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Magellan in Motion
MagellanHealth.com
2013 Annual Report
Taking
the Lead
with a unique vision of healthcare
At Magellan, we are leading the way in healthcare by expanding
our capabilities and solutions beyond the traditional definitions
of behavioral healthcare, radiology services, and pharmacy benefit
management. We are providing integrated care programs to
special populations, delivering inspired insights through our
innovative specialty solutions, and offering the broadest spectrum
of pharmacy products available, complete with market-leading
technologies. Through our unique vision, we are taking the lead in
shaping the future of healthcare.
Shareholder
Information
Transfer Agent
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6201 15th Avenue
Brooklyn, New York 11219
Toll Free: 800-937-5449
Local/International: 718-921-8124
Website: amstock.com
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Our transfer agent can help with a variety
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Investor Relations
This annual report along with a variety of
other financial materials can be viewed at
MagellanHealth.com. Inquiries may be directed
to the Magellan Investor Relations Group at
877-645-6464 or ir@magellanhealth.com.
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Annual Meeting
Magellan’s annual shareholder meeting will be held
on May 21, 2014 at our Corporate Headquarters at
55 Nod Road, Avon, Connecticut. The meeting will
begin at 8:30 a.m., local time.
Safe Harbor Statement
Certain of the statements made in this report con-
stitute forward-looking statements contemplated
under the Private Securities Litigation Reform Act
of 1995 and are qualified in their entirety by the
complete discussion of risks set forth in the section
entitled “Risk Factors” in Magellan’s Annual Report
on Form 10-K for the year ended December 31,
2013, attached herein.
Environmental Awareness
This annual report is printed on recycled paper:
the cover and narrative pages are on 30 percent
post-consumer waste and Form 10-K is on 10
percent post-consumer waste.
Corporate Headquarters
55 Nod Road
Avon, Connecticut 06001
MagellanHealth.com
Auditors
Ernst & Young LLP
Baltimore, MD
Stock Listing
Symbol: MGLN
NASDAQ Stock Exchange
To Our Shareholders:
From our strong roots as a behavioral health company
are actively enrolling Medicaid and Medicare lives
CEO of Magellan Healthcare, our managed healthcare
to our work in pharmacy and providing a suite of
and gearing up for the start of the state’s dual eligible
business, Robert Field, CEO of Magellan Rx Manage-
specialty solutions, Magellan Health Services is moving
program next year. In Iowa, our Behavioral Led Health
ment, and Tina Blasi, CEO of NIA Magellan, our specialty
swiftly to become a market leader in the management
Home program, which serves adults with SMI and
solutions business, each share my vision of providing
of fast-growing, complex and high-cost areas of health-
children with Serious Emotional Disturbance, continues
unparalleled healthcare management to our clients,
care, with a focus on special population management.
to roll out in various counties across the state.
our customers and our members.
During 2013, Magellan produced solid financial
In October, we acquired Partners Rx, which enhanced
results, executed on our two primary growth strategies,
our full-service pharmacy resources by adding scale
Magellan in Motion
added seasoned healthcare executives to our team, and
and capabilities in the commercial pharmacy benefit
Our goals are ambitious, but we know what needs to
implemented changes to our operations and products
management market, and enhanced our existing,
be done to achieve them. In our Magellan Complete
to ensure that Magellan is nimble, competitive and
seasoned team with new talent. The management of
Care business, by 2017, our goal is to manage no
poised to respond swiftly to the changing healthcare
drug spend has evolved, leaving many of our
less than $2.5 billion of total healthcare spend for
marketplace. The forward momentum we built during
competitors unable to manage dollars spent through
targeted populations in approximately 5-7 states. In
2013 has positioned us well for future success.
the medical benefit. By combining our PBM with our
our pharmacy management business, our goal is to
Medicaid pharmacy, specialty pharmacy, and our
grow revenues to at least $2.5 billion by 2018.
Executing on our growth strategies
unique medical pharmacy capabilities, we are able
At Magellan, our forward movement builds upon
In the past year, we significantly advanced our two key
to manage any drug, under any benefit, at any site
our strengths, as we address challenges and embrace
growth strategies – our integrated health management
of service. The time is right for Magellan’s pharmacy
opportunities to become a growth company, balancing
business, Magellan Complete Care, and our pharmacy
business to further expand its reach and become a
the needs of customers, members and shareholders.
Barry M. Smith
Chairman and Chief Executive Officer
Magellan Health Services
business, Magellan Rx Management.
full-service market leader in the industry.
MCC is now live in three states, and we are setting
the stage to expand into other markets. In Florida, we
The Right Leadership
have been operating as a general Medicaid HMO since
Magellan’s employees are its greatest resource –
June 2013, and we are preparing to go live in mid-2014
providing innovative ideas, thoughtful solutions and
with the nation’s first Medicaid specialty plan for
outstanding customer service. We’ve expanded the
Thank you for your continued confidence in Magellan.
individuals with Serious Mental Illness. In New York,
sales, account management and clinical areas of our
Barry M. Smith
our strategic investment in AlphaCare has provided
company, and we have three seasoned healthcare
Chairman and Chief Executive Officer
us with long-term care management capabilities. We
executives leading our businesses. Sam Srivastava,
Magellan Health Services
“ Magellan is moving closer to
becoming a growth company.
With the right strategy in place,
and the right people driving
our vision, I am confident we
will succeed.”
2 Magellan Health Services2013 Annual Report 3 To Our Shareholders:
From our strong roots as a behavioral health company
are actively enrolling Medicaid and Medicare lives
CEO of Magellan Healthcare, our managed healthcare
to our work in pharmacy and providing a suite of
and gearing up for the start of the state’s dual eligible
business, Robert Field, CEO of Magellan Rx Manage-
specialty solutions, Magellan Health Services is moving
program next year. In Iowa, our Behavioral Led Health
ment, and Tina Blasi, CEO of NIA Magellan, our specialty
swiftly to become a market leader in the management
Home program, which serves adults with SMI and
solutions business, each share my vision of providing
of fast-growing, complex and high-cost areas of health-
children with Serious Emotional Disturbance, continues
unparalleled healthcare management to our clients,
care, with a focus on special population management.
to roll out in various counties across the state.
our customers and our members.
During 2013, Magellan produced solid financial
In October, we acquired Partners Rx, which enhanced
results, executed on our two primary growth strategies,
our full-service pharmacy resources by adding scale
Magellan in Motion
added seasoned healthcare executives to our team, and
and capabilities in the commercial pharmacy benefit
Our goals are ambitious, but we know what needs to
implemented changes to our operations and products
management market, and enhanced our existing,
be done to achieve them. In our Magellan Complete
to ensure that Magellan is nimble, competitive and
seasoned team with new talent. The management of
Care business, by 2017, our goal is to manage no
poised to respond swiftly to the changing healthcare
drug spend has evolved, leaving many of our
less than $2.5 billion of total healthcare spend for
marketplace. The forward momentum we built during
competitors unable to manage dollars spent through
targeted populations in approximately 5-7 states. In
2013 has positioned us well for future success.
the medical benefit. By combining our PBM with our
our pharmacy management business, our goal is to
Medicaid pharmacy, specialty pharmacy, and our
grow revenues to at least $2.5 billion by 2018.
Executing on our growth strategies
unique medical pharmacy capabilities, we are able
At Magellan, our forward movement builds upon
In the past year, we significantly advanced our two key
to manage any drug, under any benefit, at any site
our strengths, as we address challenges and embrace
growth strategies – our integrated health management
of service. The time is right for Magellan’s pharmacy
opportunities to become a growth company, balancing
business, Magellan Complete Care, and our pharmacy
business to further expand its reach and become a
the needs of customers, members and shareholders.
Barry M. Smith
Chairman and Chief Executive Officer
Magellan Health Services
business, Magellan Rx Management.
full-service market leader in the industry.
MCC is now live in three states, and we are setting
the stage to expand into other markets. In Florida, we
The Right Leadership
have been operating as a general Medicaid HMO since
Magellan’s employees are its greatest resource –
June 2013, and we are preparing to go live in mid-2014
providing innovative ideas, thoughtful solutions and
with the nation’s first Medicaid specialty plan for
outstanding customer service. We’ve expanded the
Thank you for your continued confidence in Magellan.
individuals with Serious Mental Illness. In New York,
sales, account management and clinical areas of our
Barry M. Smith
our strategic investment in AlphaCare has provided
company, and we have three seasoned healthcare
Chairman and Chief Executive Officer
us with long-term care management capabilities. We
executives leading our businesses. Sam Srivastava,
Magellan Health Services
“ Magellan is moving closer to
becoming a growth company.
With the right strategy in place,
and the right people driving
our vision, I am confident we
will succeed.”
2 Magellan Health Services2013 Annual Report 3 The Right
Combination
Effectively integrating and coordinating physical
and behavioral healthcare has never been more
important, especially for special populations such
as those with Serious Mental Illness (SMI), dual
eligibles, and those requiring long-term care.
Our unique vision of better, more affordable
and coordinated care has always been infused
in the tailored behavioral health programs we
offer to health plans, employers, state and federal
government systems and military units. As the
nation’s leading integrated behavioral healthcare
provider, we apply our deep analytics, clinical
excellence and agile technology for the benefit of
individuals, customers and communities. Through
our efforts, we have built expertise working with
vulnerable, high-need individuals and developed
a complete person perspective. We’ve leveraged
this experience in our innovative integrated
healthcare plan, Magellan Complete Care, which
we implemented in three states this past year.
In June of 2013, Magellan Complete Care of
Florida began enrolling Medicaid recipients in
Broward County in its Medicaid HMO plan. This
distinctive model of care addresses the unique
needs of individuals with SMI, and we have been
awarded a contract for the nation’s first Medicaid
specialty plan for individuals with SMI. This health
plan represents a new paradigm of holistic health
management and will enable individuals with SMI
to receive comprehensive, coordinated benefits
through a standalone specialty plan designed to
meet their unique needs.
In addition, we have made great progress in
Iowa through our Behavioral Led Health Home
program, which integrates care for adults with SMI
and children with Serious Emotional Disturbance.
Our strategic investment in AlphaCare has given
us the opportunity to expand our capabilities in
long-term care management and enter the New
York market in order to serve the state’s Medicaid
Managed Long-Term Care and Fully Integrated
Dual Advantage populations.
We look forward to entering additional geog-
raphies and expanding our capabilities to help
special populations achieve a brighter future and
better quality of life. We have the right combination
of expertise, resources and compassion to
successfully provide integrated care. This, combined
with our proven talent, focus and execution, will
enable us to make our vision a reality.
Sam K. Srivastava
Chief Executive Officer, Magellan Healthcare
“We are building a more coordinated care
delivery system that manages the whole
health of individuals. Enabled by technology,
this system will provide better value and
access to care for special populations.”
4 Magellan Health Services2013 Annual Report 5 The Right
Combination
Effectively integrating and coordinating physical
and behavioral healthcare has never been more
important, especially for special populations such
as those with Serious Mental Illness (SMI), dual
eligibles, and those requiring long-term care.
Our unique vision of better, more affordable
and coordinated care has always been infused
in the tailored behavioral health programs we
offer to health plans, employers, state and federal
government systems and military units. As the
nation’s leading integrated behavioral healthcare
provider, we apply our deep analytics, clinical
excellence and agile technology for the benefit of
individuals, customers and communities. Through
our efforts, we have built expertise working with
vulnerable, high-need individuals and developed
a complete person perspective. We’ve leveraged
this experience in our innovative integrated
healthcare plan, Magellan Complete Care, which
we implemented in three states this past year.
In June of 2013, Magellan Complete Care of
Florida began enrolling Medicaid recipients in
Broward County in its Medicaid HMO plan. This
distinctive model of care addresses the unique
needs of individuals with SMI, and we have been
awarded a contract for the nation’s first Medicaid
specialty plan for individuals with SMI. This health
plan represents a new paradigm of holistic health
management and will enable individuals with SMI
to receive comprehensive, coordinated benefits
through a standalone specialty plan designed to
meet their unique needs.
In addition, we have made great progress in
Iowa through our Behavioral Led Health Home
program, which integrates care for adults with SMI
and children with Serious Emotional Disturbance.
Our strategic investment in AlphaCare has given
us the opportunity to expand our capabilities in
long-term care management and enter the New
York market in order to serve the state’s Medicaid
Managed Long-Term Care and Fully Integrated
Dual Advantage populations.
We look forward to entering additional geog-
raphies and expanding our capabilities to help
special populations achieve a brighter future and
better quality of life. We have the right combination
of expertise, resources and compassion to
successfully provide integrated care. This, combined
with our proven talent, focus and execution, will
enable us to make our vision a reality.
Sam K. Srivastava
Chief Executive Officer, Magellan Healthcare
“We are building a more coordinated care
delivery system that manages the whole
health of individuals. Enabled by technology,
this system will provide better value and
access to care for special populations.”
4 Magellan Health Services2013 Annual Report 5 Tina M. Blasi
Chief Executive Officer, NIA Magellan
“NIA Magellan values our strong client
partnerships, and we consistently strive
to bring increased value by expanding
our product portfolio and bringing new
clinical solutions to our customers.”
Extending
Our Reach
A key component of Magellan’s growth strategy
is our ability to offer inspired insights to give
our customers, providers and individuals the
information they need to make smart decisions.
In doing so, we often extend our reach beyond
traditional business models to bring our customers
industry-leading solutions that enhance the value
we deliver.
To that end, our NIA Magellan business extends
well beyond traditional radiology benefits
management to redefine the management of
high-cost, complex areas of healthcare, optimizing
quality and affordability with a broad suite of
innovative and expanding specialty solutions. Our
exceptional results are driven by differentiated
clinical models and advanced analytics, supported
by our high-touch approach to partnering with
customers, providers and consumers. NIA Magellan
is an industry leader, backed by outstanding
service and execution capabilities, as well as
innovative technology.
Our flexible approach offers customers a unique
set of products they can bundle together or
purchase separately, resulting in a comprehensive
and collaborative way to better manage their
healthcare spend. And, we support our solutions
with market-leading clinical analytics and tools
to ensure adherence to clinical appropriateness,
based on nationally recognized, evidence-based
standards.
NIA Magellan distinguishes itself in the
marketplace through a focus on positive client
relationships, clinical excellence, provider
partnerships, product and service innovation, and
consumerism. By extending our reach, we are in
a class of our own.
6 Magellan Health Services2013 Annual Report 7 Tina M. Blasi
Chief Executive Officer, NIA Magellan
“NIA Magellan values our strong client
partnerships, and we consistently strive
to bring increased value by expanding
our product portfolio and bringing new
clinical solutions to our customers.”
Extending
Our Reach
A key component of Magellan’s growth strategy
is our ability to offer inspired insights to give
our customers, providers and individuals the
information they need to make smart decisions.
In doing so, we often extend our reach beyond
traditional business models to bring our customers
industry-leading solutions that enhance the value
we deliver.
To that end, our NIA Magellan business extends
well beyond traditional radiology benefits
management to redefine the management of
high-cost, complex areas of healthcare, optimizing
quality and affordability with a broad suite of
innovative and expanding specialty solutions. Our
exceptional results are driven by differentiated
clinical models and advanced analytics, supported
by our high-touch approach to partnering with
customers, providers and consumers. NIA Magellan
is an industry leader, backed by outstanding
service and execution capabilities, as well as
innovative technology.
Our flexible approach offers customers a unique
set of products they can bundle together or
purchase separately, resulting in a comprehensive
and collaborative way to better manage their
healthcare spend. And, we support our solutions
with market-leading clinical analytics and tools
to ensure adherence to clinical appropriateness,
based on nationally recognized, evidence-based
standards.
NIA Magellan distinguishes itself in the
marketplace through a focus on positive client
relationships, clinical excellence, provider
partnerships, product and service innovation, and
consumerism. By extending our reach, we are in
a class of our own.
6 Magellan Health Services2013 Annual Report 7 Precision &
Performance
A hallmark of Magellan’s business philosophy
has been to build partnerships with our customers.
We take the time to understand our customers’
business challenges and work together to solve
them. Then, we track our results and performance
through precise data analytics and apply that
knowledge to refine our models for the benefit of
our customers. Nowhere is this more important
than in the highly complex, high-cost environment
of pharmacy benefit management.
Magellan Rx Management offers a wide product
spectrum that includes pharmacy benefit
management, pharmacy benefit administration,
and specialty and medical pharmacy management.
With this product suite, we can drive efficiencies,
innovate new product offerings and manage total
drug spend on behalf of customers.
Our 2013 acquisition of Partners Rx has enabled
us to expand our capabilities and competitive
advantage. Magellan Rx Management has broad-
ened its scale to reach new customer markets,
especially those within the commercial middle
market segment whose needs are largely unmet
by today’s PBMs.
Our collective organization is applying our
vast pharmacy expertise to employ market-leading
technologies that drive superior service and
clinical management. In so doing, we are able
to help demystify the complexities of pharmacy
benefit management and lower costs.
Magellan Rx Management has the expertise to
provide proven cost-savings options, the knowledge
for better decision making, and a partnership
culture that uniquely adapts to customers’ needs –
all with the precision and performance that one
expects from an industry leader.
Robert W. Field
Chief Executive Officer, Magellan Rx Management
“Our industry is changing rapidly. Magellan Rx
Management is focused on turning data into
knowledge by using technology to lower costs
and help our clients make informed decisions.”
8 Magellan Health Services2013 Annual Report 9 Precision &
Performance
A hallmark of Magellan’s business philosophy
has been to build partnerships with our customers.
We take the time to understand our customers’
business challenges and work together to solve
them. Then, we track our results and performance
through precise data analytics and apply that
knowledge to refine our models for the benefit of
our customers. Nowhere is this more important
than in the highly complex, high-cost environment
of pharmacy benefit management.
Magellan Rx Management offers a wide product
spectrum that includes pharmacy benefit
management, pharmacy benefit administration,
and specialty and medical pharmacy management.
With this product suite, we can drive efficiencies,
innovate new product offerings and manage total
drug spend on behalf of customers.
Our 2013 acquisition of Partners Rx has enabled
us to expand our capabilities and competitive
advantage. Magellan Rx Management has broad-
ened its scale to reach new customer markets,
especially those within the commercial middle
market segment whose needs are largely unmet
by today’s PBMs.
Our collective organization is applying our
vast pharmacy expertise to employ market-leading
technologies that drive superior service and
clinical management. In so doing, we are able
to help demystify the complexities of pharmacy
benefit management and lower costs.
Magellan Rx Management has the expertise to
provide proven cost-savings options, the knowledge
for better decision making, and a partnership
culture that uniquely adapts to customers’ needs –
all with the precision and performance that one
expects from an industry leader.
Robert W. Field
Chief Executive Officer, Magellan Rx Management
“Our industry is changing rapidly. Magellan Rx
Management is focused on turning data into
knowledge by using technology to lower costs
and help our clients make informed decisions.”
8 Magellan Health Services2013 Annual Report 9 Revenue Growth
(dollars in millions)
$2,969
$2,799
$2,642
$3,546
$3,207
2009
2010
2011
2012
2013
Diluted Earnings Per Share
(dollars)
$4.03
$4.17
$3.01
$5.42
$4.53
2009
2010
2011
2012
2013
6
6
5
5
4
4
3
3
2
2
1
1
0
0
10 Magellan Health Services Dollars in thousands, except per share data and number of employees
Operations
Net revenue
Net income
Diluted earnings per common share
Segment profit2
Depreciation and amortization expense
Operating cash flow
Capital expenditures
Number of employees
Financial Position at Year End
Unrestricted cash and investments
Total assets
Total debt
Total stockholders’ equity
2013
2012
$ 3,546,317
$3,207,397
$ 125,261
$ 151,027
$
4.53
$
5.42
$ 259,446
$ 267,364
$
71,994
$ 60,488
$ 183,161
$ 181,293
$
64,542
$ 69,549
5,900
5,000
$ 261,396
$ 302,259
$ 1,759,218
$1,512,133
$
26,725
$
–
$ 1,156,485
$ 1,017,333
1 The foregoing financial information should be read in conjunction with the financial statements and related notes as
presented in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2013, attached herein.
2 In the above financial table and elsewhere in this annual report, Magellan refers to Segment Profit. Segment Profit is a
non-GAAP measure consisting of profit or loss from operations before stock compensation expense, depreciation and
amortization, interest expense, interest income, gain on sale of assets, special charges or benefits, and income taxes. For
a reconciliation of Segment Profit to consolidated income from continuing operations before income taxes and a discus-
sion of the Company’s use of Segment Profit in presenting its financial information, please refer to its Annual Report on
Form 10-K for the year ended December 31, 2013, attached herein.
2013 Financial Highlights12013 Annual Report 11
Leadership
Board of Directors
Officers
Barry M. Smith
Chairman and Chief Executive Officer
Magellan Health Services, Inc.
Barry M. Smith
Chairman and Chief Executive Officer
Eran Broshy
Operating Partner
Linden Capital Partners
Executive Advisor
Court Square Capital
Michael S. Diament Retired Portfolio Manager
Q Investments
William D. Forrest
Managing Partner and Equity Owner
Tower Three Partners, LLC
Robert M. Le Blanc Managing Director
Onex Corporation
William J. McBride
Retired President and Chief Operating Officer
Value Health, Inc.
Michael P. Ressner
Retired Vice President of Finance
Nortel Networks Corporation
Mary F. Sammons
Retired Chairman and Chief Executive Officer
Rite Aid Corporation
Jonathan N. Rubin
Chief Financial Officer
Daniel N. Gregoire
General Counsel and Secretary
Caskie Lewis-Clapper
Chief Human Resources Officer
Tina M. Blasi
Chief Executive Officer
NIA Magellan
Robert W. Field
Chief Executive Officer
Magellan Rx Management
Sam K. Srivastava
Chief Executive Officer
Magellan Healthcare
Pictured above from left to right: Gary D. Anderson, Chief Information Officer ; Caskie Lewis-Clapper, Chief Human Resources
Officer ; Robert W. Field, CEO Magellan Rx Management ; Barry M. Smith, Chairman and CEO; Sam K. Srivastava, CEO Magellan
Healthcare; Tina M. Blasi, CEO NIA Magellan; Jonathan N. Rubin, CFO; and Daniel N. Gregoire, General Counsel and Secretary.
12 Magellan Health Services
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:31) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
(cid:30) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 1-6639
MAGELLAN HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
55 Nod Road, Avon, Connecticut
(Address of principal executive offices)
58-1076937
(I.R.S. Employer
Identification No.)
06001
(Zip Code)
Registrant’s telephone number, including area code: (860) 507-1900
Securities registered pursuant to Section 12(b) of the Act: None.
Title of Each Class
Name of Each Exchange on which Registered
Ordinary Common Stock, par value $0.01 per share
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:31) No (cid:30)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes (cid:30) No (cid:31)
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 twelve 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 (cid:31) No (cid:30)
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 (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes (cid:31) No (cid:30)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:30)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:31)
Accelerated filer (cid:30)
Non-accelerated filer (cid:30)
(Do not check if a smaller
reporting company)
Smaller reporting company (cid:30)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:30) No (cid:31)
The aggregate market value of the Ordinary Common Stock (‘‘common stock’’) held by non-affiliates of the
registrant based on the closing price on June 30, 2013 (the last business day of the registrant’s most recently completed
second fiscal quarter) was approximately $1.5 billion.
The number of shares of Magellan Health Services, Inc.’s common stock outstanding as of February 26, 2014 was
27,479,084.
Portions of the definitive proxy statement for the 2014 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
MAGELLAN HEALTH SERVICES, INC.
REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2013
Table of Contents
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors and Executive Officers of the Registrant
. . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 15. Exhibits, Financial Statement Schedule and Additional Information . . . . . . . . . . . . . .
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PART IV
Cautionary Statement Concerning Forward-Looking Statements
PART I
This Form 10-K includes ‘‘forward-looking statements’’ within the meaning of Section 27A of the
Securities Act of 1933, as amended (the ‘‘Securities Act’’), and Section 21E of the Securities Exchange
Act of 1934, as amended (the ‘‘Exchange Act’’). Examples of forward-looking statements include, but
are not limited to, statements the Company (as defined below) makes regarding our future operating
results and liquidity needs. Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no assurance that such plans,
intentions or expectations will be achieved. Prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results to differ materially
from those in forward-looking statements are set forth under the heading ‘‘Risk Factors’’ in Item 1A
and elsewhere in this Form 10-K. When used in this Form 10-K, the words ‘‘estimate,’’ ‘‘anticipate,’’
‘‘expect,’’ ‘‘believe,’’ ‘‘should’’ and similar expressions are intended to be forward-looking statements.
Any forward-looking statement made by the Company in this Form 10-K speaks only as of the
date on which it is made. Factors or events that could cause our actual results to differ may emerge
from time to time, and it is not possible for the Company to predict all of them. The Company
undertakes no obligation to publicly update any forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be required by law.
You should also be aware that while the Company from time to time communicates with securities
analysts, the Company does not disclose to them any material non-public information, internal forecasts
or other confidential business information. Therefore, to the extent that reports issued by securities
analysts contain projections, forecasts or opinions, those reports are not the Company’s responsibility
and are not endorsed by the Company. You should not assume that the Company agrees with any
statement or report issued by any analyst, irrespective of the content of the statement or report.
Item 1. Business
Magellan Health Services, Inc. (‘‘Magellan’’) was incorporated in 1969 under the laws of the State
of Delaware. Magellan’s executive offices are located at 55 Nod Road, Avon, Connecticut 06001, and
its telephone number at that location is (860) 507-1900. References in this report to the ‘‘Company’’
include the accounts of Magellan and its majority owned subsidiaries.
Business Overview
The Company is engaged in the healthcare management business, and is focused on meeting needs
in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special
population management. The Company provides services to health plans, managed care organizations
(‘‘MCOs’’), insurance companies, employers, labor unions, various military and governmental agencies,
third party administrators, and brokers. The Company’s business is divided into the following five
segments, based on the services it provides and/or the customers that it serves, as described below.
Managed Healthcare
Two of the Company’s segments are in the managed healthcare business (previously referred to as
the managed behavioral healthcare business). This line of business reflects the Company’s:
(i) management of behavioral healthcare services, and (ii) the integrated management of physical and
behavioral healthcare for special populations, delivered through Magellan Complete Care (‘‘MCC’’).
The Company’s coordination and management of behavioral healthcare includes services provided
1
through its comprehensive network of behavioral health professionals, clinics, hospitals and ancillary
service providers. This network of credentialed and privileged providers is integrated with clinical and
quality improvement programs to enhance the healthcare experience for individuals in need of care,
while at the same time managing the cost of these services for our customers. The treatment services
provided through the Company’s provider network include outpatient programs (such as counseling or
therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization
services), inpatient treatment and crisis intervention services. The Company generally does not directly
provide or own any provider of treatment services, although it does employ licensed behavioral health
counselors to deliver non-medical counseling under certain government contracts.
The Company’s integrated management of physical and behavioral healthcare includes its full
service health plans which provide for the holistic management of special populations. These special
populations include individuals with serious mental illness, dual eligibles, those eligible for long term
care, intellectually and developmentally disabled individuals, and other populations with unique and
often complex healthcare needs.
The Company provides its management services primarily through: (i) risk-based products, where
the Company assumes all or a substantial portion of the responsibility for the cost of providing
treatment services in exchange for a fixed per member per month fee, (ii) administrative services only
(‘‘ASO’’) products, where the Company provides services such as utilization review, claims
administration and/or provider network management, but does not assume responsibility for the cost of
the treatment services, and (iii) employee assistance programs (‘‘EAPs’’) where the Company provides
short-term outpatient behavioral counseling services.
The managed healthcare business is managed based on the services provided and/or the customers
served, through the following two segments:
Commercial. The Managed Healthcare Commercial segment (‘‘Commercial’’) generally reflects
managed behavioral healthcare services and EAP services provided under contracts with health plans,
insurance companies and MCOs for some or all of their commercial, Medicaid and Medicare members,
as well as with employers, including corporations, governmental agencies, and labor unions.
Commercial’s contracts encompass risk-based, ASO and EAP arrangements. As of December 31, 2013,
Commercial’s covered lives were 4.0 million, 13.5 million and 13.0 million for risk-based, ASO and
EAP products, respectively. For the year ended December 31, 2013, Commercial’s revenue was
$501.1 million, $116.9 million and $148.8 million for risk-based, ASO and EAP products, respectively.
Public Sector. The Managed Healthcare Public Sector segment (‘‘Public Sector’’) generally
reflects: (i) the management of behavioral health services provided to recipients under Medicaid and
other state sponsored programs under contracts with state and local governmental agencies, and (ii) the
integrated management of physical, behavioral and pharmaceutical care for special populations covered
under Medicaid and other government sponsored programs. Public Sector contracts encompass either
risk-based or ASO arrangements. As of December 31, 2013, Public Sector’s covered lives were
2.1 million and 1.7 million for risk-based and ASO products, respectively. For the year ended
December 31, 2013, Public Sector’s revenue was $1.7 billion and $33.8 million for risk-based and ASO
products, respectively.
Specialty Solutions
The Specialty Solutions segment (‘‘Specialty Solutions’’) generally reflects the management of the
delivery of diagnostic imaging (radiology benefits management or ‘‘RBM’’) and a variety of other
specialty areas such as radiation oncology, obstetrical ultrasound, cardiology and pain management,
including spine surgery and musculoskeletal management, to ensure that such services are clinically
appropriate and cost effective. The Company’s Specialty Solutions services are currently provided under
contracts with health plans and insurance companies for some or all of their commercial, Medicaid and
2
Medicare members. The Company also contracts with state and local governmental agencies for the
provision of such services to Medicaid recipients. The Company offers its Specialty Solutions services
through risk-based contracts, where the Company assumes all or a substantial portion of the
responsibility for the cost of providing services, and through ASO contracts, where the Company
provides services such as utilization review and claims administration, but does not assume
responsibility for the cost of the services. As of December 31, 2013, covered lives for Specialty
Solutions were 5.7 million and 12.0 million for risk-based and ASO products, respectively. For the year
ended December 31, 2013, revenue for Specialty Solutions was $334.5 million and $41.3 million for
risk-based and ASO products, respectively.
This segment was previously defined as Radiology Benefits Management; however, as it has grown
and expanded to include additional products, the Company has renamed the segment Specialty
Solutions to encompass all of its additional product offerings.
Pharmacy Management
The Pharmacy Management segment (‘‘Pharmacy Management’’) comprises products and solutions
that provide clinical and financial management of drugs paid under medical and pharmacy benefit
programs. Pharmacy Managements’ services include (i) traditional pharmacy benefit management
(‘‘PBM’’) services; (ii) pharmacy benefit administration (‘‘PBA’’) for state Medicaid and other
government sponsored programs; (iii) specialty pharmaceutical dispensing operations, contracting and
formulary optimization programs; (iv) medical pharmacy management programs; and (v) programs for
the integrated management of drugs that treat complex conditions, regardless of site of service, method
of delivery, or benefit reimbursement. In addition, the Company has a subcontract arrangement to
provide PBM services on a risk basis for one of Public Sector’s customers, which is scheduled to
terminate on March 31, 2014.
The Company’s Pharmacy Management programs are provided under contracts with health plans,
employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass
risk-based and fee-for-service (‘‘FFS’’) arrangements. During 2013, Pharmacy Management processed
1.9 million adjusted commercial network claims in the Company’s PBM business, which includes
Partners Rx (as defined below) claims following the closing of the acquisition on October 1, 2013. As of
December 31, 2013, the Company had a generic dispensing rate of 82.3 percent within its commercial
PBM business. In addition, the Company processed 67.1 million adjusted PBA claims and 0.1 million
specialty dispensing claims. Adjusted claim totals apply a multiple of three for each 90-day and
traditional mail claim. In addition, as of December 31, 2013, Pharmacy Management served 0.4 million
commercial PBM members, 9.5 million members in its medical pharmacy management programs, and
25 states and the District of Columbia in its PBA business.
Beginning in the first quarter of 2013, the Company underwent organizational changes. As a result
of these changes, the Company concluded that changes to its reportable segments now comprising the
new Pharmacy Management segment were warranted. This segment contains the operating segments
previously defined as the Specialty Pharmaceutical Management segment and the Medicaid
Administration segment. Prior period balances have been reclassified to reflect this change.
Corporate
This segment of the Company is comprised primarily of operational support functions such as sales
and marketing and information technology, as well as corporate support functions such as executive,
finance, human resources and legal.
See Note 10—‘‘Business Segment Information’’ to the consolidated financial statements for certain
segment financial data relating to our business set forth elsewhere herein.
3
Acquisition of Partners Rx Management LLC
Pursuant to the September 6, 2013 Agreement and Plan of Merger (the ‘‘Merger Agreement’’)
with Partners Rx Management, LLC (‘‘Partners Rx’’), on October 1, 2013 the Company acquired all of
the outstanding ownership interests of Partners Rx. Partners Rx is a full-service commercial PBM with
a strong focus on health plans and self-funded employers primarily through sales through third party
administrators, consultants and brokers. As consideration for the transaction, the Company paid
$100 million in cash, subject to working capital adjustments. The Company funded the acquisition with
cash on hand.
Pursuant to the Merger Agreement, certain principal owners of Partners Rx purchased a total of
$10 million in the Company’s restricted stock at a price equal to the average of the closing prices of
the Company’s stock for the five trading day period ended on the day prior to the execution of the
Merger Agreement. The shares received by such principal owners of Partners Rx are subject to vesting
over three years with 50% vesting on the second anniversary of the acquisition and 50% vesting on the
third anniversary of the acquisition, conditioned on continued employment with the Company on the
applicable vesting dates.
The Company reports the results of operations of Partners Rx within its Pharmacy Management
segment.
For further discussion, see Note 3—‘‘Acquisitions and Joint Ventures’’ to the consolidated financial
statements set forth elsewhere herein.
Acquisition of AlphaCare Holdings, Inc.
Pursuant to the August 13, 2013 stock purchase agreement (the ‘‘Stock Purchase Agreement’’), on
December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, Inc.
(‘‘AlphaCare Holdings’’), the holding company for AlphaCare New York, Inc. (‘‘AlphaCare’’), a Health
Maintenance Organization (‘‘HMO’’) in New York that operates a New York Managed Long-Term Care
Plan ‘‘(MLTCP’’) in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in
Bronx, New York, Queens and Kings Counties.
The Company previously held a 7% equity interest in AlphaCare through a previous equity
investment of $2.0 million in preferred membership units of AlphaCare’s previous holding company,
AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to
AlphaCare Holdings, LLC. As part of the Stock Purchase Agreement, AlphaCare Holdings, LLC was
reorganized into a Delaware corporation, the preferred membership units and the loan were converted
into Series A Participating Preferred Stock (‘‘Series A Preferred’’) of AlphaCare Holdings and the
Company purchased an additional $17.4 million of Series A Preferred. The Company holds a 65%
voting interest and the remaining shareholders hold a 35% voting interest in AlphaCare Holdings.
Based on the Company’s 65% equity and voting interest in AlphaCare Holdings, the Company has
included the results of operations in its consolidated financial statements. The Company reports the
results of operations of AlphaCare Holdings within the Public Sector segment.
For further discussion, see Note 3—‘‘Acquisitions and Joint Ventures’’ to the consolidated financial
statements set forth elsewhere herein.
Industry
According to the Centers for Medicare and Medicaid Services (‘‘CMS’’), U.S. healthcare spending
was projected to have increased 3.8 percent to $2.9 trillion in 2013, representing nearly 18 percent of
the gross domestic product. With the uncertain economic environment, rising healthcare costs,
increased fiscal pressures on federal and state governments, and the uncertainty around the full
4
implementation of healthcare reform, healthcare spending will continue to be one of the greatest
pressing issues for the American public and the government agencies. The rapidly evolving clinical and
technological environment demands the expertise of specialized healthcare management services to
provide both high-quality and affordable care.
Over the last several years, the Company has transformed itself into a diversified managed
healthcare company by entering various healthcare cost and care management areas that represent a
meaningful portion of the healthcare dollar and that are growing at a disproportionately higher rate
than other areas of healthcare.
Business Strategy
The Company is engaged in the healthcare management business, and is focused on meeting needs
in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special
population management. It currently provides managed behavioral healthcare, specialty solutions, and
pharmacy management services as well as integrated physical and behavioral care management for
special populations. The Company’s strategy is to expand its integrated management programs for
special populations, expand its pharmacy management business, and further grow its other existing
businesses. The Company believes that certain of its clients may prefer to consolidate outsourced
vendors, and that as a vendor offering multiple outsourced products, it will have a competitive
advantage in the market. The Company seeks to grow its managed healthcare business through the
following initiatives:
Expanding integrated management services provided to special populations through its Magellan
Complete Care business. The Company, through Magellan Complete Care, seeks to expand its focus
on the clinically integrated management of special populations including individuals with serious mental
illness (‘‘SMI’’), those covered under both Medicare and Medicaid (dual-eligibles), and other unique
high-cost populations. These programs holistically manage the behavioral and physical health care of
special populations and utilize the Company’s unique expertise to improve health outcomes and lower
costs. The Company believes its significant Medicaid, behavioral health and pharmacy experience will
enable it to further develop and market programs to manage these special populations. The Company
is developing independent special population management capabilities and may enter into partnerships,
joint ventures, or acquisitions that facilitate this effort. The Company believes it is positioned to grow
its membership and revenues in the integrated care management of special populations over the long
term.
Expanding the Pharmacy Management business. The Company has operated in both the specialty
pharmaceutical management and Medicaid pharmacy benefits management businesses for several years
and acquired a commercial pharmacy benefit management company in October of 2013. In late 2013,
the Company integrated all of these businesses which leverages their strength and assets to best
position the Company to expand its presence in the pharmaceutical marketplace. This business segment
offers clinical and financial management solutions that help customers manage the quality and cost of
pharmaceutical care for any drug, under any benefit, at any site of service. Pharmacy Management
provides a comprehensive suite of solutions, including traditional pharmacy benefit management;
specialty pharmacy solutions including formulary and rebate management solutions and specialty
dispensing; and its medical pharmacy management product, which manages the cost and quality of
therapeutic interventions for complex conditions covered under the medical benefit. These products are
available individually, in combination, or in a fully integrated manner. The Company is marketing its
pharmacy management products to existing and new health plans, employer groups, state governments,
exchanges, Medicaid managed care organizations, and third party administrators. The Company
continues to cross-sell Pharmacy Management products to its other segments’ customer base.
5
Continued growth in our other existing businesses. The Company has operated in both the
commercial and public sectors of managed behavioral healthcare by ensuring the delivery of quality
outcomes and appropriate care through its unique behavioral healthcare expertise in managing clinical
care, provider networks, claims, and customer service. The Company focuses on continually developing
and providing innovative and cost effective solutions to its customers, and expanding into new markets.
Through its Commercial behavioral segment, the Company seeks to provide a superior outsourced
behavioral health management alternative to its health plan, employer, and government customers. The
Company has expanded its product offerings including products dealing with autism. Through its Public
Sector segment, the Company seeks to help state and local governments deal with their fiscal pressures
resulting from increasing Medicaid enrollment and rising behavioral healthcare costs. The Company
intends to continue marketing both its risk-based and ASO products, as well as new products, to its
existing customer base and new customers, and to cross-sell its behavioral product portfolio to its other
segments’ customer base.
In Specialty Solutions, the Company’s strategy is to deliver innovative and clinically appropriate
management programs that create value for its clients through the reduction in the number of
inappropriate services and ensure the delivery of appropriate services through quality providers. The
Company seeks to distinguish itself in the marketplace through a focus on clinical excellence, provider
partnerships, product and service innovation, and consumerism. The Company continues to expand its
product portfolio beyond diagnostic imaging with customer-focused solutions in new areas of medical
management including radiation oncology therapy management, cardiac management, obstetrical
ultrasound management, pain management, including spine surgery and musculoskeletal management,
and other relevant areas. In addition to selling its programs to new customers, the Company’s growth
strategy is also focused on continuing to develop innovative new products and to expand membership
with current customers, upsell additional products to existing customers, and cross-sell to its other
segments’ customer base.
Customer Contracts
The Company’s contracts with customers typically have terms of one to three years, and in certain
cases contain renewal provisions (at the customer’s option) for successive terms of between one and
two years (unless terminated earlier). Substantially all of these contracts may be immediately
terminated with cause and many of the Company’s contracts are terminable without cause by the
customer or the Company either upon the giving of requisite notice and the passage of a specified
period of time (typically between 60 and 180 days) or upon the occurrence of other specified events. In
addition, the Company’s contracts with federal, state and local governmental agencies generally are
conditioned on legislative appropriations. These contracts generally can be terminated or modified by
the customer if such appropriations are not made. The Company’s contracts for managed healthcare
and specialty solutions services generally provide for payment of a per member per month fee to the
Company. See ‘‘Risk Factors—Risk-Based Products’’ and ‘‘—Reliance on Customer Contracts.’’
The Company provides behavioral healthcare management and other related services to
approximately 660,000 members in Maricopa County, Arizona as the Regional Behavioral Health
Authority (‘‘RHBA’’) for GSA6 (‘‘Maricopa County’’) pursuant to a contract with the State of Arizona
(the ‘‘Maricopa Contract’’). The Maricopa Contract generated net revenues that exceeded, in the
aggregate, ten percent of net revenues for the consolidated Company for the years ended December 31,
2011, 2012 and 2013.
The Company also has a significant concentration of business with various counties in the State of
Pennsylvania (the ‘‘Pennsylvania Counties’’) which are part of the Pennsylvania Medicaid program, and
with various areas in the State of Florida (the ‘‘Florida Areas’’) which are part of the Florida Medicaid
program. See further discussion related to these significant customers in ‘‘Risk Factors—Reliance on
Customer Contracts.’’ In addition, see ‘‘Risk Factors—Dependence on Government Spending’’ for
discussion of risks to the Company related to government contracts.
6
Provider Network
The Company’s managed behavioral healthcare services, integrated healthcare services and EAP
treatment services are provided by a contracted network of third-party providers, including physicians,
psychiatrists, psychologists, other behavioral and physical health professionals, psychiatric hospitals,
general medical facilities with psychiatric beds, residential treatment centers and other treatment
facilities. The number and type of providers in a particular area depend upon customer preference, site,
geographic concentration and demographic composition of the beneficiary population in that area. The
Company’s network consists of approximately 145,000 healthcare providers, including facility locations,
providing various levels of care nationwide. The Company’s network providers are almost exclusively
independent contractors located throughout the local areas in which the Company’s customers’
beneficiary populations reside. Outpatient network providers work out of their own offices, although
the Company’s personnel are available to assist them with consultation and other needs.
Non-facility network providers include both individual practitioners, as well as individuals who are
members of group practices or other licensed centers or programs. Non-facility network providers
typically execute standard contracts with the Company under which they are generally paid on a
fee-for-service basis.
Third-party network facilities include inpatient psychiatric and substance abuse hospitals, intensive
outpatient facilities, partial hospitalization facilities, community health centers and other community-
based facilities, rehabilitative and support facilities and other intermediate care and alternative care
facilities or programs. This variety of facilities enables the Company to offer patients a full continuum
of care and to refer patients to the most appropriate facility or program within that continuum.
Typically, the Company contracts with facilities on a per diem or fee-for-service basis and, in some
limited cases, on a ‘‘case rate’’ or capitated basis. The contracts between the Company and inpatient
and other facilities typically are for one-year terms and are terminable by the Company or the facility
upon 30 to 120 days notice.
The Company’s RBM services are provided by a network of providers including diagnostic imaging
centers, radiology departments of hospitals that provide advanced imaging services on an outpatient
basis, and individual physicians or physician groups that own advanced imaging equipment and
specialize in certain specific areas of care. Certain providers belong to the Company’s network, while
others are members of networks belonging to the Company’s customers. These providers are paid on a
fee-for-service basis.
Joint Ventures
Magellan Complete Care of Arizona, Inc. (‘‘MCCAZ’’), a joint venture owned 80 percent by the
Company and 20 percent by VHS Phoenix Health Plan, LLC (a subsidiary of Vanguard Health
Systems, Inc.), was formed to manage integrated behavioral and physical healthcare for recipients with
SMI and behavioral healthcare for other Medicaid beneficiaries in Maricopa County. MCCAZ
previously responded to a Request for Proposal (‘‘RFP’’) released by the Arizona Department of
Health Services (‘‘ADHS’’). See further discussion related to the status of this RFP in ‘‘Risk Factors—
Reliance on Customer Contracts.’’ During the year ended December 31, 2012, the Company invested
$1.5 million in MCCAZ, which is included within restricted cash on the accompanying consolidated
balance sheets. The Company has consolidated the balance sheet and results of operations of MCCAZ
in its consolidated financial statements as of December 31, 2012 and December 31, 2013.
Competition
The Company’s business is highly competitive. The Company competes with other healthcare
organizations as well as with insurance companies, including health maintenance organizations
(‘‘HMOs’’), preferred provider organizations (‘‘PPOs’’), third-party administrators (‘‘TPAs’’),
independent practitioner associations (‘‘IPAs’’), multi-disciplinary medical groups, pharmacy benefit
7
managers (‘‘PBMs’’), healthcare information technology solutions, and other specialty healthcare and
managed care companies. Many of the Company’s competitors, particularly certain insurance
companies, HMOs, technology companies, and PBMs are significantly larger and have greater financial,
marketing and other resources than the Company, and some of the Company’s competitors provide a
broader range of services. The Company competes based upon quality and reliability of its services, a
focus on clinical excellence, product and service innovation and proven expertise in its business lines.
The Company may also encounter competition in the future from new market entrants. In addition,
some of the Company’s customers that are managed care companies may seek to provide specialty
managed healthcare services directly to their subscribers, rather than by contracting with the Company
for such services. Because of these factors, the Company does not expect to be able to rely to a
significant degree on price increases to achieve revenue growth, and expects to continue experiencing
pricing pressures.
Insurance
The Company maintains a program of insurance coverage for a broad range of risks in its business.
The Company has renewed its general, professional and managed care liability insurance policies with
unaffiliated insurers for a one-year period from June 17, 2013 to June 17, 2014. The general liability
policy is written on an ‘‘occurrence’’ basis, subject to a $0.05 million per claim un-aggregated
self-insured retention. The professional liability and managed care errors and omissions liability policies
are written on a ‘‘claims-made’’ basis, subject to a $1.0 million per claim ($10.0 million per class action
claim) un-aggregated self-insured retention for managed care errors and omissions liability, and a
$0.05 million per claim un-aggregated self-insured retention for professional liability.
The Company maintains a separate general and professional liability insurance policy with an
unaffiliated insurer for its Pharmacy Management business. The Pharmacy Management insurance
policy has a one-year term for the period June 17, 2013 to June 17, 2014. The general liability policy is
written on an ‘‘occurrence’’ basis and the professional liability policy is written on a ‘‘claims-made’’
basis, subject to a $0.05 million per claim and $0.25 million aggregated self-insured retention.
The Company maintains separate professional liability insurance policies with unaffiliated insurers
for its Maricopa Contract business for the behavioral health direct care facilities, all of which were
divested at various times prior to December 31, 2009. The Maricopa Contract professional liability
insurance policies effective dates were from September 1, 2008 to September 1, 2009. The Company
purchased a five-year extended reporting period for the professional liability policies effective
September 1, 2009 for the period September 1, 2009 to September 1, 2014, subject to a $0.5 million per
claim un-aggregated self-insured retention. The professional liability policies are written on a
‘‘claims-made’’ basis.
The Company is responsible for claims within its self-insured retentions, and for portions of claims
reported after the expiration date of the policies if they are not renewed, or if policy limits are
exceeded. The Company also purchases excess liability coverage in an amount that management
believes to be reasonable for the size and profile of the organization.
See ‘‘Risk Factors—Professional Liability and Other Insurance,’’ for a discussion of the risks
associated with the Company’s insurance coverage.
Regulation
General. The Company’s healthcare management business is subject to extensive and evolving
state and federal regulation. The Company is subject to certain state laws and regulations, including
those governing the licensing of insurance companies, HMOs, PPOs, TPAs, PBMs, pharmacies and
companies engaged in utilization review and pharmaceutical management. In addition, the Company is
subject to regulations concerning the licensing of healthcare professionals, including restrictions on
business corporations from providing, controlling or exercising excessive influence over healthcare
8
services through the direct employment of physicians, psychiatrists or, in certain states, psychologists
and other healthcare professionals. These laws and regulations vary considerably among states and the
Company may be subject to different types of laws and regulations depending on the specific regulatory
approach adopted by each state to regulate the managed care and pharmaceutical management
businesses and the provision of healthcare treatment services. In addition, the Company is subject to
certain federal laws and regulations, including federal laws and regulations in connection with its role in
managing its customers’ employee benefit plans. The regulatory scheme generally applicable to the
Company’s operations is described in this section.
The Company believes its operations are structured to comply in all material respects with
applicable laws and regulations and that it has obtained all licenses and approvals that are material to
the operation of its business. However, regulation of the healthcare management industry is constantly
evolving, with new legislative enactments and regulatory initiatives at the state and federal levels being
implemented on a regular basis. Consequently, it is possible that a court or regulatory agency may take
a position under existing or future laws or regulations, or as a result of a change in the interpretation
thereof, that such laws or regulations apply to the Company in a different manner than the Company
believes such laws or regulations apply. Moreover, any such position may require significant alterations
to the Company’s business operations in order to comply with such laws or regulations, or
interpretations thereof. Expansion of the Company’s business to cover additional geographic areas, to
serve different types of customers, to provide new services or to commence new operations could also
subject the Company to additional licensure requirements and/or regulation. Failure to comply with
applicable regulatory requirements could have a material adverse affect on the Company.
Licenses. Certain regulatory agencies having jurisdiction over the Company possess discretionary
powers when issuing or renewing licenses or granting approval of proposed actions such as mergers, a
change in ownership, transfer or assignment of licenses and certain intra-corporate transactions. One or
multiple agencies may require as a condition of such license or approval that the Company cease or
modify certain of its operations or modify the way it operates in order to comply with applicable
regulatory requirements or policies. In addition, the time necessary to obtain a license or approval
varies from state to state, and difficulties in obtaining a necessary license or approval may result in
delays in the Company’s plans to expand operations in a particular state and, in some cases, lost
business opportunities.
In recent years, in response to governmental agency inquiries or discussions with regulators, the
Company has determined to seek licensing as a single service HMO, TPA or utilization review agent in
one or more jurisdictions. The Company maintains network licenses for these lines of business in some
states where required by state regulation. The Company has also sought and obtained utilization review
licenses in some states for its pharmaceutical management business and has also sought pharmacy
benefit manager licensure and TPA licensure in some states where required to support its expanded
pharmacy product offerings. The Company has obtained HMO licenses, and is seeking additional,
licenses to support its MCC business. The Company has also obtained pharmacy licenses in states that
require such licenses.
Compliance activities, mandated changes in the Company’s operations, delays in the expansion of
the Company’s business or lost business opportunities as a result of regulatory requirements or policies
could have a material adverse effect on the Company. As discussed below in the section entitled
‘‘Regulations Affecting the Company’s Pharmacies,’’ the Company is subject to certain state licensure
requirements in relation to its Pharmacy Management business.
Insurance, HMO and PPO Activities. To the extent that the Company operates or is deemed to
operate in some states as an insurance company, HMO, PPO or similar entity, it may be required to
comply with certain laws and regulations that, among other things, may require the Company to
maintain certain types of assets and minimum levels of deposits, capital, surplus, reserves or net worth.
In many states, entities that assume risk under contracts with licensed insurance companies or HMOs
9
have not been considered by state regulators to be conducting an insurance or HMO business. As a
result, the Company has not sought licenses as either an insurer or HMO in certain states.
The National Association of Insurance Commissioners (the ‘‘NAIC’’) has undertaken a
comprehensive review of the regulatory status of entities arranging for the provision of healthcare
services through a network of providers that, like the Company, may assume risk for the cost and
quality of healthcare services, but that are not currently licensed as an HMO or similar entity. As a
result of this review, the NAIC developed a ‘‘health organizations risk-based capital’’ formula, designed
specifically for managed care organizations, that establishes a minimum amount of capital necessary for
a managed care organization to support its overall operations, allowing consideration for the
organization’s size and risk profile. The NAIC also adopted a model regulation in the area of health
plan standards, which could be adopted by individual states in whole or in part, and could result in the
Company being required to meet additional or new standards in connection with its existing operations.
Certain states, for example, have adopted regulations based on the NAIC initiative, and as a result, the
Company has been subject to certain minimum capital requirements in those states. Certain other
states, such as Maryland, Texas, New York and New Jersey, have also adopted their own regulatory
initiatives that subject entities, such as certain of the Company’s subsidiaries, to regulation under state
insurance laws. This includes, but is not limited to, requiring adherence to specific financial solvency
standards. State insurance laws and regulations may limit the Company’s ability to pay dividends, make
certain investments and repay certain indebtedness.
Being licensed as an insurance company, HMO or similar entity could also subject the Company to
regulations governing reporting and disclosure, mandated benefits, rate setting and other traditional
insurance regulatory requirements. PPO regulations to which the Company may be subject may require
the Company to register with a state authority and provide information concerning its operations,
particularly relating to provider and payor contracting. The imposition of such requirements could
increase the Company’s cost of doing business and could delay the Company’s conduct or expansion of
its business in some areas. The licensing process under state insurance laws can be lengthy and, unless
the applicable state regulatory agency allows the Company to continue to operate while the licensing
process is ongoing, the Company could experience a material adverse effect on its operating results and
financial condition while its license application is pending. In addition, failure to obtain and maintain
required licenses typically also constitutes an event of default under the Company’s contracts with its
customers. The loss of business from one or more of the Company’s major customers as a result of
such an event of default or otherwise could have a material adverse effect on the Company.
Regulators may impose operational restrictions on entities granted licenses to operate as insurance
companies or HMOs. For example, the California Department of Managed Health Care has imposed
certain restrictions on the ability of the Company’s California subsidiaries to fund the Company’s
operations in other states, to guarantee or co-sign for the Company’s financial obligations, or to pledge
or hypothecate the stock of these subsidiaries and on the Company’s ability to make certain operational
changes with respect to these subsidiaries. In addition, regulators of certain of the Company’s
subsidiaries may exercise certain discretionary rights under regulations including, without limitation,
increasing its supervision of such entities, requiring additional restricted cash or other security.
Utilization Review and Third-Party Administrator Activities. Numerous states in which the Company
does business have adopted regulations governing entities engaging in utilization review and TPA
activities. Utilization review regulations typically impose requirements with respect to the qualifications
of personnel reviewing proposed treatment, timeliness and notice of the review of proposed treatment
and other matters. TPA regulations typically impose requirements regarding claims processing and
payments and the handling of customer funds. Some states require TPA licensure for PBM entities as a
way to regulate the PBM lines of business. Utilization review and TPA regulations may increase the
Company’s cost of doing business in the event that compliance requires the Company to retain
additional personnel to meet the regulatory requirements and to take other required actions and make
necessary filings. Although compliance with utilization review and third party administrator regulations
10
has not had a material adverse effect on the Company, there can be no assurance that specific
regulations adopted in the future would not have such a result, particularly since the nature, scope and
specific requirements of such provisions vary considerably among states that have adopted regulations
of this type.
Numerous states require the licensing or certification of entities performing utilization review or
TPA activities; however, certain federal courts have held that such licensing requirements are
preempted by the Employment Retirement Income Security Act of 1974, as amended (‘‘ERISA’’).
ERISA preempts state laws that mandate employee benefit structures or their administration, as well as
those that provide alternative enforcement mechanisms. The Company believes that its TPA activities
performed for its self-insured employee benefit plan customers are exempt from otherwise applicable
state licensing or registration requirements based upon federal preemption under ERISA and have
relied on this general principle in determining not to seek licenses for certain of the Company’s
activities in some states. Existing case law is not uniform on the applicability of ERISA preemption
with respect to state regulation of utilization review or TPA activities. In some states, the Company has
licensed its self funded pharmacy related business as a TPA after a review of state regulatory
requirements and case law. There can be no assurance that additional licenses will not be required with
respect to utilization review or TPA activities in certain states.
Licensing of Healthcare Professionals. The provision of healthcare treatment services by physicians,
psychiatrists, psychologists, pharmacists and other providers is subject to state regulation with respect to
the licensing of healthcare professionals. The Company believes that the healthcare professionals, who
provide healthcare treatment on behalf of or under contracts with the Company, and the case managers
and other personnel of the health services business, are in compliance with the applicable state
licensing requirements and current interpretations thereof. However, there can be no assurance that
changes in such state licensing requirements or interpretations thereof will not adversely affect the
Company’s existing operations or limit expansion. With respect to the Company’s employee assistance
crisis intervention program, additional licensing of clinicians who provide telephonic assessment or
stabilization services to individuals who are calling from out-of-state may be required if such assessment
or stabilization services are deemed by regulatory agencies to be treatment provided in the state of
such individual’s residence. The Company believes that any such additional licenses could be obtained.
Prohibition on Fee Splitting and Corporate Practice of Professions. The laws of some states limit the
ability of a business corporation to directly provide, control or exercise excessive influence over
healthcare services through the direct employment of physicians, psychiatrists, psychologists, or other
healthcare professionals, who are providing direct clinical services. In addition, the laws of some states
prohibit physicians, psychiatrists, psychologists, or other healthcare professionals from splitting fees with
other persons or entities. These laws and their interpretations vary from state to state and enforcement
by the courts and regulatory authorities may vary from state to state and may change over time. The
Company believes that its operations as currently conducted are in material compliance with the
applicable laws. However, there can be no assurance that the Company’s existing operations and its
contractual arrangements with physicians, psychiatrists, psychologists and other healthcare professionals
will not be successfully challenged under state laws prohibiting fee splitting or the practice of a
profession by an unlicensed entity, or that the enforceability of such contractual arrangements will not
be limited. The Company believes that it could, if necessary, restructure its operations to comply with
changes in the interpretation or enforcement of such laws and regulations, and that such restructuring
would not have a material adverse effect on its operations.
Direct Contracting with Licensed Insurers. Regulators in several states in which the Company does
business have adopted policies that require HMOs or, in some instances, insurance companies, to
contract directly with licensed healthcare providers, entities or provider groups, such as IPAs, for the
provision of treatment services, rather than with unlicensed intermediary companies. In such states, the
Company’s customary model of contracting directly is modified so that, for example, the IPAs (rather
than the Company) contract directly with the HMO or insurance company, as appropriate, for the
provision of treatment services.
11
HIPAA. The Health Insurance Portability and Accountability Act of 1996 (‘‘HIPAA’’) requires the
Secretary of the Department of Health and Human Services (‘‘HHS’’) to adopt standards relating to
the transmission, privacy and security of health information by healthcare providers and healthcare
plans. Confidentiality and patient privacy requirements are particularly strict in the Company’s
behavioral managed care business. Oversight responsibilities for HIPAA compliance is handled by the
Company’s Corporate Compliance Department. The Company believes it is currently in compliance
with the provisions of HIPAA.
The Health Information Technology for Economic and Clinical Health Act (‘‘HITECH Act’’)
passed as part of the American Recovery and Reinvestment Act of 2009 represents a significant
expansion of the HIPAA privacy and security laws. The HITECH Act provisions contain multiple
effective dates. The Company believes it is currently in compliance with those provisions of the
HITECH Act and associated regulations that are currently in effect including the January 2013
‘‘Modifications to the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules under the
Health Information Technology for Economic and Clinical Health Act’’ Rule, and will be in compliance
with those portions of the law and regulations that become effective in the future. The Company
believes that it can comply with future changes in these laws and regulations, however there can be no
assurance that compliance with such laws and regulations would not have a material adverse effect on
its operations.
Other Significant Privacy Regulation. The privacy regulation under HIPAA generally does not
preempt state law except under the following limited circumstances: (i) the privacy rights afforded
under state law are contrary to those provided by HIPAA so that compliance with both standards is not
possible and (ii) HIPAA’s privacy protections are more stringent than the state law in question. Because
many states have privacy laws that either provide more stringent privacy protections than those imposed
by HIPAA or laws that can be followed in addition to HIPAA, the Company must address privacy
issues under HIPAA and state law as well. In addition, HIPAA has created an increased awareness of
the issues surrounding privacy, which may generate more state regulatory scrutiny in this area.
In addition to HIPAA and the HITECH Act, the Company is also subject to federal laws and
regulations governing patient records involving substance abuse, as well as other federal privacy laws
and regulations. The Company believes that it is currently in compliance with these applicable laws and
regulations.
Federal Anti-Remuneration/Fraud and Abuse Laws. The federal healthcare Anti-Kickback Statute
(the ‘‘Anti-Kickback Statute’’) prohibits, among other things, an entity from paying or receiving, subject
to certain exceptions and ‘‘safe harbors,’’ any remuneration, directly or indirectly, to induce the referral
of individuals covered by federally funded healthcare programs, or the purchase, or the arranging for or
recommending of the purchase, of items or services for which payment may be made in whole, or in
part, under Medicare, Medicaid, TRICARE or other federally funded healthcare programs. Sanctions
for violating the Anti-Kickback Statute may include imprisonment, criminal and civil fines and exclusion
from participation in the federally funded healthcare programs. The Anti-Kickback Statute has been
interpreted broadly by courts, the Office of Inspector General (‘‘OIG’’) within the U.S. Department of
Health and Human Services (‘‘DHHS’’), and other administrative bodies.
It also is a crime under the Public Contracts Anti-Kickback Statute, for any person to knowingly
and willfully offer or provide any remuneration to a prime contractor to the United States, including a
contractor servicing federally funded health programs, in order to obtain favorable treatment in a
subcontract. Violators of this law also may be subject to civil monetary penalties. There have been a
series of substantial civil and criminal investigations and settlements, at the state and federal level, by
pharmacy benefit managers over the last several years in connection with alleged kickback schemes.
The Company believes that it is in compliance with the legal requirements imposed by such
anti-remuneration laws and regulations. However, there can be no assurance that the Company will not
be subject to scrutiny or challenge under such laws or regulations and that any such challenge would
12
not have a material adverse effect on the Company’s business, results of operations, financial condition
or cash flows.
The federal civil monetary penalty (‘‘CMP’’) statute provides for civil monetary penalties for any
person who provides something of value to a beneficiary covered under a federal health care program,
such as Medicare or Medicaid, in order to influence the beneficiary’s choice of a provider. For
example, our specialty pharmacy is subject to the CMP statute.
ERISA, to which certain of our customers’ services are subject, generally prohibits any person from
providing to a plan fiduciary a remuneration in order to affect the fiduciary’s selection of or decisions
with respect to service providers. Unlike the federal healthcare Anti-Kickback Statute, ERISA
regulations do not provide specific safe harbors and its application may be unclear. Federal Statutes
Prohibiting False Claims. The Federal Civil False Claims Act imposes civil penalties for knowingly
making or causing to be made false claims with respect to governmental programs, such as Medicare
and Medicaid, for services not rendered, or for misrepresenting actual services rendered, in order to
obtain higher reimbursement. Private individuals may bring qui tam or whistleblower suits against
providers under the Federal Civil False Claims Act, which authorizes the payment of a portion of any
recovery to the individual bringing suit. Further, pursuant to the ACA, a violation of the Anti-kickback
Statute is also a per se violation of the Federal False Claims Act. The Federal Civil False Claims Act
generally provides for the imposition of civil penalties and for treble damages, resulting in the
possibility of substantial financial penalties for small billing errors. Criminal provisions that are similar
to the Federal Civil False Claims Act provide that a corporation may be fined if it is convicted of
presenting to any federal agency a claim or making a statement that it knows to be false, fictitious or
fraudulent. Even in situations where the Company does not directly provide services to beneficiaries of
federally funded health programs and, accordingly, does not directly submit claims to the federal
government, it is possible that the Company could nevertheless become involved in a situation where
false claim issues are raised based on allegations that it caused or assisted a government contractor in
making a false claim.
The Company is subject to certain provisions of the Deficit Reduction Act of 2005 (the ‘‘Act’’).
The Act requires entities that receive $5 million or more in annual Medicaid payments to establish
written policies that provide detailed information about the Federal Civil False Claims Act and the
remedies thereunder, as well as any state laws pertaining to civil or criminal penalties for false claims
and statements, the ‘‘whistleblower’’ protections afforded under such laws, and the role of such laws in
preventing and detecting fraud, waste and abuse. The written policies are to be disseminated to all
employees, contractors and agents which or who, on behalf of the entity, furnishes, or otherwise
authorizes the furnishing of, Medicaid healthcare items or services; performs billing or coding functions,
or is involved in the monitoring of healthcare provided by the entity. In addition, any such entity that
has an employee handbook must include a specific discussion of the federal and state false claims laws,
the rights of an employee to be protected as a whistleblower and the entity’s policies and procedures
for detecting and preventing fraud, waste and abuse.
The Company does not believe that it is in violation of the Federal Civil False Claims Act (or its
criminal counterparts) and the Company has a corporate compliance and ethics program, policies and
procedures and internal controls in place to help maintain an organizational culture of honesty and
integrity.
State Anti-Remuneration/False Claims Law. Many states have laws and/or regulations similar to the
federal anti-remuneration and Federal Civil False Claims Act described above. Sanctions for violating
these state anti-remuneration and false claims laws may include injunction, imprisonment, criminal and
civil fines and exclusion from participation in the state Medicaid programs. The Company believes that
it is in substantial compliance with the legal requirements imposed by such anti-remuneration laws and
regulations. However, there can be no assurance that the Company will not be subject to scrutiny or
challenge under such laws or regulations and that any such challenge would not have a material
adverse effect on the Company’s business, results of operations, financial condition or cash flows.
13
The Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank’’). On July 21,
2010 the President of the United States signed into law Dodd-Frank. Under the law, those with
independent knowledge of a financial fraud committed by a business required to report to the U.S.
Securities and Exchange Commission (‘‘SEC’’) or the U.S. Commodity Futures Trading Commission
(‘‘CFTC’’) may be entitled to a percentage of the money recovered. Included in Dodd-Frank are
provisions which protect employees of publicly traded companies from retaliation for reporting
securities fraud, fraud against shareholders and violation of the SEC rules/regulations. Dodd-Frank also
amends the Sarbanes-Oxley Act (‘‘SOX’’) and Federal Civil False Claims Act to expand their
whistleblower protections. On May 25, 2011, the SEC adopted final rules (the ‘‘Rules’’) for the
expanded whistleblower program established by Dodd-Frank. The Company believes it is in material
compliance with these Rules.
ERISA. Certain of the Company’s services are subject to the provisions of ERISA. ERISA
governs certain aspects of the relationship between employer- sponsored healthcare benefit plans and
certain providers of services to such plans through a series of complex laws and regulations that are
subject to periodic interpretation by the Internal Revenue Service (‘‘IRS’’) and the U.S. Department of
Labor (‘‘DOL’’). In some circumstances, and under certain customer contracts, the Company may be
expressly named as a ‘‘fiduciary’’ under ERISA, or be deemed to have assumed duties that make it an
ERISA fiduciary, and thus be required to carry out its operations in a manner that complies with
ERISA in all material respects. In other circumstances, particularly in the administration of pharmacy
benefits, the Company does not believe that its services are subject to the fiduciary obligations and
requirements of ERISA. In addition, the DOL has not yet finalized guidance regarding whether
discounts and other forms of remuneration from pharmaceutical manufacturers are required to be
reported to ERISA-governed plans in connection with ERISA reporting requirements. The Company
believes that it is in material compliance with ERISA and that such compliance does not currently have
a material adverse effect on its operations. However, there can be no assurance that continuing ERISA
compliance efforts or any future changes to ERISA will not have a material adverse effect on the
Company.
Some of the state regulatory requirements described herein may be preempted in whole or in part
by ERISA, which provides for comprehensive federal regulation of employee benefit plans. However,
the scope of ERISA preemption is uncertain and is subject to conflicting court rulings. As a result, the
Company could be subject to overlapping federal and state regulatory requirements with respect to
certain of its operations and may need to implement compliance programs that satisfy multiple
regulatory regimes.
Other Federal Laws and Regulations. The Company is subject to certain federal laws and
regulations in connection with its contracts with the federal government. These laws and regulations
affect how the Company conducts business with its federal agency customers and may impose added
costs on its business. The Company’s failure to comply with federal procurement laws and regulations
could cause it to lose business, incur additional costs, and subject it to a variety of civil and criminal
penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to
reputation, suspension of payments, fines, and suspension or debarment from doing business with
federal government agencies. The Company believes that it is in material compliance with all applicable
laws and regulations and that such compliance does not currently have a material adverse effect on its
operations.
Regulation of Customers. Regulations imposed upon the Company’s customers include, among
other things, benefits mandated by statute, exclusions from coverage prohibited by statute, procedures
governing the payment and processing of claims, record keeping and reporting requirements,
requirements for and payment rates applicable to coverage of Medicaid and Medicare beneficiaries,
provider contracting and enrollee rights and confidentiality requirements. Although the Company
believes that such regulations do not, at present, materially impair its operations, there can be no
14
assurance that such indirect regulation will not have a material adverse effect on the Company in the
future.
In October 2008, the United States Congress passed the Paul Wellstone and Pete Dominici Mental
Health Parity Act of 2008 (‘‘MHPAEA’’) establishing parity in financial requirements (e.g. co-pays,
deductibles, etc.) and treatment limitations (e.g., limits on the number of visits) between mental health
and substance abuse benefits and medical/surgical benefits for health plan members. This law does not
require coverage for mental health or substance abuse disorders but if coverage is provided it must be
provided at parity. No specific disorders are mandated for coverage; health plans are able to define
mental health and substance abuse to determine what they are going to cover. Under the Affordable
Care Act (‘‘ACA’’) non-grandfathered individual and small group plans (both on and off of the
Exchange) are required to provide mental health and substance use disorder benefits as essential health
benefits. These mandated benefits under the ACA must be provided at parity in these plans. Under the
ACA, grandfathered individual plans are required to comply with parity if they offer behavioral health
benefits. Grandfathered small group plans are exempt from requirements to provide essential health
benefits and parity requirements. State mandated benefits laws are not preempted. The law applies to
ERISA plans, Medicaid managed care plans and State Children’s Health Insurance Program
(‘‘SCHIP’’) plans. On February 2, 2010, the Department of the Treasury, the Department of Labor and
the Department of Health and Human Services issued Interim Final Rules interpreting the MHPAEA
(‘‘IFR’’). The IFR applies to ERISA plans and insured business. A State Medicaid Director Letter was
issued in January 2013 discussing applicability of parity to Medicaid managed care plans, SCHIP plans
and Alternative Benefit (Benchmark) Plans. It is possible that some states will change their behavioral
health plan benefits or management techniques as a result of this letter. On November 13, 2013 the
Department of the Treasury, the Department of Labor and the Department of Health and Human
Services issued Final Rules on the MHPAEA. The Health Insurance Exchange regulations provide that
plans offered on the exchange must offer behavioral health benefits that are compliant with federal
parity law. The IFR included some concepts not included under the statute including the requirement
to conduct the parity review at the category level within the plan, introducing the concept of
non-quantitative treatment limitations, and prohibiting separate but equal deductibles. The Final Rule
affirmed the content of the IFR with a few changes and some additional clarifications on the
regulator’s intent. While some of these regulatory requirements in the IFR were not anticipated, the
Company believes it is in compliance with the requirements of the IFR. The Company does not
anticipate any significant impacts from the Final Rule however it is still reviewing and assessing the
Final Rule with customers. The Company’s risk contracts do allow for repricing to occur effective the
same date that any legislation/regulation becomes effective if that legislation/regulation is projected to
have a material effect on cost of care.
Federal and State Medicaid Laws and Regulations. The Company directly contracts with various
states to provide Medicaid managed care services to state Medicaid beneficiaries. As such, it is subject
to certain federal and state laws and regulations affecting Medicaid as well as state contractual
requirements. The Company believes it is in material compliance with these laws, regulations and
contractual requirements. The Company also is a sub-contractor to health plans who provide Medicaid
managed care services to state Medicaid beneficiaries. In the Company’s capacity as a subcontractor
with these health plans, the Company is indirectly subject to certain federal and state laws and
regulations as well as contractual requirements pertaining to the operation of this business. If a state or
a health plan customer determines that the Company has not performed satisfactorily as a
subcontractor, a state or the health plan customer may require the Company to cease these activities or
responsibilities under the subcontract. While the Company believes that it provides satisfactory levels of
service under its respective subcontracts, the Company can give no assurances that a state or health
plan will not terminate the Company’s business relationships insofar as they pertain to these services.
In connection with its specialty pharmacy business, the Company negotiates rebates with and provides
services for drug manufacturers, which are subject to Medicaid ‘‘best price’’ regulations requiring
15
essentially that the manufacturer provide its deepest level of discounts to the Medicaid program. In
some instances, the government has challenged a manufacturer’s calculation of best price and we
cannot be certain what effect, if any, the outcome of any such investigation or proceeding will have on
our ability to negotiate favorable terms.
Medicare Laws and Regulations. The Company is a subcontractor to health plans who are
Medicare Advantage Organizations and Medicare Prescription Drug Plans and provide benefits to
Medicare beneficiaries. In the Company’s capacity as a subcontractor with these health plans, the
Company is indirectly subject to certain federal laws and regulations as well as contractual
requirements pertaining to the operation of this business. If the Centers for Medicare & Medicaid
Services or a health plan customer determines that the Company has not performed satisfactorily as a
subcontractor, CMS or the health plan customer may require the Company to cease these activities or
responsibilities under the subcontract. While the Company believes that it provides satisfactory levels of
service under its respective subcontracts, the Company can give no assurances that CMS or a health
plan will not terminate the Company’s business relationships insofar as they pertain to these services.
The Company has submitted an application to become a Medicare Prescription Drug Plan (PDP)
with respect to employer/union groups, beginning January 1, 2015. CMS has issued significant
interpretive regulations and guidance regarding PDPs to which, if approved, the Company will be
directly subject. If CMS determines that the Company has not performed satisfactorily, CMS may
require the Company to cease its Part D activities or responsibilities under the contract. The Company
can give no assurance as to whether its application will be approved. However, the Company believes
that it will be in compliance with these requirements if approval is obtained and business operations
commence.
Moreover, in relation to its pharmaceutical management business, the Company contracts with
PDPs and MA-PD plans (collectively, ‘‘Part D Plans’’) to provide various services and in its
pharmaceutical management business contracts with Part D plans to provide broader pharmacy
management services. In the Company’s capacity as a subcontractor with certain Part D Plan clients,
the Company is subject to certain federal rules, regulations, and sub-regulatory guidance pertaining to
the operation of Medicare Part D. If CMS or a Part D Plan determines that the Company has not
performed satisfactorily as a subcontractor, CMS or Part D Plan may require the Company to cease its
Part D activities or responsibilities under the subcontract. While the Company believes that it provides
satisfactory levels of service under its respective subcontracts, the Company can give no assurances that
CMS or a Part D Plan will not terminate the Company’s business relationships insofar as they pertain
to Medicare Part D.
CMS requires Part D Plans to report all price concessions received for PBM services. The
applicable CMS guidance requires Part D Plans to contractually require the right to audit their
PBMs as well as require full transparency as to manufacturer rebates and administrative fees paid for
drugs or services provided in connection with the sponsor’s plan, including the portion of such rebates
retained by the PBM. Additionally, CMS requires Part D Plans to ensure through their contractual
arrangements with first tier, downstream and related entities (which would include PBMs) that CMS
has access to such entities’ books and records pertaining to services performed in connection with
Part D. The CMS regulations also suggests that Part D Plans should contractually require their first
tier, downstream and related entities to comply with certain elements of the Part D Plan’s compliance
program. The Company has not experienced and does not anticipate that such disclosure and auditing
requirements, to the extent required by its Part D Plan partners, will have a materially adverse effect
on the Company’s business.
Federal PBM Transparency Laws. Pursuant to the ACA, companies may participate in state and
federally run health insurance exchanges. The Company has contracted to provide services to certain
health insurance exchange products offered by insurers and may be subject to certain financial
transparency and disclosure requirements. The ACA mandates that pharmacy benefit managers provide
16
financial transparency and reporting in connection with Medicare Part D plans, as well as plans offered
through exchanges. In the event that the Company is determined to be subject to these requirements,
the Company does not anticipate that such requirements will have a materially adverse effect on the
Company’s business.
FDA Regulation. The U.S. Food and Drug Administration (‘‘FDA’’) generally has authority to
regulate drug promotional activities that are performed ‘‘by or on behalf of’’ a drug manufacturer. The
Company’s business includes the provision of educational seminars for prescribers and other of the
Company’s customers on behalf of manufacturer clients and thus may be subject to the federal laws
applicable to the promotion of prescription drugs. There can be no assurance that the FDA will not
attempt to assert jurisdiction over certain aspects of the Company’s pharmaceutical management
business in the future and, although the Company is not controlled directly or indirectly by any drug
manufacturer, the impact of future FDA regulation could materially adversely affect the Company’s
pharmaceutical management business, results of operations, financial condition or cash flows.
State PBM Regulation. States continue to introduce broad legislation to regulate PBM activities.
This legislation encompasses some of the products offered by the pharmaceutical management business
of the Company. Legislation in this area is varied and encompasses licensing, audit provision, potential
fiduciary duties, pass through of cost savings and disclosure obligations. The regulatory environment is
complicated by numerous lawsuits challenging laws and legislative repeals and amendments to PBM
laws. The District of Columbia has enacted a statute designed to impose certain fiduciary obligations
on entities providing PBM services, although a federal appeals court has held the law to be pre-empted
by ERISA. Maryland has also implemented comprehensive PBM registration and examination
legislation. Other states, including Mississippi, Louisiana, Connecticut, Georgia, Illinois, Iowa, Kansas,
Louisiana, Maine, Massachusetts, Nevada, North Dakota, South Dakota, Texas and Vermont all require
PBMs to register with the state or be licensed. The Company has obtained these licenses as necessary
to support current business and future opportunities. Furthermore, numerous states, including
Arkansas, Florida, Indiana, Kentucky, Maryland, Mississippi, Missouri, New Mexico, North Dakota and
Tennessee subject PBMs to audit provisions and generally require certain financial disclosures. In some
circumstances, claims or inquiries against PBMs have been asserted under state consumer protection
laws, which exist in most states. The various state laws do not appear to be having a material adverse
effect on the Company’s pharmaceutical management business. However, the Company can give no
assurance that these and other states will not enact legislation with more adverse consequences in the
near future; nor can the Company be certain that future regulations or interpretations of existing laws
will not adversely affect its business.
State Legislation Affecting Plan or Benefit Design. Some states have enacted legislation that
prohibits certain types of managed care plan sponsors from implementing certain restrictive formulary
and network design features, and many states have legislation regulating various aspects of managed
care plans, including provisions relating to pharmacy benefits. Other states mandate coverage of certain
benefits or conditions and require health plan coverage of specific drugs, if deemed medically necessary
by the prescribing physician. Such legislation does not generally apply to the Company directly, but may
apply to certain clients of the Company, such as HMOs and health insurers. These types of laws would
generally have an adverse effect on the ability of a PBM to reduce cost for its plan sponsor customers.
Legislation and Regulation Affecting Drug Prices. Specialty pharmaceutical manufacturers generally
report various price metrics to the federal government, including ‘‘average sales price’’ (‘‘ASP’’),
‘‘average manufacturer price’’ (‘‘AMP’’) and ‘‘best price’’ (‘‘BP’’). The Company does not calculate
these price metrics, but the Company notes that the ASP, AMP and BP methodologies may create
incentives for some drug manufacturers to reduce the levels of discounts or rebates available to
purchasers, including the Company, or their clients with respect to specialty drugs. Any changes in the
guidance affecting pharmaceutical manufacturer price metric calculations could materially adversely
affect the Company’s business.
17
Additionally, most of the Company’s dispensing contracts with its customers use ‘‘average
wholesale price’’ (‘‘AWP’’) as a benchmark for establishing pricing. At least one major third party
publisher of AWP pricing data has ceased to publish such data in the past few years, and there can be
no guarantee that AWP will continue to be an available pricing metric in the future. The
discontinuance of AWP reporting by one data source has not had a material adverse affect on the
Company’s results of operations and the Company expects that were AWP data to no longer be
available, other equitable pricing measures would be available to avoid a material adverse impact on
the Company’s business. Separately, CMS and several states have taken an interest in attempting to
determine the ‘‘actual acquisition costs’’ of pharmacies. In 2012, CMS began conducting surveys and
releasing preliminary data on pharmacy acquisition costs. At this time, the Company does not anticipate
that actual acquisition cost surveys or pricing should materially adversely impact its operations, but it is
too early to speculate what impact, if any such a reimbursement shift might have in pharmacy
reimbursement and/or costs in the future.
Regulations Affecting the Company’s Pharmacies. The Company owns two pharmacies that provide
services to certain of the Company’s health plan customers. The activities undertaken by the Company’s
pharmacies subject the pharmacies to state and federal statutes and regulations governing, among other
things, the licensure and operation of mail order and non-resident pharmacies, repackaging of drug
products, stocking of prescription drug products and dispensing of prescription drug products, including
controlled substances. The Company’s pharmacy facilities are located in Florida and New York and are
duly licensed to conduct business in those states. Many states, however, require out-of-state mail order
pharmacies to register with or be licensed by the state board of pharmacy or similar governing body
when pharmaceuticals are delivered by mail into the state, and some states require that an out-of-state
pharmacy employ a pharmacist that is licensed in the state into which pharmaceuticals are shipped. The
Company holds mail order and non-resident pharmacy licenses where required. The Company also
maintains Medicare and Medicaid provider licenses where required for the pharmacies to provide
services to these plans.
Regulation of Controlled Substances. The Company’s pharmacies must register with the United
States Drug Enforcement Administration (the ‘‘DEA’’), and individual state controlled substance
authorities in order to dispense controlled substances. Federal law requires the Company to comply
with the DEA’s security, recordkeeping, inventory control, and labeling standards in order to dispense
controlled substances. State controlled substance law requires registration and compliance with state
pharmacy licensure, registration or permit standards promulgated by the state pharmacy licensing
authority.
Other Regulation of Healthcare Providers. The Company’s business is affected indirectly by
regulations imposed upon healthcare providers. Regulations imposed upon healthcare providers include
but are not limited to, provisions relating to the conduct of, and ethical considerations involved in, the
practice of psychiatry, psychology, social work and related behavioral healthcare professions, radiology,
pharmacy, accreditation, government healthcare program participation requirements, reimbursements
for patient services, Medicare and Medicaid fraud and abuse and, in certain cases, the common law
duty to warn others of danger or to prevent patient self-injury. Changes in these regulatory
requirements applicable to healthcare providers could impact the Company’s business methods and
practices and there can be no assurances that the impact would not be adverse and material.
Federal Regulations affecting Procurement. The Company also provides services to various state
Medicaid programs. Services procurement is governed in part by federal regulations because the federal
government provides a substantial amount of funding for the services. The Company’s state customers
risk loss of federal funding if the Company is not in compliance with federal regulations. The
Company’s non-compliance may also lead to unanticipated, negative financial consequences including
corrective action plans or contract default risks. The Company believes the Company is in substantial
18
compliance with various federal regulations and in compliance with contract provisions relating to the
services provided by a commercial organization.
Other Proposed Legislation.
In the last five years, legislation has periodically been introduced at
the state and federal levels providing for new healthcare regulatory programs and materially revising
existing healthcare regulatory programs (including, without limitation, legislation to carve out certain
classes from generic substitution). Recently some states including Massachusetts, Vermont, Connecticut
and California have enacted or considered legislation regarding various forms of mandatory or
universal health insurance coverage. Such legislation could include both federal and state bills affecting
Medicaid programs which may be pending in, or recently passed by, state legislatures and which are not
yet available for review and analysis. In states in which such new state legislation has been enacted,
there has been no material adverse impact on the Company. However, the Company at this time is
unable to predict whether there may be any effect, positive or negative, on its business as a result of
any such future legislation.
Health Care Reform. The ACA is a broad sweeping piece of legislation creating numerous
changes in the healthcare regulatory environment. To date, numerous regulations implementing
provisions of the ACA have been released in addition to many requests for information, frequently
asked questions and other informational notices. Some of these regulations, most notably the Medical
Loss Ratio regulations and the Internal Claims and Appeals and External Review Processes
Regulations, have an impact on the Company and its business. Others, such as the regulation on
dependent coverage to age 26 and coverage of preventative health services, could impact the nature of
the members that we serve and the utilization rates. Medicaid expansion under the ACA may impact
the Company’s business going forward. The Company has behavioral health and radiology customers
that are participating in the state and federal Health Insurance Exchanges. The Company has taken
necessary steps to support our customers in their administration of these new plans. The ACA also
contains provisions related to fees that impact the Company’s direct public sector contracts and
provisions regarding the non-deductibility of those fees as well as limitations on deductibility of
compensation for certain employees. We believe that our state public sector customers will make rate
adjustments to cover the direct costs of these fees and a majority of the impact from non-deductibility
of such fees for federal income tax purposes. There may be some impact due to taxes paid for
non-renewing customers where the timing and amount of recoupment of these additional costs is
uncertain. There can be no guarantees regarding this adjustment from our state public sector customers
and these taxes and fees may have a material impact on the Company.
Employees of the Registrant
At December 31, 2013, the Company had approximately 5,949 full-time and part-time employees.
The Company believes it has satisfactory relations with its employees.
History
Magellan was incorporated in 1969 under the laws of the State of Delaware. The Company is
engaged in the healthcare management business. Through 2005, the Company predominantly operated
in the managed behavioral healthcare business. As a result of certain acquisitions and material growth
since 2005, the Company expanded into integrated management of the physical and behavioral
healthcare for special populations, specialty solutions (including RBM activities) and pharmacy
management.
Available Information
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and Section 16 filings available, free of charge, on the
Company’s website at www.magellanhealth.com as soon as practicable after the Company has
electronically filed such material with, or furnished it to, the SEC. The information on the Company’s
website is not part of or incorporated by reference in this report on Form 10-K.
19
Item 1A. Risk Factors
Reliance on Customer Contracts—The Company’s inability to renew, extend or replace expiring or
terminated contracts could adversely affect the Company’s liquidity, profitability and financial
condition.
Substantially all of the Company’s net revenue is derived from contracts that may be terminated
immediately with cause and many, including some of the Company’s most significant contracts, are
terminable without cause by the customer upon notice and the passage of a specified period of time
(typically between 60 and 180 days), or upon the occurrence of certain other specified events. The
Company’s ten largest customers accounted for 66.6 percent, 65.0 percent and 63.1 percent of the
Company’s net revenue in the years ended December 31, 2011, 2012 and 2013, respectively. Loss of all
of these contracts or customers would, and loss of any one of these contracts or customers could,
materially reduce the Company’s net revenue and have a material adverse effect on the Company’s
liquidity, profitability and financial condition.
Significant Customers
Consolidated Company
The Maricopa Contract generated net revenues that exceeded, in the aggregate, ten percent of net
revenues for the consolidated Company for the years ended December 31, 2011, 2012 and 2013. The
Maricopa Contract is for the management of the publicly funded behavioral health system that delivers
mental health, substance abuse and crisis services for adults, youth, and children. Under the Maricopa
Contract, the Company is responsible for providing covered behavioral health services to persons
eligible under Title XIX (Medicaid) and Title XXI (State Children’s Health Insurance Program) of the
Social Security Act, non-Title XIX and non-Title XXI eligible children and adults with a serious mental
illness, and to certain non-Title XIX and non-Title XXI adults with behavioral health or substance
abuse disorders. The Maricopa Contract began on September 1, 2007 and was scheduled to expire on
October 1, 2013. The Company and the State of Arizona have agreed to extend the Maricopa Contract
through March 31, 2014. The State of Arizona has the right to terminate the Maricopa Contract for
cause, as defined, upon ten days’ notice with an opportunity to cure, and, after January 1, 2014, without
cause upon 30 days prior notice to the Company. The Maricopa Contract generated net revenues of
$779.5 million, $758.3 million and $755.0 million for the years ended December 31, 2011, 2012 and
2013, respectively.
The State of Arizona had previously issued a Solicitation for a new RBHA for Maricopa County
(the ‘‘New Contract’’) to replace the current contract with the Company to be effective on October 1,
2013. The New Contract is for the management of the publicly funded behavioral health system
currently provided by the Company under the Maricopa Contract, and also includes an integrated
behavioral and physical healthcare system for a small number of individuals with serious mental illness.
MCCAZ, a joint venture owned 80% by the Company and 20% by Vanguard/Phoenix Health Plan,
previously submitted a bid for the Contract.
On March 25, 2013, the Company was notified that MCCAZ was not selected as the RBHA for
the New Contract. On April 3, 2013, the Company filed a formal protest regarding the State’s decision
to award the RBHA in Maricopa County to another vendor. On April 17, 2013, the Arizona
Department of Health Services denied the Company’s protest. On May 9, 2013, the Company filed an
appeal of the denial of its protest (the ‘‘Appeal’’) with the Arizona Department of Administration (the
‘‘DOA’’), the agency responsible for considering appeals of procurement protest denials. The Company
also filed with the DOA a motion to stay the award and implementation of the contract pending a
decision on the Appeal. On May 21, 2013, the DOA granted the Company’s motion and issued a stay
of the award and implementation of the contract pending resolution of the Appeal by the DOA (the
‘‘Stay’’).
On June 13, 2013 the DOA referred the Appeal for a hearing before an independent
administrative law judge (‘‘ALJ’’) in the Arizona Office of Administrative Hearings (the ‘‘OAH’’). The
20
OAH held an evidentiary hearing on the Appeal on September 18-27, 2013. On November 18, 2013,
the ALJ issued a decision and recommended that the DOA rule against Magellan and dismiss the
Appeal. On December 3, 2013 the DOA accepted the recommendation of the ALJ and issued a final
administrative decision ruling against Magellan, affirming the award of the New Contract to the
winning bidder, and dismissing the Appeal. The DOA also lifted the previously issued Stay on
implementation of the New Contract.
On December 6, 2013 Magellan filed an appeal of the DOA decision in the Arizona Superior
Court in Maricopa County (the ‘‘Superior Court’’) and, on December 10, 2013, filed a motion seeking a
judicial stay of the implementation of the contract until after the court’s decision on the appeal. On
February 18, 2014 the Superior Court issued an order denying the Company’s motion for stay. The
denial of the motion for stay does not impact the final decision on the merits of Magellan’s appeal of
the DOA decision, which will continue to proceed in the Superior Court. The Company also previously
filed a separate civil lawsuit in the Superior Court challenging the legal authority of the public entity
that is one of the key members of the non-profit winning bidder to invest in and participate in the
winning bidder’s performance under the New Contract. In connection with such civil suit, the Company
previously filed a motion seeking a preliminary injunction that, if granted, could prohibit such public
entity from participation as a member of the winning bidder in the New Contract. No decision on the
motion for preliminary injunction in the separate civil suit has yet been issued by the court. There is no
assurance that the Company will prevail on its appeal to the Superior Court or that a motion for
preliminary injunction will be granted.
By Segment
In addition to the Maricopa Contract previously discussed, the following customers generated in
excess of ten percent of net revenues for the respective segment for the years ended December 31,
2011, 2012 and 2013 (in thousands):
Segment
Commercial
Term Date
2011
2012
2013
Customer A . . . . . . . June 30, 2014(1)
Customer B . . . . . . . December 31, 2017
Customer C . . . . . . . December 31, 2012 to December 14, 2013(2)(3)
Customer D . . . . . . . December 31, 2019
Public Sector
$171,109 $192,415 $207,080
71,085*
74,203*
67,049
111,607
67,959*
118,351
— 134,885
141,444
Customer E . . . . . . . June 30, 2014(4)
191,063
240,224
321,072
Specialty Solutions
Customer F . . . . . . . . December 31, 2015
Customer G . . . . . . . June 30, 2011 to November 30, 2011(2)(5)
Customer H . . . . . . . June 30, 2014
Customer I . . . . . . . . July 31, 2015
Customer J . . . . . . . . January 31, 2015
134,257
38,297
55,197
36,293
32,342*
117,739
—
60,094
57,455
38,366
130,895
—
55,078
61,838
47,311
Pharmacy Management
Customer K . . . . . . . November 30, 2014 to December 31, 2014(2)
Customer L . . . . . . . . December 31, 2013(5)
Customer B . . . . . . . September 27, 2013 to December 31, 2013(2)(5)
Customer M . . . . . . . March 31, 2014(6)
90,563
56,115
22,899*
82,770
129,209
60,350
73,785
69,090
133,724
59,125*
92,647
66,153*
* Revenue amount did not exceed ten percent of net revenues for the respective segment for the
year presented. Amount is shown for comparative purposes only.
(1) The customer has informed the Company that, after a competitive evaluation process, it has
decided not to renew its contract after the contract expires on December 31, 2013. The contract
was extended through June 30, 2014 to allow for transition to the new vendor.
21
(2) The customer has more than one contract. The individual contracts are scheduled to terminate at
various points during the time period indicated above.
(3) Revenues for the year ended December 31, 2012 of $50.0 million relate to a contract that
terminated as of December 31, 2012. The remaining business terminated in December 2013.
(4) Contract has options for the customer to extend the term for one additional one-year period.
(5) The contract has terminated.
(6) This customer represents a subcontract with Public Sector for the Maricopa Contract, and is
eliminated in consolidation.
Concentration of Business
The Company also has a significant concentration of business with various counties in the State of
Pennsylvania (the ‘‘Pennsylvania Counties’’) which are part of the Pennsylvania Medicaid program, and
with various areas in the State of Florida (the ‘‘Florida Areas’’) which are part of the Florida Medicaid
program. Net revenues from the Pennsylvania Counties in the aggregate totaled $351.6 million,
$354.1 million and $359.0 million for the years ended December 31, 2011, 2012 and 2013, respectively.
Net revenues from the Florida Areas in the aggregate totaled $131.8 million, $133.9 million and
$128.0 million for the years ended December 31, 2011, 2012 and 2013, respectively.
Integration of Companies Acquired by Magellan—The Company’s profitability could be adversely
affected if the integration of companies acquired by Magellan is not completed in a timely and
effective manner.
One of the Company’s growth strategies is to make strategic acquisitions which are complementary
to its existing operations. After Magellan closes on an acquisition, it must integrate the acquired
company into Magellan’s policies, procedures and systems. Failure to effectively integrate an acquired
business or the failure of the acquired business to perform as anticipated could result in excessive costs
being incurred, a delay in obtaining targeted synergies, decreased customer performance (which could
result in contract penalties and/or terminations), increased employee turnover, and lost sales
opportunities. Finally, difficulties assimilating acquired operations and services could result in the
diversion of capital and management’s attention away from other business issues and opportunities.
Changes in the Medical Managed Care Carve-Out Industry—Certain changes in the business practices
of this industry could negatively impact the Company’s resources, profitability and results of
operations.
Substantially all of the Company’s Commercial, Specialty Solutions and Pharmacy Management
segments’ net revenues are derived from customers in the medical managed healthcare industry,
including managed care companies, health insurers and other health plans. Some types of changes in
this industry’s business practices could negatively impact the Company. For example, if the Company’s
managed care customers seek to provide services directly to their subscribers, instead of contracting
with the Company for such services, the Company could be adversely affected. In this regard, certain of
the Company’s major customers in the past have not renewed all or part of their contracts with the
Company, and instead provided managed healthcare services directly to their subscribers. Other of the
Company’s customers that are managed care companies could also seek to provide services directly to
their subscribers, rather than by contracting with the Company for such services. In addition, the
Company has a significant number of contracts with Blue Cross Blue Shield plans and other regional
health plans. Consolidation of the healthcare industry through acquisitions and mergers could
potentially result in the loss of contracts for the Company. Any of these changes could reduce the
Company’s net revenue, and adversely affect the Company’s profitability and financial condition.
22
Changes in the Contracting Model for Medicaid Contracts—Certain changes in the contracting model
used by states for managed healthcare services contracts relating to Medicaid lives could negatively
impact the Company’s resources, profitability and results of operations.
Substantially all of the Company’s Public Sector segment net revenue is derived from direct
contracts that it has with state or county governments for the provision of services to Medicaid
enrollees. Certain states have recently contracted with managed care companies to manage both the
behavioral and physical medical care of their Medicaid enrollees. If other governmental entities change
the method for contracting for Medicaid business to a fully integrated model, the Company will
attempt to subcontract with the managed care organizations to provide behavioral healthcare
management for such Medicaid business; however, there is no assurance that the Company would be
able to secure such arrangements. Alternatively, the Company may choose to pursue licensure as a
health plan to bid on this integrated business. Accordingly, if such a change in the contracting model
were to occur, it is possible that the Company could lose current contracted revenues, as well as be
unable to bid on potential new business opportunities, thus negatively impacting the Company’s
profitability and financial condition.
Risk-Based Products—Because the Company provides services at a fixed fee, if the Company is unable
to maintain historical margins, or is unable to accurately predict and control healthcare costs, the
Company’s profitability could decline.
The Company derives its net revenue primarily from arrangements under which the Company
assumes responsibility for costs of treatment in exchange for a fixed fee. The Company refers to such
arrangements as ‘‘risk-based contracts’’ or ‘‘risk-based products,’’ which include EAP services. These
arrangements provided 79.1 percent, 78.3 percent and 79.4 percent of the Company’s net revenue in
the years ended December 31, 2011, 2012 and 2013, respectively.
The profitability of the Company’s risk contracts could be reduced if the Company is unable to
maintain its historical margins. The competitive environment for the Company’s risk products could
result in pricing pressures which cause the Company to reduce its rates. In addition, customer demands
or expectations as to margin levels could cause the Company to reduce its rates. A reduction in risk
rates which are not accompanied by a reduction in services covered or expected underlying care trend
could result in a decrease in the Company’s operating margins.
Profitability of the Company’s risk contracts could also be reduced if the Company is unable to
accurately estimate the rate of service utilization by members or the cost of such services when the
Company prices its services. The Company’s assumptions of utilization and costs when the Company
prices its services may not ultimately reflect actual utilization rates and costs, many aspects of which are
beyond the Company’s control. If the cost of services provided to members under a contract together
with the administrative costs exceeds the aggregate fees received by the Company under such contract,
the Company will incur a loss on the contract.
The Company’s profitability could also be reduced if the Company is required to make
adjustments to estimates made in reporting historical financial results regarding cost of care, reflected
in the Company’s financial statements as medical claims payable. Medical claims payable includes
reserves for incurred but not reported (‘‘IBNR’’) claims, which are claims for covered services rendered
by the Company’s providers which have not yet been submitted to the Company for payment. The
Company estimates and reserves for IBNR claims based on past claims payment experience, including
the average interval between the date services are rendered and the date the claims are received and
between the date services are rendered and the date claims are paid, enrollment data, utilization
statistics, adjudication decisions, authorized healthcare services and other factors. This data is
incorporated into contract-specific reserve models. The estimates for submitted claims and IBNR claims
are made on an accrual basis and adjusted in future periods as required. If such risk-based products are
23
not correctly underwritten, the Company’s profitability and financial condition could be adversely
affected.
Factors that affect the Company’s ability to price the Company’s services, or accurately make
estimates of IBNR claims and other expenses for which the Company creates reserves may include
differences between the Company’s assumptions and actual results arising from, among other things:
• changes in the delivery system;
• changes in utilization patterns;
• changes in the number of members seeking treatment;
• unforeseen fluctuations in claims backlogs;
• unforeseen increases in the costs of the services;
• the occurrence of catastrophes;
• regulatory changes; and
• changes in benefit plan design.
Some of these factors could impact the ability of the Company to manage and control the medical
costs to the extent assumed in the pricing of its services.
If the Company’s membership in risk-based business continues to grow (which is a major focus of
the Company’s strategy), the Company’s exposure to potential losses from risk-based products will also
increase.
Expansion of Risk-Based Products—Because the Company intends to expand into clinically integrated
management of special populations eligible for Medicaid and Medicare including individuals with SMI,
and other unique high-cost populations, if the Company is unable to accurately underwrite the
healthcare cost risk for this new business and control associated costs, the Company’s profitability
could decline.
The Company believes that it can leverage its information systems, call center, claims and network
infrastructure as well as its financial strength and underwriting expertise to facilitate the development
of risk product offerings to states that include behavioral healthcare and physical medical care for their
special Medicaid and dual eligible populations, particularly individuals with SMI. As this represents a
new business for the Company, the Company will incur start-up costs to develop and grow this
business. The Company’s profitability may be negatively impacted until such time that sufficient
business is generated to offset these start-up costs.
Furthermore, since this is a new business for the Company, there is an increased risk associated
with the underwriting and implementation for this business. Profitability of any such business could be
adversely affected if the Company is unable to accurately estimate the rate of service utilization or the
cost of such services when the Company prices its services. The Company’s assumptions of utilization
and costs when the Company prices its services may not ultimately reflect actual utilization rates and
costs, many aspects of which are beyond the Company’s control. If the cost of services provided to
members under a contract together with the administrative costs exceeds the aggregate fees received by
the Company under such contract, the Company will incur a loss on the contract.
The Company may partner with managed care organizations to create joint ventures in some
states. Conflicts or disagreements between the Company and any joint venture partner may negatively
impact the benefits to be achieved by the relevant joint venture or may ultimately threaten the ability
of any such joint venture to continue. The Company is also subject to additional risks and uncertainties
because the Company may be dependent upon, and subject to, liability, losses or reputational damage
relating to systems, controls and personnel that are not entirely under the Company’s control.
24
Provider Agreements—Failure to maintain or to secure cost-effective healthcare provider contracts may
result in a loss of membership or higher medical costs.
The Company’s profitability depends, to an extent, upon the ability to contract favorably with
certain healthcare providers. The Company may be unable to enter into agreements with providers in
new markets on a timely basis or under favorable terms. If the Company is unable to retain its current
provider contracts or enter into new provider contracts timely or on favorable terms, the Company’s
profitability could be reduced. The Company cannot provide any assurance that it will be able to
continue to renew its existing provider contracts or enter into new contracts.
Pharmacy Management—Loss of Relationship with Providers—If we lose our relationship, or our
relationship otherwise changes in an unfavorable manner, with one or more key pharmacy providers or
if significant changes occur within the pharmacy provider marketplace, or if other issues arise with
respect to our pharmacy networks, our business could be adversely affected.
Our operations are dependent to a significant extent on our ability to obtain discounts on
prescription purchases from retail pharmacies that can be utilized by our clients and their members.
Our contracts with retail pharmacies, which are non-exclusive, are generally terminable by either party
on short notice. If one or more of our top pharmacy chains elects to terminate its relationship with us,
or if we are only able to continue our relationship on terms less favorable to us, access to retail
pharmacies by our clients and their health plan members, and consequently our business, results of
operations, financial condition or cash flows could be adversely affected.
Pharmacy Management—Loss of Relationship with Vendors—Our specialty pharmacies, pharmacy
claims processing, and mail processing are dependent on our relationships with a limited number of
vendors and suppliers and the loss of any of these relationships could significantly impact our ability
to sustain our financial performance.
We acquire a substantial percentage of our specialty pharmacies prescription drug supply from a
limited number of suppliers. Our agreements with these suppliers may be short-term and cancelable by
either party without cause with a relatively short time-frame of prior notice. These agreements may
limit our ability to provide services for competing drugs during the term of the agreement and allow
the supplier to dispense through channels other than us. Further, certain of these agreements allow
pricing and other terms of these relationships to be periodically adjusted for changing market
conditions or required service levels. A termination or modification to any of these relationships could
have an adverse effect on our business, financial condition and results of operations. An additional risk
related to supply is that many products dispensed by our specialty pharmacy business are manufactured
with ingredients that are susceptible to supply shortages. If any products we dispense are in short
supply for long periods of time, this could result in a material adverse effect on our business, financial
condition and results of operations. Further, we source from a limited number of vendors, certain
aspects of our pharmacy claims and mail processing capabilities. An interruption of service, termination
or modification to the terms to any of these agreements may adversely affect our business and financial
condition.
Pharmacy Management—Loss of Relationship with Manufacturers—If we lose relationships with one
or more key pharmaceutical manufacturers or third party rebate administrators or if rebate payments
we receive from pharmaceutical manufacturers and rebate processing service providers decline, our
business, results of operations, financial condition or cash flows could be adversely affected.
We receive fees from our clients for administering rebate programs with pharmaceutical
manufacturers based on the use of selected drugs by members of health plans sponsored by our clients,
25
as well as fees for other programs and services. Our business, results of operations, financial condition
or cash flows could be adversely affected if:
• we lose relationships with one or more key pharmaceutical manufacturers or third party rebate
administrators;
• we are unable to renew or finalize rebate contracts with one or more key pharmaceutical
manufacturers in the future, or are unable to negotiate interim arrangements;
• rebates decline due to the failure of our health plan sponsors to meet market share or other
thresholds;
• legal restrictions are imposed on the ability of pharmaceutical manufacturers to offer rebates or
purchase our programs or services;
• pharmaceutical manufacturers choose not to offer rebates or purchase our programs or services;
or
• rebates decline due to contract branded products losing their patients.
Fluctuation in Operating Results—The Company experiences fluctuations in quarterly operating
results and, as a consequence, the Company may fail to meet or exceed market expectations, which
could cause the Company’s stock price to decline.
The Company’s quarterly operating results have varied in the past and may fluctuate significantly
in the future due to seasonal and other factors, including:
• changes in utilization levels by enrolled members of the Company’s risk-based contracts,
including seasonal utilization patterns (for example, members generally tend to seek services less
during the third and fourth quarters of the year than in the first and second quarters of the
year);
• performance-based contractual adjustments to net revenue, reflecting utilization results or other
performance measures;
• changes in estimates for contractual adjustments under commercial contracts;
• retrospective membership adjustments;
• the timing of implementation of new contracts and enrollment changes; and
• changes in estimates regarding medical costs and IBNR claims.
These factors may affect the Company’s quarterly and annual net revenue, expenses and
profitability in the future and, accordingly, the Company may fail to meet market expectations, which
could cause the Company’s stock price to decline.
Dependence on Government Spending—The Company can be adversely affected by changes in federal,
state and local healthcare policies, programs, funding and enrollments.
All of the Company’s Public Sector segment net revenue, and a portion of the Company’s net
revenue in the Company’s other segments are derived, directly or indirectly, from governmental
agencies, including state Medicaid programs. Contract rates vary from state to state, are subject to
periodic negotiation and may limit the Company’s ability to maintain or increase rates. The Company is
unable to predict the impact on the Company’s operations of future regulations or legislation affecting
Medicaid programs, or the healthcare industry in general. Future regulations or legislation may have a
material adverse effect on the Company. Moreover, any reduction in government spending for such
programs could also have a material adverse effect on the Company (See ‘‘Reliance on Customer
26
Contracts’’). In addition, the Company’s contracts with federal, state and local governmental agencies,
under both direct contract and subcontract arrangements, generally are conditioned upon financial
appropriations by one or more governmental agencies, especially in the case of state Medicaid
programs. These contracts generally can be terminated or modified by the customer if such
appropriations are not made. The Company faces increased risks in this regard as state budgets have
come under increasing pressure due to the recent economic downturn. Finally, some of the Company’s
contracts with federal, state and local governmental agencies, under both direct contract and
subcontract arrangements, require the Company to perform additional services if federal, state or local
laws or regulations imposed after the contract is signed so require, in exchange for additional
compensation, to be negotiated by the parties in good faith. Government and other third-party payors
generally seek to impose lower contract rates and to renegotiate reduced contract rates with service
providers in a trend toward cost control.
Restrictive Covenants in the Company’s Debt Instruments—Restrictions imposed by the Company’s
debt agreements limit the Company’s operating and financial flexibility. These restrictions may
adversely affect the Company’s ability to finance the Company’s future operations or capital needs or
engage in other business activities that may be in the Company’s interest.
On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility
Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S.
Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to
$70.0 million for the issuance of letters of credit for the account of the Company (the ‘‘2011 Credit
Facility’’), which contains a number of covenants. The 2011 Credit Facility will mature on December 9,
2014.
These covenants limit management’s discretion in operating the Company’s business by restricting
or limiting the Company’s ability, among other things, to:
• incur or guarantee additional indebtedness or issue preferred or redeemable stock;
• pay dividends and make other distributions;
• repurchase equity interests;
• make certain advances, investments and loans;
• enter into sale and leaseback transactions;
• create liens;
• sell and otherwise dispose of assets;
• acquire, merge or consolidate with another company; and
• enter into some types of transactions with affiliates.
These restrictions could adversely affect the Company’s ability to finance future operations or
capital needs or engage in other business activities that may be in the Company’s interest. The 2011
Credit Facility also requires the Company to comply with specified financial ratios and tests. Failure to
do so, unless waived by the lenders under the 2011 Credit Facility, pursuant to its terms, would result
in an event of default under the 2011 Credit Facility. The 2011 Credit Facility is guaranteed by most of
the Company’s subsidiaries and is secured by most of the Company’s assets and the Company’s
subsidiaries’ assets.
27
Required Assurances of Financial Resources—The Company’s liquidity, financial condition, prospects
and profitability can be adversely affected by present or future state regulations and contractual
requirements that the Company provide financial assurance of the Company’s ability to meet the
Company’s obligations.
Some of the Company’s contracts and certain state regulations require the Company or certain of
the Company’s subsidiaries to maintain specified cash reserves or letters of credit and/or to maintain
certain minimum tangible net equity in certain of the Company’s subsidiaries as assurance that the
Company has financial resources to meet the Company’s contractual obligations. Many of these state
regulations also restrict the investment activity of certain of the Company’s subsidiaries. Some state
regulations also restrict the ability of certain of the Company’s subsidiaries to pay dividends to
Magellan. Additional state regulations could be promulgated that would increase the cash or other
security the Company would be required to maintain. In addition, the Company’s customers may
require additional restricted cash or other security with respect to the Company’s obligations under the
Company’s contracts, including the Company’s obligation to pay IBNR claims and other medical claims
not yet processed and paid. In addition, certain of the Company’s contracts and state regulations limit
the profits that the Company may earn on risk-based business. The Company’s liquidity, financial
condition, prospects and profitability could be adversely affected by the effects of such regulations and
contractual provisions. See Note 2—‘‘Summary of Significant Accounting Policies—Restricted Assets’’
to the consolidated financial statements set forth elsewhere herein for a discussion of the Company’s
restricted assets.
Competition—The competitive environment in the managed healthcare industry may limit the
Company’s ability to maintain or increase the Company’s rates, which would limit or adversely affect
the Company’s profitability, and any failure in the Company’s ability to respond adequately may
adversely affect the Company’s ability to maintain contracts or obtain new contracts.
The Company’s business is highly competitive. The Company competes with other healthcare
organizations as well as with insurance companies, including HMOs, PPOs, TPAs, IPAs, multi-
disciplinary medical groups, PBMs, specialty pharmacy companies, RBM companies and other specialty
healthcare and managed care companies. Many of the Company’s competitors, particularly certain
insurance companies, HMOs and PBMs are significantly larger and have greater financial, marketing
and other resources than the Company, which can create downward pressure on prices through
economies of scale. The entrance or expansion of these larger companies in the managed healthcare
industry (including the Company’s customers who have in-sourced or who may choose to in-source
healthcare services) could increase the competitive pressures the Company faces and could limit the
Company’s ability to maintain or increase the Company’s rates. If this happens, the Company’s
profitability could be adversely affected. In addition, if the Company does not adequately respond to
these competitive pressures, it could cause the Company to not be able to maintain its current
contracts or to not be able to obtain new contracts.
Possible Impact of Federal Healthcare Reform Law—can significantly impact the Company’s revenues
or profitability.
The ACA is a comprehensive piece of legislation intended to make significant changes to the
healthcare system in the United States. The ACA contains various effective dates extending through
2020. Numerous regulations have been promulgated related to the ACA with hundreds more expected
in the future.
Significant provisions in the ACA include requiring individuals to purchase health insurance,
minimum medical loss ratios for health insurance issuers, significant changes to the Medicare and
Medicaid programs and many other changes that affect healthcare insurance and managed care. See
‘‘Regulation’’ above for more information. Therefore, it is uncertain at this time what the financial
28
impact of healthcare reform will be to the Company. The Company cannot predict the effect of this
legislation or other legislation that may be adopted by the United States Congress or by the states, and
such legislation, if implemented, could have an adverse effect on the Company.
The ACA also contains provisions related to fees that impact the Company’s direct public sector
contracts and provisions regarding the non-deductibility of those fees as well as limitations on
deductibility of compensation for certain employees. We believe that our state public sector customers
will make rate adjustments to cover the direct costs of these fees and a majority of the impact from
non-deductibility of such fees for federal income tax purposes. There may be some impact due to taxes
paid for non-renewing customers where the timing and amount of recoupment of these additional costs
is uncertain. There can be no guarantees regarding this adjustment from our state public sector
customers and these taxes and fees may have a material impact on the Company.
Possible Impact of Federal Mental Health Parity—can significantly impact the Company’s revenues or
profitability.
In October 2008, the United States Congress passed the Paul Wellstone and Pete Dominici Mental
Health Parity Act of 2008 (‘‘MHPAEA’’) establishing parity in financial requirements (e.g. co-pays,
deductibles, etc.) and treatment limitations (e.g., limits on the number of visits) between mental health
and substance abuse benefits and medical/surgical benefits for health plan members. This law does not
require coverage for mental health or substance abuse disorders but if coverage is provided it must be
provided at parity. No specific disorders are mandated for coverage; health plans are able to define
mental health and substance abuse to determine what they are going to cover. Under the ACA
non-grandfathered individual and small group plans (both on and off of the exchange) are required to
provide mental health and substance use disorder benefits as essential health benefits. These mandated
benefits under the ACA must be provided at parity in these plans. Under the ACA, grandfathered
individual plans are required to comply with parity if they offer behavioral health benefits.
Grandfathered small group plans are exempt from requirements to provide essential health benefits
and parity requirements. State mandated benefits laws are not preempted. The law applies to ERISA
plans, Medicaid managed care plans and State Children’s Health Insurance Program (‘‘SCHIP’’) plans.
On February 2, 2010, the Department of the Treasury, the Department of Labor and the Department
of Health and Human Services issued Interim Final Rules interpreting the MHPAEA (‘‘IFR’’). The
IFR applies to ERISA plans and insured business. A State Medicaid Director Letter was issued in
January 2013 discussing applicability of parity to Medicaid managed care plans, SCHIP plans and
Alternative Benefit (Benchmark) Plans. It is possible that some states will change their behavioral
health plan benefits or management techniques as a result of this letter. On November 13, 2013 the
Department of the Treasury, the Department of Labor and the Department of Health and Human
Services issued Final Rules on the MHPAEA (‘‘Final Rule’’). The IFR included some concepts not
included under the statute including the requirement to conduct the parity review at the category level
within the plan, introducing the concept of non-quantitative treatment limitations, and prohibiting
separate but equal deductibles. While some of the regulatory requirements in the IFR were not
anticipated, the Company believes it is in compliance with the requirements of the IFR. The Company
does not anticipate any significant impacts from the Final Rule however it is still reviewing and
assessing the Final Rule with customers. The Company’s risk contracts do allow for repricing to occur
effective the same date that any legislation/regulation becomes effective if that legislation/regulation is
projected to have a material effect on cost of care.
29
Government Regulation—The Company is subject to substantial government regulation and scrutiny,
which increase the Company’s costs of doing business and could adversely affect the Company’s
profitability.
The managed healthcare industry is subject to extensive and evolving federal and state regulation.
Such laws and regulations cover, but are not limited to, matters such as licensure, accreditation,
government healthcare program participation requirements, information privacy and security,
reimbursement for patient services, and Medicare and Medicaid fraud and abuse. The Company’s
pharmaceutical management business is also the subject of substantial federal and state governmental
regulation and scrutiny. Government investigations and allegations have become more frequent
concerning possible violations of fraud and abuse and false claims statutes and regulations by
healthcare organizations. Violators may be excluded from participating in government healthcare
programs, subject to fines or penalties or required to repay amounts received from the government for
previously billed services. A violation of such laws and regulations may have a material adverse effect
on the Company.
The Company is subject to certain state laws and regulations and federal laws as a result of the
Company’s role in management of customers’ employee benefit plans.
Regulatory issues may also affect the Company’s operations including, but not limited to:
• additional state licenses that may be required to conduct the Company’s businesses, including
utilization review, PBM, pharmacy, HMO and TPA activities;
• limits imposed by state authorities upon corporations’ control or excessive influence over
managed healthcare services through the direct employment of physicians, psychiatrists,
psychologists or other professionals, and prohibiting fee splitting;
• laws that impose financial terms and requirements on the Company due to the Company’s
assumption of risk under contracts with licensed insurance companies or HMOs;
• laws in certain states that impose an obligation to contract with any healthcare provider willing
to meet the terms of the Company’s contracts with similar providers;
• compliance with HIPAA (including the federal HITECH Act, which strengthens and expands
HIPAA) and other federal and state laws impacting the confidentiality of member information;
• state legislation regulating PBMs or imposing fiduciary status on PBMs;
• pharmacy laws and regulation;
• legislation imposing benefit plan design restrictions, which limit how our clients can design their
drug benefit plans; and
• network pharmacy access laws, including ‘‘any willing provider’’ and ‘‘due process’’ legislation,
that affect aspects of our pharmacy network contracts.
The imposition of additional licensing and other regulatory requirements may, among other things,
increase the Company’s equity requirements, increase the cost of doing business or force significant
changes in the Company’s operations to comply with these requirements.
The costs associated with compliance with government regulation as discussed above may adversely
affect the Company’s financial condition and results of operation.
30
The Company faces risks related to unauthorized disclosure of sensitive or confidential member and
other information.
As part of its normal operations, the Company collects, processes and retains confidential member
information making the Company subject to various federal and state laws and rules regarding the use
and disclosure of confidential member information, including HIPAA. The Company also maintains
other confidential information related to its business and operations. Despite appropriate security
measures, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses,
misplaced or lost data, programming and/or human errors or other similar events. Noncompliance with
any privacy or security laws and regulations or any security breach, whether by the Company or by its
vendors, could result in enforcement actions, material fines and penalties and could also subject the
Company to litigation.
The Company faces additional regulatory risks associated with its Pharmacy Management segment
which could subject it to additional regulatory scrutiny and liability and which could adversely affect
the profitability of the Pharmacy Management segment in the future.
Various aspects of the Company’s Pharmacy Management segment are governed by federal and
state laws and regulations. Pharmaceutical management services are provided by the Company to
Medicaid and Medicare plans as well as commercial insurance plans. There has been enhanced scrutiny
on federal programs and the Company must remain vigilant in ensuring compliance with the
requirements of these programs. In addition there are provisions of the ACA which may impact the
Company’s business. For example, the ACA imposes new transparency requirements on PBMs, and the
Centers for Medicare and Medicaid Services (‘‘CMS’’) issued a final rule implementing these
requirements in April 2012. PBMs have also increasingly become the target of federal and state
litigation over alleged practices relating to prescription drug switching, soliciting, and receiving unlawful
remuneration, handling rebates, and fiduciary duties, among others. Significant sanctions may be
imposed for violations of these laws and compliance programs are a significant operational requirement
of the Company’s business. There are significant uncertainties involving the application of many of
these legal requirements to the Company. Accordingly, the Company may be required to incur
additional administrative and compliance expenses in determining the applicable requirements and in
adapting its compliance practices, or modifying its business practices, in order to satisfy changing
interpretations and regulatory policies. In addition, there are numerous proposed healthcare laws and
regulations at the federal and state levels, many of which, if adopted, could adversely affect the
Company’s business. See ‘‘Regulation’’ above.
Risks Related To Realization of Goodwill and Intangible Assets—The Company’s profitability could be
adversely affected if the value of intangible assets is not fully realized.
The Company’s total assets at December 31, 2013 reflect goodwill of approximately $488.2 million,
representing approximately 27.8 percent of total assets. The Company completed its annual impairment
analysis of goodwill as of October 1, 2013 noting that no impairment was identified.
At December 31, 2013, identifiable intangible assets (customer lists, contracts and provider
networks) totaled approximately $69.7 million. Intangible assets are amortized over their estimated
useful lives, which range from approximately one to eighteen years. The amortization periods used may
differ from those used by other entities. In addition, the Company may be required to shorten the
amortization period for intangible assets in future periods based on changes in the Company’s business.
There can be no assurance that such goodwill or intangible assets will be realizable.
The Company evaluates, on a regular basis, whether for any reason the carrying value of the
Company’s intangible assets and other long-lived assets may no longer be completely recoverable, in
which case a charge to earnings for impairment losses could become necessary. When events or
31
changes in circumstances occur that indicate the carrying amount of long-lived assets may not be
recoverable, the Company assesses the recoverability of long-lived assets other than goodwill by
determining whether the carrying value of such assets will be recovered through the future cash flows
expected from the use of the asset and its eventual disposition.
Any event or change in circumstances leading to a future determination requiring write-off of a
significant portion of unamortized intangible assets or goodwill would adversely affect the Company’s
profitability.
Claims for Professional Liability—Pending or future actions or claims for professional liability
(including any associated judgments, settlements, legal fees and other costs) could require the
Company to make significant cash expenditures and consume significant management time and
resources, which could have a material adverse effect on the Company’s profitability and financial
condition.
The Company’s operating activities entail significant risks of liability. In recent years, participants
in the healthcare industry generally, as well as the managed healthcare industry, have become subject
to an increasing number of lawsuits. From time to time, the Company is subject to various actions and
claims of professional liability alleging negligence in performing utilization review and other managed
healthcare activities, as well as for the acts or omissions of the Company’s employees, including
employed physicians and other clinicians, network providers, pharmacists, or others. In the normal
course of business, the Company receives reports relating to deaths and other serious incidents
involving patients whose care is being managed by the Company. Such incidents occasionally give rise
to malpractice, professional negligence and other related actions and claims against the Company, the
Company’s employees, or the Company’s network providers. The Company is also subject to actions
and claims for the costs of services for which payment was denied. Many of these actions and claims
seek substantial damages and require the Company to incur significant fees and costs related to the
Company’s defense and consume significant management time and resources. While the Company
maintains professional liability insurance, there can be no assurance that future actions or claims for
professional liability (including any judgments, settlements or costs associated therewith) will not have a
material adverse effect on the Company’s profitability and financial condition.
Professional Liability and Other Insurance—Claims brought against the Company that exceed the
scope of the Company’s liability coverage or denial of coverage could materially and adversely affect
the Company’s profitability and financial condition.
The Company maintains a program of insurance coverage against a broad range of risks in the
Company’s business. As part of this program of insurance, the Company carries professional liability
insurance, subject to certain deductibles and self-insured retentions. The Company also is sometimes
required by customer contracts to post surety bonds with respect to the Company’s potential liability on
professional responsibility claims that may be asserted in connection with services the Company
provides. As of December 31, 2013, the Company had approximately $138.4 million of such bonds
outstanding. The Company’s insurance may not be sufficient to cover any judgments, settlements or
costs relating to present or future claims, suits or complaints. Upon expiration of the Company’s
insurance policies, sufficient insurance may not be available on favorable terms, if at all. To the extent
the Company’s customers are entitled to indemnification under their contracts with the Company
relating to liabilities they incur arising from the operation of the Company’s programs, such
indemnification may not be covered under the Company’s insurance policies. To the extent that certain
actions and claims seek punitive and compensatory damages arising from the Company’s alleged
intentional misconduct, such damages, if awarded, may not be covered, in whole or in part, by the
Company’s insurance policies. If the Company is unable to secure adequate insurance in the future, or
if the insurance the Company carries is not sufficient to cover any judgments, settlements or costs
32
relating to any present or future actions or claims, such judgments, settlements or costs may have a
material adverse effect on the Company’s profitability and financial condition. If the Company is
unable to obtain needed surety bonds in adequate amounts or make alternative arrangements to satisfy
the requirements for such bonds, the Company may no longer be able to operate in those states, which
would have a material adverse effect on the Company.
Class Action Suits and Other Legal Proceedings—The Company is subject to class action and other
lawsuits that could result in material liabilities to the Company or cause the Company to incur
material costs, to change the Company’s operating procedures in ways that increase costs or to comply
with additional regulatory requirements.
Managed healthcare companies and PBM companies have been targeted as defendants in national
class action lawsuits regarding their business practices. The Company has in the past been subject to
such national class actions as defendants and is also subject to or a party to other class actions, lawsuits
and legal proceedings in conducting the Company’s business. In addition, certain of the Company’s
customers are parties to pending class action lawsuits regarding the customers’ business practices for
which the customers could seek indemnification from the Company. These lawsuits may take years to
resolve and cause the Company to incur substantial litigation expense, and the outcomes could have a
material adverse effect on the Company’s profitability and financial condition. In addition to potential
damage awards, depending upon the outcomes of such cases, these lawsuits may cause or force changes
in practices of the Company’s industry and may also cause additional regulation of the industry through
new federal or state laws or new applications of existing laws or regulations. Such changes could
increase the Company’s operating costs.
Negative Publicity—The Company may be subject to negative publicity which may adversely affect the
Company’s business, financial position, results of operations or cash flows.
From time to time, the managed healthcare industry has received negative publicity. This publicity
has led to increased legislation, regulation, review of industry practices and private litigation. These
factors may adversely affect the Company’s ability to market our services, require the Company to
change its services, or increase the overall regulatory burden under which the Company operates. Any
of these factors may increase the costs of doing business and adversely affect the Company’s business,
financial position, results of operations or cash flows.
Government Investigations—The Company may be subjected to additional regulatory requirements and
to investigations or regulatory action by governmental agencies, each of which may have a material
adverse effect on the Company’s business, financial condition and results of operations.
From time to time, the Company receives notifications from and engages in discussions with
various government agencies concerning the Company’s businesses and operations. As a result of these
contacts with regulators, the Company may, as appropriate, be required to implement changes to the
Company’s operations, revise the Company’s filings with such agencies and/or seek additional licenses
to conduct the Company’s business. The Company’s inability to comply with the various regulatory
requirements may have a material adverse effect on the Company’s business.
In addition, the Company may become subject to regulatory investigations relating to the
Company’s business, which may result in litigation or regulatory action. A subsequent legal liability or a
significant regulatory action against the Company could have a material adverse effect on the
Company’s business, financial condition and results of operations. Moreover, even if the Company
ultimately prevails in the litigation, regulatory action or investigation, such litigation, regulatory action
or investigation could have a material adverse effect on the Company’s business, financial condition and
results of operations.
33
Investment Portfolio—The value of the Company’s investments is influenced by varying economic and
market conditions, and a decrease in value may result in a loss charged to income.
All of the Company’s investments are classified as ‘‘available-for-sale’’ and are carried at fair value.
The Company’s available-for-sale investment securities were $208.3 million and represented
11.8 percent of the Company’s total assets at December 31, 2013.
The current economic environment and recent volatility of securities markets increase the difficulty
of assessing investment impairment and the same influences tend to increase the risk of potential
impairment of these assets. The Company believes it has adequately reviewed its investment securities
for impairment and that its investment securities are carried at fair value. However, over time, the
economic and market environment may provide additional insight regarding the fair value of certain
securities, which could change the Company’s judgment regarding impairment. This could result in
realized losses relating to other-than-temporary declines being charged against future income. Given
the current market conditions and the significant judgments involved, there is a risk that declines in fair
value may occur and material other-than-temporary impairments may be charged to income in future
periods, resulting in realized losses. In addition, if it became necessary for the Company to liquidate its
investment portfolio on an accelerated basis, it could have an adverse effect on the Company’s results
of operations.
Adverse Economic Conditions—The state of the national economy and adverse changes in economic
conditions could adversely affect the Company’s business and results of operations.
The state of the economy has negatively affected state budgets and could adversely affect the
Company’s reimbursement from state Medicaid programs in its Public Sector segment. The state of the
economy and adverse economic conditions could also adversely affect the Company’s customers in the
Commercial, Specialty Solutions and Pharmacy Management segments resulting in increased pressures
on the Company’s operating margins. In addition, the economic conditions may result in decreased
membership in the Commercial, Specialty Solutions and Pharmacy Management segments, thereby
adversely affecting the revenues to the Company from such customers as well as the Company’s
operating profitability.
Adverse economic conditions in the debt markets may affect the Company’s ability to refinance the
Company’s existing 2011 Credit Facility upon maturity December 9, 2014 on acceptable terms, or at all.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company currently leases approximately one million square feet of office space comprising 47
offices in 22 states and the District of Columbia with terms expiring between January 2014 and January
2025. The Company’s principal executive offices are located in Avon, Connecticut, which lease expires
in September 2019. The Company believes that its current facilities are suitable for and adequate to
support the level of its present operations.
Item 3. Legal Proceedings
The Company’s operating activities entail significant risks of liability. From time to time, the
Company is subject to various actions and claims arising from the acts or omissions of its employees,
network providers or other parties. In the normal course of business, the Company receives reports
relating to deaths and other serious incidents involving patients whose care is being managed by the
Company. Such incidents occasionally give rise to malpractice, professional negligence and other related
34
actions and claims against the Company or its network providers. Many of these actions and claims
received by the Company seek substantial damages and therefore require the Company to incur
significant fees and costs related to their defense.
On July 25, 2012, the Company filed a lawsuit currently pending in the United States District
Court for the District of Connecticut against two former employees and a corporation partially-owned
by one of such former employees asserting claims for violation of contractual restrictive covenants and
common law obligations owed to the Company arising from actions of such former employees in
connection with their employment by the defendant corporation. The Company’s complaint alleges
claims for breach of contract and breach of the covenant of good dealing against the individual former
employees; tortious interference with contract against the defendant corporation; and violation of the
Connecticut Uniform Trade Secrets Act, civil conspiracy, and violation of the Connecticut Unfair Trade
Practices Act against all defendants arising out of activity undertaken by the former employees on
behalf of the defendant corporation in competition with the Company’s specialty pharmacy business.
The Company is seeking a permanent injunction and recovery of compensatory and punitive damages
and an award of attorneys’ fees and costs. On December 18, 2012, the defendant corporation filed
counterclaims against the Company in which it asserts tortious interference with business expectancy,
abuse of process, and violation of the Connecticut Unfair Trade Practices Act arising out of the
Company’s efforts to enforce its contractual and legal rights. On June 10, 2013, the defendant
corporation disclosed an alleged damages computation in the amount of $155 million in lost profits
plus unspecified business diminution damages. The Company believes the counterclaims and damages
calculations of the defendant corporation are without merit and is defending them vigorously.
The Company is also subject to or party to certain class actions and other litigation and claims
relating to its operations or business practices. In the opinion of management, the Company has
recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be
asserted against the Company, and for which the outcome is probable and reasonably estimable.
Management believes that the resolution of such litigation and claims will not have a material adverse
effect on the Company’s financial condition or results of operations; however, there can be no
assurance in this regard.
Item 4. Mine Safety Disclosures
Not applicable.
35
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Since January 6, 2004, shares of the Company’s Ordinary Common Stock, $0.01 par value per
share (‘‘common stock’’) have traded on the NASDAQ Stock Market under the symbol ‘‘MGLN.’’ For
further information regarding the Company’s common stock, see Note 6—‘‘Stockholders’ Equity’’ to the
consolidated financial statements set forth elsewhere herein. The following tables set forth the high and
low closing bid prices of the Company’s common stock as reported by the NASDAQ Stock Market for
the years ended December 31, 2012 and 2013, as follows:
Common Stock
Sales Prices
High
Low
2012
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$50.15
49.38
55.89
53.52
$46.30
40.81
44.83
47.48
2013
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54.23
56.75
59.97
61.44
47.45
48.72
55.69
56.91
As of December 31, 2013, there were approximately 307 stockholders of record of the Company’s
common stock. The stockholders of record data for common stock does not reflect persons whose stock
was held on that date by the Depository Trust Company or other intermediaries.
36
Comparison of Cumulative Total Returns
The following graph compares the change in the cumulative total return on the Company’s
common stock to (a) the change in the cumulative total return on the stocks included in the
Standard & Poor’s (‘‘S&P’’) 500 Stock Index and (b) the change in the cumulative total return on the
stocks included in the S&P 500 Managed Health Care Index, assuming an investment of $100 made at
the close of trading on December 31, 2008, and comparing relative values on December 31, 2009, 2010,
2011, 2012 and 2013. The Company did not pay any dividends during the period reflected in the graph.
The common stock price performance shown below should not be viewed as being indicative of future
performance.
Comparison of Cumulative Total Return
Comparison of Cumulative Five Year Total Return
$350
$300
$250
$200
$150
$100
$50
$0
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
Magellan Health Services, Inc.
S&P 500 Index
S&P 500 Managed Health Care Index
22FEB201401190971
2008
2009
2010
2011
2012
2013
December 31,
Magellan Health Services, Inc.
. . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . .
S&P 500 Managed Health Care Index(1) .
$100.00
100.00
100.00
$104.01
126.46
127.68
$120.74
145.51
139.02
$126.33
148.59
186.84
$125.13
172.37
197.97
$152.99
228.19
292.73
(1) The S&P 500 Managed Health Care Index consists of Aetna, Inc., CIGNA Corp., Humana, Inc.,
UnitedHealth Group, Inc. and WellPoint, Inc.
The information set forth above under the ‘‘Comparison of Cumulative Total Returns’’ does not
constitute soliciting material and should not be deemed filed or incorporated by reference into any other of
the Company’s filings under the Securities Act or the Exchange Act, except to the extent the filing specifically
incorporates such information by reference therein.
Stock Repurchases
The Company’s board of directors has previously authorized a series of stock repurchase plans.
Stock repurchases for each such plan could be executed through open market repurchases, privately
negotiated transactions, accelerated share repurchases or other means. The board of directors
authorized management to execute stock repurchase transactions from time to time and in such
amounts and via such methods as management deemed appropriate. Each stock repurchase program
could be limited or terminated at any time without prior notice.
37
On July 27, 2010 the Company’s board of directors approved a stock repurchase plan which
authorized the Company to purchase up to $350 million of its outstanding common stock through
July 28, 2012. On February 18, 2011, the Company’s board of directors increased the stock repurchase
program by an additional $100 million, to a total of $450 million. Pursuant to this program, the
Company made open market purchases of 1,684,510 shares of the Company’s common stock at an
average price of $48.36 per share for an aggregate cost of $81.5 million (excluding broker commissions)
during the period from November 3, 2010 through December 31, 2010. Pursuant to this program, the
Company made open market purchases of 7,534,766 shares of the Company’s common stock at an
average price of $48.91 per share for an aggregate cost of $368.5 million (excluding broker
commissions) during the period January 1, 2011 through November 10, 2011, which was the date the
repurchase program was completed.
On October 25, 2011 the Company’s board of directors approved a stock repurchase plan which
authorized the Company to purchase up to $200 million of its outstanding common stock through
October 25, 2013. On July 24, 2013 the Company’s board of directors approved an increase and
extension of the stock repurchase plan which authorizes the Company to purchase up to $300 million
of its outstanding stock through October 25, 2015. Pursuant to this program, the Company made open
market purchases of 671,776 shares of the Company’s common stock at an average price of $48.72 per
share for an aggregate cost of $32.7 million (excluding broker commissions) during the period from
November 11, 2011 through December 31, 2011. Pursuant to this program, the Company made open
market purchases of 459,252 shares of the Company’s common stock at an average price of $50.27 per
share for an aggregate cost of $23.1 million (excluding broker commissions) during 2012. Pursuant to
this program, the Company made open market purchases of 1,159,871 shares of the Company’s
common stock at an average price of $51.83 per share for an aggregate cost of $60.1 million (excluding
broker commissions) during 2013.
Following is a summary of stock repurchases made during the three months ended December 31,
2013:
Period
Total number
of Shares
Purchased
Average
Price Paid
Total Number of Shares
Purchased as Part of Publicly
per Share(2) Announced Plans or Programs
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans(1)(2)
October 1–31, 2013 . . . .
November 1–30, 2013 . .
December 1–31, 2013 . .
15,077
85,176
103,842
204,095
$59.69
$59.86
$58.84
15,077
85,176
103,842
204,095
$195,276
190,177
184,067
(1) Excludes amounts that could be used to repurchase shares acquired under the Company’s equity
incentive plans to satisfy withholding tax obligations of employees and non-employee directors
upon the vesting of restricted stock units.
(2) Excludes broker commissions.
During the period from January 1, 2014 through February 26, 2014, the Company made additional
open market purchases of 177,227 shares of the Company’s common stock at an aggregate cost of
$10.6 million (excluding broker commissions).
Dividends
The Company did not declare any dividends during either of the years ended December 31, 2012 or
2013 and does not expect to pay a dividend in 2014. The Company is prohibited from paying dividends
on its common stock under the terms of the 2011 Credit Facility, except in limited circumstances. The
declaration and payment of any dividends in the future by the Company will be subject to the sole
discretion of the Company’s board of directors and will depend upon many factors, including the
Company’s financial condition, earnings, covenants associated with the Company’s 2011 Credit Facility
and any similar future agreement, legal requirements, regulatory constraints and other factors deemed
relevant by the Company’s board of directors. Moreover, should the Company pay any dividends in the
future, there can be no assurance that the Company will continue to pay such dividends.
38
Recent Sales of Unregistered Securities
On September 6, 2013, the Company and Partners Rx entered into a Merger Agreement pursuant
to which on October 1, 2013 certain principal owners of Partners Rx purchased 175,596 shares of the
Company’s restricted stock for a total purchase price of $10 million. The purchase price of the shares
was equal to the average of the closing prices of the Company’s stock for the five trading day period on
the day prior to the execution of the Merger Agreement. The shares received by such principal owners
of Partners Rx are subject to vesting over three years with 50% vesting on the second anniversary of
the acquisition and 50% vesting on the third anniversary of the acquisition, conditioned on continued
employment with the Company on the applicable vesting dates. The shares were issued to the principal
owners of Partners Rx in a private placement pursuant to Section 4(a)(2) of the Securities Act.
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated financial information of the Company
as of and for the years ended December 31, 2009, 2010, 2011, 2012 and 2013.
Selected consolidated financial information for the years ended December 31, 2011, 2012 and 2013
and as of December 31, 2012 and 2013 presented below, have been derived from, and should be read
in conjunction with, the consolidated financial statements and the notes thereto included elsewhere
herein. Selected consolidated financial information for the years ended December 31, 2009 and 2010
has been derived from the Company’s audited consolidated financial statements not included in this
Form 10-K. The selected financial data set forth below also should be read in conjunction with the
Company’s financial statements and accompanying notes and ‘‘Management’s Discussion and Analysis
of Financial Condition and Results of Operations’’ appearing elsewhere herein.
39
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
2009
2010
2011
2012
2013
Year Ended December 31,
Statement of Operations Data:
Net revenue . . . . . . . . . . . . . . . . . . .
Cost of care . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . .
Direct service costs and other
operating expenses(1) . . . . . . . . . . .
Depreciation and amortization . . . . . .
Interest expense . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . .
Income before income taxes . . . . . . . .
Provision for income taxes . . . . . . . . .
$2,641,814
1,765,313
203,336
$2,969,240
1,907,985
218,630
$2,799,400
1,784,724
232,038
$3,207,397
2,071,890
328,414
$3,546,317
2,232,976
455,601
465,710
47,268
2,424
(6,245)
164,008
57,337
566,582
54,682
2,233
(3,275)
222,403
83,744
529,634
58,623
2,502
(2,781)
194,660
65,037
557,512
60,488
2,247
(2,019)
188,865
37,838
619,546
71,994
3,000
(1,985)
165,185
39,924
Net income . . . . . . . . . . . . . . . . . . . .
$ 106,671
$ 138,659
$ 129,623
$ 151,027
$ 125,261
Income per common share—basic: . . .
Income per common share—diluted: . .
$
$
3.03
3.01
$
$
4.10
4.03
$
$
4.25
4.17
$
$
5.51
5.42
$
$
4.63
4.53
2009
2010
2011
2012
2013
December 31,
Balance Sheet Data:
Current assets . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . .
Total capital lease obligations . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . .
$ 753,588
369,164
108,219
1,441,041
—
950,492
$ 858,487
390,169
111,814
1,549,432
559
1,039,015
$ 732,709
369,550
118,022
1,341,167
—
845,274
$ 871,418
393,202
136,548
1,512,133
—
1,017,333
$ 989,358
476,267
172,333
1,759,218
26,725
1,156,485
(1) Includes stock compensation expense of $19.8 million, $15.1 million, $17.4 million, $17.8 million
and $21.3 million in 2009, 2010, 2011, 2012 and 2013, respectively.
40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s financial condition and results of
operations should be read in conjunction with the Company’s selected financial data and the
Company’s financial statements and the accompanying notes included herein. The following discussion
may contain ‘‘forward-looking statements’’ within the meaning of the Securities Act and the Exchange
Act. When used in this Form 10-K, the words ‘‘estimate,’’ ‘‘anticipate,’’ ‘‘expect,’’ ‘‘believe,’’ ‘‘should’’
and similar expressions are intended to be forward-looking statements. Although the Company believes
that its plans, intentions and expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such plans, intentions or expectations will be achieved. Prospective
investors are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors currently known to
management that could cause actual results to differ materially from those in forward-looking
statements are set forth under the heading ‘‘Risk Factors’’ in Item 1A and elsewhere in this Form 10-K.
Capitalized or defined terms included in this Item 7 have the meanings set forth in Item 1 of this
Form 10-K.
Business Overview
Magellan Health Services, Inc. (‘‘Magellan’’) was incorporated in 1969 under the laws of the State
of Delaware. Magellan’s executive offices are located at 55 Nod Road, Avon, Connecticut 06001, and
its telephone number at that location is (860) 507-1900. References in this report to the ‘‘Company’’
include the accounts of Magellan and its majority owned subsidiaries.
Business Overview
The Company is engaged in the healthcare management business, and is focused on meeting needs
in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special
population management. The Company provides services to health plans, MCOs, insurance companies,
employers, labor unions, various military and governmental agencies, third party administrators, and
brokers. The Company’s business is divided into the following five segments, based on the services it
provides and/or the customers that it serves, as described below.
Managed Healthcare
Two of the Company’s segments are in the managed healthcare business. This line of business
reflects the Company’s: (i) management of behavioral healthcare services, and (ii) the integrated
management of physical and behavioral healthcare for special populations, delivered through MCC.
The Company’s coordination and management of behavioral healthcare includes services provided
through its comprehensive network of behavioral health professionals, clinics, hospitals and ancillary
service providers. This network of credentialed and privileged providers is integrated with clinical and
quality improvement programs to enhance the healthcare experience for individuals in need of care,
while at the same time managing the cost of these services for our customers. The treatment services
provided through the Company’s provider network include outpatient programs (such as counseling or
therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization
services), inpatient treatment and crisis intervention services. The Company generally does not directly
provide or own any provider of treatment services, although it does employ licensed behavioral health
counselors to deliver non-medical counseling under certain government contracts.
The Company’s integrated management of physical and behavioral healthcare includes its full
service health plans which provide for the holistic management of special populations. The special
populations include individuals with serious mental illness, dual eligibles, those eligible for long term
care, intellectually and developmentally disabled individuals, and other populations with unique and
often complex healthcare needs.
41
The Company provides its management services primarily through: (i) risk-based products, where
the Company assumes all or a substantial portion of the responsibility for the cost of providing
treatment services in exchange for a fixed per member per month fee, (ii) ASO products, where the
Company provides services such as utilization review, claims administration and/or provider network
management, but does not assume responsibility for the cost of the treatment services, and (iii) EAPs
where the Company provides short-term outpatient behavioral counseling services.
The managed healthcare business is managed based on the services provided and/or the customers
served, through the following two segments:
Commercial. Commercial generally reflects managed behavioral healthcare services and EAP
services provided under contracts with health plans, insurance companies and MCOs for some or all of
their commercial, Medicaid and Medicare members, as well as with employers, including corporations,
governmental agencies, and labor unions. Commercial’s contracts encompass risk-based, ASO and EAP
arrangements. As of December 31, 2013, Commercial’s covered lives were 4.0 million, 13.5 million and
13.0 million for risk-based, ASO and EAP products, respectively. For the year ended December 31,
2013, Commercial’s revenue was $501.1 million, $116.9 million and $148.8 million for risk-based, ASO
and EAP products, respectively.
Public Sector. Public Sector generally reflects: (i) the management of behavioral health services
provided to recipients under Medicaid and other state sponsored programs under contracts with state
and local governmental agencies, and (ii) the integrated management of physical, behavioral and
pharmaceutical care for special populations covered under Medicaid and other government sponsored
programs. Public Sector contracts encompass either risk-based or ASO arrangements. As of
December 31, 2013, Public Sector’s covered lives were 2.1 million and 1.7 million for risk-based and
ASO products, respectively. For the year ended December 31, 2013, Public Sector’s revenue was
$1.7 billion and $33.8 million for risk-based and ASO products, respectively.
The Maricopa Contract began on September 1, 2007 and extends through March 31, 2014 unless
sooner terminated by the parties. The Maricopa Contract generated net revenues of $779.5 million,
$758.3 million, and $755.0 million for the years ended December 31, 2011, 2012, and 2013, respectively.
See further discussion of the Maricopa Contract in Item 1A—‘‘Risk Factors—Reliance on Customer
Contracts’’.
Specialty Solutions
Specialty Solutions generally reflects the management of the delivery of diagnostic imaging
(radiology benefits management) and a variety of other specialty areas such as radiation oncology,
obstetrical ultrasound, cardiology and pain management, including spine surgery and musculoskeletal
management, to ensure that such services are clinically appropriate and cost effective. The Company’s
Specialty Solutions services are currently provided under contracts with health plans and insurance
companies for some or all of their commercial, Medicaid and Medicare members. The Company also
contracts with state and local governmental agencies for the provision of such services to Medicaid
recipients. The Company offers its Specialty Solutions services through risk-based contracts, where the
Company assumes all or a substantial portion of the responsibility for the cost of providing services,
and through ASO contracts, where the Company provides services such as utilization review and claims
administration, but does not assume responsibility for the cost of the services. As of December 31,
2013, covered lives for Specialty Solutions were 5.7 million and 12.0 million for risk-based and ASO
products, respectively. For the year ended December 31, 2013, revenue for Specialty Solutions was
$334.5 million and $41.3 million for risk-based and ASO products, respectively.
This segment was previously defined as Radiology Benefits Management; however, as it has grown
and expanded to include additional products, the Company has renamed the segment Specialty
Solutions to encompass all of its additional product offerings.
42
Pharmacy Management
Pharmacy Management comprises products and solutions that provide clinical and financial
management of drugs paid under medical and pharmacy benefit programs. Pharmacy Managements’
services include (i) traditional pharmacy benefit management (‘‘PBM’’) services; (ii) pharmacy benefit
administration (‘‘PBA’’) for state Medicaid and other government sponsored programs; (iii) specialty
pharmaceutical dispensing operations, contracting and formulary optimization programs; (iv) medical
pharmacy management programs; and (v) programs for the integrated management of drugs that treat
complex conditions, regardless of site of service, method of delivery, or benefit reimbursement. In
addition, the Company has a subcontract arrangement to provide PBM services on a risk basis for one
of Public Sector’s customers, which is scheduled to terminate on March 31, 2014.
The Company’s Pharmacy Management programs are provided under contracts with health plans,
employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass
risk-based and FFS arrangements. During 2013, Pharmacy Management processed 1.9 million adjusted
commercial network claims in the Company’s PBM business, which includes Partners Rx claims
following the closing of the acquisition on October 1, 2013. As of December 31, 2013, the Company
had a generic dispensing rate of 82.3 percent within its commercial PBM business. In addition, the
Company processed 67.1 million adjusted PBA claims and 0.1 million specialty dispensing claims.
Adjusted claim totals apply a multiple of three for each 90-day and traditional mail claim. In addition,
as of December 31, 2013, Pharmacy Management served 0.4 million commercial PBM members,
9.5 million members in its medical pharmacy management programs, and 25 states and the District of
Columbia in its PBA business.
Beginning in the first quarter of 2013, the Company underwent organizational changes. As a result
of these changes, the Company concluded that changes to its reportable segments now comprising the
new Pharmacy Management segment were warranted. This segment contains the operating segments
previously defined as the Specialty Pharmaceutical Management segment and the Medicaid
Administration segment. Prior period balances have been reclassified to reflect this change.
Corporate
This segment of the Company is comprised primarily of operational support functions such as sales
and marketing and information technology, as well as corporate support functions such as executive,
finance, human resources and legal.
Acquisition of Partners Rx Management LLC
Pursuant to the September 6, 2013 Agreement and Plan of Merger (the ‘‘Merger Agreement’’)
with Partners Rx Management, LLC (‘‘Partners Rx’’), on October 1, 2013 the Company acquired all of
the outstanding ownership interests of Partners Rx. Partners Rx is a privately held, full-service
commercial PBM with a strong focus on health plans and self-funded employers primarily through sales
through third party administrators, consultants and brokers. As consideration for the transaction, the
Company paid $100 million in cash, subject to working capital adjustments. The Company funded the
acquisition with cash on hand.
Pursuant to the Merger Agreement, certain principal owners of Partners Rx purchased a total of
$10 million in the Company’s restricted stock at a price equal to the average of the closing prices of
the Company’s stock for the five trading day period ended on the day prior to the execution of the
Merger Agreement. The shares received by such principal owners of Partners Rx are subject to vesting
over three years with 50% vesting on the second anniversary of the acquisition and 50% vesting on the
third anniversary of the acquisition, conditioned on continued employment with the Company on the
applicable vesting dates.
The Company reports the results of operations of Partners Rx within its Pharmacy Management
segment.
43
Acquisition of AlphaCare Holdings, Inc.
Pursuant to the August 13, 2013 stock purchase agreement (the ‘‘Stock Purchase Agreement’’), on
December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, Inc.
(‘‘AlphaCare Holdings’’), the holding company for AlphaCare New York, Inc. (‘‘AlphaCare’’), a Health
Maintenance Organization (‘‘HMO’’) in New York that operates a New York Managed Long-Term Care
Plan ‘‘(MLTCP’’) in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in
Bronx, New York, Queens and Kings Counties.
The Company previously held a 7% equity interest in AlphaCare through a previous equity
investment of $2.0 million in preferred membership units of AlphaCare’s previous holding company,
AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to
AlphaCare Holdings, LLC. As part of the Stock Purchase Agreement, AlphaCare Holdings, LLC was
reorganized into a Delaware corporation, the preferred membership units and the loan were converted
into Series A Participating Preferred Stock (‘‘Series A Preferred’’) of AlphaCare Holdings and the
Company purchased an additional $17.4 million of Series A Preferred. The Company holds a 65%
voting interest and the remaining shareholders hold a 35% voting interest in AlphaCare Holdings.
Based on the Company’s 65% equity and voting interest in AlphaCare Holdings, the Company has
included the results of operations in its consolidated financial statements. The Company reports the
results of operations of AlphaCare Holdings within the Public Sector segment.
Managed Care and Other Revenue
Managed Care Revenue. Managed care revenue, inclusive of revenue from the Company’s risk,
EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for
covered members. The Company is paid a per member fee for all enrolled members, and this fee is
recorded as revenue in the month in which members are entitled to service. The Company adjusts its
revenue for retroactive membership terminations, additions and other changes, when such adjustments
are identified, with the exception of retroactivity that can be reasonably estimated. The impact of a
retroactive rate amendment is generally recorded in the accounting period that terms to the
amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of
service are recorded as deferred revenue. Managed care revenues approximated $2.2 billion, $2.5 billion
and $2.7 billion for the years ended December 31, 2011, 2012 and 2013, respectively.
Fee-For-Service and Cost-Plus Contracts. The Company has certain fee-for-service contracts,
including cost-plus contracts, with customers under which the Company recognizes revenue as services
are performed and as costs are incurred. Revenues from these contracts approximated $174.5 million,
$151.4 million and $215.1 million for the years ended December 31, 2011, 2012 and 2013, respectively.
Block Grant Revenues. Public Sector has a contract that is partially funded by federal, state and
county block grant money, which represents annual appropriations. The Company recognizes revenue
from block grant activity ratably over the period to which the block grant funding applies. Block grant
revenues were approximately $114.4 million, $124.8 million and $131.5 million for the years ended
December 31, 2011, 2012 and 2013, respectively.
Performance-Based Revenue. The Company has the ability to earn performance-based revenue
under certain risk and non-risk contracts. Performance-based revenue generally is based on either the
ability of the Company to manage care for its clients below specified targets, or on other operating
metrics. For each such contract, the Company estimates and records performance-based revenue after
considering the relevant contractual terms and the data available for the performance-based revenue
calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the
rights and obligations of each party upon termination of the contracts. Performance-based revenues
were $26.5 million, $25.4 million and $14.0 million for the years ended December 31, 2011, 2012 and
2013, respectively.
44
Rebate Revenue. The Company administers a rebate program for certain clients through which the
Company coordinates the achievement, calculation and collection of rebates and administrative fees
from pharmaceutical manufacturers on behalf of clients. Each period, the Company estimates the total
rebates earned based on actual volumes of pharmaceutical purchases by the Company’s clients, as well
as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of
rebates generated for its clients. The Company does not record as rebate revenue any rebates that are
passed through to its clients. Total rebate revenues for the years ended December 31, 2011, 2012 and
2013 were $32.8 million, $40.2 million and $34.8 million, respectively.
In relation to the Company’s PBM business, the Company administers rebate programs through
which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The
Company recognizes rebates when the Company is entitled to them and when the amounts of the
rebates are determinable. The amount recorded for rebates earned by the Company from the
pharmaceutical manufacturers are recorded as a reduction of cost of goods sold.
PBM and Dispensing Revenue
Pharmacy Benefit Management Revenue. The Company recognizes PBM revenue, which consists of
a negotiated prescription price (ingredient cost plus dispensing fee), co-payments collected by the
pharmacy and any associated administrative fees, when claims are adjudicated. The Company
recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as
the principal in the arrangement and is contractually obligated to its clients and network pharmacies,
which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the
claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments
from the client for drugs dispensed by the pharmacy, and managing the total prescription drug
relationship with the client’s members. If the Company enters into a contract where it is only an
administrator, and does not assume any of the risks previously noted, revenue will be recognized on a
net basis. Prior to the year ended December 31, 2013 the Company had no PBM business. PBM
revenues were $106.7 million for the year ended December 31, 2013.
Dispensing Revenue. The Company recognizes dispensing revenue, which includes the co-payments
received from members of the health plans the Company serves, when the specialty pharmaceutical
drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the
Company’s customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of
the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund.
Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were
$247.4 million, $350.3 million and $376.6 million for the years ended December 31, 2011, 2012 and
2013, respectively.
Cost of Care, Medical Claims Payable and Other Medical Liabilities
Cost of care is recognized in the period in which members receive managed healthcare services. In
addition to actual benefits paid, cost of care in a period also includes the impact of accruals for
estimates of medical claims payable. Medical claims payable represents the liability for healthcare
claims reported but not yet paid and claims IBNR related to the Company’s managed healthcare
businesses. Such liabilities are determined by employing actuarial methods that are commonly used by
health insurance actuaries and that meet actuarial standards of practice.
The IBNR portion of medical claims payable is estimated based on past claims payment
experience for member groups, enrollment data, utilization statistics, authorized healthcare services and
other factors. This data is incorporated into contract-specific actuarial reserve models and is further
analyzed to create ‘‘completion factors’’ that represent the average percentage of total incurred claims
that have been paid through a given date after being incurred. Factors that affect estimated completion
factors include benefit changes, enrollment changes, shifts in product mix, seasonality influences,
provider reimbursement changes, changes in claims inventory levels, the speed of claims processing and
changes in paid claim levels. Completion factors are applied to claims paid through the financial
45
statement date to estimate the ultimate claim expense incurred for the current period. Actuarial
estimates of claim liabilities are then determined by subtracting the actual paid claims from the
estimate of the ultimate incurred claims. For the most recent incurred months (generally the most
recent two months), the percentage of claims paid for claims incurred in those months is generally low.
This makes the completion factor methodology less reliable for such months. Therefore, incurred
claims for any month with a completion factor that is less than 70 percent are generally not projected
from historical completion and payment patterns; rather they are projected by estimating claims
expense based on recent monthly estimated cost incurred per member per month times membership,
taking into account seasonality influences, benefit changes and healthcare trend levels, collectively
considered to be ‘‘trend factors.’’
Medical claims payable balances are continually monitored and reviewed. If it is determined that
the Company’s assumptions in estimating such liabilities are significantly different than actual results,
the Company’s results of operations and financial position could be impacted in future periods.
Adjustments of prior period estimates may result in additional cost of care or a reduction of cost of
care in the period an adjustment is made. Further, due to the considerable variability of healthcare
costs, adjustments to claim liabilities occur each period and are sometimes significant as compared to
the net income recorded in that period. Prior period development is recognized immediately upon the
actuary’s judgment that a portion of the prior period liability is no longer needed or that additional
liability should have been accrued. The following table presents the components of the change in
medical claims payable for the years ended December 31, 2011, 2012 and 2013 (in thousands):
Claims payable and IBNR, beginning of period . . . . . . . . . . . . .
Cost of care:
2011
2012
2013(3)
$ 166,095
$ 157,099
$ 222,929
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,790,124
(5,400)
2,076,190
(4,300)
2,264,276
(31,300)
Total cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,784,724
2,071,890
2,232,976
Claim payments and transfers to other medical liabilities(1):
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,657,291
136,429
1,877,459
128,601
2,053,274
160,402
Total claim payments and transfers to other medical
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,793,720
2,006,060
2,213,676
Claims payable and IBNR, end of period . . . . . . . . . . . . . . . . .
Withhold receivables, end of period(2) . . . . . . . . . . . . . . . . . . .
157,099
(19,126)
222,929
(24,500)
242,229
(13,888)
Medical claims payable, end of period . . . . . . . . . . . . . . . . . . . .
$ 137,973
$ 198,429
$ 228,341
(1) For any given period, a portion of unpaid medical claims payable could be covered by reinvestment
liability (discussed below) and may not impact the Company’s results of operations for such
periods.
(2) Medical claims payable is offset by customer withholds from capitation payments in situations in
which the customer has the contractual requirement to pay providers for care incurred.
(3) The favorable development of prior years cost of care includes approximately $15.1 million of
adjustments of block funding to providers resulting from an annual reconciliation process.
Actuarial standards of practice require that the claim liabilities be adequate under moderately
adverse circumstances. Adverse circumstances are situations in which the actual claims experience could
be higher than the otherwise estimated value of such claims. In many situations, the claims paid
amount experienced will be less than the estimate that satisfies the actuarial standards of practice.
Care trend factors and completion factors can have a significant impact on the medical claims
payable liability. The following example provides the estimated impact to the Company’s December 31,
46
2013 unpaid medical claims payable liability assuming hypothetical changes in care trend factors and
completion factors:
Care Trend Factor(1)
(Decrease) Increase
Completion Factor(2)
(Decrease) Increase
Trend Factor
Medical Claims Payable
Completion Factor Medical Claims Payable
(cid:31)3%
(cid:31)2%
(cid:31)1%
1%
2%
3%
(in thousands)
$(28,000)
(18,000)
(8,500)
8,500
18,000
28,000
(cid:31)3%
(cid:31)2%
(cid:31)1%
1%
2%
3%
(in thousands)
$(44,000)
(29,000)
(14,500)
14,500
29,000
44,000
Approximately 70 percent of IBNR dollars is based on care trend factors.
(1) Assumes a change in the care trend factor for any month that a completion factor is not
used to estimate incurred claims (which is generally any month that is less than
70 percent complete).
(2) Assumes a change in the completion factor for any month for which completion factors
are used to estimate IBNR (which is generally any month that is 70 percent or more
complete).
Due to the existence of risk sharing and reinvestment provisions in certain customer contracts, a
change in the estimate for medical claims payable does not necessarily result in an equivalent impact
on cost of care.
The Company believes that the amount of medical claims payable is adequate to cover its ultimate
liability for unpaid claims as of December 31, 2013; however, actual claims payments may differ from
established estimates.
Other medical liabilities consist primarily of ‘‘reinvestment’’ payables under certain managed
healthcare contracts with Medicaid customers and ‘‘profit share’’ payables under certain risk-based
contracts. Under a contract with reinvestment features, if the cost of care is less than certain minimum
amounts specified in the contract (usually as a percentage of revenue), the Company is required to
‘‘reinvest’’ such difference in behavioral healthcare programs when and as specified by the customer or
to pay the difference to the customer for their use in funding such programs. Under a contract with
profit share provisions, if the cost of care is below certain specified levels, the Company will ‘‘share’’
the cost savings with the customer at the percentages set forth in the contract.
Long-lived Assets
Long-lived assets, including property and equipment and definite lived intangible assets to be held
and used, are currently reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is determined by comparing the carrying
value of these long-lived assets to management’s best estimate of the future undiscounted cash flows
expected to result from the use of the assets and their eventual disposition. The cash flow projections
used to make this assessment are consistent with the cash flow projections that management uses
internally in making key decisions. In the event an impairment exists, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the asset, which is generally determined
by using quoted market prices or the discounted present value of expected future cash flows.
Goodwill
The Company is required to test its goodwill for impairment on at least an annual basis. The
Company has selected October 1 as the date of its annual impairment test. The goodwill impairment
test is a two-step process that requires management to make judgments in determining what
47
assumptions to use in the calculation. The first step of the process consists of estimating the fair value
of each reporting unit with goodwill based on various valuation techniques, with the primary technique
being a discounted cash flow analysis, which requires the input of various assumptions with respect to
revenues, operating margins, growth rates and discount rates. The estimated fair value for each
reporting unit is compared to the carrying value of the reporting unit, which includes goodwill. If the
estimated fair value is less than the carrying value, a second step is performed to compute the amount
of the impairment by determining an ‘‘implied fair value’’ of goodwill. The determination of a reporting
unit’s ‘‘implied fair value’’ of goodwill requires the Company to allocate the estimated fair value of the
reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents
the ‘‘implied fair value’’ of goodwill, which is compared to its corresponding carrying value.
Goodwill is tested for impairment at a level referred to as a reporting unit, with the Company’s
reporting units as of December 31, 2013 comprised of Health Plan, Specialty Solutions, Pharmacy
Management, and Public Sector. Prior to October 1, 2013, the Company’s reporting units included
Specialty Pharmaceutical Management and Medicaid Administration. Effective October 1, 2013, the
goodwill associated with these reporting units was aggregated with the goodwill recognized from the
acquisition of Partners Rx, and represent the Pharmacy Management reporting unit. The change in
reporting units was attributable to the fact that discrete financial information is now being reviewed at
the Pharmacy Management operating segment level. The Company’s marketing and pricing of
pharmacy products on an integrated basis and integration of pharmacy related operations contributed
to the reporting unit change.
The fair value of the Health Plan (a component of the Commercial segment) and Specialty
Solutions reporting units were determined using a discounted cash flow method. This method involves
estimating the present value of estimated future cash flows utilizing a risk adjusted discount rate. Key
assumptions for this method include cash flow projections, terminal growth rates and discount rates.
The fair value of the Pharmacy Management reporting unit was determined using discounted cash
flow, guideline company and similar transaction methods. Key assumptions for the discounted cash flow
method are consistent with those described above. For the guideline company method, revenue and
earnings before interest, taxes, depreciation, and amortization (‘‘EBITDA’’) multiples for guideline
companies were applied to the reporting unit’s pro forma revenue and EDITDA for 2013, which
represents actual results for the nine-month period ended September 30, 2013 and projected results for
the three-month period ended December 31, 2013, and to the reporting unit’s projected revenue and
EBITDA for 2014. For the similar transaction method, revenue and EBITDA multiples based on
merger and acquisition transactions for similar companies were applied to the reporting unit’s pro
forma revenue and EBITDA for 2013, which represents actual results for the nine-month period ended
September 30, 2013 and projected results for the three-month period ended December 31, 2013. The
weighting applied to the fair values determined using the discounted cash flow, guideline company and
similar transaction methods to determine an overall fair value for the Pharmacy Management reporting
unit was 75 percent, 22.5 percent and 2.5 percent, respectively. The weighting of each of the methods
described above was based on the relevance of the approach. A change in the weighting would not
change the outcome of the first step of the impairment test.
As a result of the first step of the 2013 annual goodwill impairment analysis, the fair value of each
reporting unit with goodwill exceeded its carrying value. Therefore, the second step was not necessary.
However, a 47.9 percent, 32.9 percent, and 25.5 percent decline in the fair values of the Health Plan,
Specialty Solutions, and Pharmacy Management reporting units, respectively, would have caused the
carrying values for these reporting units to be in excess of fair values, which would require the second
step to be performed. The second step could have resulted in an impairment loss for goodwill.
48
The Company’s goodwill attributed to the Public Sector reporting unit is related to the AlphaCare
Holdings acquisition which closed on December 31, 2013, therefore an impairment analysis was not
performed for this reporting unit in 2013.
Goodwill for each of the Company’s reporting units at December 31, 2012 and 2013 were as
follows (in thousands):
Health Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmacy Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$120,485
104,549
201,905
—
$120,485
104,549
242,290
20,882
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$426,939
$488,206
2012
2013
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2013
are reflected in the table below (in thousands):
Balance as of beginning of period . . . . . . . . . . . . . . . . . . . . .
Acquisition of Partners Rx . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of AlphaCare Holdings . . . . . . . . . . . . . . . . . . . .
$426,939
—
—
$426,939
40,385
20,882
Balance as of end of period . . . . . . . . . . . . . . . . . . . . . . . .
$426,939
$488,206
2012
2013
Stock Compensation
At December 31, 2012 and 2013, the Company had equity-based employee incentive plans, which
are described more fully in Note 6—‘‘Stockholders’ Equity’’ to the consolidated financial statements set
forth elsewhere herein. The Company recorded stock compensation expense of $17.8 million and
$21.3 million for the years ended December 31, 2012 and 2013, respectively. The Company recognizes
compensation costs for awards that do not contain performance conditions on a straight-line basis over
the requisite service period, which is generally the vesting term of three years. For restricted stock units
that include performance conditions, stock compensation is recognized using an accelerated method
over the vesting period.
The Company estimates the fair value of substantially all stock options using the Black-Scholes-
Merton option pricing model that employs certain factors including expected volatility of stock price,
expected life of the option, risk-free interest rate and expected dividend yield. For the years ended
December 31, 2012 and 2013, such volatility was based on the historical volatility of the Company’s
stock price.
The expected term of the option is based on historical employee stock option exercise behavior
and the vesting terms of the respective option. Risk-free interest rates are based on the U.S. Treasury
yield in effect at the time of grant.
The Company recognizes compensation expense for only the portion of options, restricted stock or
restricted stock units that are ultimately expected to vest. Therefore, estimated forfeiture rates are
derived from historical employee termination behavior. The Company’s estimated forfeiture rate for the
years ended December 31, 2012 and 2013 was four percent. If the actual number of forfeitures differs
from those estimated, additional adjustments to compensation expense may be required in future
periods. If vesting of an award is conditioned upon the achievement of performance goals,
49
compensation expense during the performance period is estimated using the most probable outcome of
the performance goals, and adjusted as the expected outcome changes.
Income Taxes
The Company files a consolidated federal income tax return for the Company and its eighty-
percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in
various state and local jurisdictions.
The Company estimates income taxes for each of the jurisdictions in which it operates. This
process involves determining both permanent and temporary differences resulting from differing
treatment for tax and book purposes. Deferred tax assets and/or liabilities are determined by
multiplying the temporary differences between the financial reporting and tax reporting bases for assets
and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or
settled. The Company then assesses the likelihood that the deferred tax assets will be recovered from
the reversal of temporary differences, the implementation of feasible and prudent tax planning
strategies, and future taxable income. To the extent the Company cannot conclude that recovery is
more likely than not, it establishes a valuation allowance. The effect of a change in tax rates on
deferred taxes is recognized in income in the period that includes the enactment date.
The Company has federal net operating loss carryforwards (‘‘NOLs’’) as of December 31, 2013 of
$3.6 million available to reduce future federal taxable income. These NOLs, if not used, will expire in
2017 through 2019 and are subject to examination and adjustment by the IRS. Utilization of these
NOLs is also subject to certain timing limitations, although the Company does not believe these
limitations will restrict its ability to use any federal NOLs before they expire. The Company has state
NOLs as of December 31, 2013 of $152.3 million available to reduce future state taxable income at
certain subsidiaries. Most of these NOLs, if not used, will expire in 2017 through 2022 and are subject
to examination and adjustment by the respective state tax authorities.
The Company’s valuation allowances against deferred tax assets were $3.1 million as of
December 31, 2012 and 2013, mostly relating to uncertainties regarding the eventual realization of
certain state NOLs. Determination of the amount of deferred tax assets considered realizable requires
significant judgment and estimation regarding the forecasts of future taxable income which are
consistent with the plans and estimates the Company uses to manage the underlying businesses.
Although consideration is also given to potential tax planning strategies which might be available to
improve the realization of deferred tax assets, none were identified which were both prudent and
reasonable. Future changes in the estimated realizable portion of deferred tax assets could materially
affect the Company’s financial condition and results of operations.
Reversals of both valuation allowances and unrecognized tax benefits are recorded in the period
they occur, typically as reductions to income tax expense. However, reversals of unrecognized tax
benefits related to deductions for stock compensation in excess of the related book expense are
recorded as increases in additional paid-in capital. To the extent reversals of unrecognized tax benefits
cannot be specifically traced to these excess deductions due to complexities in the tax law, the
Company records the tax benefit for such reversals to additional paid-in-capital on a pro-rata basis.
The tax benefit from an uncertain tax position is recognized when it is more likely than not that,
based on technical merit, the position will be sustained upon examination, including resolution of any
related appeals or litigation processes. As of December 31, 2013, $30.2 million of unrecognized tax
benefits were included in tax contingencies. If these unrecognized tax benefits had been realized as of
December 31, 2013, $23.3 million would have reduced income tax expense.
50
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2009 expired during 2013. As a result, $28.6 million of unrecognized tax benefits recorded as
of December 31, 2012 were reversed in the current year due to statute expirations, of which
$23.2 million is reflected as a reduction to income tax expense, $3.9 million as an increase to additional
paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1 million of
accrued interest was reversed in 2013 and reflected as a reduction to income tax expense due to the
closing of statutes of limitations on tax assessments.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2008 expired during 2012. As a result, $43.3 million of unrecognized tax benefits recorded as
of December 31, 2011 were reversed in 2012 as a result of statute expirations, of which $35.7 million is
reflected as a reduction to income tax expense, $6.2 million as an increase to additional paid-in capital,
and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued interest
and $0.8 million of unrecognized state tax benefits were reversed in 2012 and reflected as reductions to
income tax expense due to the closing of statutes of limitations on tax assessments and changes in tax
return elections, respectively.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2007 closed during 2011. As a result, $15.0 million of unrecognized tax benefits recorded as of
December 31, 2010 were reversed in 2011, of which $10.4 million was reflected as a reduction to
income tax expense, $2.5 million as an increase to additional paid-in capital, and the remainder as a
decrease to deferred tax assets. Additionally, $2.2 million of accrued interest was reversed in 2011 and
reflected as a reduction to income tax expense due to these statute closings.
With few exceptions, the Company is no longer subject to income tax assessments by tax
authorities for years ended prior to 2010. Further, it is reasonably possible the statutes of limitations
regarding the assessment of federal and most state and local income taxes for 2010 could expire during
2014. The Company anticipates that up to $19.5 million of unrecognized tax benefits recorded as of
December 31, 2013 could be reversed during 2014 as a result of statute expirations, of which
$16.0 million would be reflected as a reduction to income tax expense, $2.6 million as an increase to
additional paid-in capital, and the remainder as a decrease to deferred tax assets. All such reversals
would be reflected as discrete adjustments during the quarter in which the respective statute expiration
occurs, primarily in the third quarter.
In addition to reversals for statute closings, the Company also adjusts these liabilities for
unrecognized tax benefits when its judgment changes as a result of the evaluation of new information
not previously available. However, the ultimate resolution of a disputed tax position following an
examination by a taxing authority could result in a payment that is materially different from that
accrued by the Company. These differences are reflected as increases or decreases to income tax
expense in the period in which they are determined.
Results of Operations
The accounting policies of the Company’s segments are the same as those described in Note 1—
‘‘General.’’ The Company evaluates performance of its segments based on profit or loss from
operations before stock compensation expense, depreciation and amortization, interest expense, interest
and other income, gain on sale of assets, special charges or benefits, and income taxes (‘‘Segment
Profit’’). Management uses Segment Profit information for internal reporting and control purposes and
considers it important in making decisions regarding the allocation of capital and other resources, risk
assessment and employee compensation, among other matters. Public Sector subcontracts with
Pharmacy Management to provide pharmacy benefits management services for certain of Public
51
Sector’s customers. As such, revenue and cost of care related to this intersegment arrangement are
eliminated. The Company’s segments are defined above.
The following tables summarize, for the periods indicated, operating results by business segment
(in thousands):
Commercial
Public
Sector
Specialty
Solutions Management Elimination Consolidated
Pharmacy
Corporate
and
Year Ended December 31, 2011
Managed care and other revenue . $ 561,780 $ 1,459,659 $ 344,335 $ 268,987 $ (82,770) $ 2,551,991
247,409
Dispensing revenue . . . . . . . . . . .
(1,784,724)
Cost of care . . . . . . . . . . . . . . . .
— (232,038)
Cost of goods sold . . . . . . . . . . . .
(529,634)
Direct service costs and other . . . .
17,418
Stock compensation expense(1) . .
— 247,409
(76,544)
— (232,038)
(127,598)
817
(314,178) (1,271,532) (205,240)
—
(152,760)
839
—
(67,227)
872
(120,368)
13,327
(61,681)
1,563
—
82,770
—
—
Segment profit (loss) . . . . . . . . . . $ 95,681 $
121,772 $ 78,977 $ 81,033 $(107,041) $
270,422
Commercial
Public
Sector
Specialty
Solutions Management Elimination Consolidated
Pharmacy
Corporate
and
Year Ended December 31, 2012
Managed care and other revenue . $ 728,512 $ 1,620,875 $ 349,133 $ 227,669 $ (69,090) $ 2,857,099
Dispensing revenue . . . . . . . . . . .
350,298
(2,071,890)
Cost of care . . . . . . . . . . . . . . . .
— (328,414)
Cost of goods sold . . . . . . . . . . . .
(557,512)
Direct service costs and other . . . .
17,783
Stock compensation expense(1) . .
— 350,298
(61,759)
— (328,414)
(111,593)
1,007
(437,518) (1,413,320) (228,383)
—
(172,035)
532
—
(89,129)
1,111
(129,337)
13,566
(55,418)
1,567
—
69,090
—
—
Segment profit (loss) . . . . . . . . . . $ 119,491 $
119,537 $ 66,899 $ 77,208 $(115,771) $
267,364
Commercial
Public
Sector
Specialty
Solutions Management Elimination Consolidated
Pharmacy
Corporate
and
Year Ended December 31, 2013
Managed care and other revenue . $ 766,841 $ 1,757,933 $ 375,818 $ 228,705 $ (66,248) $ 3,063,049
PBM and dispensing revenue . . . .
483,268
(2,232,976)
Cost of care . . . . . . . . . . . . . . . .
— (455,601)
Cost of goods sold . . . . . . . . . . . .
(619,546)
Direct service costs and other . . . .
21,252
Stock compensation expense(1) . .
259,446
Segment profit (loss) . . . . . . . . . . $ 125,375 $
— 483,268
(59,227)
— (455,601)
(128,427)
1,172
113,129 $ 72,618 $ 69,890 $(121,566) $
(469,478) (1,523,023) (247,496)
—
(122,819)
1,038
—
(172,491)
503
(138,475)
16,909
(57,334)
1,630
—
66,248
—
—
(1) Stock compensation expense is included in direct service costs and other operating expenses,
however this amount is excluded from the computation of segment profit since it is managed on a
consolidated basis.
The following table reconciles Segment Profit to consolidated income before income taxes for the
years ended December 31, 2011, 2012 and 2013 (in thousands):
2011
2012
2013
Segment Profit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . .
$270,422
(17,418)
(58,623)
(2,502)
2,781
$194,660
$267,364
(17,783)
(60,488)
(2,247)
2,019
$188,865
$259,446
(21,252)
(71,994)
(3,000)
1,985
$165,185
52
Year ended December 31, 2013 (‘‘2013’’) compared to the year ended December 31, 2012 (‘‘2012’’)
Commercial
Net Revenue
Net revenue related to Commercial increased by 5.3 percent or $38.3 million from 2012 to 2013.
The increase in revenue is mainly due to new contracts implemented after (or during) 2012 of
$51.2 million, favorable rate changes of $26.7 million, increased membership from existing customers of
$18.0 million, customer settlements in 2013 of $5.6 million, retroactive rate and membership
adjustments recorded in 2013 of $2.9 million, retroactive risk share adjustments recorded in 2012 of
$1.6 million and other net increases (mainly utilization revenue) of $5.4 million, which increases were
partially offset by terminated contracts of $62.6 million and performance-based revenue recorded in
2012 of $10.5 million.
Cost of Care
Cost of care increased by 7.3 percent or $32.0 million from 2012 to 2013. The increase in cost of
care is primarily due to new contracts of $33.9 million, increased membership from existing customers
of $10.2 million, favorable prior period medical claims development recorded in 2012 of $3.8 million
and unfavorable care trends and other net variances of $42.7 million, which increases were partially
offset by terminated contracts of $50.7 million, favorable prior period medical claims development
recorded in 2013 of $5.4 million and favorable medical claims development for 2012 which was
recorded after 2012 of $2.5 million. Cost of care increased as a percentage of risk revenue (excluding
EAP business) from 78.0 percent in 2012 to 79.3 percent in 2013, mainly due to business mix.
Direct Service Costs
Direct service costs increased by 0.3 percent or $0.5 million from 2012 to 2013 primarily due to
severance and restructuring cost pertaining to terminated contracts of $4.7 million, partially offset by
reduced costs as a result of cost containment efforts. Direct service costs decreased as a percentage of
net revenue from 23.6 percent in 2012 to 22.5 percent in 2013, mainly due to cost containment efforts
and the impact of increased revenue from favorable rate changes.
Public Sector
Net Revenue
Net revenue related to Public Sector increased by 8.5 percent or $137.1 million from 2012 to 2013.
This increase is primarily due to new contracts implemented after (or during) 2012 of $131.9 million,
favorable rate changes of $7.7 million in 2013 and other net favorable variances of $3.4 million, which
increases were partially offset by decreased membership from existing customers of $5.9 million.
Cost of Care
Cost of care increased by 7.8 percent or $109.7 million from 2012 to 2013. This increase is
primarily due to new contracts of $111.7 million, care associated with rate changes for contracts with
minimum care requirements of $7.0 million, favorable contractual settlements of $2.2 million in 2012
and unfavorable care trends and other net unfavorable variances of $20.8 million, these increases were
partially offset by favorable prior period medical claims development recorded in 2013 of $19.9 million
(including 15.1 million of adjustments of block funding to providers resulting from an annual
reconciliation process), decreased membership from existing customers of $6.7 million and favorable
medical claims development for 2012 which was recorded after 2012 of $5.4 million. Cost of care
decreased as a percentage of risk revenue from 88.7 percent in 2012 to 88.3 percent in 2013 mainly due
to favorable medical claims development.
53
Direct Service Costs
Direct service costs increased by 37.8 percent or $33.7 million from 2012 to 2013, mainly due to
severance and restructuring costs of terminated contracts of $6.8 million, costs to support new business
and development for the Magellan Complete Care product. Direct service costs increased as a
percentage of net revenue from 5.5 percent for the 2012 to 7.0 percent in 2013 mainly due to
development costs for the Magellan Complete Care product.
Specialty Solutions
Net Revenue
Net revenue related to Specialty Solutions increased by 7.6 percent or $26.7 million from 2012 to
2013. This increase is primarily due to new contracts implemented after (or during) 2012 of
$38.0 million and increased membership from existing customers of $32.0 million, which increases were
partially offset by unfavorable rate changes of $26.4 million, terminated contracts of $10.2 million,
contractual settlements of $4.4 million in 2012, the revenue impact of favorable medical claims
development for 2012 recorded in 2013 of $2.0 million and other net unfavorable variances of
$0.3 million.
Cost of Care
Cost of care increased by 8.4 percent or $19.1 million from 2012 to 2013. This increase is primarily
attributed to new contracts of $32.3 million and increased membership from existing customers of
$25.1 million, which increases were partially offset by favorable prior period medical claims
development recorded in 2013 of $6.0 million, terminated contracts of $7.9 million, favorable medical
claims development for 2012 which was recorded after 2012 of $4.7 million and care trends and other
net favorable variances of $19.7 million. Cost of care was consistent as a percentage of risk revenue at
74.0 percent in 2012 and 2013.
Direct Service Costs
Direct service costs increased by 3.5 percent or $1.9 million from 2012 to 2013, mainly due to the
cost to support new business. As a percentage of net revenue, direct service costs decreased from
15.9 percent in 2012 to 15.3 percent in 2013, mainly due to changes in business mix.
Pharmacy Management
Net Revenue
Net revenue related to Pharmacy Management increased by 23.2 percent or $134.0 million from
2012 to 2013. This increase is primarily due to revenue for Partners Rx which was acquired on
October 1, 2013 of $84.8 million, net increased dispensing activity from existing customers of
$34.6 million, new business of $28.8 million (mainly PBM) and increased pharmacy revenue of
$3.8 million, which increases were partially offset by terminated contracts of $10.2 million, decreased
formulary optimization revenue of $3.6 million, a reduction to revenue associated with profit share
recorded due to favorable cost of care trends of $2.9 million and other net unfavorable variances of
$1.3 million.
Cost of Care
Cost of care decreased by 4.1 percent or $2.5 million from 2012 to 2013. This decrease is primarily
due to favorable care trends. Cost of care as a percentage of risk revenue was 89.4 percent in 2012 and
89.5 percent in 2013.
54
Cost of Goods Sold
Cost of goods sold increased by 38.7 percent or $127.2 million from 2012 to 2013. This increase is
primarily due to cost of goods sold for Partners Rx of $77.7 million, increased dispensing activity of
$35.5 million and new business of $22.2 million, which increases were partially offset by terminated
contracts of $8.2 million. As a percentage of PBM and dispensing revenue, cost of goods sold increased
from 93.8 percent in 2012 to 94.3 percent in 2013, mainly due to business mix.
Direct Service Costs
Direct service costs increased by 15.1 percent or $16.8 million from 2012 to 2013. This increase
mainly relates to costs for Partners Rx, implementation costs and ongoing costs to support new
business. As a percentage of net revenue, direct service costs decreased from 19.3 percent in 2012 to
18.0 percent in 2013, mainly due to business mix.
Corporate and Other
Other Operating Expenses
Other operating expenses related to the Corporate and Other segment increased by 7.1 percent or
$9.1 million from 2012 to 2013. The increase results primary from severance and other one time items
in 2013 of $12.4 million, an increase in stock compensation expense of $3.3 million and other net
unfavorable variances of $4.0 million which increases were partially offset by costs related to growth
initiatives of $10.6 million incurred in 2012. As a percentage of total net revenue, other operating
expenses decreased from 4.0 percent for 2012 to 3.9 percent for 2013, primarily due to increased
revenue from new business, as well as the inclusion in 2012 of expenses incurred to support growth
initiatives.
Depreciation and Amortization
Depreciation and amortization expense increased by 19.0 percent or $11.5 million from 2012 to
2013, primarily due to asset additions after 2012 and the acquisition of Partners Rx.
Interest Expense
Interest expense increased by 33.5 percent or $0.8 million from 2012 to 2013, primarily due to
capital lease additions after 2012.
Interest and Other Income
Interest and other income of $2.0 million were consistent from 2012 to 2013.
Income Taxes
The Company’s effective income tax rate was 20.0 percent in 2012 and 24.2 percent in 2013. These
rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent
differences between book and tax income, and changes to recorded tax contingencies. The Company
also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.
The effective income tax rate for 2012 was lower than 2013 mainly due to lower reversals of tax
contingencies in 2013 from closure of statutes of limitations.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2009 expired during 2013. As a result, $28.6 million of unrecognized tax benefits recorded as
of December 31, 2012 were reversed in 2013 as a result of statute expirations, of which $23.2 million is
reflected as a reduction to income tax expense, $3.9 million as an increase to additional paid-in capital,
55
and the remainder as a decrease to deferred tax assets. Additionally, $2.1 million of accrued interest
was reversed in 2013 and reflected as a reduction to income tax expense due to the closing of statutes
of limitations on tax assessments.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2008 expired during 2012. As a result, $43.3 million of unrecognized tax benefits recorded as
of December 31, 2011 were reversed in 2012 as a result of statute expirations, of which $35.7 million is
reflected as a reduction to income tax expense, $6.2 million as an increase to additional paid-in capital,
and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued interest
and $0.8 million of unrecognized state tax benefits were reversed in 2012 and reflected as reductions to
income tax expense due to the closing of statutes of limitations on tax assessments and changes in tax
return elections, respectively.
2012 compared to the year ended December 31, 2011 (‘‘2011’’)
Commercial
Net Revenue
Net revenue related to Commercial increased by 29.7 percent or $166.7 million from 2011 to 2012.
The increase in net revenue is mainly due to new contracts implemented after 2011 of $149.8 million,
favorable rate changes of $29.7 million and higher performance-based revenue recorded in 2012 of
$10.5 million ($5.9 million relating to the prior year), which increases were partially offset by favorable
retroactive membership and rate adjustments recorded in 2011 of $8.6 million, program changes of
$6.4 million, terminated contracts of $3.3 million, retroactive risk share adjustments recorded in 2012 of
$1.6 million, net decreased membership from existing customers of $1.4 million and other net decreases
of $2.0 million.
Cost of Care
Cost of care increased by 39.3 percent or $123.3 million from 2011 to 2012. The increase in cost of
care is primarily due to new contracts implemented after 2011 of $115.5 million and unfavorable care
trends and other net variances of $24.2 million, which increases were partially offset by program
changes of $6.2 million, favorable medical claims development for 2011 which was recorded after 2011
of $3.7 million, favorable prior period medical claims development recorded in 2012 of $3.8 million and
net decreased membership from existing customers of $2.7 million. Cost of care increased as a
percentage of risk revenue (excluding EAP business) from 77.0 in 2011 to 78.0 percent in 2012, mainly
due to unfavorable care trends in excess of rate increases and changes in business mix.
Direct Service Costs
Direct service costs increased by 12.6 percent or $19.3 million from 2011 to 2012. The increase in
direct service costs is mainly due to costs to support new contracts. Direct service costs decreased as a
percentage of net revenue from 27.2 percent in 2011 to 23.6 percent in 2012, mainly due to changes in
business mix.
Public Sector
Net Revenue
Net revenue related to Public Sector increased by 11.0 percent or $161.2 million from 2011 to
2012. This increase is primarily due to new contracts implemented after 2011 of $177.4 million,
unfavorable retroactive contract funding adjustments in 2011 of $12.6 million, timing of incentive
revenue for 2012 of $5.8 million and the revenue impact for favorable prior period medical claims
development recorded in 2011 of $2.0 million. The revenue increases were partially offset by
56
unfavorable rate changes and program funding of $23.0 million, retroactive incentive revenue recorded
in 2011 of $6.8 million, 2011 incentive revenue recorded in 2011 of $5.2 million and net decreased
membership from existing customers of $1.6 million.
Cost of Care
Cost of care increased by 11.2 percent or $141.8 million from 2011 to 2012. This increase is
primarily due to new contracts implemented after 2011 of $132.4 million, care associated with
retroactive contract funding changes in 2011 of $14.4 million, favorable prior period medical claims
development recorded in 2011 of $2.3 million and unfavorable care trends and other net variances of
$20.8 million, which increases were partially offset by care associated with rate changes for contracts
with minimum care requirements of $25.9 million and favorable contractual settlements of $2.2 million
in 2012. Cost of care increased as a percentage of risk revenue from 87.5 percent in 2011 to
88.7 percent in 2012, mainly due to unfavorable rate changes, unfavorable care trends, and changes in
business mix.
Direct Service Costs
Direct service costs increased by 32.6 percent or $21.9 million from 2011 to 2012, mainly due to
costs to support new contracts. Direct service costs increased as a percentage of net revenue from
4.6 percent for 2011 to 5.5 percent in 2012 mainly due to rate decreases and changes in business mix.
Specialty Solutions
Net Revenue
Net revenue related to Specialty Solutions increased by 1.4 percent or $4.8 million from 2011 to
2012. This increase is primarily due to the net impact of new contracts implemented after (or during)
2011 of $54.3 million, favorable contractual settlements of $4.4 million in 2012 and program changes of
$2.9 million which increases were partially offset by decreased membership from terminated contracts
and existing customers of $39.7 million, unfavorable rate changes of $14.5 million and other net
unfavorable variances of $2.6 million.
Cost of Care
Cost of care increased by 11.3 percent or $23.1 million from 2011 to 2012. This increase is
primarily attributed to new contracts implemented after (or during) 2011 of $38.4 million, program
changes of $2.9 million and favorable prior period medical claims development recorded in 2011 of
$3.1 million, which increases were partially offset by decreased membership from terminated contracts
and existing customers of $18.3 million, favorable prior period medical claims development recorded in
2012 of $0.4 million and care trends and other net favorable variances of $2.6 million. Cost of care
increased as a percentage of risk revenue from 69.3 percent in 2011 to 74.0 percent in 2012 mainly due
to unfavorable rate changes in excess of care trends and changes in business mix.
Direct Service Costs
Direct service costs decreased by 10.2 percent or $6.3 million from 2011 to 2012. The decrease in
direct service costs is mainly attributable to terminated contracts. As a percentage of net revenue,
direct service costs decreased from 17.9 percent in 2011 to 15.9 percent in 2012, mainly due to changes
in business mix.
57
Pharmacy Management
Net Revenue
Net revenue related to Pharmacy Management increased by 11.9 percent or $61.6 million from
2011 to 2012. This increase is primarily due to net increased dispensing activity of $102.9 million
(mainly due to increased business from new and existing customers), formulary optimization revenue of
$6.0 million and other net increases of $0.3 million. These increases were partially offset by terminated
contracts of $28.8 million, decreased revenue due to lower cost of care associated with the subcontract
with Public Sector of $13.7 million and decreased pharmacy revenue of $5.1 million. The terminated
contracts are associated with the Company’s decision to exit the fiscal agent services (‘‘FAS’’) market,
with the Company’s last FAS contract terminating in late 2011.
Cost of Care
Cost of care decreased by 19.3 percent or $14.8 million from 2011 to 2012. This decrease is
primarily due to favorable care trends. Cost of care decreased as a percentage of risk revenue from
92.5 percent in 2011 to 89.4 percent in 2012, mainly due to favorable care trends.
Cost of Goods Sold
Cost of goods sold increased by 41.5 percent or $96.4 million from 2011 to 2012. This increase is
primarily due to net increased dispensing activity. As a percentage of the portion of net revenue that
relates to dispensing activity, cost of goods sold was 93.8 percent in 2012, which is consistent with 2011.
Direct Service Costs
Direct service costs decreased by 12.5 percent or $16.0 million from 2011 to 2012. This decrease is
primarily due to terminated contracts. As a percentage of net revenue, direct service costs decreased
from 24.7 percent in 2011 to 19.3 percent in 2012, mainly due to changes in business mix.
Corporate and Other
Other Operating Expenses
Other operating expenses related to the Corporate and Other Segment increased by 7.5 percent or
$9.0 million from 2011 to 2012. The increase results primarily from an increase in costs of $10.6 million
related to our growth initiatives, partially offset by other net unfavorable variances of $1.6 million. As a
percentage of total net revenue, other operating expenses were 4.0 percent for 2012, which decreased
slightly from 2011.
Depreciation and Amortization
Depreciation and amortization expense increased by 3.2 percent or $1.9 million from 2011 to 2012,
primarily due to asset additions after 2011.
Interest Expense
Interest expense decreased by $0.3 million from 2011 to 2012.
Interest and Other Income
Interest and other income decreased by $0.8 million from 2011 to 2012, mainly due to lower yields.
58
Income Taxes
The Company’s effective income tax rate was 33.4 percent in 2011 and 20.0 percent in 2012. These
rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent
differences between book and tax income, and changes to recorded tax contingencies. The Company
also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.
The effective income tax rate for 2012 was lower than 2011 mainly due to more significant reversals of
tax contingencies in 2012 from closure of statutes of limitations.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2008 expired during 2012. As a result, $43.3 million of unrecognized tax benefits recorded as
of December 31, 2011 were reversed in 2012 as a result of statute expirations, of which $35.7 million is
reflected as an a reduction to income tax expense, $6.2 million as an increase to additional paid-in
capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued
interest and $0.8 million of unrecognized state tax benefits were reversed in 2012 and reflected as
reductions to income tax expense due to the closing of statutes of limitations on tax assessments and
changes in tax return elections, respectively.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2007 closed during 2011. As a result, $15.0 million of unrecognized tax benefits recorded as of
December 31, 2010 were reversed in 2011, of which $10.4 million is reflected as a reduction to income
tax expense, $2.5 million as an increase to additional paid-in capital, and the remainder as a decrease
to deferred tax assets. Additionally, $2.2 million of accrued interest was reversed in 2011 and reflected
as a reduction to income tax expense due to these statute closings.
Outlook—Results of Operations
The Company’s Segment Profit and net income are subject to significant fluctuations from period
to period. These fluctuations may result from a variety of factors such as those set forth under
Item 1A—‘‘Risk Factors’’ as well as a variety of other factors including: (i) changes in utilization levels
by enrolled members of the Company’s risk-based contracts, including seasonal utilization patterns;
(ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of
implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments
upon contract renewals (and price competition in general); and (vi) changes in estimates regarding
medical costs and IBNR.
A portion of the Company’s business is subject to rising care costs due to an increase in the
number and frequency of covered members seeking behavioral healthcare or radiology services, and
higher costs per inpatient day or outpatient visit for behavioral services, and higher costs per scan for
radiology services. Many of these factors are beyond the Company’s control. Future results of
operations will be heavily dependent on management’s ability to obtain customer rate increases that are
consistent with care cost increases and/or to reduce operating expenses.
In relation to the managed behavioral healthcare business, the Company is a market leader in a
mature market with many viable competitors. The Company is continuing its attempts to grow its
business in the managed behavioral healthcare industry through aggressive marketing and development
of new products; however, due to the maturity of the market, the Company believes that the ability to
grow its current business lines may be limited. In addition, as previously discussed, substantially all of
the Company’s Commercial segment revenues are derived from Blue Cross Blue Shield health plans
and other managed care companies, health insurers and health plans. In the past, certain of the
managed care customers of the Company have decided not to renew all or part of their contracts with
the Company, and to instead manage the behavioral healthcare services directly for their subscribers.
59
Care Trends. The Company expects that same-store normalized cost of care trend for the
12 month forward outlook to be 6 to 8 percent for Commercial, 0 to 2 percent for Public Sector and 3
to 5 percent for Specialty Solutions.
Interest Rate Risk. Changes in interest rates affect interest income earned on the Company’s cash
equivalents and investments, as well as interest expense on variable interest rate borrowings under the
Company’s 2011 Credit Facility. Based on the amount of cash equivalents and investments and the
borrowing levels under the 2011 Credit Facility as of December 31, 2013, a hypothetical 10 percent
increase or decrease in the interest rate associated with these instruments, with all other variables held
constant, would not materially affect the Company’s future earnings and cash outflows.
Historical—Liquidity and Capital Resources
2013 compared to 2012
Operating Activities. The Company reported net cash provided by operating activities of
$181.3 million and $183.2 million for 2012 and 2013, respectively. The $1.9 million increase in operating
cash flows from 2012 to 2013 is primarily attributable to the net shift of restricted funds between cash
and investments, which results in an operating cash flow change that is directly offset by an investing
cash flow change. Partially offsetting these items is the net unfavorable impact of working capital
changes, reduction in Segment Profit and increase in tax payments between years.
During 2012, restricted investments of $16.7 million were shifted to restricted cash that reduced
operating cash flows, with restricted cash of $29.2 million shifted to restricted investments in 2013 that
increased operating cash flows. The net impact of the shift in restricted funds between periods is an
increase in operating cash flows of $45.9 million. The net unfavorable impact of working capital
changes between years totaled $28.3 million, and was primarily attributable to an increase in restricted
cash requirements for the Company’s regulated entities. In 2012 and 2013, the Company was required
to restrict additional funds of $5.4 million and $45.9 million, respectively. Segment Profit for 2013
decreased $7.9 million from 2012. Tax payments for 2013 totaled $65.5 million, which is an increase of
$7.8 million from 2012.
During 2013, the Company’s restricted cash increased $10.1 million. The change in restricted cash
is attributable to an increase in restricted cash of $31.4 million associated with the Company’s regulated
entities and restricted cash of $7.9 associated with the acquisition of AlphaCare, partially offset by the
net shift of restricted cash of $29.2 million. The net change in restricted cash for the Company’s
regulated entities is attributable to a net increase of $45.9 million in restricted cash requirements that
resulted in an operating cash flow use, partially offset by a net decrease in restricted cash of
$14.5 million that is offset by changes in other assets and liabilities, primarily accounts receivable,
accrued liabilities, medical claims payable and other medical liabilities, thus having no impact on
operating cash flows.
Investing Activities. The Company utilized $69.5 million and $64.5 million during 2012 and 2013,
respectively, for capital expenditures. The additions related to hard assets (equipment, furniture,
leaseholds) and capitalized software for 2012 were $31.7 million and $37.8 million, respectively, as
compared to additions for 2013 related to hard assets and capitalized software of $24.4 million and
$40.1 million, respectively. During 2013, the Company had non-cash capital lease additions of
$26.9 million and $2.8 million associated with properties and software, respectively. In addition, during
2012 the Company used net cash of $39.8 million for the net purchase of ‘‘available for sale’’ securities,
with the Company receiving net cash during 2013 of $16.2 million from the net maturity of ‘‘available
for sale’’ securities. In 2012, the Company had other net uses of $1.2 million. In 2013, the Company
used cash of $88.5 million and $19.1 million for the acquisitions of Partners Rx and AlphaCare,
respectively.
60
Financing Activities. During 2012, the Company paid $21.9 million for the repurchase of treasury
stock under the Company’s share repurchase program. In addition, the Company received $20.5 million
from the exercise of stock options and had other net favorable items of $0.3 million.
During 2013, the Company paid $60.7 million for the repurchase of treasury stock under the
Company’s share repurchase program and paid $3.0 million on capital lease obligations. In addition,
the Company received $47.5 million from the exercise of stock options and had other net favorable
items of $2.6 million.
2012 compared to 2011
Operating Activities
The Company reported net cash provided by operating activities of $112.0 million and
$181.3 million for 2011 and 2012, respectively. The $69.3 million increase in operating cash flows from
2011 to 2012 is primarily attributable to the net shift of restricted funds between cash and investments,
which results in an operating cash flow change that is directly offset by an investing cash flow change,
as well as the net favorable impact of working capital changes between periods. Partially offsetting
these items is a reduction in Segment Profit and increase in tax payments between years.
During 2011 and 2012, restricted investments of $62.3 million and $16.7 million, respectively, were
shifted to restricted cash that reduced operating cash flows for both years, resulting in a net increase of
operating cash flows between years of $45.6 million. The net favorable impact of working capital
changes between years totaled $34.1 million, with $12.5 million of the change related to restricted cash
requirements for the Company’s regulated entities and $11.2 million of the change related to
pharmaceutical inventory levels and the timing of the settlement of the associated inventory payables.
In 2011 and 2012, the Company was required to restrict additional funds of $17.9 million and
$5.4 million, respectively. Segment Profit for 2012 decreased $3.1 million from 2011. Tax payments for
2012 totaled $57.7 million, which is an increase of $7.3 million from 2011.
During 2012, the Company’s restricted cash increased $40.8 million. The change is attributable to
the shift of restricted investments of $16.7 million to restricted cash, net increases in restricted cash of
$24.3 million related to the Company’s regulated entities, partially offset by other net decreases of
$0.2 million. The net change in restricted cash for the Company’s regulated entities is attributable to an
increase in restricted cash of $18.9 million that is offset by changes in other assets and liabilities,
primarily accounts receivable, accrued liabilities, medical claims payable and other medical liabilities,
thus having no impact on operating cash flows, and a net increase of $5.4 million in restricted cash
requirements that resulted in an operating cash flow use.
Investing Activities
The Company utilized $54.4 million and $69.5 million during 2011 and 2012, respectively, for
capital expenditures. The additions related to hard assets (equipment, furniture, leaseholds) and
capitalized software for 2011 were $25.4 million and $29.0 million, respectively, as compared to
additions for 2012 related to hard assets and capitalized software of $31.7 million and $37.8 million,
respectively. In addition, during 2011 the Company received net cash of $71.0 million from the net
maturity of ‘‘available for sale’’ securities, with the Company using net cash during 2012 of
$39.8 million for the net purchase of ‘‘available for sale’’ securities. During 2011, the Company
purchased provider network contracts for $1.3 million that resulted in the establishment of an
intangible asset. In addition, during 2011, the Company had other net sources of $0.9 million and
during 2012, the Company had other net uses of $1.2 million.
61
Financing Activities
During 2011, the Company paid $407.6 million for the repurchase of treasury stock under the
Company’s share repurchase program and paid $0.6 million for capital lease obligations. In addition,
the Company received $20.0 million under a share purchase agreement pursuant to which Blue Shield
of California purchased shares of the Company’s common stock, received $41.8 million from the
exercise of stock options and warrants, and had other net favorable items of $0.8 million.
During 2012, the Company paid $21.9 million for the repurchase of treasury stock under the
Company’s share repurchase program. In addition, the Company received $20.5 million from the
exercise of stock options and had other net favorable items of $0.3 million.
Outlook—Liquidity and Capital Resources
Liquidity
During 2014, the Company expects to fund its estimated capital expenditures of $47 to $57 million
with cash from operations. The Company does not anticipate that it will need to draw on amounts
available under the 2011 Credit Facility for cash flow needs related to its operations, capital needs or
debt service in 2014. The Company also currently expects to have adequate liquidity to satisfy its
existing financial commitments over the periods in which they will become due. The Company plans to
maintain its current investment strategy of investing in a diversified, high quality, liquid portfolio of
investments and continues to closely monitor the situation in the financial markets. The Company
estimates that it has no risk of any material permanent loss on its investment portfolio; however, there
can be no assurance that the Company will not experience any such losses in the future.
Contractual Obligations and Commitments
The following table sets forth the future financial commitments of the Company as of
December 31, 2013 (in thousands):
Contractual Obligations
Operating leases(1) . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit(2) . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations(3) . . . . . . . . . . . . . . . . .
Purchase commitments(4) . . . . . . . . . . . . . . . . . .
Tax contingency reserves(5) . . . . . . . . . . . . . . . . .
Payments due by period
Total
$106,296
33,652
34,204
3,046
30,176
Less than
1 year
1 - 3
years
3 - 5
years
More than
5 years
$16,799
—
888
3,046
244
$42,781
—
8,631
—
—
$21,422
—
6,245
—
—
$25,294
—
18,440
—
—
$199,895
$19,883
$48,387
$26,116
$41,925
(1) Operating lease obligations include estimated future lease payments for both open and closed
offices.
(2) These letters of credit typically act as a guarantee of payment to certain third parties in accordance
with specified terms and conditions.
(3) Capital lease obligations include imputed interest of $7.5 million and are net of leasehold
improvement allowances.
(4) Purchase commitments include open purchase orders as of December 31, 2013 relating to ongoing
capital expenditure and operational activities.
(5) Other than the estimated amount to be paid during 2014, the Company is unable to make a
reasonably reliable estimate of the period of the cash settlement (if any) with the respective taxing
authorities for the $30.2 million balance of its tax contingency reserves. However, settlement of
62
such amounts could require the utilization of working capital. See further discussion in
Note 7—‘‘Income Taxes’’ to the consolidated financial statements set forth elsewhere herein.
In addition to the contractual obligations and commitments discussed above, the Company has a
variety of other contractual agreements related to acquiring materials and services used in the
Company’s operations. However, the Company does not believe these other agreements contain
material noncancelable commitments.
Stock Repurchases
The Company’s board of directors has previously authorized a series of stock repurchase plans.
Stock repurchases for each such plan could be executed through open market repurchases, privately
negotiated transactions, accelerated share repurchases or other means. The board of directors
authorized management to execute stock repurchase transactions from time to time and in such
amounts and via such methods as management deemed appropriate. Each stock repurchase program
could be limited or terminated at any time without prior notice.
On July 27, 2010 the Company’s board of directors approved a stock repurchase plan which
authorized the Company to purchase up to $350 million of its outstanding common stock through
July 28, 2012. On February 18, 2011, the Company’s board of directors increased the stock repurchase
program by an additional $100 million, to a total of $450 million. Pursuant to this program, the
Company made open market purchases of 1,684,510 shares of the Company’s common stock at an
average price of $48.36 per share for an aggregate cost of $81.5 million (excluding broker commissions)
during the period from November 3, 2010 through December 31, 2010. Pursuant to this program, the
Company made open market purchases of 7,534,766 shares of the Company’s common stock at an
average price of $48.91 per share for an aggregate cost of $368.5 million (excluding broker
commissions) during the period January 1, 2011 through November 10, 2011, which was the date the
repurchase program was completed.
On October 25, 2011 the Company’s board of directors approved a stock repurchase plan which
authorized the Company to purchase up to $200 million of its outstanding common stock through
October 25, 2013. On July 24, 2013 the Company’s board of directors approved an increase and
extension of the stock repurchase plan which authorizes the Company to purchase up to $300 million
of its outstanding stock through October 25, 2015. Pursuant to this program, the Company made open
market purchases of 671,776 shares of the Company’s common stock at an average price of $48.72 per
share for an aggregate cost of $32.7 million (excluding broker commissions) during the period from
November 11, 2011 through December 31, 2011. Pursuant to this program, the Company made open
market purchases of 459,252 shares of the Company’s common stock at an average price of $50.27 per
share for an aggregate cost of $23.1 million (excluding broker commissions) during 2012. Pursuant to
this program, the Company made open market purchases of 1,159,871 shares of the Company’s
common stock at an average price of $51.83 per share for an aggregate cost of $60.1 million (excluding
broker commissions) during 2013.
During the period from January 1, 2014 through February 26, 2014, the Company made additional
open market purchases of 177,227 shares of the Company’s common stock at an aggregate cost of
$10.6 million (excluding broker commissions).
Recent Sales of Unregistered Securities
On January 28, 2011, the Company and Blue Shield of California (‘‘Blue Shield’’) entered into a
Share Purchase Agreement (the ‘‘Share Purchase Agreement’’) pursuant to which on January 31, 2011
Blue Shield purchased 416,840 shares of the Company’s common stock (the ‘‘Shares’’) for a total
purchase price of $20 million. The Shares were issued to Blue Shield, an accredited investor, in a
private placement pursuant to Regulation D of the Securities Act. Blue Shield agreed not to transfer
such Shares for a two year period, except in the event of any change in control of the Company as
63
defined in the Share Purchase Agreement. The purchase price for the Shares issued was determined
taking into account the recent trading price of the Company’s common stock on NASDAQ and the
restrictions on transfer of the Shares agreed to by Blue Shield.
On September 6, 2013, the Company and Partners Rx entered into a Merger Agreement pursuant
to which on October 1, 2013 certain principal owners of Partners Rx purchased 175,596 shares of the
Company’s restricted stock for a total purchase price of $10 million. The purchase price of the shares
was equal to the average of the closing prices of the Company’s stock for the five trading day period on
the day prior to the execution of the Merger Agreement. The shares received by such principal owners
of Partners Rx are subject to vesting over three years with 50% vesting on the second anniversary of
the acquisition and 50% vesting on the third anniversary of the acquisition, conditioned on continued
employment with the Company on the applicable vesting dates. The shares were issued to the principal
owners of Partners Rx in a private placement pursuant to Section 4(a)(2) of the Securities Act.
Off-Balance Sheet Arrangements
As of December 31, 2013, the Company has no material off-balance sheet arrangements.
2011 Credit Facility
On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility
Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S.
Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to
$70.0 million for the issuance of letters of credit for the account of the Company (the ‘‘2011 Credit
Facility’’). Citibank, N.A., has assigned a portion of its interest in the 2011 Credit Facility to Bank of
Tokyo. The 2011 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company
and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011
Credit Facility will mature on December 9, 2014.
Under the 2011 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to
(i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 0.75 percent plus
the higher of the prime rate, one-half of one percent in excess of the overnight ‘‘federal funds’’ rate, or
the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar denominated
loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest
period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar
denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment
bear interest at the rate of 1.875 percent. The commitment commission on the 2011 Credit Facility is
0.375 percent of the unused Revolving Loan Commitment.
The 2011 Credit Facility contains covenants that limit management’s discretion in operating the
Company’s business by restricting or limiting the Company’s ability, among other things, to:
• incur or guarantee additional indebtedness or issue preferred or redeemable stock;
• pay dividends and make other distributions;
• repurchase equity interests;
• make certain advances, investments and loans;
• enter into sale and leaseback transactions;
• create liens;
• sell and otherwise dispose of assets;
• acquire, merge or consolidate with another company; and
• enter into some types of transactions with affiliates.
64
These restrictions could adversely affect the Company’s ability to finance future operations or
capital needs or engage in other business activities that may be in the Company’s interest.
The 2011 Credit Facility also requires the Company to comply with specified financial ratios and
tests. Failure to do so, unless waived by the lenders under the 2011 Credit Facility, pursuant to its
terms, would result in an event of default under the 2011 Credit Facility. As of December 31, 2013, the
Company was in compliance with all covenants, including financial covenants, under the 2011 Credit
Facility.
Although the 2011 Credit Facility expires on December 9, 2014, the Company believes it will be
able to obtain a new facility or, if not, to use cash on hand to fund letters of credit and other liquidity
needs.
Net Operating Loss Carryforwards
The Company has federal NOLs as of December 31, 2013 of approximately $3.6 million available
to reduce future federal taxable income. These NOLs, if not used, expire in 2017 through 2019 and are
subject to examination and adjustment by the IRS. Utilization of these NOLs is also subject to certain
timing limitations, although the Company does not believe these limitations will restrict its ability to use
any federal NOLs before they expire. The Company has state NOLs as of December 31, 2013 of
$152.3 million available to reduce future state taxable income at certain subsidiaries. Most of these
NOLs, if not used, will expire in 2017 through 2022 and are subject to examination and adjustment by
the respective state tax authorities.
As of December 31, 2013, the Company’s valuation allowances against deferred tax assets were
$3.1 million, mostly relating to uncertainties regarding the eventual realization of certain state NOLs.
Determination of the amount of deferred tax assets considered realizable requires significant judgment
and estimation regarding the forecasts of future taxable income which are consistent with the plans and
estimates the Company uses to manage the underlying businesses. Future changes in the estimated
realizable portion of deferred taxes could materially affect the Company’s financial condition and
results of operations.
Recent Accounting Pronouncements
In July 2011, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) No. 2011-06, ‘‘Other Expenses (Topic 720): Fees Paid to the Federal Government by
Health Insurers (a consensus of the FASB Emerging Issues Task Force)’’ (‘‘ASU 2011-06’’), which
addresses how fees mandated by the Patient Protection and the ACA, as amended by the Health Care
and Education Reconciliation Act of 2010 (collectively, the ‘‘Health Reform Law’’), should be
recognized and classified in the income statements of health insurers. The Health Reform Law imposes
a mandatory annual fee on health insurers for each calendar year beginning on or after January 1,
2014. ASU 2011-06 stipulates that the liability incurred for that fee be amortized to expense over the
calendar year in which it is payable. This ASU is effective for calendar years beginning after
December 31, 2013, when the fee initially becomes effective. We believe that our state public sector
customers will make rate adjustments to cover the direct costs of these fees and a majority of the
impact from non-deductibility of such fees for federal income tax purposes. There may be some impact
due to taxes paid for non-renewing customers where the timing and amount of recoupment of these
additional costs is uncertain. For 2014, the projected ACA fees are currently estimated to be
$25.0 million. There can be no guarantees regarding this adjustment from our state public sector
customers and these taxes and fees may have a material impact on the Company.
In February 2013, the FASB issued ASU No. 2013-02, ‘‘Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified out of Accumulated Comprehensive Income’’ (‘‘ASU 2013-02’’).
ASU 2013-02 requires companies to report the effect of significant reclassifications out of accumulated
other comprehensive income on the respective line items in net income if the amount being reclassified
65
is required under generally accepted accounting principles (‘‘GAAP’’) to be reclassified in its entirety to
net income. Entities are required to provide information about significant reclassifications by
component, and to present those reclassifications either on the face of the statement where net income
is presented or in the notes. For other amounts that are not required to be reclassified in their entirety
to net income, entities are required to cross-reference other disclosures that provide additional details
about those amounts. The amendments in this ASU do not change the current requirements for
reporting net income or other comprehensive income in financial statements. The amendments in this
ASU are effective prospectively for reporting periods beginning after December 15, 2012 and were
adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the
Company’s consolidated results of operations, financial position, or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, ‘‘Income Taxes (Topic 740): Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax
Carryforward Exists’’ (‘‘ASU 2013-11’’). ASU 2013-11 provides guidance on the financial statement
presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax
loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax
benefit should be presented in the financial statements as a liability. The amendments in this ASU do
not require new recurring disclosures. The amendments in this ASU are effective for reporting periods
beginning after December 15, 2013. The guidance is not expected to materially impact the Company’s
consolidated results of operations, financial position, or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Changes in interest rates affect interest income earned on the Company’s cash equivalents and
restricted cash and investments, as well as interest expense on variable interest rate borrowings under
the 2011 Credit Facility. Based on the Company’s investment balances, and the borrowing levels under
the 2011 Credit Facility as of December 31, 2013, a hypothetical 10 percent increase or decrease in the
interest rate associated with these instruments, with all other variables held constant, would not
materially affect the Company’s future earnings and cash outflows.
Item 8. Financial Statements and Supplementary Data
Information with respect to this item is contained in the Company’s consolidated financial
statements, including the reports of independent accountants, set forth elsewhere herein and financial
statement schedule indicated in the Index on Page F-1 of this Report on Form 10-K, and is included
herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management evaluated, with the participation of the Company’s principal executive
and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the ‘‘Exchange Act’’)), as of December 31, 2013. Based on their evaluation, management has
concluded that the Company’s disclosure controls and procedures were effective as of December 31,
2013.
66
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In the fourth quarter ended December 31, 2013, there have been no changes in the Company’s
internal controls over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended). The Company’s internal control system was designed to provide reasonable
assurance regarding the preparation and fair presentation of published financial statements. Because of
its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Under the supervision and with the
participation of management, including the Company’s Chief Executive Officer and Chief Financial
Officer, the Company assessed the effectiveness of internal control over financial reporting as of
December 31, 2013. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (‘‘COSO’’) in its statement
‘‘Internal Control-Integrated Framework (1992).’’
Management’s assessment of the effectiveness of internal control over financial reporting excludes
the evaluation of the internal controls over reporting of Partners Rx and AlphaCare, which were
acquired on October 1, 2013 and December 31, 2013, respectively. These operations represent
10.5 percent and 10.7 percent of total and net assets of the Company, respectively, as of December 31,
2013 and 2.4 percent and 1.1 percent of revenues and Segment Profit, respectively, of the Company for
the year then ended.
Based on this assessment, which excluded an assessment of internal control of the acquired
operations of Partners Rx and AlphaCare, management has concluded that, as of December 31, 2013,
internal control over financial reporting is effective based on these criteria.
The Company’s independent registered public accounting firm has issued an audit report on the
Company’s internal control over financial reporting. This report dated March 3, 2014 appears on
page 68 of this Form 10-K.
67
The Board of Directors and Stockholders of Magellan Health Services, Inc.
Report of Independent Registered Public Accounting Firm
We have audited Magellan Health Services, Inc.’s internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the
COSO criteria). Magellan Health Services, Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial
Reporting, management’s assessment of and conclusion on the effectiveness of internal control over
financial reporting did not include the internal controls of Partners Rx and AlphaCare, which are
included in the 2013 consolidated financial statements of Magellan Health Services, Inc. and collectively
constituted 10.5% and 10.7% of total and net assets, respectively, as of December 31, 2013 and 2.4%
and 1.1% of revenues and segment profit, respectively, for the year then ended. Our audit of internal
control over financial reporting of Magellan Health Services, Inc. also did not include an evaluation of
the internal control over financial reporting of Partners Rx and AlphaCare.
In our opinion, Magellan Health Services, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Magellan Health Services, Inc. as
of December 31, 2012 and 2013, and the related consolidated statements of comprehensive income,
changes in stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2013 of Magellan Health Services, Inc. and our report dated March 3, 2014 expressed an
unqualified opinion thereon.
Baltimore, Maryland
March 3, 2014
/s/ ERNST & YOUNG LLP
68
Item 9B. Other Information
None.
PART III
The information required by Items 10 through 14 is incorporated by reference to the Registrant’s
definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, within 120 days after December 31, 2013, except for the following information
required by Item 12 of this Part III.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2013 with respect to the
Company’s compensation plans under which equity securities are authorized for issuance:
Plan category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column(a))
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . . .
4,010,146
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . .
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,010,146
$47.23
—
$47.23
2,289,039(1)
—
2,289,039(1)
(1) Consists of shares remaining available for issuance as of December 31, 2013 under the Company’s
equity compensation plans (pursuant to which the Company may issue stock options, restricted
stock awards, stock bonuses, stock purchase rights and other equity incentives), after giving effect
to the shares issuable upon the exercise of outstanding options and the shares of restricted stock.
For further discussion, see Note 6—‘‘Stockholders’ Equity’’ to the consolidated financial statements
set forth elsewhere herein.
Item 15. Exhibits, Financial Statement Schedule and Additional Information
(a) Documents furnished as part of the Report:
PART IV
1.
Financial Statements
Information with respect to this item is contained on Pages F-1 to F-47 of this Report on
Form 10-K.
2.
Financial Statement Schedule
Information with respect to this item is contained on page S-1 of this Report on Form 10-K.
69
3. Exhibits
Exhibit No.
2.1
Description of Exhibit
Share Purchase Agreement between Magellan Health Services, Inc. and California
Physicians’ Service D/B/A Blue Shield of California, dated January 28, 2011, which was
filed as Exhibit 2.3 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2010, which was filed on February 25, 2011 and is incorporated herein by
reference.
3.1
Bylaws of the Company, which were filed as Exhibit 3.1 to the Company’s Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2008, which was filed on May 2,
2008, and is incorporated herein by reference.
3.2 Amended and Restated Certificate of Incorporation of the Company, which was filed as
Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the period ended
December 31, 2004, which was filed on March 30, 2004, and is incorporated herein by
reference.
4.1
Credit Agreement, dated December 9, 2011, among the Company, various lenders listed
therein and Citibank, N.A., as administrative agent, which was filed as Exhibit 4.1 to the
Company’s current report on Form 8-K, which was filed on December 13, 2011 and is
incorporated herein by reference.
*10.1 Magellan Health Services, Inc.—2003 Management Incentive Plan, effective as of January 5,
2004, which was filed as Exhibit 2.14 to the Company’s current report on Form 8-K, which
was filed on January 6, 2004, and is incorporated herein by reference.
*10.2 Magellan Health Services, Inc.—2005 Director Stock Compensation Plan, effective as of
March 3, 2005, which was filed as Appendix B to the Company’s definitive proxy statement,
filed on April 18, 2005, and is incorporated herein by reference.
*10.3
*10.4
*10.5
*10.6
*10.7
Form of Stock Option Agreement, relating to options granted under the Company’s 2003
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on March 17, 2005, and is incorporated herein by
reference.
Form of First Amendment to Stock Option Agreement, relating to options granted under
the Company’s 2003 Management Incentive Plan, which was filed as Exhibit 10.1 to the
Company’s current report on Form 8-K, which was filed on January 9, 2006, and is
incorporated herein by reference.
Form of Notice of March 2005 Stock Option Grant, relating to options granted under the
Company’s 2003 Management Incentive Plan, which was filed as Exhibit 10.2 to the
Company’s current report on Form 8-K, which was filed on March 17, 2005, and is
incorporated herein by reference.
Form of Restricted Stock Agreement, relating to restricted shares granted under the
Company’s 2003 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on March 17, 2005, and is
incorporated herein by reference.
Form of Notice of March 2005 Restricted Stock Award, relating to restricted shares granted
under the Company’s 2003 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on March 17, 2005, and is
incorporated herein by reference.
70
Exhibit No.
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
Description of Exhibit
First form of Notice of Amendment of Stock Option Grant, relating to options granted
under the Company’s 2003 Management Incentive Plan and dated as of January 3, 2006,
between the Company and Steven J. Shulman, Chief Executive Officer of the Company,
Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief
Financial Officer of the Company, which was filed as Exhibit 10.2 to the Company’s current
report on Form 8-K, which was filed on January 9, 2006, and is incorporated herein by
reference.
Second form of Notice of Stock Option Grant, relating to options granted under the
Company’s 2003 Management Incentive Plan and dated as of January 5, 2004, between the
Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer,
Chief Operating Officer of the Company, and Mark S. Demilio, Chief Financial Officer of
the Company, which was filed as Exhibit 10.6 to the Company’s current report on
Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.
Second form of Notice of Amendment of Stock Option Grant, relating to options granted
under the Company’s 2003 Management Incentive Plan and dated as of January 3, 2006,
between the Company and Steven J. Shulman, Chief Executive Officer of the Company,
Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief
Financial Officer of the Company, which was filed as Exhibit 10.3 to the Company’s current
report on Form 8-K, which was filed on January 9, 2006, and is incorporated herein by
reference.
Third form of Notice of Stock Option Grant, relating to options granted under the
Company’s 2003 Management Incentive Plan and dated as of January 5, 2004, between the
Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer,
Chief Operating Officer of the Company, and Mark S. Demilio, Chief Financial Officer of
the Company, which was filed as Exhibit 10.7 to the Company’s current report on
Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.
Third form of Notice of Amendment of Stock Option Grant, relating to options granted
under the Company’s 2003 Management Incentive Plan and dated as of January 3, 2006,
between the Company and Steven J. Shulman, Chief Executive Officer of the Company,
Rene Lerer, Chief Operating Officer of the Company, and Mark S. Demilio, Chief
Financial Officer of the Company, which was filed as Exhibit 10.4 to the Company’s current
report on Form 8-K, which was filed on January 9, 2006, and is incorporated herein by
reference.
Form of Notice of Restricted Stock Award, relating to restricted shares granted under the
Company’s 2003 Management Incentive Plan and dated as of January 5, 2004, between the
Company and Steven J. Shulman, Chief Executive Officer of the Company, Rene Lerer,
Chief Operating Officer of the Company and Mark S. Demilio, Chief Financial Officer of
the Company, which was filed as Exhibit 10.8 to the Company’s current report on
Form 8-K, which was filed on March 17, 2005, and is incorporated herein by reference.
*10.14 Notice of Restricted Stock Award, relating to restricted shares granted under the
Company’s 2003 Management Incentive Plan and dated as of January 5, 2004, between the
Company and Steven J. Shulman, Chief Executive Officer of the Company, which was filed
as Exhibit 10.9 to the Company’s current report on Form 8-K, which was filed on
March 17, 2005, and is incorporated herein by reference.
71
Exhibit No.
*10.15
*10.16
*10.17
*10.18
*10.19
*10.20
Description of Exhibit
Supplemental Accumulation Plan, adopted in 2002, which was filed as Exhibit 10.10 to the
Company’s current report on Form 8-K, which was filed on March 17, 2005, and is
incorporated herein by reference.
Form of Stock Option Agreement, relating to the 2006 Management Incentive Plan, which
was filed as Exhibit 10.1 to the Company’s current report on Form 8-K, which was filed on
May 22, 2006, and is incorporated herein by reference.
Form of Notice of Stock Option Grant, pursuant to the 2006 Management Incentive Plan,
which was filed as Exhibit 10.2 to the Company’s current report on Form 8-K, which was
filed on May 22, 2006, and is incorporated herein by reference.
Form of Restricted Stock Unit Agreement, pursuant to the 2006 Management Incentive
Plan, which was filed as Exhibit 10.3 to the Company’s current report on Form 8-K, which
was filed on May 22, 2006, and is incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, pursuant to the 2006 Management
Incentive Plan, which was filed as Exhibit 10.4 to the Company’s current report on
Form 8-K, which was filed on May 22, 2006, and is incorporated herein by reference.
Form of Restricted Stock and Stock Option Award Agreement, pursuant to the 2006
Director Equity Compensation Plan, which was filed as Exhibit 10.5 to the Company’s
current report on Form 8-K, which was filed on May 22, 2006, and is incorporated herein
by reference.
*10.21 Magellan Health Services, Inc.—2006 Management Incentive Plan, effective as of May 16,
2006, which was filed as Exhibit 10.1 to the Company’s Quarterly report on Form 10-Q for
the quarterly period ended June 30, 2006, which was filed on July 28, 2006, and is
incorporated herein by reference.
*10.22 Magellan Health Services, Inc.—2006 Director Equity Compensation Plan, effective as of
May 16, 2006, which was filed as Exhibit 10.2 to the Company’s Quarterly report on
Form 10-Q for the quarterly period ended June 30, 2006, which was filed on July 28, 2006,
and is incorporated herein by reference.
*10.23 Magellan Health Services, Inc.—2006 Employee Stock Purchase Plan, effective as of
May 16, 2006 which was filed as Exhibit 10.3 to the Company’s Quarterly report on
Form 10-Q for the quarterly period ended June 30, 2006, which was filed on July 28, 2006,
and is incorporated herein by reference.
*10.24 Amended and Restated Supplemental Accumulation Plan, effective as of January 1, 2005,
which was filed as Exhibit 10.1 to the Company’s Quarterly report on Form 10-Q for the
quarter ended September 30, 2006, which was filed on October 26, 2006, and is
incorporated herein by reference.
*10.25 Amendment to Employment Agreement, dated July 28, 2006, between the Company and
Jeffrey N. West, Senior Vice President and Controller of the Company, which was filed as
Exhibit 10.2 to the Company’s Quarterly report on Form 10-Q for the quarter ended
September 30, 2006, which was filed on October 26, 2006, and is incorporated herein by
reference.
*10.26 Amendment to Agreements and Documents Governing Restricted Stock Units, dated
December 1, 2008, between the Company and Rene Lerer, Chief Executive Officer which
was filed as Exhibit 10.66 to the Company’s Annual Report on Form 10-K, which was filed
on February 29, 2008 and is incorporated herein by reference.
72
Exhibit No.
*10.27
Description of Exhibit
Employment Agreement dated February 19, 2008 between the Company and Rene Lerer,
M.D., which was filed as Exhibit 10.1 to the Company’s current report on Form 8-K, which
was filed on February 25, 2008 and is incorporated herein by reference.
*10.28
Employment Agreement, dated February 25, 2008, between the Company and Tina Blasi,
which was filed as Exhibit 10.46 to the Company’s Annual Report on Form 10-K, which was
filed on February 29, 2008 and is incorporated herein by reference.
*10.29 Amendment to Employment Agreement, dated February 25, 2008, between the Company
and Tina Blasi, which was filed as Exhibit 10.47 to the Company’s Annual Report on
Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.
*10.30
*10.31
*10.32
*10.33
*10.34
Form of Stock Option Agreement, relating to options granted under the Company’s 2008
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on May 27, 2008 and is incorporated herein by
reference.
Form of Notice of March 2008 Stock Option Grant, relating to options granted under the
Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the
Company’s current report on Form 8-K, which was filed on May 27, 2008 and is
incorporated herein by reference.
Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under
the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on May 27, 2008 and is
incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted
under the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on May 27, 2008 and is
incorporated herein by reference.
Employment Agreement, dated August 11, 2008 between the Company and Jonathan
Rubin, Chief Financial Officer, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on August 13, 2008, and is incorporated herein by
reference.
*10.35 Magellan Health Services, Inc.—2008 Management Incentive Plan, effective as of
February 27, 2008, which was filed as Appendix A to the Company’s Definitive Proxy
Statement, which was filed on April 11, 2008, and is incorporated herein by reference.
*10.36 Amendment to Employment Agreement, dated December 1, 2008, between the Company
and Jeffrey West, Senior Vice President and Controller which was filed as Exhibit 10.56 to
the Company’s Annual Report on Form 10-K, which was filed on February 29, 2008 and is
incorporated herein by reference.
*10.37 Amendment to Employment Agreement, dated December 1, 2008, between the Company
and Tina Blasi, Chief Executive Officer of National Imaging Associates, Inc. which was
filed as Exhibit 10.57 to the Company’s Annual Report on Form 10-K, which was filed on
February 29, 2008 and is incorporated herein by reference.
*10.38 Amendment to Employment Agreement, dated December 1, 2008, between the Company
and Daniel N. Gregoire, Executive Vice President, General Counsel and Secretary which
was filed as Exhibit 10.58 to the Company’s Annual Report on Form 10-K, which was filed
on February 29, 2008 and is incorporated herein by reference.
73
Exhibit No.
Description of Exhibit
*10.39 Amendment to Agreements and Documents Governing Restricted Stock Units, dated
December 1, 2008, between the Company and Caskie Lewis-Clapper, Chief Human
Resources Officer which was filed as Exhibit 10.61 to the Company’s Annual Report on
Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.
*10.40 Amendment to Agreements and Documents Governing Restricted Stock Units, dated
December 1, 2008, between the Company and Tina Blasi, Chief Executive Officer of
National Imaging Associates, Inc. which was filed as Exhibit 10.62 to the Company’s
Annual Report on Form 10-K, which was filed on February 29, 2008 and is incorporated
herein by reference.
*10.41 Amendment to Agreements and Documents Governing Restricted Stock Units, dated
December 1, 2008, between the Company and Jeffrey West, Senior Vice President and
Controller which was filed as Exhibit 10.63 to the Company’s Annual Report on
Form 10-K, which was filed on February 29, 2008 and is incorporated herein by reference.
*10.42 Amendment to Agreements and Documents Governing Restricted Stock Units, dated
December 1, 2008, between the Company and Daniel N. Gregoire, Executive Vice
President, General Counsel and Secretary which was filed as Exhibit 10.64 to the
Company’s Annual Report on Form 10-K, which was filed on February 29, 2008 and is
incorporated herein by reference.
*10.43 Amendment to Employment Agreement, as amended and restated December 16, 2008,
between the Company and Rene Lerer, M.D, Chief Executive Officer which was filed as
Exhibit 10.65 to the Company’s Annual Report on Form 10-K, which was filed on
February 29, 2008 and is incorporated herein by reference.
*10.44 Amendment to Agreements and Documents Governing Restricted Stock Units, dated
December 1, 2008, between the Company and Rene Lerer, Chief Executive Officer which
was filed as Exhibit 10.66 to the Company’s Annual Report on Form 10-K, which was filed
on February 29, 2008 and is incorporated herein by reference.
*10.45
*10.46
*10.47
*10.48
Form of Stock Option Agreement, relating to options granted under the Company’s 2008
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on May 4, 2009 and is incorporated herein by
reference.
Form of Notice of March 2008 Stock Option Grant, relating to options granted under the
Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the
Company’s current report on Form 8-K, which was filed on May 4, 2009 and is
incorporated herein by reference.
Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under
the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on May 4, 2009 and is
incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted
under the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on May 4, 2009 and is
incorporated herein by reference.
74
Exhibit No.
*10.49
Description of Exhibit
Employment Agreement, dated July 28, 2009 between Karen S. Rohan and Magellan
Health Services, Inc., which was filed as Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2009, which was filed on July 31, 2009
and is incorporated herein by reference.
*10.50 Amendment to Employment Agreement, dated July 28, 2009 between Magellan Health
Services, Inc. and Karen S. Rohan, which was filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, which was
filed on July 31, 2009 and is incorporated herein by reference.
*10.51
*10.52
*10.53
*10.54
*10.55
*10.56
*10.57
*10.58
Form of Stock Option Agreement, relating to options granted under the Company’s 2008
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on March 5, 2010 and is incorporated herein by
reference.
Form of Notice of March 2008 Stock Option Grant, relating to options granted under the
Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the
Company’s current report on Form 8-K, which was filed on March 5, 2010 and is
incorporated herein by reference.
Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under
the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on March 5, 2010 and is
incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted
under the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on March 5, 2010 and is
incorporated herein by reference.
Form of Stock Option Agreement, relating to options granted under the Company’s 2008
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on March 8, 2011 and is incorporated herein by
reference.
Form of Notice of Stock Option Grant, relating to options granted under the Company’s
2008 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company’s current
report on Form 8-K, which was filed on March 8, 2011 and is incorporated herein by
reference.
Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under
the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on March 8, 2011 and is
incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted
under the Company’s 2008 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on March 8, 2011 and is
incorporated herein by reference.
*10.59 Magellan Health Services, Inc. 2011 Management Incentive Plan, effective as of May 18,
2011, which was filed as Appendix A to the Company’s Definitive Proxy Statement, which
was filed on April 8, 2011, and is incorporated herein by reference.
75
Exhibit No.
Description of Exhibit
*10.60 Magellan Health Services, Inc. 2011 Employee Stock Purchase Plan, effective as of May 18,
2011, which was filed as Appendix B to the Company’s Definitive Proxy Statement, which
was filed on April 8, 2011, and is incorporated herein by reference.
*10.61
*10.62
*10.63
*10.64
Form of Stock Option Agreement, relating to options granted under the Company’s 2011
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on March 7, 2012 and is incorporated herein by
reference.
Form of Notice of Stock Option Grant, relating to options granted under the Company’s
2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company’s current
report on Form 8-K, which was filed on March 7, 2012 and is incorporated herein by
reference.
Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under
the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on March 7, 2012 and is
incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted
under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on March 7, 2012 and is
incorporated herein by reference.
*10.65 Amendment to Employment Agreement, dated December 10, 2012 between Magellan
Health Services, Inc. and Rene Lerer, M.D., which was filed as Exhibit 10.1 to the
Company’s current report on Form 8-K, which was filed on December 12, 2012, and is
incorporated herein by reference.
*10.66
*10.67
*10.68
*10.69
*10.70
Employment Agreement dated December 10, 2012 between the Company and Barry M.
Smith, which was filed as Exhibit 10.2 to the Company’s current report on Form 8-K, which
was filed on December 12, 2012, and is incorporated herein by reference.
Form of Stock Option Agreement, relating to options granted under the Company’s 2011
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on February 7, 2013 and is incorporated herein by
reference.
Form of Notice of Stock Option Grant, relating to options granted under the Company’s
2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company’s current
report on Form 8-K, which was filed on February 7, 2013 and is incorporated herein by
reference.
Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under
the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on February 7, 2013 and is
incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted
under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on February 7, 2013 and is
incorporated herein by reference.
76
Exhibit No.
*10.71
*10.72
*10.73
*10.74
*10.75
Description of Exhibit
Form of Stock Option Agreement, relating to options granted under the Company’s 2011
Management Incentive Plan, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on March 8, 2013 and is incorporated herein by
reference.
Form of Notice of Stock Option Grant, relating to options granted under the Company’s
2011 Management Incentive Plan, which was filed as Exhibit 10.2 to the Company’s current
report on Form 8-K, which was filed on March 8, 2013 and is incorporated herein by
reference.
Form of Restricted Stock Unit Agreement, relating to restricted stock units granted under
the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.3 to the
Company’s current report on Form 8-K, which was filed on March 8, 2013 and is
incorporated herein by reference.
Form of Notice of Restricted Stock Unit Award, relating to restricted stock units granted
under the Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.4 to
the Company’s current report on Form 8-K, which was filed on March 8, 2013 and is
incorporated herein by reference.
Form of Notice of Cash Denominated Award, relating to cash awards granted under the
Company’s 2011 Management Incentive Plan, which was filed as Exhibit 10.5 to the
Company’s current report on Form 8-K, which was filed on March 8, 2013 and is
incorporated herein by reference.
*10.76 Amendment to Employment Agreement, dated April 3, 2013 between Magellan Health
Services, Inc. and Tina Blasi, which was filed as Exhibit 10.1 to the Company’s current
report on Form 8-K, which was filed on April 8, 2013, and is incorporated herein by
reference.
*10.77 Amendment to Employment Agreement, dated May 14, 2013 between Magellan Health
Services, Inc. and Rene Lerer, M.D., which was filed as Exhibit 10.1 to the Company’s
current report on Form 8-K, which was filed on May 14, 2013, and is incorporated herein
by reference.
10.78 Agreement and Plan of Merger, dated September 6, 2013, among Magellan Health
Services, Inc., Cactus Acquisition LLC, Partners Rx Management LLC, and Holder
Repco LLC, which was filed as Exhibit 10.1 to the Company’s current report on Form 8-K,
which was filed on October 1, 2013, and is incorporated herein by reference.
#21
#23
#31.1
#31.2
†32.1
List of subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
77
Exhibit No.
†32.2
†101
Description of Exhibit
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
The following materials from the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2013 formatted in Extensible Business Reporting Language
(XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Balance Sheets,
(iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated
Statements of Cash Flows and (v) related notes.
*
Constitutes a management contract, compensatory plan or arrangement.
# Filed herewith.
†
Furnished herewith.
(b) Exhibits Required by Item 601 of Regulation S-K:
Exhibits required to be filed by the Company pursuant to Item 601 of Regulation S-K are
contained in a separate volume.
(c) Financial statements and schedules required by Regulation S-X Item 14(d):
(1) Not applicable.
(2) Not applicable.
(3) Information with respect to this item is contained on page S-1 of this Report on
Form 10-K.
4. Additional Information
The Company will provide to any person without charge, upon request, a copy of its annual Report
on Form 10-K (without exhibits) for the year ended December 31, 2013, as filed with the Securities and
Exchange Commission. The Company will also provide to any person without charge, upon request,
copies of its Code of Ethics for Directors, Code of Ethics for Covered Officers, and Corporate
Compliance Handbook for all employees (hereinafter referred to as the ‘‘Codes of Ethics’’). Any such
requests should be made in writing to the Investor Relations Department, Magellan Health
Services, Inc., 55 Nod Road, Avon, Connecticut 06001. The documents referred to above and other
Securities and Exchange Commission filings of the Company are available on the Company’s website at
www.magellanhealth.com. The Company intends to disclose any future amendments to the provisions of
the Codes of Ethics and waivers from such Codes of Ethics, if any, made with respect to any of its
directors and executive officers, on its internet site.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly
authorized.
SIGNATURES
MAGELLAN HEALTH SERVICES, INC.
(Registrant)
Date: March 3, 2014
/s/ JONATHAN N. RUBIN
Date: March 3, 2014
Jonathan N. Rubin
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ JEFFREY N. WEST
Jeffrey N. West
Senior Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on
behalf of the Registrant and in the capacities and on the dates indicated have signed this Report below.
Signature
Title
Date
/s/ BARRY SMITH
Barry Smith
/s/ ERAN BROSHY
Eran Broshy
/s/ MICHAEL DIAMENT
Michael Diament
/s/ WILLIAM D. FORREST
William D. Forrest
/s/ ROBERT M. LE BLANC
Robert M. Le Blanc
/s/ WILLIAM J. MCBRIDE
William J. McBride
Chief Executive Officer and Chairman
of the Board of Directors
(Principal Executive Officer)
March 3, 2014
Director
Director
Director
Director
Director
79
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
Signature
Title
Date
/s/ MICHAEL P. RESSNER
Michael P. Ressner
/s/ MARY SAMMONS
Mary Sammons
Director
Director
/s/ JONATHAN N. RUBIN
Jonathan N. Rubin
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
March 3, 2014
March 3, 2014
March 3, 2014
/s/ JEFFREY N. WEST
Jeffrey N. West
Senior Vice President and Controller
(Principal Accounting Officer)
March 3, 2014
80
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of the registrant and its subsidiaries are submitted
herewith in response to Item 8 and Item 15(a)1:
Magellan Health Services, Inc.
Audited Consolidated Financial Statements
Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated balance sheets as of December 31, 2012 and 2013 . . . . . . . . . . . . . . . . . . . .
Consolidated statements of comprehensive income for the years ended December 31,
2011, 2012 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of changes in stockholders’ equity for the years ended
December 31, 2011, 2012 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of cash flows for the years ended December 31, 2011, 2012 and
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The following financial statement schedule of the registrant and its subsidiaries is submitted
herewith in response to Item 15(a)2:
Page(s)
F-2
F-3
F-4
F-5
F-6
F-7
Schedule II—Valuation and qualifying accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S-1
All other schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions or are inapplicable
and therefore have been omitted.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Magellan Health Services, Inc.
We have audited the accompanying consolidated balance sheets of Magellan Health Services, Inc.
as of December 31, 2012 and 2013, and the related consolidated statements of comprehensive income,
changes in stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2013. Our audits also included the financial statement schedule listed in the Index at
Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Magellan Health Services, Inc. at December 31, 2012 and 2013,
and the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Magellan Health Services, Inc.’s internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
framework) and our report dated March 3, 2014 expressed an unqualified opinion thereon.
Baltimore, Maryland
March 3, 2014
/s/ ERNST & YOUNG LLP
F-2
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
(In thousands, except per share amounts)
2012
2013
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, less allowance for doubtful accounts of $4,612 and $5,447 at
$ 189,464
226,554
$ 203,187
236,696
December 31, 2012 and 2013, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
138,253
238,185
Short-term investments (restricted investments of $88,332 and $117,674 at December 31, 2012
and 2013, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets (restricted deposits of $20,846 and $25,009 at December 31, 2012 and
2013, respectively)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
201,127
31,698
45,727
38,595
871,418
136,548
32,563
9,730
426,939
34,935
175,883
37,530
49,609
48,268
989,358
172,333
32,430
7,197
488,206
69,694
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,512,133
$1,759,218
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND
STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical claims payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other medical liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2012 and 2013—Issued and outstanding—none . . .
Ordinary common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2012 and 2013—Issued and outstanding—45,928
shares and 27,353 shares at December 31, 2012, respectively, and 47,351 and 27,616 shares at
December 31, 2013, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-Vote common stock, par value $.01 per share
Authorized—40,000 shares at December 31, 2012 2013—Issued and outstanding—none . . . . .
Other Stockholders’ Equity:
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ordinary common stock in treasury, at cost, 18,575 shares and 19,735 shares at December 31,
17,081
100,778
198,429
76,914
—
393,202
—
34,086
60,697
6,815
494,800
—
—
459
—
$
42,853
134,652
228,341
67,416
3,005
476,267
23,720
42,046
32,343
17,803
592,179
10,554
—
474
—
848,238
975,232
(35)
922,325
1,100,493
(93)
2012 and 2013, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(806,561)
(866,714)
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,017,333
1,156,485
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity . . . . . . . . . .
$1,512,133
$1,759,218
See accompanying notes to consolidated financial statements.
F-3
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except per share amounts)
2011
2012
2013
Net revenue:
Managed care and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PBM and dispensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,551,991
247,409
$2,857,099
350,298
$3,063,049
483,268
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,799,400
3,207,397
3,546,317
Costs and expenses:
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other operating expenses(1) . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,784,724
232,038
529,634
58,623
2,502
(2,781)
2,071,890
328,414
557,512
60,488
2,247
(2,019)
2,232,976
455,601
619,546
71,994
3,000
(1,985)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,604,740
3,018,532
3,381,132
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
194,660
65,037
129,623
188,865
37,838
151,027
165,185
39,924
125,261
Net income per common share—basic: . . . . . . . . . . . . . . . . . . .
Net income per common share—diluted: . . . . . . . . . . . . . . . . . .
$
$
4.25
4.17
$
$
5.51
5.42
$
$
4.63
4.53
Other comprehensive (loss) income
Unrealized (losses) gains on available-for-sale securities(2) . . .
(159)
115
(58)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 129,464
$ 151,142
$ 125,203
(1) Includes stock compensation expense of $17,418, $17,783 and $21,252 for the years ended
December 31, 2011, 2012 and 2013, respectively.
(2) Net of income tax (benefit) provision of $(102), $73 and $(38) for the years ended December 31,
2011, 2012 and 2013, respectively.
See accompanying notes to consolidated financial statements.
F-4
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Common
Stock
In Treasury
Shares Amount Shares Amount
Additional
Paid in
Capital
Accumulated
Other
Total
Retained Warrants Comprehensive Stockholders’
Earnings Outstanding Income (Loss)
Equity
Balance at December 31,
$437
—
11
(9,905) $(381,755) $725,322 $ 694,582
—
— 17,256
—
— 40,830
—
—
$ 420
—
—
$
2010 . . . . . . . . . . . . . . 43,687
—
1,065
Stock compensation expense .
Exercise of stock options . . .
Tax benefit (cost) from exercise
of stock options and vesting
of stock awards . . . . . . . .
Exercise of stock warrants
. .
Issuance of equity . . . . . . .
Repurchase of stock . . . . . .
Adjustment to additional paid
in capital due to reversal of
tax contingency . . . . . . . .
Forfeiture of stock warrants .
Net income . . . . . . . . . . .
Other comprehensive loss—
other . . . . . . . . . . . . . .
Balance at December 31,
2011 . . . . . . . . . . . . . . 45,285
—
531
Stock compensation expense .
Exercise of stock options . . .
Tax benefit from exercise of
stock options and vesting
of stock awards . . . . . . . .
Issuance of equity . . . . . . .
Repurchase of stock . . . . . .
Adjustment to additional paid
in capital due to reversal of
tax contingency . . . . . . . .
Net income . . . . . . . . . . .
Other comprehensive
income—other . . . . . . . .
Balance at December 31,
2012 . . . . . . . . . . . . . . 45,928
—
1,139
Stock compensation expense .
Exercise of stock options . . .
Tax benefit from exercise of
stock options and vesting
of stock awards . . . . . . . .
Issuance of equity . . . . . . .
Repurchase of stock . . . . . .
—
31
502
—
—
—
—
—
—
112
—
—
—
—
Adjustment to additional paid
in capital due to reversal of
tax contingency . . . . . . . .
Net income . . . . . . . . . . .
Other comprehensive (loss)—
other . . . . . . . . . . . . . .
Balance at December 31,
—
—
—
—
5
—
— (8,207) (401,514)
(1,213)
—
—
1,251
— 17,975
—
—
—
—
—
—
—
—
—
453
—
5
—
1
—
—
—
—
459
—
12
—
—
—
—
—
—
—
—
2,490
124
—
—
(18,112) (783,269)
—
—
804,035
— 17,945
— 20,717
—
—
129,623
—
824,205
—
—
—
—
(463)
—
—
(23,292)
112
(733)
—
—
—
—
—
—
—
—
—
—
6,162
—
—
(18,575) (806,561)
—
—
848,238
— 21,252
— 47,281
—
151,027
—
975,232
—
—
—
284
—
—
—
—
—
3
—
—
— (1,160)
—
—
(60,153)
2,297
(596)
—
—
—
—
—
—
—
—
—
—
—
—
—
3,853
—
—
—
125,261
—
—
(296)
—
—
—
(124)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9
—
—
—
—
—
—
—
—
—
(159)
(150)
—
—
—
—
—
—
—
115
(35)
—
—
—
—
—
—
—
$1,039,015
17,256
40,841
(1,213)
955
17,980
(401,514)
2,490
—
129,623
(159)
845,274
17,945
20,722
112
(732)
(23,292)
6,162
151,027
115
1,017,333
21,252
47,293
2,297
(593)
(60,153)
3,853
125,261
(58)
(58)
2013 . . . . . . . . . . . . . . 47,351
$474
(19,735) $(866,714) $922,325 $1,100,493
$ —
$ (93)
$1,156,485
See accompanying notes to consolidated financial statements.
F-5
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock compensation expense . . . . . . . . . . . . . . . . . . . . .
Non-cash income tax expense (benefits) . . . . . . . . . . . . . . . . . . . .
Non-cash amortization on investments . . . . . . . . . . . . . . . . . . . . .
Cash flows from changes in assets and liabilities, net of effects
from acquisitions of businesses:
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . .
Medical claims payable and other medical liabilities . . . . . . . . . . .
Tax contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other long-term liabilities . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2012
2013
$ 129,623
$ 151,027
$ 125,261
58,623
1,033
17,418
8,285
12,309
(69,060)
(15,609)
(11,657)
3,804
(7,251)
(7,905)
(9,453)
1,558
285
60,488
728
17,783
17,306
7,193
(40,760)
(16,411)
(6,160)
414
(8,321)
31,292
(35,376)
1,901
189
71,994
736
21,252
(1,212)
9,107
(2,242)
(40,804)
(3,882)
(9,293)
3,593
17,866
(22,960)
10,988
2,757
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . .
112,003
181,293
183,161
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and investments in businesses, net of cash acquired . .
Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(54,394)
(376)
(259,552)
330,583
—
(69,549)
(64,542)
— (107,541)
(323,253)
339,428
—
(321,541)
281,748
(1,225)
Net cash provided by (used in) investing activities . . . . . . . . . . . . .
16,261
(110,567)
(155,908)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations . . . . . . . .
Payments to acquire treasury stock . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of equity . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options and warrants . . . . . . . . . .
Tax benefit from exercise of stock options and vesting of stock
awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(559)
(407,645)
20,000
41,796
—
(21,868)
—
20,486
(3,001)
(60,677)
—
47,529
2,038
(1,211)
990
(732)
3,212
(593)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . .
(345,581)
(1,124)
(13,530)
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . .
(217,317)
337,179
69,602
119,862
13,723
189,464
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . .
$ 119,862
$ 189,464
$ 203,187
See accompanying notes to consolidated financial statements.
F-6
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
1. General
Basis of Presentation
The consolidated financial statements of Magellan Health Services, Inc., a Delaware corporation
(‘‘Magellan’’), include the accounts of Magellan, its majority owned subsidiaries, and all variable
interest entities (‘‘VIEs’’) for which Magellan is the primary beneficiary (together with Magellan, the
‘‘Company’’). All significant intercompany accounts and transactions have been eliminated in
consolidation.
Business Overview
The Company is engaged in the healthcare management business, and is focused on meeting needs
in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special
population management. The Company provides services to health plans, managed care organizations
(‘‘MCOs’’), insurance companies, employers, labor unions, various military and governmental agencies,
third party administrators, and brokers. The Company’s business is divided into the following five
segments, based on the services it provides and/or the customers that it serves, as described below.
Managed Healthcare
Two of the Company’s segments are in the managed healthcare business (previously referred to as
the managed behavioral healthcare business). This line of business reflects the Company’s:
(i) management of behavioral healthcare services, and (ii) the integrated management of physical and
behavioral healthcare for special populations, delivered through Magellan Complete Care (‘‘MCC’’).
The Company’s coordination and management of behavioral healthcare includes services provided
through its comprehensive network of behavioral health professionals, clinics, hospitals and ancillary
service providers. This network of credentialed and privileged providers is integrated with clinical and
quality improvement programs to enhance the healthcare experience for individuals in need of care,
while at the same time managing the cost of these services for our customers. The treatment services
provided through the Company’s provider network include outpatient programs (such as counseling or
therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization
services), inpatient treatment and crisis intervention services. The Company generally does not directly
provide or own any provider of treatment services, although it does employ licensed behavioral health
counselors to deliver non-medical counseling under certain government contracts.
The Company’s integrated management of physical and behavioral healthcare includes its full
service health plans which provide for the holistic management of special populations. The special
populations include individuals with serious mental illness, dual eligibles, those eligible for long term
care, intellectually and developmentally disabled individuals, and other populations with unique and
often complex healthcare needs.
The Company provides its management services primarily through: (i) risk-based products, where
the Company assumes all or a substantial portion of the responsibility for the cost of providing
treatment services in exchange for a fixed per member per month fee, (ii) administrative services only
(‘‘ASO’’) products, where the Company provides services such as utilization review, claims
administration and/or provider network management, but does not assume responsibility for the cost of
F-7
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
1. General (Continued)
the treatment services, and (iii) employee assistance programs (‘‘EAPs’’) where the Company provides
short-term outpatient behavioral counseling services.
The managed healthcare business is managed based on the services provided and/or the customers
served, through the following two segments:
Commercial. The Managed Healthcare Commercial segment (‘‘Commercial’’) generally reflects
managed behavioral healthcare services and EAP services provided under contracts with health plans,
insurance companies and MCOs for some or all of their commercial, Medicaid and Medicare members,
as well as with employers, including corporations, governmental agencies, and labor unions.
Commercial’s contracts encompass risk-based, ASO and EAP arrangements.
Public Sector. The Managed Healthcare Public Sector segment (‘‘Public Sector’’) generally
reflects: (i) the management of behavioral health services provided to recipients under Medicaid and
other state sponsored programs under contracts with state and local governmental agencies, and (ii) the
integrated management of physical, behavioral and pharmaceutical care for special populations covered
under Medicaid and other government sponsored programs. Public Sector contracts encompass either
risk-based or ASO arrangements.
Specialty Solutions
The Specialty Solutions segment (‘‘Specialty Solutions’’) generally reflects the management of the
delivery of diagnostic imaging (radiology benefits management or ‘‘RBM’’) and a variety of other
specialty areas such as radiation oncology, obstetrical ultrasound, cardiology and pain management,
including spine surgery and musculoskeletal management, to ensure that such services are clinically
appropriate and cost effective. The Company’s Specialty Solutions services are currently provided under
contracts with health plans and insurance companies for some or all of their commercial, Medicaid and
Medicare members. The Company also contracts with state and local governmental agencies for the
provision of such services to Medicaid recipients. The Company offers its Specialty Solutions services
through risk-based contracts, where the Company assumes all or a substantial portion of the
responsibility for the cost of providing services, and through ASO contracts, where the Company
provides services such as utilization review and claims administration, but does not assume
responsibility for the cost of the services.
This segment was previously defined as Radiology Benefits Management; however, as it has grown
and expanded to include additional products, the Company has renamed the segment Specialty
Solutions to encompass all of its additional product offerings.
Pharmacy Management
The Pharmacy Management segment (‘‘Pharmacy Management’’) comprises products and solutions
that provide clinical and financial management of drugs paid under medical and pharmacy benefit
programs. Pharmacy Managements’ services include (i) traditional pharmacy benefit management
(‘‘PBM’’) services; (ii) pharmacy benefit administration (‘‘PBA’’) for state Medicaid and other
government sponsored programs; (iii) specialty pharmaceutical dispensing operations, contracting and
formulary optimization programs; (iv) medical pharmacy management programs; and (v) programs for
F-8
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
1. General (Continued)
the integrated management of drugs that treat complex conditions, regardless of site of service, method
of delivery, or benefit reimbursement. In addition, the Company has a subcontract arrangement to
provide PBM services on a risk basis for one of Public Sector’s customers, which is scheduled to
terminate on March 31, 2014.
The Company’s Pharmacy Management programs are provided under contracts with health plans,
employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass
risk-based and fee-for-service (‘‘FFS’’) arrangements.
Beginning in the first quarter of 2013, the Company underwent organizational changes. As a result
of these changes, the Company concluded that changes to its reportable segments now comprising the
new Pharmacy Management segment were warranted. This segment contains the operating segments
previously defined as the Specialty Pharmaceutical Management segment and the Medicaid
Administration segment. Prior period balances have been reclassified to reflect this change.
Corporate
This segment of the Company is comprised primarily of operational support functions such as sales
and marketing and information technology, as well as corporate support functions such as executive,
finance, human resources and legal.
2. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In July 2011, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) No. 2011-06, ‘‘Other Expenses (Topic 720): Fees Paid to the Federal Government by
Health Insurers (a consensus of the FASB Emerging Issues Task Force)’’ (‘‘ASU 2011-06’’), which
addresses how fees mandated by the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act of 2010 (collectively, the ‘‘Health Reform Law’’), should
be recognized and classified in the income statements of health insurers. The Health Reform Law
imposes a mandatory annual fee on health insurers for each calendar year beginning on or after
January 1, 2014. ASU 2011-06 stipulates that the liability incurred for that fee be amortized to expense
over the calendar year in which it is payable. This ASU is effective for calendar years beginning after
December 31, 2013, when the fee initially becomes effective. We believe that our state public sector
customers will make rate adjustments to cover the direct costs of these fees and a majority of the
impact from non-deductibility of such fees for federal income tax purposes. There may be some impact
due to taxes paid for non-renewing customers where the timing and amount of recoupment of these
additional costs is uncertain. For 2014, the projected ACA fees are currently estimated to be
$25.0 million. There can be no guarantees regarding this adjustment from our state public sector
customers and these taxes and fees may have a material impact on the Company.
In February 2013, the FASB issued ASU No. 2013-02, ‘‘Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified out of Accumulated Comprehensive Income’’ (‘‘ASU 2013-02’’).
ASU 2013-02 requires companies to report the effect of significant reclassifications out of accumulated
other comprehensive income on the respective line items in net income if the amount being reclassified
is required under generally accepted accounting principles (‘‘GAAP’’) to be reclassified in its entirety to
F-9
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
net income. Entities are required to provide information about significant reclassifications by
component, and to present those reclassifications either on the face of the statement where net income
is presented or in the notes. For other amounts that are not required to be reclassified in their entirety
to net income, entities are required to cross-reference other disclosures that provide additional details
about those amounts. The amendments in this ASU do not change the current requirements for
reporting net income or other comprehensive income in financial statements. The amendments in this
ASU are effective prospectively for reporting periods beginning after December 15, 2012 and were
adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the
Company’s consolidated results of operations, financial position, or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, ‘‘Income Taxes (Topic 740): Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax
Carryforward Exists’’ (‘‘ASU 2013-11’’). ASU 2013-11 provides guidance on the financial statement
presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax
loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax
benefit should be presented in the financial statements as a liability. The amendments in this ASU do
not require new recurring disclosures. The amendments in this ASU are effective for reporting periods
beginning after December 15, 2013. The guidance is not expected to materially impact the Company’s
consolidated results of operations, financial position, or cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period.
Significant estimates of the Company include, among other things, accounts receivable realization,
valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims
payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities.
Actual results could differ from those estimates.
Managed Care and Other Revenue
Managed Care Revenue. Managed care revenue, inclusive of revenue from the Company’s risk,
EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for
covered members. The Company is paid a per member fee for all enrolled members, and this fee is
recorded as revenue in the month in which members are entitled to service. The Company adjusts its
revenue for retroactive membership terminations, additions and other changes, when such adjustments
are identified, with the exception of retroactivity that can be reasonably estimated. The impact of
retroactive rate amendments is generally recorded in the accounting period that terms to the
amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of
service are recorded as deferred revenue. Managed care revenues approximated $2.2 billion, $2.5 billion
and $2.7 billion for the years ended December 31, 2011, 2012 and 2013, respectively.
F-10
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Fee-For-Service and Cost-Plus Contracts. The Company has certain fee-for-service contracts,
including cost-plus contracts, with customers under which the Company recognizes revenue as services
are performed and as costs are incurred. Revenues from these contracts approximated $174.5 million,
$151.4 million and $215.1 million for the years ended December 31, 2011, 2012 and 2013, respectively.
Block Grant Revenues. Public Sector has a contract that is partially funded by federal, state and
county block grant money, which represents annual appropriations. The Company recognizes revenue
from block grant activity ratably over the period to which the block grant funding applies. Block grant
revenues were approximately $114.4 million, $124.8 million and $131.5 million for the years ended
December 31, 2011, 2012 and 2013, respectively.
Performance-Based Revenue. The Company has the ability to earn performance-based revenue
under certain risk and non-risk contracts. Performance-based revenue generally is based on either the
ability of the Company to manage care for its clients below specified targets, or on other operating
metrics. For each such contract, the Company estimates and records performance-based revenue after
considering the relevant contractual terms and the data available for the performance-based revenue
calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the
rights and obligations of each party upon termination of the contracts. Performance-based revenues
were $26.5 million, $25.4 million and $14.0 million for the years ended December 31, 2011, 2012 and
2013, respectively.
Rebate Revenue. The Company administers a rebate program for certain clients through which the
Company coordinates the achievement, calculation and collection of rebates and administrative fees
from pharmaceutical manufacturers on behalf of clients. Each period, the Company estimates the total
rebates earned based on actual volumes of pharmaceutical purchases by the Company’s clients, as well
as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of
rebates generated for its clients. The Company does not record as rebate revenue any rebates that are
passed through to its clients. Total rebate revenues for the years ended December 31, 2011, 2012 and
2013 were $32.8 million, $40.2 million and $34.8 million, respectively.
In relation to the Company’s PBM business, the Company administers rebate programs through
which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The
Company recognizes rebates when the Company is entitled to them and when the amounts of the
rebates are determinable. The amount recorded for rebates earned by the Company from the
pharmaceutical manufacturers are recorded as a reduction of cost of goods sold.
PBM and Dispensing Revenue
Pharmacy Benefit Management Revenue. The Company recognizes PBM revenue, which consists of
a negotiated prescription price (ingredient cost plus dispensing fee), co-payments collected by the
pharmacy and any associated administrative fees, when claims are adjudicated. The Company
recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as
the principal in the arrangement and is contractually obligated to its clients and network pharmacies,
which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the
claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments
from the client for drugs dispensed by the pharmacy, and managing the total prescription drug
F-11
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
relationship with the client’s members. If the Company enters into a contract where it is only an
administrator, and does not assume any of the risks previously noted, revenue will be recognized on a
net basis. Prior to the year ended December 31, 2013 the Company had no PBM business. PBM
revenues were $106.7 million for the year ended December 31, 2013.
Dispensing Revenue. The Company recognizes dispensing revenue, which includes the co-payments
received from members of the health plans the Company serves, when the specialty pharmaceutical
drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the
Company’s customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of
the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund.
Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were
$247.4 million, $350.3 million and $376.6 million for the years ended December 31, 2011, 2012 and
2013, respectively.
Significant Customers
Consolidated Company
The Company provides behavioral healthcare management and other related services to
approximately 660,000 members in Maricopa County, Arizona as the Regional Behavioral Health
Authority (‘‘RHBA’’) for GSA6 (‘‘Maricopa County’’) pursuant to a contract with the State of Arizona
(the ‘‘Maricopa Contract’’).
The Maricopa Contract generated net revenues that exceeded, in the aggregate, ten percent of net
revenues for the consolidated Company for the years ended December 31, 2011, 2012 and 2013. The
Maricopa Contract is for the management of the publicly funded behavioral health system that delivers
mental health, substance abuse and crisis services for adults, youth, and children. Under the Maricopa
Contract, the Company is responsible for providing covered behavioral health services to persons
eligible under Title XIX (Medicaid) and Title XXI (State Children’s Health Insurance Program) of the
Social Security Act, non-Title XIX and non-Title XXI eligible children and adults with a serious mental
illness, and to certain non-Title XIX and non-Title XXI adults with behavioral health or substance
abuse disorders. The Maricopa Contract began on September 1, 2007 and was scheduled to expire on
October 1, 2013. The Company and the State of Arizona have agreed to extend the Maricopa Contract
through March 31, 2014. The State of Arizona has the right to terminate the Maricopa Contract for
cause, as defined, upon ten days’ notice with an opportunity to cure, and, after January 1, 2014, without
cause upon 30 days prior notice to the Company. The Maricopa Contract generated net revenues of
$779.5 million, $758.3 million and $755.0 million for the years ended December 31, 2011, 2012 and
2013, respectively.
The State of Arizona had previously issued a Solicitation for a new RBHA for Maricopa County
(the ‘‘New Contract’’) to replace the current contract with the Company to be effective on October 1,
2013. The New Contract is for the management of the publicly funded behavioral health system
currently provided by the Company under the Maricopa Contract, and also includes an integrated
behavioral and physical healthcare system for a small number of individuals with serious mental illness.
Magellan Complete Care of Arizona (‘‘MCCAZ’’), a joint venture owned 80% by the Company and
20% by Vanguard/Phoenix Health Plan, previously submitted a bid for the Contract.
F-12
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
On March 25, 2013, the Company was notified that MCCAZ was not selected as the RBHA for
the New Contract. On April 3, 2013, the Company filed a formal protest regarding the State’s decision
to award the RBHA in Maricopa County to another vendor. On April 17, 2013, the Arizona
Department of Health Services denied the Company’s protest. On May 9, 2013, the Company filed an
appeal of the denial of its protest (the ‘‘Appeal’’) with the Arizona Department of Administration (the
‘‘DOA’’), the agency responsible for considering appeals of procurement protest denials. The Company
also filed with the DOA a motion to stay the award and implementation of the contract pending a
decision on the Appeal. On May 21, 2013, the DOA granted the Company’s motion and issued a stay
of the award and implementation of the contract pending resolution of the Appeal by the DOA (the
‘‘Stay’’).
On June 13, 2013 the DOA referred the Appeal for a hearing before an independent
administrative law judge (‘‘ALJ’’) in the Arizona Office of Administrative Hearings (the ‘‘OAH’’). The
OAH held an evidentiary hearing on the Appeal on September 18-27, 2013. On November 18, 2013,
the ALJ issued a decision and recommended that the DOA rule against Magellan and dismiss the
Appeal. On December 3, 2013 the DOA accepted the recommendation of the ALJ and issued a final
administrative decision ruling against Magellan, affirming the award of the New Contract to the
winning bidder, and dismissing the Appeal. The DOA also lifted the previously issued Stay on
implementation of the New Contract.
On December 6, 2013 Magellan filed an appeal of the DOA decision in the Arizona Superior
Court in Maricopa County (the ‘‘Superior Court’’) and, on December 10, 2013, filed a motion seeking a
judicial stay of the implementation of the contract until after the court’s decision on the appeal. On
February 18, 2014 the Superior Court issued an order denying the Company’s motion for stay. The
denial of the motion for stay does not impact the final decision on the merits of Magellan’s appeal of
the DOA decision, which will continue to proceed in the Superior Court. The Company also previously
filed a separate civil lawsuit in the Superior Court challenging the legal authority of the public entity
that is one of the key members of the non-profit winning bidder to invest in and participate in the
winning bidder’s performance under the New Contract. In connection with such civil suit, the Company
previously filed a motion seeking a preliminary injunction that, if granted, could prohibit such public
entity from participation as a member of the winning bidder in the New Contract. No decision on the
motion for preliminary injunction in the separate civil suit has yet been issued by the court. There is no
assurance that the Company will prevail on its appeal to the Superior Court or that a motion for
preliminary injunction will be granted.
In the event that the Company does not prevail on the appeal, the Company will likely incur
shutdown costs pertaining to the contract, including severance, lease termination, and software
impairment charges. As of December 31, 2013, the Company has recorded $6.1 million of such
shutdown costs.
F-13
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
By Segment
In addition to the Maricopa Contract previously discussed, the following customers generated in
excess of ten percent of net revenues for the respective segment for the years ended December 31,
2011, 2012 and 2013 (in thousands):
Segment
Commercial
Term Date
2011
2012
2013
Customer A . . . . . . June 30, 2014(1)
Customer B . . . . . . December 31, 2017
Customer C . . . . . . December 31, 2012 to December 14, 2013(2)(3)
Customer D . . . . . . December 31, 2019
$171,109 $192,415 $207,080
67,049
111,607
67,959*
118,351
— 134,885
71,085*
74,203*
141,444
Public Sector
Customer E . . . . . . June 30, 2014(4)
191,063
240,224
321,072
Specialty Solutions
Customer F . . . . . . December 31, 2015
Customer G . . . . . . June 30, 2011 to November 30, 2011(2)(5)
Customer H . . . . . . June 30, 2014
Customer I . . . . . . . July 31, 2015
Customer J . . . . . . January 31, 2015
134,257
38,297
55,197
36,293
32,342*
117,739
—
60,094
57,455
38,366
130,895
—
55,078
61,838
47,311
Pharmacy Management
Customer K . . . . . . November 30, 2014 to December 31, 2014(2)
Customer L . . . . . . December 31, 2013(5)
Customer B . . . . . . September 27, 2013 to December 31, 2013(2)(5)
Customer M . . . . . . March 31, 2014(6)
90,563
56,115
22,899*
82,770
129,209
60,350
73,785
69,090
133,724
59,125*
92,647
66,153*
*
Revenue amount did not exceed ten percent of net revenues for the respective segment for the year
presented. Amount is shown for comparative purposes only.
(1) The customer has informed the Company that, after a competitive evaluation process, it has decided not
to renew its contract after the contract expires on December 31, 2013. The contract was extended
through June 30, 2014 to allow for transition to the new vendor.
(2) The customer has more than one contract. The individual contracts are scheduled to terminate at
various points during the time period indicated above.
(3) Revenues for the year ended December 31, 2012 of $50.0 million relate to a contract that terminated as
of December 31, 2012.
(4) Contract has options for the customer to extend the term for one additional one-year period.
(5) The contract has terminated.
(6) This customer represents a subcontract with Public Sector for the Maricopa Contract, and is eliminated
in consolidation.
F-14
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Concentration of Business
The Company also has a significant concentration of business with various counties in the State of
Pennsylvania (the ‘‘Pennsylvania Counties’’) which are part of the Pennsylvania Medicaid program, and
with various areas in the State of Florida (the ‘‘Florida Areas’’) which are part of the Florida Medicaid
program. Net revenues from the Pennsylvania Counties in the aggregate totaled $351.6 million,
$354.1 million and $359.0 million for the years ended December 31, 2011, 2012 and 2013, respectively.
Net revenues from the Florida Areas in the aggregate totaled $131.8 million, $133.9 million and
$128.0 million for the years ended December 31, 2011, 2012 and 2013, respectively.
The Company’s contracts with customers typically have terms of one to three years, and in certain
cases contain renewal provisions (at the customer’s option) for successive terms of between one and
two years (unless terminated earlier). Substantially all of these contracts may be immediately
terminated with cause and many of the Company’s contracts are terminable without cause by the
customer or the Company either upon the giving of requisite notice and the passage of a specified
period of time (typically between 60 and 180 days) or upon the occurrence of other specified events. In
addition, the Company’s contracts with federal, state and local governmental agencies generally are
conditioned on legislative appropriations. These contracts generally can be terminated or modified by
the customer if such appropriations are not made.
Income Taxes
The Company files a consolidated federal income tax return for the Company and its
eighty-percent or more owned subsidiaries, and the Company and its subsidiaries file income tax
returns in various state and local jurisdictions.
The Company estimates income taxes for each of the jurisdictions in which it operates. This
process involves determining both permanent and temporary differences resulting from differing
treatment for tax and book purposes. Deferred tax assets and/or liabilities are determined by
multiplying the temporary differences between the financial reporting and tax reporting bases for assets
and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or
settled. The Company establishes valuation allowances against deferred tax assets if it is more likely
than not that the deferred tax asset will not be realized. The need for a valuation allowance is
determined based on the evaluation of various factors, including expectations of future earnings and
management’s judgment. The effect of a change in tax rates on deferred taxes is recognized in income
in the period that includes the enactment date.
Reversals of both valuation allowances and unrecognized tax benefits are recorded in the period
they occur, typically as reductions to income tax expense. However, reversals of unrecognized tax
benefits related to deductions for stock compensation in excess of the related book expense are
recorded as increases in additional paid-in capital. To the extent reversals of unrecognized tax benefits
cannot be specifically traced to these excess deductions due to complexities in the tax law, the
Company records the tax benefit for such reversals to additional paid-in-capital on a pro-rata basis.
The Company recognizes interim period income taxes by estimating an annual effective tax rate
and applying it to year-to-date results. The estimated annual effective tax rate is periodically updated
throughout the year based on actual results to date and an updated projection of full year income.
F-15
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Although the effective tax rate approach is generally used for interim periods, taxes on significant,
unusual and infrequent items are recognized at the statutory tax rate entirely in the period the amounts
are realized.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid interest-bearing investments with maturity dates of
three months or less when purchased, consisting primarily of money market instruments. At
December 31, 2013, the Company’s excess capital and undistributed earnings for the Company’s
regulated subsidiaries of $40.9 million are included in cash and cash equivalents.
Restricted Assets
The Company has certain assets which are considered restricted for: (i) the payment of claims
under the terms of certain managed care contracts; (ii) regulatory purposes related to the payment of
claims in certain jurisdictions; and (iii) the maintenance of minimum required tangible net equity levels
for certain of the Company’s subsidiaries. Significant restricted assets of the Company as of
December 31, 2012 and 2013 were as follows (in thousands):
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted short-term investments
. . . . . . . . . . . . . . . . . . . . .
Restricted deposits (included in other current assets) . . . . . . .
Restricted long-term investments . . . . . . . . . . . . . . . . . . . . . .
$226,554
88,332
20,846
32,563
$236,696
117,674
25,009
32,430
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$368,295
$411,809
2012
2013
Investments
All of the Company’s investments are classified as ‘‘available-for-sale’’ and are carried at fair value.
Securities which have been classified as Level 1 are measured using quoted market prices while those
which have been classified as Level 2 are measured using quoted prices for identical assets and
liabilities in markets that are not active. The Company’s policy is to classify all investments with
contractual maturities within one year as current. Investment income is recognized when earned and
reported net of investment expenses. Net unrealized holding gains or losses are excluded from earnings
and are reported, net of tax, as ‘‘accumulated other comprehensive income (loss)’’ in the accompanying
consolidated balance sheets and consolidated statements of comprehensive income until realized, unless
the losses are deemed to be other-than-temporary. Realized gains or losses, including any provision for
other-than-temporary declines in value, are included in the consolidated statements of comprehensive
income.
If a debt security is in an unrealized loss position and the Company has the intent to sell the debt
security, or it is more likely than not that the Company will have to sell the debt security before
recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is
recorded to other-than-temporary impairment losses recognized in income in the consolidated
statements of comprehensive income. For impaired debt securities that the Company does not intend to
F-16
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
sell or it is more likely than not that the Company will not have to sell such securities, but the
Company expects that it will not fully recover the amortized cost basis, the credit component of the
other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized
in income in the consolidated statements of comprehensive income and the non-credit component of
the other-than-temporary impairment is recognized in other comprehensive income.
The credit component of an other-than-temporary impairment is determined by comparing the net
present value of projected future cash flows with the amortized cost basis of the debt security. The net
present value is calculated by discounting the best estimate of projected future cash flows at the
effective interest rate implicit in the debt security at the date of acquisition. Cash flow estimates are
driven by assumptions regarding probability of default, including changes in credit ratings, and
estimates regarding timing and amount of recoveries associated with a default. Furthermore, unrealized
losses entirely caused by non-credit related factors related to debt securities for which the Company
expects to fully recover the amortized cost basis continue to be recognized in accumulated other
comprehensive income.
As of December 31, 2012 and 2013, there were no unrealized losses that the Company believed to
be other-than-temporary. No realized gains or losses were recorded for the years ended December 31,
2011, 2012 or 2013. The following is a summary of short-term and long-term investments at
December 31, 2012 and 2013 (in thousands):
U.S. Government and agency securities . . . . . . . . . . . . . .
Obligations of government-sponsored enterprises(1) . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$
1,065
6,126
214,603
150
11,805
Total investments at December 31, 2012 . . . . . . . . . . . . . .
$233,749
U.S. Government and agency securities . . . . . . . . . . . . . .
Obligations of government-sponsored enterprises(1) . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$
1,129
8,441
198,748
150
Total investments at December 31, 2013 . . . . . . . . . . . . . .
$208,468
December 31, 2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$—
4
66
—
—
$70
$ — $
(2)
(122)
—
(5)
1,065
6,128
214,547
150
11,800
$(129)
$233,690
December 31, 2013
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
$—
2
18
—
$20
$ — $
(3)
(172)
—
1,129
8,440
198,594
150
$(175)
$208,313
(1) Includes investments in notes issued by the Federal Home Loan Bank.
F-17
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
The maturity dates of the Company’s investments as of December 31, 2013 are summarized below
(in thousands):
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$175,997
31,518
953
$175,883
31,479
951
Total investments at December 31, 2013 . . . . . . . . . . . . . . . . .
$208,468
$208,313
Amortized
Cost
Estimated
Fair Value
Accounts Receivable
The Company’s accounts receivable consists of amounts due from customers throughout the
United States. Collateral is generally not required. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers, historical trends and
other information. Management believes the allowance for doubtful accounts is adequate to provide for
normal credit losses.
Concentration of Credit Risk
Accounts receivable subjects the Company to a concentration of credit risk with third party payors
that include health insurance companies, managed healthcare organizations, healthcare providers and
governmental entities.
The Company maintains cash and cash equivalents balances at financial institutions and are
insured by the Federal Deposit Insurance Corporation (‘‘FDIC’’). At times, balances in certain bank
accounts may exceed the FDIC insured limits.
Pharmaceutical Inventory
Pharmaceutical inventory consists solely of finished goods (primarily prescription drugs) and are
stated at the lower of first-in first-out cost or market.
Long-lived Assets
Long-lived assets, including property and equipment and intangible assets to be held and used, are
currently reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed. Impairment is determined by comparing the carrying value of
these long-lived assets to management’s best estimate of the future undiscounted cash flows expected to
result from the use of the assets and their eventual disposition. The cash flow projections used to make
this assessment are consistent with the cash flow projections that management uses internally in making
key decisions. In the event an impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset, which is generally determined by using quoted market
prices or the discounted present value of expected future cash flows.
F-18
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment is stated at cost, except for assets that have been impaired, for which the
carrying amount has been reduced to estimated fair value. Expenditures for renewals and
improvements are capitalized to the property accounts. Replacements and maintenance and repairs that
do not improve or extend the life of the respective assets are expensed as incurred. The Company
capitalizes costs incurred to develop internal-use software during the application development stage.
Capitalization of software development costs occurs after the preliminary project stage is complete,
management authorizes the project, and it is probable that the project will be completed and the
software will be used for the function intended. Amortization of capital lease assets is included in
depreciation expense and is included in accumulated depreciation as reflected in the table below.
Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which is
generally two to ten years for building improvements (or the lease term, if shorter), three to fifteen
years for equipment and three to five years for capitalized internal-use software. The net capitalized
internal use software as of December 31, 2012 and 2013 was $71.1 million and $78.8 million,
respectively. Depreciation expense was $47.9 million, $50.8 million and $61.4 million for the years
ended December 31, 2011, 2012 and 2013, respectively. Included in depreciation expense for the years
ended December 31, 2011, 2012 and 2013 was $28.9 million, $28.8 million and $34.8 million,
respectively, related to capitalized internal use software.
Property and equipment, net, consisted of the following at December 31, 2012 and 2013 (in
thousands):
2012
2013
Building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases—property . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases—equipment
. . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized internal-use software . . . . . . . . . . . . . . . . . . . . .
$
7,285
168,400
—
—
261,833
$ 12,074
180,540
26,945
2,794
304,146
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . .
437,518
(300,970)
526,499
(354,166)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . .
$ 136,548
$ 172,333
Goodwill
The Company is required to test its goodwill for impairment on at least an annual basis. The
Company has selected October 1 as the date of its annual impairment test. The goodwill impairment
test is a two-step process that requires management to make judgments in determining what
assumptions to use in the calculation. The first step of the process consists of estimating the fair value
of each reporting unit with goodwill based on various valuation techniques, with the primary technique
being a discounted cash flow analysis, which requires the input of various assumptions with respect to
revenues, operating margins, growth rates and discount rates. The estimated fair value for each
reporting unit is compared to the carrying value of the reporting unit, which includes goodwill. If the
estimated fair value is less than the carrying value, a second step is performed to compute the amount
F-19
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
of the impairment by determining an ‘‘implied fair value’’ of goodwill. The determination of a reporting
unit’s ‘‘implied fair value’’ of goodwill requires the Company to allocate the estimated fair value of the
reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents
the ‘‘implied fair value’’ of goodwill, which is compared to its corresponding carrying value.
Goodwill is tested for impairment at a level referred to as a reporting unit, with the Company’s
reporting units as of December 31, 2013 comprised of Health Plan, Specialty Solutions, Pharmacy
Management, and Public Sector. Prior to October 1, 2013, the Company’s reporting units included
Specialty Pharmaceutical Management and Medicaid Administration. Effective October 1, 2013, the
goodwill associated with these reporting units was aggregated with the goodwill recognized from the
acquisition of Partners Rx Management, LLC (‘‘Partners Rx’’), and represent the Pharmacy
Management reporting unit. The change in reporting units was attributable to the fact that discrete
financial information is now being reviewed at the Pharmacy Management operating segment level. The
Company’s marketing and pricing of pharmacy products is on an integrated basis and integration of
pharmacy related operations contributed to the reporting unit change.
The fair value of the Health Plan (a component of the Commercial segment) and Specialty
Solutions reporting units were determined using a discounted cash flow method. This method involves
estimating the present value of estimated future cash flows utilizing a risk adjusted discount rate. Key
assumptions for this method include cash flow projections, terminal growth rates and discount rates.
The fair value of the Pharmacy Management reporting unit was determined using discounted cash
flow, guideline company and similar transaction methods. Key assumptions for the discounted cash flow
method are consistent with those described above. For the guideline company method, revenue and
earnings before interest, taxes, depreciation, and amortization (‘‘EBITDA’’) multiples for guideline
companies were applied to the reporting unit’s pro forma revenue and EDITDA for 2013, which
represents actual results for the nine-month period ended September 30, 2013 and projected results for
the three-month period ended December 31, 2013, and to the reporting unit’s projected revenue and
EBITDA for 2014. For the similar transaction method, revenue and EBITDA multiples based on
merger and acquisition transactions for similar companies were applied to the reporting unit’s pro
forma revenue and EBITDA for 2013, which represents actual results for the nine-month period ended
September 30, 2013 and projected results for the three-month period ended December 31, 2013. The
weighting applied to the fair values determined using the discounted cash flow, guideline company and
similar transaction methods to determine an overall fair value for the Pharmacy Management reporting
unit was 75 percent, 22.5 percent and 2.5 percent, respectively. The weighting of each of the methods
described above was based on the relevance of the approach. A change in the weighting would not
change the outcome of the first step of the impairment test.
As a result of the first step of the 2013 annual goodwill impairment analysis, the fair value of each
reporting unit with goodwill exceeded its carrying value. Therefore, the second step was not necessary.
However, a 47.9 percent, 32.9 percent, and 25.5 percent decline in the fair values of the Health Plan,
Specialty Solutions, and Pharmacy Management reporting units, respectively, would have caused the
carrying values for these reporting units to be in excess of fair values, which would require the second
step to be performed. The second step could have resulted in an impairment loss for goodwill.
F-20
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
The Company’s goodwill attributed to the Public Sector reporting unit is related to the AlphaCare
Holdings, Inc. (‘‘AlphaCare Holdings’’) acquisition which closed on December 31, 2013, therefore an
impairment analysis was not performed for this reporting unit in 2013.
Goodwill for each of the Company’s reporting units at December 31, 2012 and 2013 were as
follows (in thousands):
Health Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmacy Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$120,485
104,549
201,905
—
$120,485
104,549
242,290
20,882
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$426,939
$488,206
2012
2013
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2013
are reflected in the table below (in thousands):
Balance as of beginning of period . . . . . . . . . . . . . . . . . . . . .
Acquisition of Partners Rx . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of AlphaCare Holdings . . . . . . . . . . . . . . . . . . . .
$426,939
—
—
$426,939
40,385
20,882
Balance as of end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
$426,939
$488,206
2012
2013
Intangible Assets
The following is a summary of intangible assets at December 31, 2012 and 2013, and the estimated
useful lives for such assets (in thousands):
Asset
December 31, 2012
Estimated
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer agreements and lists . . . . . . . . . . . . . . . .
Provider networks and other . . . . . . . . . . . . . . . . . .
3 to 18 years
5 to 16 years
$121,490
8,743
$(90,548)
(4,750)
$30,942
3,993
$130,233
$(95,298)
$34,935
Asset
Estimated
Useful Life
December 31, 2013
Gross
Carrying
Amount
Accumulated
Amortization
Customer agreements and lists . . . . . . . . . . . . . . .
Provider networks and other . . . . . . . . . . . . . . . . .
2.5 to 18 years
1 to 16 years
$163,990
11,593
$(100,482)
(5,407)
Net
Carrying
Amount
$63,508
6,186
$175,583
$(105,889)
$69,694
F-21
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Amortization expense was $10.7 million, $9.7 million and $10.6 million for the years ended
December 31, 2011, 2012 and 2013, respectively. The Company estimates amortization expense will be
$15.4 million, $14.0 million, $9.9 million, $6.1 million and $4.6 million for the years ending
December 31, 2014, 2015, 2015, 2017, and 2018 respectively.
Cost of Care, Medical Claims Payable and Other Medical Liabilities
Cost of care is recognized in the period in which members receive managed healthcare services. In
addition to actual benefits paid, cost of care in a period also includes the impact of accruals for
estimates of medical claims payable. Medical claims payable represents the liability for healthcare
claims reported but not yet paid and claims incurred but not yet reported (‘‘IBNR’’) related to the
Company’s managed healthcare businesses. Such liabilities are determined by employing actuarial
methods that are commonly used by health insurance actuaries and that meet actuarial standards of
practice.
The IBNR portion of medical claims payable is estimated based on past claims payment
experience for member groups, enrollment data, utilization statistics, authorized healthcare services and
other factors. This data is incorporated into contract-specific actuarial reserve models and is further
analyzed to create ‘‘completion factors’’ that represent the average percentage of total incurred claims
that have been paid through a given date after being incurred. Factors that affect estimated completion
factors include benefit changes, enrollment changes, shifts in product mix, seasonality influences,
provider reimbursement changes, changes in claims inventory levels, the speed of claims processing and
changes in paid claim levels. Completion factors are applied to claims paid through the financial
statement date to estimate the ultimate claim expense incurred for the current period. Actuarial
estimates of claim liabilities are then determined by subtracting the actual paid claims from the
estimate of the ultimate incurred claims. For the most recent incurred months (generally the most
recent two months), the percentage of claims paid for claims incurred in those months is generally low.
This makes the completion factor methodology less reliable for such months. Therefore, incurred
claims for any month with a completion factor that is less than 70 percent are generally not projected
from historical completion and payment patterns; rather they are projected by estimating claims
expense based on recent monthly estimated cost incurred per member per month times membership,
taking into account seasonality influences, benefit changes and healthcare trend levels, collectively
considered to be ‘‘trend factors.’’
Medical claims payable balances are continually monitored and reviewed. If it is determined that
the Company’s assumptions in estimating such liabilities are significantly different than actual results,
the Company’s results of operations and financial position could be impacted in future periods.
Adjustments of prior period estimates may result in additional cost of care or a reduction of cost of
care in the period an adjustment is made. Further, due to the considerable variability of healthcare
costs, adjustments to claim liabilities occur each period and are sometimes significant as compared to
the net income recorded in that period. Prior period development is recognized immediately upon the
actuary’s judgment that a portion of the prior period liability is no longer needed or that additional
F-22
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
liability should have been accrued. The following table presents the components of the change in
medical claims payable for the years ended December 31, 2011, 2012 and 2013 (in thousands):
Claims payable and IBNR, beginning of period . . . . . . . . . . . . .
Cost of care:
2011
2012
2013(3)
$ 166,095
$ 157,099
$ 222,929
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,790,124
(5,400)
1,784,724
2,076,190
(4,300)
2,071,890
2,264,276
(31,300)
2,232,976
Claim payments and transfers to other medical liabilities(1):
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,657,291
136,429
1,877,459
128,601
2,053,274
160,402
Total claim payments and transfers to other medical
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Claims payable and IBNR, end of period . . . . . . . . . . . . . . . . .
Withhold receivables, end of period(2) . . . . . . . . . . . . . . . . . . .
Medical claims payable, end of period . . . . . . . . . . . . . . . . . . . .
1,793,720
157,099
(19,126)
$ 137,973
2,006,060
222,929
(24,500)
$ 198,429
2,213,676
242,229
(13,888)
$ 228,341
(1) For any given period, a portion of unpaid medical claims payable could be covered by reinvestment
liability (discussed below) and may not impact the Company’s results of operations for such
periods.
(2) Medical claims payable is offset by customer withholds from capitation payments in situations in
which the customer has the contractual requirement to pay providers for care incurred.
(3) The favorable development of prior years cost of care includes approximately $15.1 million of
adjustments of block funding to providers resulting from an annual reconciliation process.
Actuarial standards of practice require that the claim liabilities be adequate under moderately
adverse circumstances. Adverse circumstances are situations in which the actual claims experience could
be higher than the otherwise estimated value of such claims. In many situations, the claims paid
amount experienced will be less than the estimate that satisfies the actuarial standards of practice.
Due to the existence of risk sharing and reinvestment provisions in certain customer contracts,
principally in the Public Sector segment, a change in the estimate for medical claims payable does not
necessarily result in an equivalent impact on cost of care.
The Company believes that the amount of medical claims payable is adequate to cover its ultimate
liability for unpaid claims as of December 31, 2013; however, actual claims payments may differ from
established estimates.
Other medical liabilities consist primarily of ‘‘reinvestment’’ payables under certain managed
healthcare contracts with Medicaid customers and ‘‘profit share’’ payables under certain risk-based
contracts. Under a contract with reinvestment features, if the cost of care is less than certain minimum
amounts specified in the contract (usually as a percentage of revenue), the Company is required to
‘‘reinvest’’ such difference in behavioral healthcare programs when and as specified by the customer or
to pay the difference to the customer for their use in funding such programs. Under a contract with
profit share provisions, if the cost of care is below certain specified levels, the Company will ‘‘share’’
the cost savings with the customer at the percentages set forth in the contract.
F-23
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
Accrued Liabilities
As of December 31, 2012 and 2013, the only individual current liability that exceeded five percent
of total current liabilities related to accrued employee compensation liabilities of $36.5 million and
$40.2 million, respectively.
Net Income per Common Share
Net income per common share is computed based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period (see
Note 6—‘‘Stockholders’ Equity’’).
Redeemable Non-Controlling Interest
Noncontrolling interests with redemption features, such as put options, that are not solely within
the Company’s control are considered redeemable noncontrolling interest. Redeemable noncontrolling
interest is considered to be temporary equity and is therefore reported in the mezzanine section
between liabilities and equity on the Company’s consolidated balance sheets at the greater of the initial
carrying amount adjusted for the noncontrolling interest’s share of net income or loss or its redemption
value.
Stock Compensation
The Company uses the Black-Scholes-Merton formula to estimate the fair value of substantially all
stock options granted to employees, and recorded stock compensation expense of $17.4 million,
$17.8 million and $21.3 million for the years ended December 31, 2011, 2012 and 2013, respectively. As
stock compensation expense recognized in the consolidated statements of comprehensive income for
the years ended December 31, 2011, 2012 and 2013 is based on awards ultimately expected to vest, it
has been reduced for annual estimated forfeitures of four percent. If the actual number of forfeitures
differs from those estimated, additional adjustments to compensation expense may be required in
future periods. If vesting of an award is conditioned upon the achievement of performance goals,
compensation expense during the performance period is estimated using the most probable outcome of
the performance goals, and adjusted as the expected outcome changes. The Company recognizes
compensation costs for awards that do not contain performance conditions on a straight-line basis over
the requisite service period, which is generally the vesting term of three years. For restricted stock units
that include performance conditions, stock compensation is recognized using an accelerated method
over the vesting period.
Fair Value Measurements
The Company currently does not have non-financial assets and non-financial liabilities that are
required to be measured at fair value on a recurring basis. Financial assets and liabilities are to be
measured using inputs from the three levels of the fair value hierarchy, which are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and
F-24
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
2. Summary of Significant Accounting Policies (Continued)
inputs that are derived principally from or corroborated by observable market data by correlation or
other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect the Company’s assumptions about the assumptions that
market participants would use in pricing the asset or liability. The Company develops these inputs
based on the best information available, including the Company’s data.
In accordance with the fair value hierarchy described above, the following table shows the fair
value of the Company’s financial assets and liabilities that are required to be measured at fair value as
of December 31, 2012 and 2013 (in thousands):
Fair Value Measurements
at December 31, 2012
Level 1
Level 2
Level 3
Total
Cash and Cash Equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $102,137
Restricted Cash(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . .
Obligations of government-sponsored enterprises(3) . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— —
6,128 —
1,065
1,065
—
6,128
— 214,547 — 214,547
11,800
— 11,800 —
150
150 —
—
$— $102,137
82,839
— 82,839 —
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,065 $417,601
$— $418,666
Fair Value Measurements
at December 31, 2013
Level 1
Level 2
Level 3
Total
Cash and Cash Equivalents(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $101,028
Restricted Cash(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . .
Obligations of government-sponsored enterprises(3) . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— —
8,440 —
1,129
1,129
—
8,440
— 198,594 — 198,594
150
—
150 —
$— $101,028
— 128,318 — 128,318
December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,129 $436,530
$— $437,659
(1) Excludes $87.3 million of cash held in bank accounts by the Company.
(2) Excludes $143.7 million of restricted cash held in bank accounts by the Company.
(3) Includes investments in notes issued by the Federal Home Loan Bank.
(4) Excludes $102.2 million of cash held in bank accounts by the Company.
(5) Excludes $108.4 million of restricted cash held in bank accounts by the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
F-25
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
3. Acquisitions and Joint Ventures
Magellan Complete Care of Arizona, Inc. (‘‘MCCAZ’’), a joint venture owned 80 percent by the
Company and 20 percent by VHS Phoenix Health Plan, LLC (a subsidiary of Vanguard Health
Systems, Inc.), was formed to manage integrated behavioral and physical healthcare for recipients with
SMI and behavioral healthcare for other Medicaid beneficiaries in Maricopa County. MCCAZ
previously responded to a Request for Proposal (‘‘RFP’’) released by the Arizona Department of
Health Services (‘‘ADHS’’). See further discussion related to the status of this RFP in Note 2—
‘‘Summary of Significant Accounting Policies’’. During the year ended December 31, 2012, the
Company invested $1.5 million in MCCAZ, which is included within restricted cash on the
accompanying consolidated balance sheets. The Company has consolidated the balance sheet and
results of operations of MCCAZ in its consolidated financial statements as of December 31, 2012 and
December 31, 2013.
Acquisition of Partners Rx Management LLC
Pursuant to the September 6, 2013 Agreement and Plan of Merger (the ‘‘Merger Agreement’’)
with Partners Rx, on October 1, 2013 the Company acquired all of the outstanding ownership interests
of Partners Rx. Partners Rx is a full-service commercial PBM with a strong focus on health plans and
self-funded employers primarily through sales through third party administrators, consultants and
brokers. As consideration for the transaction, the Company paid $100 million in cash, subject to
working capital adjustments. At closing, cash consideration paid was reduced by a preliminary working
capital adjustment of $1.5 million. The Company funded the acquisition with cash on hand.
Pursuant to the Merger Agreement, certain principal owners of Partners Rx purchased a total of
$10 million in the Company’s restricted stock at a price equal to the average of the closing prices of
the Company’s stock for the five trading day period ended on the day prior to the execution of the
Merger Agreement. The shares received by such principal owners of Partners Rx are subject to vesting
over three years with 50% vesting on the second anniversary of the acquisition and 50% vesting on the
third anniversary of the acquisition, conditioned on continued employment with the Company on the
applicable vesting dates.
The Company reports the results of operations of Partners Rx within its Pharmacy Management
segment.
The purchase price has been allocated based upon the estimated fair value of net assets acquired
at the date of acquisition. A portion of the excess purchase price over tangible net assets acquired has
been allocated to identified intangible assets totaling $40.8 million, consisting of customer contracts in
the amount of $38.7 million, which is being amortized over 2.5 to 10 years, tradenames in the amount
of $0.4 million, which is being amortized over 15 months, and non-compete agreements in the amount
of $1.7 million, which is being amortized over 5 years. The entire purchase price is amortizable for tax
purposes, although the Company’s effective tax rate will not be impacted by the tax amortization of the
goodwill recorded with the Partners Rx transaction.
F-26
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
3. Acquisitions and Joint Ventures (Continued)
The estimated fair values of Partners Rx assets acquired and liabilities assumed at the date of the
acquisition are summarized as follows (in thousands):
Assets acquired:
Current assets (includes $58,038 of accounts receivable) . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other identified intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 58,164
4,327
254
40,760
40,385
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,890
Liabilities assumed:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,125
56,125
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 87,765
As of December 31, 2013, the Company established a working capital receivable of $0.7 million
that was reflected as a reduction to goodwill.
As of December 31, 2013, settlement of the working capital and certain contractual liabilities
remain open and therefore are subject to further estimation. In addition, the amount recognized for
deferred tax assets may be impacted by the determination of these items. The Company will make
appropriate adjustments to the purchase price allocation prior to the completion of the measurement
period as required.
In connection with the Partners Rx acquisition, the Company incurred $0.8 million of acquisition
related costs that were expensed during the year ended December 31, 2013. These costs are included
within direct service costs and other operating expenses in the accompanying consolidated statements of
comprehensive income.
Pro Forma disclosures related to the Partners Rx acquisition have been excluded as immaterial.
Acquisition of AlphaCare Holdings, Inc.
Pursuant to the August 13, 2013 stock purchase agreement (the ‘‘Stock Purchase Agreement’’), on
December 31, 2013 (the ‘‘Closing Date’’) the Company acquired a 65% equity interest in AlphaCare
Holdings, the holding company for AlphaCare New York, Inc. (‘‘AlphaCare’’), a Health Maintenance
Organization (‘‘HMO’’) in New York that operates a New York Managed Long-Term Care Plan
(‘‘MLTCP’’) in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in
Bronx, New York, Queens and Kings Counties.
The Company previously held a 7% equity interest in AlphaCare through a previous equity
investment of $2.0 million in preferred membership units of AlphaCare’s previous holding company,
AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to
AlphaCare Holdings, LLC. As part of the Stock Purchase Agreement, AlphaCare Holdings, LLC was
F-27
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
3. Acquisitions and Joint Ventures (Continued)
reorganized into a Delaware corporation, the preferred membership units and the loan were converted
into Series A Participating Preferred Stock (‘‘Series A Preferred’’) of AlphaCare Holdings and the
Company purchased an additional $17.4 million of Series A Preferred. The Company holds a 65%
voting interest and the remaining shareholders hold a 35% voting interest in AlphaCare Holdings.
Based on the Company’s 65% equity and voting interest in AlphaCare Holdings, the Company has
included the results of operations in its consolidated financial statements. The Company reports the
results of operations of AlphaCare Holdings within the Public Sector segment.
During the year ended December 31, 2013, the Company accounted for its 7% interest in
AlphaCare using the equity method and reported its results within the Public Sector segment. The
incremental 58% interest was accounted for as a business combination achieved in stages. The
acquisition was accounted for using the acquisition method of accounting.
On the Closing Date, the Company remeasured its preexisting investment in AlphaCare and
recognized a gain from such remeasurement. The fair value of the Company’s interest immediately
before the Closing Date was $2.2 million, which resulted in the Company recognizing a non-cash gain
of approximately $0.7 million which is included within interest and other income on the consolidated
statements of comprehensive income for the year ended December 31, 2013. The Company used the
guideline transaction method of the market approach to measure both the fair value of the Company’s
preexisting investment and the fair value of the noncontrolling interest.
The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring
the Company to purchase 50 percent of the remaining shares prior to January 1, 2017 provided certain
membership levels are attained. After December 31, 2016 the other shareholders of AlphaCare
Holdings have the right to exercise put options requiring the Company to purchase all or any portion
of the remaining shares. In addition, after December 31, 2016 the Company has the right to purchase
all remaining shares. Noncontrolling interests with redemption features, such as put options, that are
not solely within the Company’s control are considered redeemable noncontrolling interest.
Redeemable non-controlling interest is considered to be temporary and is therefore reported in a
mezzanine level between liabilities and stockholders’ equity on the Company’s consolidated balance
sheet at the greater of the initial carrying amount adjusted for the non-controlling interest’s share of
net income or loss or its redemption value. The Company recorded $10.6 million of redeemable
non-controlling interest in relation to the acquisition. As of December 31, 2013 the carrying value of
the noncontrolling interest exceeded the redemption value and therefore no adjustment to the carrying
value was required.
The purchase price has been allocated based upon the estimated fair value of net assets acquired
at the date of acquisition. A portion of the excess purchase price over tangible net assets acquired has
been allocated to identified intangible assets totaling $4.6 million, consisting of customer contracts in
the amount of $3.8 million, which is being amortized over 10 years, and provider networks in the
amount of $0.8 million, which is being amortized over 10 years. The Company’s effective tax rate will
not be impacted by the non-deductible amortization of these identified intangibles. None of the
goodwill is deductible for tax purposes.
F-28
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
3. Acquisitions and Joint Ventures (Continued)
The estimated fair values of AlphaCare Holdings assets acquired and liabilities assumed at the
date of the acquisition are summarized as follows (in thousands):
Assets acquired:
Current assets (includes $6,249 of cash and $7,900 of restricted cash) . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other identified intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
$ 15,053
310
188
4,590
20,882
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,023
Liabilities assumed:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,323
1,830
5,153
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net assets attributable to noncontrolling interest . . . . . . . . . . . . . . .
35,870
(10,554)
Net consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,316
As of December 31, 2013, finalization of the estimated intangibles remain open and therefore are
subject to further estimation. The Company will make appropriate adjustments to the purchase price
allocation prior to the completion of the measurement period as required.
In connection with the AlphaCare Holdings acquisition, the Company incurred $0.3 million of
acquisition related costs that were expensed during the year ended December 31, 2013. These costs are
included within direct service costs and other operating expenses in the accompanying consolidated
statements of comprehensive income.
Pro Forma disclosures related to the AlphaCare Holdings acquisition have been excluded as
immaterial.
4. Benefit Plans
The Company has a defined contribution retirement plan (the ‘‘401(k) Plan’’). Employee
participants can elect to contribute up to 75 percent of their compensation, subject to Internal Revenue
Service (‘‘IRS’’) deferral limitations. The Company makes contributions to the 401(k) Plan based on
employee compensation and contributions. The Company matches 50 percent of each employee’s
contribution up to 6 percent of their annual compensation. The Company recognized $5.8 million,
$6.3 million and $7.4 million of expense for the years ended December 31, 2011, 2012 and 2013,
respectively, for matching contributions to the 401(k) Plan.
5. Long-Term Debt and Capital Lease Obligations
On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility
Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S.
Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to
$70.0 million for the issuance of letters of credit for the account of the Company (the ‘‘2011 Credit
Facility’’). Citibank, N.A., has assigned a portion of its interest in the 2011 Credit Facility to Bank of
F-29
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
5. Long-Term Debt and Capital Lease Obligations (Continued)
Tokyo. The 2011 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company
and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011
Credit Facility will mature on December 9, 2014.
Under the 2011 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to
(i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 0.75 percent plus
the higher of the prime rate, one-half of one percent in excess of the overnight ‘‘federal funds’’ rate, or
the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar denominated
loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest
period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar
denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment
bear interest at the rate of 1.875 percent. The commitment commission on the 2011 Credit Facility is
0.375 percent of the unused Revolving Loan Commitment.
The 2011 Credit Facility contains covenants that limit management’s discretion in operating the
Company’s business by restricting or limiting the Company’s ability, among other things, to:
• incur or guarantee additional indebtedness or issue preferred or redeemable stock;
• pay dividends and make other distributions;
• repurchase equity interests;
• make certain advances, investments and loans;
• enter into sale and leaseback transactions;
• create liens;
• sell and otherwise dispose of assets;
• acquire or merge or consolidate with another company; and
• enter into some types of transactions with affiliates.
There were $32.0 million and $33.7 million of letters of credit outstanding at December 31, 2012
and 2013, respectively, and no Revolving Loan borrowings at December 31, 2012 or 2013.
There were no capital lease obligations at December 31, 2012 and $26.7 million of capital lease
obligations at December 31, 2013. The Company’s capital lease obligations represent amounts due
under leases for certain properties and computer software and equipment. The recorded gross cost of
capital leased assets was $29.7 million at December 31, 2013.
6. Stockholders’ Equity
Stock Compensation
At December 31, 2012 and 2013, the Company had equity-based employee incentive plans. Prior to
May 18, 2011, the Company utilized the 2008 Management Incentive Plan (the ‘‘2008 MIP’’), 2006
Management Incentive Plan (the ‘‘2006 MIP’’), 2003 Management Incentive Plan (the ‘‘2003 MIP’’)
and 2006 Directors’ Equity Compensation Plan (collectively the ‘‘Preexisting Plans’’) for grants of stock
options, restricted stock, restricted stock units, and stock appreciation rights, to provide incentives to
officers, employees and non-employee directors.
On February 18, 2011, the board of directors of the Company approved the 2011 Management
Incentive Plan (‘‘2011 MIP’’), and the 2011 MIP was approved by the Company’s shareholders at the
F-30
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
6. Stockholders’ Equity (Continued)
2011 Annual Meeting of Shareholders on May 18, 2011. The 2011 MIP provides for the delivery of up
to a number of shares equal to (i) 5,000,000 shares of common stock, plus (ii) the number of shares
subject to outstanding awards under the Preexisting Plans which become available after shareholder
approval of the 2011 MIP as a result of forfeitures, expirations, and in other permitted ways under the
share recapture provisions of the 2011 MIP. Delivery of shares under ‘‘full-value’’ awards (awards other
than options or stock appreciation rights) will be counted for each share delivered as 2.29 shares
against the total number of shares reserved under the 2011 MIP. Upon shareholder approval of the
2011 MIP, no further awards were made under the Preexisting Plans, and any shares that remained
available for new awards (i.e., were not committed for outstanding awards) under the Preexisting Plans
were not carried forward to the 2011 MIP.
The 2011 MIP provides for awards of stock options, restricted stock awards (‘‘RSAs’’), restricted
stock units (‘‘RSUs’’), stock appreciation rights, cash-denominated awards and any combination of the
foregoing. A restricted stock unit is a notional account representing the right to receive a share of the
Company’s Common Stock (or, at the Company’s option, cash in lieu thereof) at some future date. In
general, stock options vest ratably on each anniversary over the three years subsequent to grant, and
have a ten year life. With the exception of the shares received by the principal owners of Partners, Rx,
RSAs generally vest on the anniversary of the grant. In general, RSUs vest ratably on each anniversary
over the three years subsequent to grant, assuming that the associated performance hurdle(s) for that
vesting year are met. Stock compensation expense is recognized using an accelerated method over the
vesting period based upon the continued employment of the RSU holder and the probability of
achievement of the performance hurdle(s). RSUs granted in 2011 have performance thresholds based
on EPS, while RSUs granted in 2012 and 2013 have performance thresholds based on EPS and return
on equity (‘‘ROE’’). At December 31, 2013, 2,289,039 shares of the Company’s common stock remain
available for future grant under the Company’s 2011 MIP.
On February 18, 2011 the board of directors of the Company approved the 2011 Employee Stock
Purchase Plan (‘‘2011 ESPP’’), and the 2011 ESPP was approved by the Company’s shareholders at the
2011 Annual Meeting of Shareholders on May 18, 2011. The 2011 ESPP provides for up to 100,000
shares of the Company’s ordinary common stock to be issued. During the years ended December 31,
2012 and 2013, 23,346 and 28,715 shares of the Company’s common stock were issued under the 2011
ESPP, respectively. At December 31, 2013, 47,939 shares of the Company’s common stock remain
available for future grant under the Company’s 2011 ESPP.
Stock Options
Summarized information related to the Company’s stock options for the years ended December 31,
2011, 2012 and 2013 is as follows:
Outstanding, beginning of period . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, end of period . . . . . . . . . . . . . . . . . . . . . . .
F-31
2011
2012
Weighted
Average
Exercise
Price
$39.27
49.30
42.13
38.34
$42.65
Weighted
Average
Exercise
Price
$42.65
47.54
46.08
39.03
$44.35
Options
3,841,233
1,402,800
(444,939)
(530,854)
4,268,240
Options
3,775,586
1,217,958
(86,986)
(1,065,325)
3,841,233
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
6. Stockholders’ Equity (Continued)
Outstanding, beginning of period . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
4,268,240
1,047,133
(165,734)
(1,139,493)
Outstanding, end of period . . . . . . . . . . . . .
4,010,146
$44.35
53.18
49.66
41.53
$47.23
Vested and expected to vest at end of period .
3,971,929
$47.19
Exercisable, end of period . . . . . . . . . . . . . .
1,971,716
$43.80
2013
Weighted
Average
Exercise
Price
Weighted
Average
Remaining Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in thousands)
7.18
7.17
5.77
$50,902
$50,585
$31,763
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (based
upon the difference between the Company’s closing stock price on the last trading day of 2013 of
$59.91 and the exercise price) for all in-the-money options as of December 31, 2013. This amount
changes based on the fair market value of the Company’s common stock.
The total pre-tax intrinsic value of options exercised (based on the difference between the
Company’s closing stock price on the day the option was exercised and the exercise price) during the
years ended December 31, 2011, 2012 and 2013 was $13.1 million, $6.4 million, and $18.2 million,
respectively.
The weighted average grant date fair value per share of substantially all stock options granted
during the years ended December 31, 2011, 2012 and 2013 was $12.72, $11.65 and $12.24, respectively,
as estimated using the Black- Scholes-Merton option pricing model based on the following weighted
average assumptions:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . .
1.63% 0.66% 0.67%
4 years
4 years
4 years
29.88% 30.30% 27.86%
0.00% 0.00% 0.00%
2011
2012
2013
For the years ended December 31, 2011, 2012 and 2013, expected volatility was based on the
historical volatility of the Company’s stock price.
As of December 31, 2013, there was $14.3 million of total unrecognized compensation expense
related to nonvested stock options that is expected to be recognized over a weighted average remaining
recognition period of 2.02 years. The total fair value of options vested during the year ended
December 31, 2013 was $11.5 million.
The benefits of tax deductions in excess of recognized stock compensation expense are reported as
a financing cash flow, rather than as an operating cash flow. In the years ended December 31, 2011,
2012 and 2013, approximately $2.0 million, $1.0 million and $3.2 million, respectively, of benefits of
such tax deductions related to stock compensation expense were realized and as such were reported as
financing cash flows. For the year ended December 31, 2013, the net change to additional paid-in
capital related to tax benefits (deficiencies) was $2.3 million which includes the $3.2 million of excess
tax benefits offset by $0.9 million of tax deficiencies and adjustments to prior years’ tax benefit from
F-32
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
6. Stockholders’ Equity (Continued)
exercise of stock options and vesting of stock awards. For the year ended December 31, 2012, the
change to additional paid-in capital related to tax benefits (deficiencies) was $0.1 million which includes
the $1.0 million of excess tax benefits offset by $0.9 million of tax deficiencies and adjustments to prior
years’ tax benefit from exercise of stock options and vesting of stock awards. For the year ended
December 31, 2011, the net change to additional paid-in capital related to tax benefits (deficiencies)
was $(1.2) million which includes the $2.0 million of excess tax benefits offset by $3.2 million of tax
deficiencies and adjustments to prior years’ tax benefit from exercise of stock options and vesting of
stock awards.
Restricted Stock Awards
Summarized information related to the Company’s nonvested RSAs for the years ended
December 31, 2011, 2012 and 2013 is as follows:
2011
2012
2013
Outstanding, beginning of period . . . .
Awarded . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . .
Shares
22,309
18,748
(22,309)
—
Outstanding, ending of period . . . . . .
18,748
Weighted
Average
Grant Date
Fair Value
$39.23
52.11
39.23
—
$52.11
Weighted
Average
Grant Date
Fair Value
$52.11
42.25
52.11
—
$42.25
Weighted
Average
Grant Date
Fair Value
$ 42.25
56.59
(42.25)
—
Shares
23,672
192,165
(23,672)
—
192,165
$ 56.59
Shares
18,748
23,672
(18,748)
—
23,672
As of December 31, 2013, there was $9.5 million of unrecognized stock compensation expense
related to nonvested restricted stock awards. This cost is expected to be recognized over a weighted-
average period of 2.61 years.
Restricted Stock Units
Summarized information related to the Company’s nonvested RSUs for the years ended
December 31, 2011, 2012 and 2013 is as follows:
2011
2012
2013
Outstanding, beginning of period . . . .
Awarded . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . .
Shares
190,488
115,003
(90,853)
(8,300)
Outstanding, ending of period . . . . . .
206,338
Weighted
Average
Grant Date
Fair Value
$38.43
49.14
37.50
42.94
$44.63
Weighted
Average
Grant Date
Fair Value
$44.63
47.48
41.81
47.43
$47.38
Shares
206,338
131,913
(99,976)
(35,585)
202,690
Weighted
Average
Grant Date
Fair Value
$47.38
52.62
46.72
49.79
$50.21
Shares
202,690
98,580
(95,138)
(11,219)
194,913
F-33
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
6. Stockholders’ Equity (Continued)
As of December 31, 2013, there was $3.5 million of unrecognized stock compensation expense
related to nonvested restricted stock units. This cost is expected to be recognized over a weighted-
average period of 2.79 years.
Common Stock Warrants
On January 5, 2004, the Company issued 570,825 warrants to purchase common stock of the
Company at a purchase price of $30.46 per share at anytime until January 5, 2011 and at an
approximate fair value per warrant of $9.44 (‘‘2004 Warrants’’). As of December 31, 2010, 44,561 of
these 2004 Warrants remained outstanding. In January 2011, 31,362 warrants were exercised and the
remaining 13,199 warrants were forfeited. There were no warrants outstanding as of December 31,
2013.
Income per Common Share
The following table reconciles income (numerator) and shares (denominator) used in the
Company’s computations of net income per share for the years ended December 31, 2011, 2012 and
2013 (in thousands, except per share data):
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$129,623
$151,027
$125,261
2011
2012
2013
Denominator:
Weighted average number of common shares outstanding—basic . . . .
Common stock equivalents—stock options . . . . . . . . . . . . . . . . . . .
Common stock equivalents—restricted stock awards . . . . . . . . . . . .
Common stock equivalents—restricted stock units . . . . . . . . . . . . .
Common stock equivalents—employee stock purchase plan . . . . . .
Weighted average number of common shares outstanding—diluted . . .
Net income per common share—basic . . . . . . . . . . . . . . . . . . . . . . .
Net income per common share—diluted . . . . . . . . . . . . . . . . . . . . . .
30,478
480
9
91
—
31,058
27,386
406
11
77
2
27,882
27,054
564
13
42
2
27,675
$
$
4.25
4.17
$
$
5.51
5.42
$
$
4.63
4.53
The weighted average number of common shares outstanding for the years ended December 31,
2011, 2012 and 2013 was calculated using outstanding shares of the Company’s common stock.
Common stock equivalents included in the calculation of diluted weighted average common shares
outstanding for the years ended December 31, 2011, 2012 and 2013 represent stock options to purchase
shares of the Company’s common stock, restricted stock awards, restricted stock units and stock
purchased under the ESPP.
For the years ended December 31, 2011, 2012 and 2013, the Company had additional potential
dilutive securities outstanding representing 1.0 million, 2.2 million and 0.8 million options, respectively,
that were not included in the computation of dilutive securities because they were anti-dilutive for such
periods. Had these shares not been anti-dilutive, all of these shares would not have been included in
F-34
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
6. Stockholders’ Equity (Continued)
the net income per common share calculation as the Company uses the treasury stock method of
calculating diluted shares.
Stock Repurchases
The Company’s board of directors has previously authorized a series of stock repurchase plans.
Stock repurchases for each such plan could be executed through open market repurchases, privately
negotiated transactions, accelerated share repurchases or other means. The board of directors
authorized management to execute stock repurchase transactions from time to time and in such
amounts and via such methods as management deemed appropriate. Each stock repurchase program
could be limited or terminated at any time without prior notice.
On July 27, 2010 the Company’s board of directors approved a stock repurchase plan which
authorized the Company to purchase up to $350 million of its outstanding common stock through
July 28, 2012. On February 18, 2011, the Company’s board of directors increased the stock repurchase
program by an additional $100 million, to a total of $450 million. Pursuant to this program, the
Company made open market purchases of 1,684,510 shares of the Company’s common stock at an
average price of $48.36 per share for an aggregate cost of $81.5 million (excluding broker commissions)
during the period from November 3, 2010 through December 31, 2010. Pursuant to this program, the
Company made open market purchases of 7,534,766 shares of the Company’s common stock at an
average price of $48.91 per share for an aggregate cost of $368.5 million (excluding broker
commissions) during the period January 1, 2011 through November 10, 2011, which was the date the
repurchase program was completed.
On October 25, 2011 the Company’s board of directors approved a stock repurchase plan which
authorized the Company to purchase up to $200 million of its outstanding common stock through
October 25, 2013. On July 24, 2013 the Company’s board of directors approved an increase and
extension of the stock repurchase plan which authorizes the Company to purchase up to $300 million
of its outstanding stock through October 25, 2015. Pursuant to this program, the Company made open
market purchases of 671,776 shares of the Company’s common stock at an average price of $48.72 per
share for an aggregate cost of $32.7 million (excluding broker commissions) during the period from
November 11, 2011 through December 31, 2011. Pursuant to this program, the Company made open
market purchases of 459,252 shares of the Company’s common stock at an average price of $50.27 per
share for an aggregate cost of $23.1 million (excluding broker commissions) during 2012. Pursuant to
this program, the Company made open market purchases of 1,159,871 shares of the Company’s
common stock at an average price of $51.83 per share for an aggregate cost of $60.1 million (excluding
broker commissions) during 2013.
During the period from January 1, 2014 through February 26, 2013, the Company made additional
open market purchases of 177,227 shares of the Company’s common stock at an aggregate cost of
$10.6 million (excluding broker commissions).
Recent Sales of Unregistered Securities
On January 28, 2011, the Company and Blue Shield of California (‘‘Blue Shield’’) entered into a
Share Purchase Agreement (the ‘‘Share Purchase Agreement’’) pursuant to which on January 31, 2011
F-35
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
6. Stockholders’ Equity (Continued)
Blue Shield purchased 416,840 shares of the Company’s Common Stock (the ‘‘Shares’’) for a total
purchase price of $20 million. The Shares were issued to Blue Shield, an accredited investor, in a
private placement pursuant to Regulation D of the Securities Act. Blue Shield agreed not to transfer
such Shares for a two year period, except in the event of any change in control of the Company as
defined in the Share Purchase Agreement. The purchase price for the Shares issued was determined
taking into account the recent trading price of the Company’s Common Stock on NASDAQ and the
restrictions on transfer of the Shares agreed to by Blue Shield.
On September 6, 2013, the Company and Partners Rx entered into a Merger Agreement pursuant
to which on October 1, 2013 certain principal owners of Partners Rx purchased 175,596 shares of the
Company’s restricted stock for a total purchase price of $10 million. The purchase price of the shares
was equal to the average of the closing prices of the Company’s stock for the five trading day period on
the day prior to the execution of the Merger Agreement. The shares received by such principal owners
of Partners Rx are subject to vesting over three years with 50% vesting on the second anniversary of
the acquisition and 50% vesting on the third anniversary of the acquisition, conditioned on continued
employment with the Company on the applicable vesting dates. The shares were issued to the principal
owners of Partners Rx in a private placement pursuant to Section 4(a)(2) of the Securities Act.
7. Income Taxes
Income Tax Expense
The components of income tax expense (benefit) for the following years ended December 31 were
as follows (in thousands):
Income taxes currently payable:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$51,195
5,534
$18,345
2,187
$37,691
3,445
2011
2012
2013
Deferred income taxes (benefits):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,729
20,532
41,136
8,644
(336)
8,308
14,922
2,384
17,306
(1,726)
514
(1,212)
Total income tax expense . . . . . . . . . . . . . . . . . . . .
$65,037
$37,838
$39,924
F-36
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
7. Income Taxes (Continued)
Total income tax expense for the years ended December 31 was different from the amount
computed using the statutory federal income tax rate of 35 percent for the following reasons (in
thousands):
Income tax expense at federal statutory rate . . . . . .
State income taxes, net of federal income tax
benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax contingencies reversed due to statute closings . .
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2012
2013
$ 68,458
$ 67,107
$ 57,815
7,013
(12,521)
2,087
6,812
(37,093)
1,012
4,412
(25,299)
2,996
Total income tax expense . . . . . . . . . . . . . . . . . . . .
$ 65,037
$ 37,838
$ 39,924
Deferred Income Taxes
The significant components of deferred tax assets and liabilities at December 31 were as follows
(in thousands):
Deferred tax assets:
Operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Community reinvestment reserves . . . . . . . . . . . . . . . . . . . . . .
Claims reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-deductible accrued liabilities . . . . . . . . . . . . . . . . . .
Indirect tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2013
$ 10,116
16,225
3,891
6,276
7,244
2,408
8,082
5,897
1,282
$ 8,604
15,926
7,619
550
8,005
6,708
13,018
4,804
987
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,421
(3,130)
66,221
(3,102)
Deferred tax assets after valuation allowance . . . . . . . . . . . . . .
58,291
63,119
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of goodwill and intangible assets . . . . . . . . . . . . .
Other deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
(44,728)
(15,782)
(169)
(43,417)
(20,615)
(3,603)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
(60,679)
(67,635)
Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . .
$ (2,388) $ (4,516)
The Company has federal NOLs as of December 31, 2013 of $3.6 million available to reduce
future federal taxable income. These NOLs, if not used, will expire in 2017 through 2019 and are
subject to examination and adjustment by the IRS. Utilization of these NOLs is also subject to certain
timing limitations, although the Company does not believe these limitations will restrict its ability to use
F-37
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
7. Income Taxes (Continued)
any federal NOLs before they expire. The Company has state NOLs as of December 31, 2013 of
$152.3 million available to reduce future state taxable income at certain subsidiaries. Most of these
NOLs, if not used, will expire in 2017 through 2022 and are subject to examination and adjustment by
the respective state tax authorities.
The Company’s valuation allowances against deferred tax assets were $3.1 million as of
December 31, 2012 and 2013, mostly relating to uncertainties regarding the eventual realization of
certain state net operating loss carryforwards (‘‘NOLs’’). Determination of the amount of deferred tax
assets considered realizable requires significant judgment and estimation regarding the forecasts of
future taxable income which are consistent with the plans and estimates the Company uses to manage
the underlying businesses. Although consideration is also given to potential tax planning strategies
which might be available to improve the realization of deferred tax assets, none were identified which
were both prudent and reasonable. The Company believes taxable income expected to be generated in
the future will be sufficient to support realization of the Company’s deferred tax assets, as reduced by
valuation allowances. This determination is based upon its consistent overall earnings history and future
earnings expectations. Other than deferred tax benefits attributable to operating loss carryforwards,
there are no time constraints within which the Company’s deferred tax assets must be realized. Changes
in these estimates in the future could materially affect the Company’s financial condition and results of
operations. Reversals of valuation allowances are recorded as reductions to income tax expense in the
period they occur.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as
follows (in thousands):
Balance as of beginning of period . . . . . . . . . . . . .
Additions for current year tax positions . . . . . . . . .
Additions for tax positions of prior years . . . . . . . .
Reductions for tax positions of prior years . . . . . . .
Reductions due to lapses of applicable statutes of
2011
2012
2013
$111,594
3,240
948
(1,492)
$ 99,230
1,904
403
(1,618)
$ 56,601
2,367
214
(396)
limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,011)
(43,297)
(28,606)
Reductions due to settlements with taxing
authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(49)
(21)
(4)
Balance as of end of period . . . . . . . . . . . . . . . . . .
$ 99,230
$ 56,601
$ 30,176
If these unrecognized tax benefits had been realized as of December 31, 2012 and 2013,
$45.1 million and $23.3 million, respectively, would have reduced income tax expense.
The Company continually performs a comprehensive review of its tax positions and accrues
amounts for tax contingencies related to uncertain tax positions. Based upon these reviews, the status
of ongoing tax audits, and the expiration of applicable statutes of limitations, accruals are adjusted as
necessary. The tax benefit from an uncertain tax position is recognized when it is more likely than not
F-38
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
7. Income Taxes (Continued)
that, based on technical merit, the position will be sustained upon examination, including resolution of
any related appeals or litigation processes.
The Company also adjusts these liabilities for unrecognized tax benefits when its judgment changes
as a result of the evaluation of new information not previously available. However, the ultimate
resolution of a disputed tax position following an examination by a taxing authority could result in a
payment that is materially different from that accrued by the Company. These differences are reflected
as increases or decreases to income tax expense in the period in which they are determined. However,
reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the
related book expense are recorded as increases in additional paid-in capital. To the extent reversals of
unrecognized tax benefits cannot be specifically traced to these excess deductions due to complexities in
the tax law, the Company records the tax benefit for such reversals to additional paid-in capital on a
pro-rata basis.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2009 expired during 2013. As a result, $28.6 million of unrecognized tax benefits recorded as
of December 31, 2012 were reversed in the current year as a result of statute expirations, of which
$23.2 million is reflected as a reduction to income tax expense, $3.9 million as an increase to additional
paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1 million of
accrued interest was reversed in 2013 and reflected as a reduction to income tax expense due to the
closing of statutes of limitations on tax assessments.
The statutes of limitations regarding the assessment of federal and certain state and local income
taxes for 2008 expired during 2012. As a result, $43.3 million of unrecognized tax benefits recorded as
of December 31, 2011 were reversed in 2012 as a result of statute expirations, of which $35.7 million is
reflected as a reduction to income tax expense, $6.2 million as an increase to additional paid-in capital,
and the remainder as a decrease to deferred tax assets. Additionally, $1.4 million of accrued interest
and $0.8 million of unrecognized state tax benefits were reversed in 2012 and reflected as reductions to
income tax expense due to the closing of statutes of limitations on tax assessments and changes in tax
return elections, respectively.
With few exceptions, the Company is no longer subject to income tax assessments by tax
authorities for years ended prior to 2010. Further, it is reasonably possible the statutes of limitations
regarding the assessment of federal and most state and local income taxes for 2010 could expire during
2014. The Company anticipates that up to $19.5 million of unrecognized tax benefits recorded as of
December 31, 2013 could be reversed during 2014 as a result of statute expirations, of which
$16.0 million would be reflected as a reduction to income tax expense, $2.6 million as an increase to
additional paid-in capital, and the remainder as a decrease to deferred tax assets. All such reversals
would be reflected as discrete adjustments during the quarter in which the respective statute expiration
occurs, primarily in the third quarter.
As of December 31, 2012 and 2013, the Company had accrued approximately $2.7 million and
$1.5 million, respectively, for the potential payment of interest and penalties (net of indirect benefits).
The Company accrues interest and penalties related to unrecognized tax benefits in its provision for
income taxes. During the years ended December 31, 2011, 2012 and 2013, the Company recorded
approximately $(0.9) million, $(0.1) million and $(1.2) million in interest and penalties.
F-39
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
8. Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 31, 2011, 2012 and 2013 is as
follows (in thousands):
Income taxes paid, net of refunds . . . . . . . . . . . . . . . .
$50,324
$57,663
$65,511
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,521
$ 1,594
$ 2,264
Assets acquired through capital leases . . . . . . . . . . . . .
$ — $ — $29,739
2011
2012
2013
9. Commitments and Contingencies
Insurance
The Company maintains a program of insurance coverage for a broad range of risks in its business.
The Company has renewed its general, professional and managed care liability insurance policies with
unaffiliated insurers for a one-year period from June 17, 2013 to June 17, 2014. The general liability
policy is written on an ‘‘occurrence’’ basis, subject to a $0.05 million per claim un-aggregated
self-insured retention. The professional liability and managed care errors and omissions liability policies
are written on a ‘‘claims-made’’ basis, subject to a $1.0 million per claim ($10.0 million per class action
claim) un-aggregated self-insured retention for managed care errors and omissions liability, and a
$0.05 million per claim un-aggregated self-insured retention for professional liability.
The Company maintains a separate general and professional liability insurance policy with an
unaffiliated insurer for its Specialty Pharmaceutical Management business. The Specialty
Pharmaceutical Management insurance policy has a one-year term for the period June 17, 2013 to
June 17, 2014. The general liability policy is written on an ‘‘occurrence’’ basis and the professional
liability policy is written on a ‘‘claims-made’’ basis, subject to a $0.05 million per claim and
$0.25 million aggregated self-insured retention.
The Company maintains separate professional liability insurance policies with unaffiliated insurers
for its Maricopa Contract business for the behavioral health direct care facilities, all of which were
divested at various times prior to September 1, 2009. The Maricopa Contract professional liability
insurance policies effective dates were from September 1, 2008 to September 1, 2009. The Company
purchased a five-year extended reporting period for the professional liability policies effective
September 1, 2009 for the period September 1, 2009 to September 1, 2014, subject to a $0.5 million per
claim un-aggregated self-insured retention. The professional liability policies are written on a
‘‘claims-made’’ basis.
The Company is responsible for claims within its self-insured retentions, and for portions of claims
reported after the expiration date of the policies if they are not renewed, or if policy limits are
exceeded. The Company also purchases excess liability coverage in an amount that management
believes to be reasonable for the size and profile of the organization.
Regulatory Issues
The managed healthcare industry is subject to numerous laws and regulations. The subjects of such
laws and regulations cover, but are not limited to, matters such as licensure, accreditation, government
F-40
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
9. Commitments and Contingencies (Continued)
healthcare program participation requirements, information privacy and security, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. Over the past several years, government
activity has increased with respect to investigations and/or allegations concerning possible violations of
fraud and abuse and false claims statutes and/or regulations by healthcare organizations and insurers.
Entities that are found to have violated these laws and regulations may be excluded from participating
in government healthcare programs, subjected to fines or penalties or required to repay amounts
received from the government for previously billed patient services. Compliance with such laws and
regulations can be subject to future government review and interpretation, as well as regulatory actions
unknown or unasserted at this time.
In addition, regulators of certain of the Company’s subsidiaries may exercise certain discretionary
rights under regulations including increasing their supervision of such entities, requiring additional
restricted cash or other security or seizing or otherwise taking control of the assets and operations of
such subsidiaries.
Legal
The Company’s operating activities entail significant risks of liability. From time to time, the
Company is subject to various actions and claims arising from the acts or omissions of its employees,
network providers or other parties. In the normal course of business, the Company receives reports
relating to deaths and other serious incidents involving patients whose care is being managed by the
Company. Such incidents occasionally give rise to malpractice, professional negligence and other related
actions and claims against the Company or its network providers. Many of these actions and claims
received by the Company seek substantial damages and therefore require the Company to incur
significant fees and costs related to their defense.
On July 25, 2012, the Company filed a lawsuit currently pending in the United States District
Court for the District of Connecticut against two former employees and a corporation partially-owned
by one of such former employees asserting claims for violation of contractual restrictive covenants and
common law obligations owed to the Company arising from actions of such former employees in
connection with their employment by the defendant corporation. The Company’s complaint alleges
claims for breach of contract and breach of the covenant of good dealing against the individual former
employees; tortious interference with contract against the defendant corporation; and violation of the
Connecticut Uniform Trade Secrets Act, civil conspiracy, and violation of the Connecticut Unfair Trade
Practices Act against all defendants arising out of activity undertaken by the former employees on
behalf of the defendant corporation in competition with the Company’s specialty pharmacy business.
The Company is seeking a permanent injunction and recovery of compensatory and punitive damages
and an award of attorneys’ fees and costs. On December 18, 2012, the defendant corporation filed
counterclaims against the Company in which it asserts tortious interference with business expectancy,
abuse of process, and violation of the Connecticut Unfair Trade Practices Act arising out of the
Company’s efforts to enforce its contractual and legal rights. On June 10, 2013, the defendant
corporation disclosed an alleged damages computation in the amount of $155 million in lost profits
plus unspecified business diminution damages. The Company believes the counterclaims and damages
calculations of the defendant corporation are without merit and is defending them vigorously.
The Company is also subject to or party to certain class actions and other litigation and claims
relating to its operations or business practices. In the opinion of management, the Company has
F-41
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
9. Commitments and Contingencies (Continued)
recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be
asserted against the Company, and for which the outcome is probable and reasonably estimable.
Management believes that the resolution of such litigation and claims will not have a material adverse
effect on the Company’s financial condition or results of operations; however, there can be no
assurance in this regard.
Operating Leases
The Company leases certain of its operating facilities and equipment. The leases, which expire at
various dates through January 2025, generally require the Company to pay all maintenance, property
tax and insurance costs.
At December 31, 2013, aggregate amounts of future minimum payments under operating leases
were as follows: 2014—$16.8 million; 2015—$15.9 million; 2016—$14.5 million; 2017—$12.4 million;
2018—$11.1 million; 2019 and beyond—$35.6 million. Operating lease obligations include estimated
future lease payments for both open and closed offices.
At December 31, 2013, aggregate amounts of future minimum rentals to be received under
operating subleases were as follows: 2014—$0.5 million and 2015—$0.3 million. Operating sublease
rentals to be received relate primarily to behavioral health direct care facilities transitioned to third
parties pursuant to the Maricopa Contract.
Rent expense is recognized on a straight-line basis over the terms of the leases. Rent expense was
$19.3 million, $19.5 million and $15.2 million for the years ended December 31, 2011, 2012 and 2013,
respectively.
Capital Leases
At December 31, 2013, aggregate future amounts of minimum payments under capital leases, net
of leasehold improvement allowances, were as follows: 2014—$0.9 million; 2015—$2.1 million; 2016—
$3.2 million; 2017—$3.3 million; 2018—$3.4 million; 2019 and beyond—$21.3 million. Included in the
future amounts payable under capital lease commitments is imputed interest of $7.5 million.
Restructuring Activities
In connection with various restructuring activities initiated in 2013, the Company anticipates it will
incur approximately $17.7 million in restructuring costs related to contract terminations and
organizational changes made in an effort to improve its ability to execute its strategy. These
restructuring costs include $12.8 million of employee termination costs, $2.5 million of asset impairment
charges and $2.4 million of lease termination and exit costs. Projected restructuring costs by segment
are Public Sector $8.2 million, Commercial $5.7 million and Corporate $3.8 million. For the year ended
December 31, 2013, the Company incurred $15.3 million of restructuring costs which represents the
employee termination and asset impairment charges. The restructuring costs incurred by segment for
the year ended December 31, 2013 were Public Sector $6.8 million, Commercial $4.7 million and
Corporate $3.8 million. The restructuring costs are included in direct service costs and other operating
expenses in the consolidated statements of comprehensive income. At December 31, 2013, a remaining
liability associated with employee termination costs of $12.5 million is included in accrued liabilities on
the Company’s consolidated balance sheets.
F-42
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
10. Business Segment Information
The accounting policies of the Company’s segments are the same as those described in Note 1—
‘‘General.’’ The Company evaluates performance of its segments based on profit or loss from
operations before stock compensation expense, depreciation and amortization, interest expense, interest
and other income, gain on sale of assets, special charges or benefits, and income taxes (‘‘Segment
Profit’’). Management uses Segment Profit information for internal reporting and control purposes and
considers it important in making decisions regarding the allocation of capital and other resources, risk
assessment and employee compensation, among other matters. Public Sector subcontracts with
Pharmacy Management to provide pharmacy benefits management services for certain of Public
Sector’s customers. As such, revenue and cost of care related to this intersegment arrangement are
eliminated. The Company’s segments are defined previously.
The following tables summarize, for the periods indicated, operating results by business segment
(in thousands):
Commercial
Public
Sector
Specialty
Solutions Management Elimination Consolidated
Pharmacy
Corporate
and
Year Ended December 31, 2011
Managed care and other revenue . $ 561,780 $ 1,459,659 $ 344,335 $ 268,987 $ (82,770) $ 2,551,991
247,409
Dispensing revenue . . . . . . . . . . .
(1,784,724)
Cost of care . . . . . . . . . . . . . . . .
— (232,038)
Cost of goods sold . . . . . . . . . . . .
(529,634)
Direct service costs and other . . . .
17,418
Stock compensation expense(1) . .
— 247,409
(76,544)
— (232,038)
(127,598)
817
(314,178) (1,271,532) (205,240)
—
(152,760)
839
—
(67,227)
872
(120,368)
13,327
(61,681)
1,563
—
82,770
—
—
Segment profit (loss) . . . . . . . . . . $ 95,681 $
121,772 $ 78,977 $ 81,033 $(107,041) $
270,422
Identifiable assets by business
segment(2)
Restricted cash . . . . . . . . . . . . . . $ 18,319 $
Net accounts receivable . . . . . . . .
Investments . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . .
. . . . .
Other intangible assets, net
26,822
5,320
—
120,485
3,228
— $
— $
164,479 $
28,331
131,261
1,398
—
— 39,567
— 104,549
9,632
—
52,024
—
—
201,905
31,729
2,996 $
13,031
64,322
—
—
—
185,794
121,606
200,903
39,567
426,939
44,589
F-43
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
10. Business Segment Information (Continued)
Commercial
Public
Sector
Specialty
Solutions Management Elimination Consolidated
Pharmacy
Corporate
and
Year Ended December 31, 2012
Managed care and other revenue . $ 728,512 $ 1,620,875 $ 349,133 $ 227,669 $ (69,090) $ 2,857,099
Dispensing revenue . . . . . . . . . . .
350,298
(2,071,890)
Cost of care . . . . . . . . . . . . . . . .
— (328,414)
Cost of goods sold . . . . . . . . . . . .
(557,512)
Direct service costs and other . . . .
17,783
Stock compensation expense(1) . .
— 350,298
(61,759)
— (328,414)
(111,593)
1,007
(437,518) (1,413,320) (228,383)
—
(172,035)
532
—
(89,129)
1,111
(129,337)
13,566
(55,418)
1,567
—
69,090
—
—
Segment profit (loss) . . . . . . . . . . $ 119,491 $
119,537 $ 66,899 $ 77,208 $(115,771) $
267,364
Identifiable assets by business
segment(2)
Restricted cash . . . . . . . . . . . . . . $ 18,254 $
Net accounts receivable . . . . . . . .
Investments . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . .
. . . . .
Other intangible assets, net
39,678
21,273
—
120,485
2,152
— $
— $ 60,534 $
147,766 $
27,415
101,093
7,580
—
— 45,727
— 104,549
7,877
—
65,755
(2,175)
— 111,324
—
—
—
201,905
—
24,906
226,554
138,253
233,690
45,727
426,939
34,935
F-44
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
10. Business Segment Information (Continued)
Commercial
Public
Sector
Specialty
Solutions Management Elimination Consolidated
Pharmacy
Corporate
and
Year Ended December 31, 2013
Managed care and other revenue . $ 766,841 $ 1,757,933 $ 375,818 $ 228,705 $ (66,248) $ 3,063,049
PBM and dispensing revenue . . . .
483,268
(2,232,976)
Cost of care . . . . . . . . . . . . . . . .
— (455,601)
Cost of goods sold . . . . . . . . . . . .
(619,546)
Direct service costs and other . . . .
21,252
Stock compensation expense(1) . .
— 483,268
(59,227)
— (455,601)
(128,427)
1,172
(469,478) (1,523,023) (247,496)
—
(122,819)
1,038
—
(172,491)
503
(138,475)
16,909
(57,334)
1,630
—
66,248
—
—
Segment profit (loss) . . . . . . . . . . $ 125,375 $
113,129 $ 72,618 $ 69,890 $(121,566) $
259,446
Identifiable assets by business
segment(2)
Restricted cash . . . . . . . . . . . . . . $ 25,107 $
Net accounts receivable . . . . . . . .
Investments . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . .
. . . . .
Other intangible assets, net
50,407
16,491
—
120,485
1,076
— $
— $ 14,938 $
196,651 $
62,977
92,966
7,368
—
— 49,609
104,549
6,123
20,882
4,590
115,527
—
—
242,290
57,905
1,906
98,856
—
—
—
236,696
238,185
208,313
49,609
488,206
69,694
(1) Stock compensation expense is included in direct service costs and other operating expenses,
however this amount is excluded from the computation of segment profit since it is managed on a
consolidated basis.
(2) Identifiable assets by business segment are those assets that are used in the operations of each
segment. The remainder of the Company’s assets cannot be specifically identified by segment.
The following table reconciles Segment Profit to consolidated income before income taxes for the
years ended December 31, 2011, 2012 and 2013 (in thousands):
2011
2012
2013
Segment Profit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . .
$270,422
(17,418)
(58,623)
(2,502)
2,781
$267,364
(17,783)
(60,488)
(2,247)
2,019
$259,446
(21,252)
(71,994)
(3,000)
1,985
Income before income taxes . . . . . . . . . . . . . . . . .
$194,660
$188,865
$165,185
F-45
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
11. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended
December 31, 2012 and 2013 (in thousands, except per share amounts):
For the Quarter Ended
March 31,
2012
June 30,
2012
September 30,
2012
December 31,
2012
Fiscal Year Ended December 31, 2012
Net revenue:
Managed care and other . . . . . . . . . . . . . . . . . . . .
Dispensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$686,059
87,154
$716,998
88,475
$711,092
87,345
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
773,213
805,473
798,437
Costs and expenses:
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other operating
expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . .
505,293
81,038
521,830
82,855
516,238
81,662
136,589
14,781
600
(412)
140,333
15,152
576
(857)
135,574
15,239
537
(350)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . .
737,889
759,889
748,900
Income before income taxes . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . .
35,324
14,534
45,584
18,611
49,537
(16,725)
$742,950
87,324
830,274
528,529
82,859
145,016
15,316
534
(400)
771,854
58,420
21,418
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,790
$ 26,973
$ 66,262
$ 37,002
Weighted average number of common shares
outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . .
27,199
27,317
27,521
27,505
Weighted average number of common shares
outstanding—diluted . . . . . . . . . . . . . . . . . . . . . .
27,747
27,717
28,042
28,020
Net income per common share—basic: . . . . . . . . . . .
Net income per common share—diluted:
. . . . . . . . .
$
$
0.76
0.75
$
$
0.99
0.97
$
$
2.41
2.36
$
$
1.35
1.32
F-46
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
11. Selected Quarterly Financial Data (Unaudited) (Continued)
For the Quarter Ended
March 31,
2013(3)
June 30,
2013(3)
September 30,
2013(3)
December 31,
2013
Fiscal Year Ended December 31, 2013
Net revenue:
Managed care and other . . . . . . . . . . . . . . . . . . . .
PBM and dispensing . . . . . . . . . . . . . . . . . . . . . .
$722,589
99,172
$746,720
96,028
$770,113
103,485
$ 823,627
184,583
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
821,761
842,748
873,598
1,008,210
Costs and expenses:
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other operating
expenses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . .
525,027
93,512
537,630
90,175
564,537
97,503
139,627
16,170
610
(353)
144,497
16,946
792
(358)
156,834
17,654
789
(291)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . .
774,593
789,682
837,026
Income before income taxes . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . .
47,168
19,110
53,066
21,586
36,572
(10,660)
605,782
174,411
178,588
21,224
809
(983)
979,831
28,379
9,888
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 28,058
$ 31,480
$ 47,232
$
18,491
Weighted average number of common shares
outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . .
27,110
26,829
26,990
27,285
Weighted average number of common shares
outstanding—diluted . . . . . . . . . . . . . . . . . . . . . .
27,648
27,338
27,704
28,008
Net income per common share—basic: . . . . . . . . . . .
Net income per common share—diluted:
. . . . . . . . .
$
$
1.03
1.01
$
$
1.17
1.15
$
$
1.75
1.70
$
$
0.68
0.67
(1) Includes stock compensation expense of $5,102, $4,365, $4,468 and $3,848 for the quarters ended
March 31, June 30, September 30, and December 31, 2012, respectively.
(2) Includes stock compensation expense of $5,638, $4,602, $4,524 and $6,488 for the quarters ended
March 31, June 30, September 30, and December 31, 2013, respectively.
(3) Certain amounts have been reclassified to conform to the presentation for the quarter ended
December 31, 2013.
F-47
MAGELLAN HEALTH SERVICES, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Classification
Year Ended December 31, 2011
Balance at
Beginning
of Period
Charged to Charged to
Costs and
Expenses
Other
Accounts
Addition Deduction
Balance
at End
of Period
Allowance for doubtful accounts . . . .
$1,985
$1,528(3) $(150)(1)
$ — $ (27)(2) $3,336
Year Ended December 31, 2012
Allowance for doubtful accounts . . . .
3,336
1,947(3)
(346)(1)
—
(325)(2)
4,612
Year Ended December 31, 2013
Allowance for doubtful accounts . . . .
4,612
1,205(3)
(126)(1)
130(4)
(374)(2)
5,447
(1) Recoveries of accounts receivable previously written off.
(2) Accounts written off.
(3) Bad debt expense.
(4) To establish a reserve on pre-acquisition balances of Partners Rx.
S-1
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Taking
the Lead
with a unique vision of healthcare
At Magellan, we are leading the way in healthcare by expanding
our capabilities and solutions beyond the traditional definitions
of behavioral healthcare, radiology services, and pharmacy benefit
management. We are providing integrated care programs to
special populations, delivering inspired insights through our
innovative specialty solutions, and offering the broadest spectrum
of pharmacy products available, complete with market-leading
technologies. Through our unique vision, we are taking the lead in
shaping the future of healthcare.
Shareholder
Information
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
Toll Free: 800-937-5449
Local/International: 718-921-8124
Website: amstock.com
E-mail: info@amstock.com
Our transfer agent can help with a variety
of shareholder-related services, including:
• Change of address
• Lost stock certificates
• Transfer of stock to another person
• Additional administrative services
Investor Relations
This annual report along with a variety of
other financial materials can be viewed at
MagellanHealth.com. Inquiries may be directed
to the Magellan Investor Relations Group at
877-645-6464 or ir@magellanhealth.com.
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Annual Meeting
Magellan’s annual shareholder meeting will be held
on May 21, 2014 at our Corporate Headquarters at
55 Nod Road, Avon, Connecticut. The meeting will
begin at 8:30 a.m., local time.
Safe Harbor Statement
Certain of the statements made in this report con-
stitute forward-looking statements contemplated
under the Private Securities Litigation Reform Act
of 1995 and are qualified in their entirety by the
complete discussion of risks set forth in the section
entitled “Risk Factors” in Magellan’s Annual Report
on Form 10-K for the year ended December 31,
2013, attached herein.
Environmental Awareness
This annual report is printed on recycled paper:
the cover and narrative pages are on 30 percent
post-consumer waste and Form 10-K is on 10
percent post-consumer waste.
Corporate Headquarters
55 Nod Road
Avon, Connecticut 06001
MagellanHealth.com
Auditors
Ernst & Young LLP
Baltimore, MD
Stock Listing
Symbol: MGLN
NASDAQ Stock Exchange
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Magellan in Motion
MagellanHealth.com
2013 Annual Report