period in effect for such borrowing plus

17



the Applicable Rate. The “Applicable Rate” means a percentage ranging from 0.50% to 1.00% per annum for ABR Loans and a percentage ranging from 1.50% to 2.00% per annum for Eurodollar Loans, depending upon our ratio of total debt to cash flow, as calculated in accordance with the 2016 Credit Agreement.
  
The 2016 Credit Agreement includes negative and financial covenants that limit certain activities of us and our subsidiaries, including (i) restrictions on our ability and the ability of our subsidiaries to incur additional indebtedness; and (ii) financial covenants that require (a) the ratio of total net debt to cash flow not to exceed a maximum; and (b) a minimum interest expense and principal payment coverage ratio. The 2016 Credit Agreement also contains customary representations and warranties that must be accurate in order for us to borrow under the 2016 Revolving Credit Facility. In addition, the 2016 Credit Agreement contains customary events of default. If an event of default occurs and is continuing, we may be required immediately to repay all amounts outstanding under the 2016 Credit Agreement. Lenders holding at least 50% of the loans and commitments under the 2016 Credit Agreement may elect to accelerate the maturity of the loans and/or terminate the commitments under the 2016 Credit Agreement upon the occurrence and during the continuation of an event of default.

As of June 30, 2016 and as of the date of this filing, we remain in compliance with all covenants under both the Senior Notes and the 2016 Credit Agreement.

9. FAIR VALUE MEASUREMENTS

Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, accounts payable, medical benefits payable, long-term debt and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value due to the short period of time between the origination of these instruments and the expected realization or payment. Certain assets and liabilities are measured at fair value on a recurring basis and are disclosed below. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see the consolidated financial statements and notes thereto included in our 2015 Form 10-K.

Recurring Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis at June 30, 2016 are as follows:

 
 
 
Fair Value Measurements Using
 
Carrying Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Investments:
 
 
 
 
 
 
 
Asset backed securities
$
10.6

 
$

 
$
10.6

 
$

Auction rate securities
30.6

 

 

 
30.6

Corporate debt securities
79.2

 

 
79.2

 

Money market funds
47.6

 
47.6

 

 

Municipal securities
42.8

 

 
42.8

 

U.S. government and agency obligations
2.9

 
2.9

 

 

Variable rate bond fund
84.1

 
84.1

 

 

Total investments
$
297.8

 
$
134.6

 
$
132.6

 
$
30.6

Restricted investments:
 

 
 

 
 

 
 

Cash
60.7

 
60.7

 

 

Certificates of deposit
0.1

 

 
0.1

 

Money market funds
66.9

 
66.9

 

 

U.S. government and agency obligations
74.8

 
74.8

 

 

Total restricted investments
$
202.5

 
$
202.4

 
$
0.1

 
$

 
 
 
 
 
 
 
 


18



Assets and liabilities measured at fair value on a recurring basis at December 31, 2015 are as follows:

 
 
 
Fair Value Measurements Using
 
Carrying Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Investments:
 
 
 
 
 
 
 
Asset backed securities
$
17.2

 
$

 
$
17.2

 
$

Auction rate securities
31.7

 

 

 
31.7

Corporate debt securities
103.8

 

 
103.8

 

Money market funds
45.9

 
45.9

 

 

Municipal securities
46.3

 

 
46.3

 

U.S. government securities
7.1

 
7.1

 

 

Variable rate bond fund
84.2

 
84.2

 

 

Total investments
$
336.2

 
$
137.2

 
$
167.3

 
$
31.7

Restricted investments:
 

 
 

 
 

 
 

Cash
$
3.2

 
$
3.2

 
$

 
$

Certificates of deposit
1.1

 

 
1.1

 

Money market funds
67.5

 
67.5

 

 

U.S. government securities
124.2

 
124.2

 

 

Total restricted investments
$
196.0

 
$
194.9

 
$
1.1

 
$

 
 
 
 
 
 
 
 
 
The following table presents the carrying value and fair value of our long-term debt outstanding as of June 30, 2016 and December 31, 2015:

 
 
 
Fair Value Measurements Using
 
Carrying Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Long-term debt - June 30, 2016
$
1,097.2

 
$
930.4

 
$
194.4

 
$

Long-term debt - December 31, 2015
899.6

 
931.5

 

 

 
 
 
 
 
 
 
 

The fair value of our Senior Notes was determined based on quoted market prices; therefore, would be classified within Level 1 of the fair value hierarchy. The fair value of obligations outstanding under our 2016 Revolving Credit Facility was determined based on a discounted cash flow analysis, utilizing current rates estimated to be available to us for debt of similar terms and remaining maturities; therefore, would be classified within Level 2 of the fair value hierarchy. The carrying value of our Term Loan outstanding at December 31, 2015 approximated the fair value; therefore, the carrying value and fair value were excluded from the table above.
 

19



The following table presents the changes in the fair value of our Level 3 auction rate securities for the three and six months ended June 30, 2016 and 2015.

 
For the Three Months Ended
June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
31.2

 
$
32.3

 
$
31.7

 
$
32.3

Realized gains (losses) in earnings

 

 

 

Unrealized gains (losses) in other comprehensive income
(0.6
)
 
(0.5
)
 
(1.1
)
 
(0.5
)
Purchases, sales and redemptions

 
(0.1
)
 

 
(0.1
)
Net transfers in or (out) of Level 3

 

 

 

Balance as of June 30,
$
30.6

 
$
31.7

 
$
30.6

 
$
31.7

 
 
 
 
 
 
 
 


10. INCOME TAXES

Our effective income tax rate was 56.1% and 56.5% for the three and six months ended June 30, 2016, respectively, and 63.3% and 64.5% for the three and six months ended June 30, 2015, respectively. The rate decline was primarily driven by a higher level of income before income taxes in 2016, the recognition of certain previously unrecognized tax benefits, discussed below, and the adoption of ASU 2016-09 "Compensation—Stock Compensation (Topic 718)," which was reflected as of January 1, 2016.

In September 2014, the IRS issued final regulations on the ACA's $0.5 million limit on the deduction for compensation for health insurance providers under Internal Revenue Code ("IRC") section 162(m)(6). As a result, we no longer believe the deduction limitations apply to WellCare, and we took deductions totaling $2.0 million and $4.4 million, gross before the effect of taxes, for such compensation during the three and six months ended June 30, 2016, respectively. However, we are not able to conclude at this time that our tax position is more-likely-than-not to be sustained upon IRS review for periods other than the 2014 tax year, as discussed below. Therefore, we recognized cumulative liabilities for unrecognized tax benefits amounting to $13.0 million and $14.0 million at June 30, 2016 and December 31, 2015, respectively.

During June 2016, the IRS completed its audit of our 2014 consolidated income tax return, which effectively settled the 2014 tax year. Accordingly, we recognized $2.6 million of previously unrecognized tax benefits resulting from our IRC section 162(m)(6) tax position during the three and six months ended June 30, 2016, which had the effect of reducing our effective tax rate.

11. COMMITMENTS AND CONTINGENCIES

Government Investigations

Under the terms of settlement agreements entered into on April 26, 2011, and finalized on March 23, 2012, to resolve matters under investigation by the Civil Division of the U.S. Department of Justice ("Civil Division") and certain other federal and state enforcement agencies (the "Settlement"), we agreed to pay the Civil Division a total of $137.5 million in four annual installments of $34.4 million over 36 months, plus interest accrued at 3.125%. The final payment of $35.4 million, which included accrued interest, was remitted to the Civil Division in March 2015. As of March 31, 2015, no amounts remained outstanding related to this obligation.
 
Securities Class Action Complaint

In December 2010, we entered into a Stipulation and Agreement of Settlement (the "Stipulation Agreement") with the lead plaintiffs in the consolidated securities class action Eastwood Enterprises, L.L.C. v. Farha, et al., Case No. 8:07-cv-1940-VMC-EAJ. The Stipulation Agreement requires us to pay to the class 25% of any sums we recover from Todd Farha, Paul Behrens and/or Thaddeus Bereday related to the same facts and circumstances that gave rise to the consolidated securities class action. Messrs. Farha, Behrens and Bereday are three former executives that were implicated in the government investigations of the Company that commenced in 2007.


20



Corporate Integrity Agreement

We operated under a Corporate Integrity Agreement (the "Corporate Integrity Agreement") with the Office of Inspector General of the United States Department of Health and Human Services ("OIG-HHS"). The Corporate Integrity Agreement had a term of five years from its effective date of April 26, 2011 with certain OIG-HHS rights and company obligations extending for an additional 120 days following the submission of the fifth annual report. The Corporate Integrity Agreement mandates various ethics and compliance programs designed to help ensure our ongoing compliance with federal health care program requirements. The terms of the Corporate Integrity Agreement include certain organizational structure requirements, internal monitoring requirements, compliance training, screening processes for associates, requirements related to reporting to OIG-HHS, and the engagement of an independent review organization to review and prepare written reports regarding, among other things, WellCare's reporting practices and bid submissions to federal health care programs. With the completion of the fifth reporting period on April 26, 2016, WellCare is required to submit to the OIG-HHS for its review and acceptance the fifth annual report, by August 5, 2016. Upon acceptance of our final annual report, the OIG-HHS, at its discretion, may release us from the Corporate Integrity Agreement. If we do not comply with the terms of the Corporate Integrity Agreement, we may be subject to penalties or exclusion from participation in federal health care programs.

Indemnification Obligations

Under Delaware law, our charter and bylaws and certain indemnification agreements to which we are a party, we are obligated to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors, officers and associates with respect to current and future investigations and litigation, including the matters discussed in this note. The indemnification agreements for our directors and executive officers with respect to events occurring prior to May 2009 require us to indemnify an indemnitee to the fullest extent permitted by law if the indemnitee was or is or becomes a party to or a witness or other participant in any proceeding by reason of any event or occurrence related to the indemnitee's status as a director, officer, associate, agent or fiduciary of the Company or any of our subsidiaries. The indemnification agreements require us to indemnify an indemnitee against all expenses, including attorney's fees, judgments, fines, settlement amounts and interest and other charges, and any taxes as a result of the receipt of payments under the indemnification agreement. We will not indemnify the indemnitee if not permitted under applicable law. We are required to advance all expenses incurred by the indemnitee. We are entitled to reimbursement by an indemnitee of expenses advanced if the indemnitee is not permitted to be reimbursed under applicable law after a final judicial determination is made and all rights of appeal have been exhausted or lapsed.

We amended and restated our indemnification agreements in May 2009. The revised agreements apply to our officers and directors with respect to events occurring after that time. Pursuant to the 2009 indemnification agreements, we will indemnify the indemnitee against all expenses, including attorney's fees, judgments, penalties, fines, settlement amounts and any taxes imposed as a result of payments made under the indemnification agreement incurred in connection with any proceedings that relate to the indemnitee's status as a director, officer or associate of the Company or any of our subsidiaries or any other enterprise that the indemnitee was serving at our request. We will also indemnify for expenses incurred by an indemnitee if the indemnitee, by reason of his or her corporate status, is a witness in any proceeding. Further, we are required to indemnify for expenses incurred by an indemnitee in defense of a proceeding to the extent the indemnitee has been successful on the merits or otherwise. Finally, if the indemnitee is involved in certain proceedings as a result of the indemnitee's corporate status, we are required to advance the indemnitee's reasonable expenses incurred in connection with such proceeding, subject to the requirement that the indemnitee repay the expenses if it is ultimately determined that the indemnitee is not entitled to be indemnified. We are not obligated to indemnify an indemnitee for losses incurred in connection with any proceeding if a determination has not been made by the Board of Directors, a committee of disinterested directors or independent legal counsel in the specific case that the indemnitee has satisfied any standards of conduct required as a condition to indemnification under Section 145 of the Delaware General Corporation Law.

Pursuant to our obligations, we have advanced, and will continue to advance, legal fees and related expenses to three former officers and two additional associates who were criminally indicted in connection with the government investigations of the Company that commenced in 2007 related to federal criminal health care fraud charges including conspiracy to defraud the United States, false statements relating to health care matters, and health care fraud in connection with their defense of criminal charges. In June 2013, the jury in the criminal trial reached guilty verdicts on multiple charges for the four individuals that were tried in 2013. In May 2014, the individuals were sentenced and our request for restitution was denied. All four individuals filed notices of appeal and the government filed notices of cross appeal on three of the four individuals, which the government has subsequently voluntarily dismissed. The fifth individual is expected to be tried after the appeals have been decided.

We have also previously advanced legal fees and related expenses to these five individuals regarding: disputes in Delaware Chancery Court related to whether we were legally obligated to advance fees or indemnify certain of these individuals; the

21



class actions titled Eastwood Enterprises, L.L.C. v. Farha, et al. and Hutton v. WellCare Health Plans, Inc. et al. filed in federal court; six stockholder derivative actions filed in federal and state courts between October 2007 and January 2008; an investigation by the United States Securities & Exchange Commission (the "Commission"); and an action by the Commission filed in January 2012 against three of the five individuals, Messrs. Farha, Behrens and Bereday. The Delaware Chancery Court cases have concluded. We settled the class actions in May 2011. In 2010, we settled the stockholder derivative actions and we were realigned as the plaintiff to pursue our claims against Messrs. Farha, Behrens and Bereday. These actions, as well as the action by the Commission, are currently stayed.

In addition, we are advancing legal fees and related expenses to Mr. Farha in connection with his lawsuit filed in Florida state court to have certain restrictions lifted on WellCare stock purportedly awarded to him during his employment with WellCare. We have asserted affirmative defenses and counterclaims against Mr. Farha in response. This action is awaiting a hearing on the Company’s motion for summary judgment, which is currently scheduled for September 2016.

In connection with these matters, we have advanced to the five individuals, cumulative legal fees and related expenses of approximately $220.8 million from the inception of the investigations through June 30, 2016. We incurred $4.3 million and $9.7 million of these fees and related expenses during the three and six months ended June 30, 2016, respectively, and $6.2 million and $12.9 million for the three and six months ended June 30, 2015, respectively. We expense these costs as incurred and classify the costs as selling, general and administrative expense incurred in connection with the investigations and related matters.

We expect the continuing cost of our obligations to the five individuals in connection with their defense and appeal of criminal charges and related litigation to be significant and to continue for a number of years. We have exhausted our insurance policies related to reimbursement of our advancement of fees related to these matters. We are unable to estimate the total amount of these costs or a range of possible loss. Accordingly, we continue to expense these costs as incurred. Even if it is eventually determined that we are entitled to reimbursement of the advanced expenses, it is possible that we may not be able to recover all or any portion of our damages or advances. Our indemnification obligations and requirements to advance legal fees and expenses may continue to have a material adverse effect on our financial condition, results of operations and cash flows.

Other Lawsuits and Claims

Based on the nature of our business, we are subject to regulatory reviews or other investigations by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance and benefits companies and their reviews focus on numerous facets of our business, including claims payment practices, provider contracting, competitive practices, commission payments, privacy issues and utilization management practices, among others. Some of these reviews have historically resulted in fines imposed on us and some have required changes to our business practices. We continue to be subject to such reviews, which may result in additional fines and/or sanctions being imposed, premium refunds or additional changes in our business practices.

Separate and apart from the legal matters described above, we are also involved in other legal actions in the normal course of our business, including, without limitation, protests and appeals related to Medicaid procurement awards, wage and hour claims and other employment claims, vendor disputes and provider disputes regarding payment of claims. Some of these actions seek monetary damages including claims for liquidated or punitive damages, which are not covered by insurance. We review relevant information with respect to these litigation matters and we update our estimates of reasonably possible losses and related disclosures. We accrue an estimate for contingent liabilities, including attorney's fees related to these matters, if a loss is probable and estimable. Currently, we do not expect that the resolution of any of these currently pending actions, either individually or in the aggregate, will differ materially from our current estimates or have a material adverse effect on our results of operations, financial condition and cash flows. However, the outcome of any legal actions cannot be predicted, and therefore, actual results may differ from those estimates.


22



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Statements contained in this Form 10-Q for the quarterly period ended June 30, 2016 ("2016 Form 10-Q"), which are not historical fact may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and we intend such statements to be covered by the safe harbor provisions for forward-looking statements contained therein. Such statements, which may address, among other things, our financial outlook, the timing of the launch of new programs, pending new Medicaid contracts, the outcome of Medicaid award protests and litigation, the appropriation and payment to us by state governments of Medicaid premiums receivable, rate changes, market acceptance of our products and services, our ability to finance growth opportunities, our ability to respond to changes in laws and government regulations, implementation of our growth strategies, projected capital expenditures, liquidity and the availability of additional funding sources may be found in this Item of this 2016 Form 10-Q and elsewhere in this report generally. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "targets," "predicts," "potential," "continues" or the negative of such terms or other comparable terminology. You are cautioned that forward-looking statements involve risks and uncertainties, including economic, regulatory, competitive and other factors that may affect our business. Please refer to the Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 ("2015 Form 10-K"). These forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, as they are based on management's expectations and beliefs about future events and circumstances. Given the risks and uncertainties inherent in forward-looking statements, any of our forward-looking statements could be incorrect and investors are cautioned not to place undue reliance on any of our forward-looking statements. Subsequent events and developments may cause actual results to differ, perhaps materially, from our forward-looking statements. We undertake no duty and expressly disclaim any obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Our actual results may differ materially from those indicated by forward-looking statements as a result of various important factors including the expiration, cancellation, delay, suspension or amendment of our state and federal contracts. In addition, our results of operations and estimates of future earnings depend, in large part, on accurately estimating and effectively managing health benefits and other operating expenses. A variety of factors may affect our premium revenue, medical expenses, profitability, cash flows, and liquidity, including the outcome of any protests and litigation related to Medicaid awards, competition, changes in health care practices, changes in the demographics of our members, higher than expected utilization of health care services by our members, changes in federal or state laws and regulations or their interpretations, inflation, provider contract changes, changes in or suspensions or terminations of our contracts with government agencies, new technologies, such as new, expensive medications, potential reductions in Medicaid and Medicare revenue, the appropriation and payment to us by state governments of Medicaid premiums receivable, our ability to negotiate actuarially sound rates, especially in new programs with limited experience, government-imposed surcharges, taxes or assessments, changes to how provider payments are made by governmental payors, the ability of state customers to launch new programs on their announced timelines, the timing of the approval by the Centers for Medicare & Medicaid Services ("CMS") of Medicaid contracts, or changes to the contracts or rates required to obtain CMS approval, major epidemics, disasters and numerous other factors affecting the delivery and cost of health care, such as major health care providers' inability to maintain their operations and our ability to implement healthcare value-added programs and our ability to control our medical costs and other operating expenses, including through our vendors. Governmental action or inaction could result in premium revenues not increasing to offset any increase in medical costs, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "ACA") industry fee or other operating expenses. Once set, premiums are generally fixed for one-year periods and, accordingly, costs that exceed our estimates or our regulators' actuarial pricing assumptions during such periods generally may not be able to be recovered through higher premiums or rate adjustments. Furthermore, if we are unable to estimate accurately incurred but not reported medical costs in the current period, our future profitability may be adversely affected. Due to these factors and risks, we cannot provide any assurance regarding our future premium levels or our ability to control our future medical costs.

In addition, the risks and uncertainties include, but are not limited to, our progress on top priorities such as improving health care quality and access, ensuring a competitive cost position, delivering prudent, profitable growth, and achieving service excellence, our ability to effectively estimate and manage growth, our ability to address operational challenges relating to new business, including, but not limited to, the outcome of any protests and litigation related to Medicaid awards, our ability to meet the requirements of readiness reviews, our ability to effectively execute and integrate acquisitions and the performance of our acquisitions once acquired. Due to these factors and risks, we may be required to write down or take impairment charges of assets associated with acquisitions. Furthermore, at both the federal and state government levels, legislative and regulatory

23



proposals have been made related to, or potentially affecting, the health care industry, including, but not limited to, limitations on managed care organizations, including changes to membership eligibility, benefit mandates, and reform of the Medicaid and Medicare programs. Any such legislative or regulatory action, including changes to benefit mandates or reform of the Medicaid and Medicare programs, could have the effect of reducing the premiums paid to us by governmental programs, increasing our medical and administrative costs or requiring us to materially alter the manner in which we operate. We are unable to predict the specific content of any future legislation, action or regulation that may be enacted or when any such future legislation or regulation will be adopted. Therefore, we cannot predict accurately the effect or ramifications of such future legislation, action or regulation on our business. We also may be unable to comply with the terms of our Corporate Integrity Agreement, which could result in monetary penalties or exclusion from participating in federal health care programs.

OVERVIEW

Introduction

WellCare Health Plans, Inc. (the "Company," "we," "us," or "our"), focuses exclusively on government-sponsored managed care services, primarily through Medicaid, Medicare Advantage ("MA") and Medicare Prescription Drug Plans ("PDPs") to families, children, seniors and individuals with complex medical needs. As of June 30, 2016, we served approximately 3.8 million members. During the six months ended June 30, 2016, we operated Medicaid health plans in Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, New Jersey, New York and South Carolina. As of June 30, 2016, we also operated MA coordinated care plans ("CCPs") in Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Mississippi, New Jersey, New York, South Carolina, Tennessee and Texas, as well as stand-alone Medicare prescription drug plans ("PDP") in all 50 states and the District of Columbia.

Summary of Consolidated Financial Results

Summarized below are the key highlights for the three and six months ended June 30, 2016. For additional information, refer to "Results of Operations" below, which discusses both consolidated and segment results.

Membership at June 30, 2016 declined by 58,000, or 1.5%, compared to June 30, 2015, mainly driven by a decline in PDP membership as a result of our 2016 bid strategy, as well as a decline in our Medicare Health Plans membership due to the divestiture of Sterling Life Insurance Company ("Sterling"), and our bid positioning for the 2016 plan year. Medicaid Health Plans membership increased 32,000, or 1.3% year-over-year, primarily due to the membership acquired from Advicare Corp. ("Advicare"), effective June 1, 2016.

Premiums increased 3.2% and 2.6% for the three and six months ended June 30, 2016, respectively, compared to the same periods in 2015, mainly reflecting membership growth in our Medicaid Health Plans segment as well as additional Medicaid premium revenue related to underpayments for specific benefits in Florida for certain periods prior to May 2016. These increases were partially offset by the effect of lower membership in our Medicare PDPs segment and the divestiture of Sterling.

Net Income for the three and six months ended June 30, 2016 increased $39.1 million and $59.4 million, respectively, compared to the same periods in 2015 primarily attributable to operating improvement in all three of the company’s reportable segments due to continued improvement in operational execution and pharmacy rebates management.

Key Developments and Accomplishments

Presented below are key developments and accomplishments relating to progress on our business strategy that have affected, or are expected to affect, our results:

In 2016, the Georgia Department of Community Health (“Georgia DCH”) announced its intention to exercise its option (through two six-month renewal terms) to extend our current contract through June 30, 2017. We have received from Georgia DCH a notice of intent to award a new contract and anticipate services under that contract would commence on July 1, 2017, with an initial one-year term and three additional one-year renewal options at Georgia DCH's discretion. As of June 30, 2016, we served approximately 580,000 Medicaid members in Georgia.

In June 2016, we completed the acquisition of certain assets of Advicare, a managed care organization that provides Medicaid benefits in South Carolina. The acquired assets primarily relate to approximately 30,000 Advicare members who were transferred to our Medicaid plan in South Carolina, as well as certain provider agreements.

24




In May 2016, we entered into a contract amendment with the Kentucky Department of Medicaid Services that renewed our participation in the Kentucky Medicaid program through December 31, 2016, and included one additional six-month or three additional one-year renewal periods upon mutual agreement.

In April 2016, the Nebraska Department of Administrative Services ("DAS") announced that we were selected to participate in the state’s Medicaid Managed Care program, Heritage Health. Services under the contract are scheduled to commence on January 1, 2017, with an initial five-year term and two additional one-year renewal options at the discretion of Nebraska DAS.

In March 2016, we extended our contract with the New York State Department of Health to continue providing managed care services for children as part of the Child Health Plus program in 16 counties. The extension runs through September 2019 and does not require annual renewals.

In January 2016, we entered into a new $850.0 million senior unsecured revolving credit facility, replacing and terminating the previous senior unsecured credit facility. Upon closing, through a combination of $100.0 million in cash and $200.0 million borrowed as a revolving loan under the new credit facility, we repaid in full the $300.0 million term loan due in September 2016 (the "Term Loan") under the previous credit facility.

Effective January 1, 2016, we transitioned our pharmacy benefit management to CVS Health Corporation.

Political and Regulatory Developments

On May 6, 2016, CMS published regulations that overhauled Medicaid managed care requirements. These regulations include requirements that state Medicaid programs evaluate network adequacy standards and impose a requirement of managed care organizations ("MCO") to report medical loss ratios ("MLRs") annually to states, as well as a requirement that states set MCO rates to reasonably achieve an MLR of greater than 85% as long as the capitation rates are actuarially sound. Additionally, these regulations expand federal financial participation reimbursement opportunities related to members with behavioral (mental) health issues who receive short term services in an alternative mental disease institution and outline requirements for value-based provider contracting.  Under the regulations, the states will also be tasked with developing and publicizing plan quality rating results.  These changes will be phased in over the course of three years with some regulations being effective immediately on May 6, 2016.  The implementation by CMS and the state Medicaid agencies of these regulations may materially adversely affect our results of operations, financial condition and cash flows.

In April 2016, CMS released final updates to the MA and Part D programs through the 2017 Rate Announcement and Call Letter. We estimate the 2017 rate change, as compared with 2016, will be flat to one percent, excluding Medicare coding trends and the 2017 ACA fee moratorium.

Our 2017 PDP bids resulted in one of our basic plans being below the benchmarks in 30 of the 34 CMS regions for which we submitted bids, and within the de minimis range in three other regions, compared with our 2016 bids, in which we were below the benchmarks in 17 of the 34 CMS regions, and within the de minimis range in nine other regions.



25




RESULTS OF OPERATIONS

Consolidated Financial Results

The following tables set forth condensed consolidated statements of operations data, as well as other key data used in our results of operations discussion for the three and six months ended June 30, 2016 compared to the same periods in 2015.
 
For the Three Months Ended
June 30,
 
Percentage
 
For the Six Months Ended June 30,
 
Percentage
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Revenues:
(Dollars in millions)
Premium
$
3,590.6

 
$
3,478.5

 
3.2
 %
 
$
7,126.6

 
$
6,944.6

 
2.6
 %
Investment and other income
3.8

 
4.0

 
(5.0
)%
 
8.3

 
7.8

 
6.4
 %
Total revenues
3,594.4

 
3,482.5

 
3.2
 %
 
7,134.9

 
6,952.4

 
2.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 

 
 

 
 

Medical benefits
2,988.9

 
2,977.1

 
0.4
 %
 
6,050.8

 
6,029.3

 
0.4
 %
Selling, general and administrative
278.0

 
255.5

 
8.8
 %
 
546.9

 
512.4

 
6.7
 %
ACA industry fee
56.9

 
58.3

 
(2.4
)%
 
113.9

 
116.6

 
(2.3
)%
Medicaid premium taxes
27.6

 
20.3

 
36.0
 %
 
54.8

 
40.2

 
36.3
 %
Depreciation and amortization
21.7

 
18.1

 
19.9
 %
 
42.5

 
34.9

 
21.8
 %
Interest
14.6

 
12.5

 
16.8
 %
 
30.4

 
23.9

 
27.2
 %
Total expenses
3,387.7

 
3,341.8

 
1.4
 %
 
6,839.3

 
6,757.3

 
1.2
 %
Income before income taxes
206.7

 
140.7

 
46.9
 %
 
295.6

 
195.1

 
51.5
 %
Income tax expense
115.9

 
89.0

 
30.2
 %
 
167.0

 
125.9

 
32.6
 %
Net income
$
90.8

 
$
51.7

 
75.6
 %
 
$
128.6

 
$
69.2

 
85.8
 %
Effective tax rate
56.1
%
 
63.3
%
 
(7.2
)%
 
56.5
%
 
64.5
%
 
(8.0
)%
 
 
 
 
 
 
 
 
 
 
 
 



26



Membership

In the following tables, we have summarized membership for our business segments in each state that exceeded 5% of our total membership, as well as all other states in the aggregate, as of June 30, 2016 and 2015, respectively.
 
 
June 30, 2016
State
 
Medicaid Health Plans(1)
 
Medicare Health Plans(1)
 
Medicare PDPs
 
Total Membership
 
Percentage of
Total
Florida
 
773,000

 
92,000

 
29,000

 
894,000

 
23.7%
Georgia
 
580,000

 
38,000

 
23,000

 
641,000

 
17.0%
Kentucky
 
445,000

 
8,000

 
20,000

 
473,000

 
12.5%
New York
 
129,000

 
42,000

 
55,000

 
226,000

 
6.0%
Illinois
 
168,000

 
15,000

 
28,000

 
211,000

 
5.6%
Other states
 
331,000

 
136,000

 
857,000

 
1,324,000

 
35.2%
Total
 
2,426,000

 
331,000

 
1,012,000

 
3,769,000

 
100.0%
 
 
 
 
 
 
 
 
 
 
 

 
 
June 30, 2015
State
 
Medicaid Health Plans(1)
 
Medicare Health Plans(1)
 
Medicare PDPs
 
Total Membership
 
Percentage of
Total
Florida
 
773,000

 
107,000

 
41,000

 
921,000

 
24.1%
Georgia
 
594,000

 
36,000

 
23,000

 
653,000

 
17.1%
Kentucky
 
429,000

 
7,000

 
21,000

 
457,000

 
11.9%
New York
 
118,000

 
46,000

 
53,000

 
217,000

 
5.7%
Illinois
 
180,000

 
15,000

 
33,000

 
228,000

 
6.0%
Other states
 
300,000


177,000


874,000


1,351,000

 
35.3%
Total
 
2,394,000

 
388,000

 
1,045,000

 
3,827,000

 
100.0%
 
 
 
 
 
 
 
 
 
 
 

(1) Medicaid Health Plans and Medicare Health Plans membership includes members who are dually-eligible and participate in both our Medicaid and Medicare programs. These members comprised 44,000 and 47,000 of our Medicaid and Medicare membership as of June 30, 2016 and 2015, respectively.

As of June 30, 2016, membership decreased approximately 58,000 members, or 1.5%, compared with June 30, 2015. Membership discussion by segment follows:

Medicaid Health Plans. Membership increased by 32,000 or 1.3% year-over-year, to 2.4 million members as of June 30, 2016. The increase was primarily due to membership acquired from Advicare, as well as membership growth in Kentucky and New York, partially offset by membership declines in our Georgia and Illinois Medicaid markets.

Medicare Health Plans. Membership as of June 30, 2016 decreased by 57,000 year-over-year, or 14.7%, to 331,000 members. The decrease primarily reflects the divestiture of our Medicare Supplement business on July 1, 2015, as well as planned service area reductions for the 2016 plan year.
 
Medicare PDPs. Membership as of June 30, 2016 decreased 33,000 year-over-year, or 3.2%, to 1.0 million members. The decrease was primarily the result of our 2016 bid strategy.

Premium Revenue

Premium revenue increased by approximately $112.1 million and $182.0 million for the three and six months ended June 30, 2016, respectively, compared with the same periods in 2015. The increase primarily reflects higher membership in our Medicaid Health Plans segment as well as additional Medicaid premium revenue related to underpayments for specific benefits in Florida for certain periods prior to May 2016. Additionally, 2016 premiums reflect a rate increase for the Florida Managed Medical Assistance ("MMA") program effective September 1, 2015. These increases were partially offset by lower membership resulting from the divestiture of our Medicare Supplement business as well as the effect of lower membership in our Medicare PDPs segment.
 

27



Medical Benefits Expense

Medical benefits expense increased by approximately $11.8 million and $21.5 million for the three and six months ended June 30, 2016, respectively, compared with the same periods in 2015, primarily driven by the increase in Medicaid membership, partially offset by the favorable result of actions taken relating to our 2016 MA and PDP bids and the divestiture of our Medicare Supplement business effective July 1, 2015.

Selling, General and Administrative Expense
 
SG&A expense includes aggregate costs related to the resolution of previously disclosed governmental investigations and related litigation, such as settlement accruals and related fair value accretion, legal fees and other similar costs. Refer to Note 11 within the Condensed Consolidated Financial Statements included in this 2016 Form 10-Q for additional discussion of investigation-related litigation and other resolution costs. SG&A expense also includes certain activities relating to the divestiture of Sterling ("Sterling divestiture costs"), transitory costs related to our decision to change our pharmacy claims processing to a new pharmacy benefit manager ("PBM") effective January 1, 2016 ("PBM transitory costs") and non-recurring Iowa SG&A costs relating to readiness costs, certain wind-down costs of WellCare's Iowa operations and certain legal costs incurred during the first qu